UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
[X]
[X] | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
For the quarterly period endedJanuary 31, 2004 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.) |
(650) 944-6000
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 205,703,236196,862,515 shares of Common Stock, $0.01 par value, as of January 31, 2003February 27, 2004
INTUIT INC.
FORM 10-Q
INDEX
INTUIT INC.
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Number | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 23 | |||||||
Quantitative and Qualitative Disclosures about Market Risk | 40 | |||||||
41 | ||||||||
42 | ||||||||
43 | ||||||||
Exhibits and Reports on Form 8-K | 44 | |||||||
EXHIBIT 10.02 | ||||||||
EXHIBIT 10.03 | ||||||||
EXHIBIT 10.04 | ||||||||
EXHIBIT 10.05 | ||||||||
EXHIBIT 10.06 | ||||||||
EXHIBIT 10.07 | ||||||||
EXHIBIT 10.08 | ||||||||
EXHIBIT 10.09 | ||||||||
EXHIBIT 10.10 | ||||||||
EXHIBIT 10.11 | ||||||||
EXHIBIT 31.01 | ||||||||
EXHIBIT 31.02 | ||||||||
EXHIBIT 32.01 | ||||||||
EXHIBIT 32.02 |
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-
INTUIT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, | January 31, | |||||||||||||||||||||||
July 31, | January 31, | 2003 | 2004 | |||||||||||||||||||||
(In thousands; unaudited) | (In thousands; unaudited) | 2002 | 2003 | (In thousands; unaudited) | ||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
ASSETS | ASSETS | |||||||||||||||||||||||
Current assets: | Current assets: | Current assets: | ||||||||||||||||||||||
Cash and cash equivalents | $ | 414,748 | $ | 379,915 | ||||||||||||||||||||
Short-term investments | 815,342 | 718,437 | ||||||||||||||||||||||
Marketable securities | 16,791 | 18,548 | ||||||||||||||||||||||
Customer deposits | 300,409 | 259,958 | Cash and cash equivalents | $ | 170,043 | $ | 87,831 | |||||||||||||||||
Accounts receivable, net | 51,999 | 244,437 | Short-term investments | 1,036,758 | 891,081 | |||||||||||||||||||
Deferred income taxes | 67,799 | 61,270 | Payroll customer deposits | 306,007 | 281,448 | |||||||||||||||||||
Income taxes receivable | 2,187 | — | Accounts receivable, net | 88,156 | 283,959 | |||||||||||||||||||
Prepaid expenses and other current assets | 49,581 | 39,520 | Deferred income taxes | 34,824 | 34,824 | |||||||||||||||||||
Amounts due from discontinued operations entities | 241,616 | 5,978 | Prepaid expenses and other current assets | 33,082 | 61,554 | |||||||||||||||||||
Total current assets | 1,960,472 | 1,728,063 | Total current assets | 1,668,870 | 1,640,697 | |||||||||||||||||||
Property and equipment, net | Property and equipment, net | 179,122 | 195,990 | Property and equipment, net | 188,253 | 196,913 | ||||||||||||||||||
Goodwill, net | Goodwill, net | 428,948 | 583,907 | Goodwill, net | 591,091 | 690,766 | ||||||||||||||||||
Purchased intangibles, net | 125,474 | 124,289 | ||||||||||||||||||||||
Purchased intangible assets, net | Purchased intangible assets, net | 125,445 | 124,865 | |||||||||||||||||||||
Long-term deferred income taxes | Long-term deferred income taxes | 176,553 | 172,835 | Long-term deferred income taxes | 183,061 | 183,061 | ||||||||||||||||||
Loans to executive officers and other employees | Loans to executive officers and other employees | 21,270 | 19,968 | Loans to executive officers and other employees | 19,690 | 18,206 | ||||||||||||||||||
Other assets | Other assets | 31,854 | 11,512 | Other assets | 13,857 | 18,630 | ||||||||||||||||||
Net long-term assets of discontinued operations | 4,312 | 4,066 | ||||||||||||||||||||||
Total assets | Total assets | $ | 2,928,005 | $ | 2,840,630 | Total assets | $ | 2,790,267 | $ | 2,873,138 | ||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||||||||||||
Current liabilities: | Current liabilities: | Current liabilities: | ||||||||||||||||||||||
Accounts payable | $ | 71,069 | $ | 107,189 | Accounts payable | $ | 56,786 | $ | 104,448 | |||||||||||||||
Accrued compensation and related liabilities | 87,426 | 91,598 | Accrued compensation and related liabilities | 118,678 | 105,401 | |||||||||||||||||||
Payroll service obligations | 300,381 | 259,958 | Payroll service obligations | 306,007 | 281,448 | |||||||||||||||||||
Deferred revenue | 147,120 | 170,500 | Deferred revenue | 178,840 | 203,686 | |||||||||||||||||||
Income taxes payable | — | 17,169 | Income taxes payable | 76,725 | 103,523 | |||||||||||||||||||
Short-term note payable | 2,277 | 2,717 | Other current liabilities | 59,129 | 145,653 | |||||||||||||||||||
Other current liabilities | 81,795 | 176,855 | ||||||||||||||||||||||
Net current liabilities of discontinued operations | 7,688 | 4,220 | Total current liabilities | 796,165 | 944,159 | |||||||||||||||||||
Long-term obligations | Long-term obligations | 29,265 | 18,864 | |||||||||||||||||||||
Total current liabilities | 697,756 | 830,206 | ||||||||||||||||||||||
Long-term obligations | 14,610 | 12,766 | ||||||||||||||||||||||
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 | 1,846,707 | 1,877,296 | Common stock and additional paid-in capital | 1,921,554 | 1,944,273 | |||||||||||||||||||
Treasury shares, at cost | (126,107 | ) | (393,007 | ) | Treasury shares, at cost | (672,326 | ) | (795,505 | ) | |||||||||||||||
Deferred compensation | (12,628 | ) | (9,263 | ) | Deferred compensation | (25,850 | ) | (21,988 | ) | |||||||||||||||
Accumulated other comprehensive income (loss) | (3,675 | ) | 3,603 | Accumulated other comprehensive income (loss) | (789 | ) | (2,616 | ) | ||||||||||||||||
Retained earnings | 511,342 | 519,029 | Retained earnings | 742,248 | 785,951 | |||||||||||||||||||
Total stockholders’ equity | 2,215,639 | 1,997,658 | Total stockholders’ equity | 1,964,837 | 1,910,115 | |||||||||||||||||||
Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | $ | 2,928,005 | $ | 2,840,630 | Total liabilities and stockholders’ equity | $ | 2,790,267 | $ | 2,873,138 | ||||||||||||||
See accompanying notes.
-3-
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||
January 31, | January 31, | January 31, | January 31, | ||||||||||||||||||||||||||||||||||
(In thousands, except per share data; unaudited) | 2002 | 2003 | 2002 | 2003 | |||||||||||||||||||||||||||||||||
2003 | 2004 | 2003 | 2004 | ||||||||||||||||||||||||||||||||||
(In thousands, except per share amounts; unaudited) | (In thousands, except per share amounts; unaudited) | ||||||||||||||||||||||||||||||||||||
Net revenue: | Net revenue: | Net revenue: | |||||||||||||||||||||||||||||||||||
Products | $ | 413,096 | $ | 465,130 | $ | 524,169 | $ | 607,033 | Product | $ | 457,240 | $ | 509,012 | $ | 599,143 | $ | 669,197 | ||||||||||||||||||||
Services | 45,029 | 75,348 | 76,950 | 130,952 | Service | 83,238 | 109,556 | 138,842 | 175,823 | ||||||||||||||||||||||||||||
Other | 17,783 | 17,598 | 33,107 | 32,963 | Other | 17,598 | 17,721 | 32,963 | 33,797 | ||||||||||||||||||||||||||||
Total net revenue | 475,908 | 558,076 | 634,226 | 770,948 | Total net revenue | 558,076 | 636,289 | 770,948 | 878,817 | ||||||||||||||||||||||||||||
Costs and expenses: | Costs and expenses: | Costs and expenses: | |||||||||||||||||||||||||||||||||||
Cost of revenue: | Cost of revenue: | ||||||||||||||||||||||||||||||||||||
Cost of products | 71,636 | 71,062 | 102,277 | 99,774 | Cost of product revenue | 71,062 | 65,895 | 99,774 | 97,913 | ||||||||||||||||||||||||||||
Cost of services | 28,454 | 39,557 | 52,658 | 76,169 | Cost of service revenue | 39,557 | 42,472 | 76,169 | 78,308 | ||||||||||||||||||||||||||||
Cost of other revenue | 6,160 | 5,164 | 11,320 | 9,754 | Cost of other revenue | 5,164 | 6,889 | 9,754 | 13,673 | ||||||||||||||||||||||||||||
Amortization of purchased software | 7,171 | 3,518 | 8,877 | 6,495 | Amortization of purchased software | 3,518 | 3,324 | 6,495 | 6,613 | ||||||||||||||||||||||||||||
Customer service and technical support | 50,289 | 55,591 | 85,985 | 95,221 | Customer service and technical support | 55,591 | 63,215 | 95,221 | 104,206 | ||||||||||||||||||||||||||||
Selling and marketing | 74,720 | 97,796 | 131,012 | 172,617 | Selling and marketing | 97,796 | 107,640 | 172,617 | 199,589 | ||||||||||||||||||||||||||||
Research and development | 51,402 | 66,080 | 98,822 | 130,207 | Research and development | 66,080 | 73,333 | 130,207 | 144,664 | ||||||||||||||||||||||||||||
General and administrative | 28,761 | 38,405 | 54,987 | 78,021 | General and administrative | 38,405 | 48,131 | 78,021 | 91,826 | ||||||||||||||||||||||||||||
Charge for purchased research and development | — | 1,070 | — | 8,859 | Charge for purchased research and development | 1,070 | — | 8,859 | — | ||||||||||||||||||||||||||||
Acquisition-related charges | 62,008 | 9,154 | 102,999 | 18,609 | Acquisition-related charges | 9,154 | 6,780 | 18,609 | 12,829 | ||||||||||||||||||||||||||||
Loss on impairment of long-lived asset | — | — | 27,000 | — | |||||||||||||||||||||||||||||||||
Total costs and expenses | 387,397 | 417,679 | 695,726 | 749,621 | |||||||||||||||||||||||||||||||||
Total costs and expenses | 380,601 | 387,397 | 675,937 | 695,726 | |||||||||||||||||||||||||||||||||
Income from continuing operations | Income from continuing operations | 170,679 | 218,610 | 75,222 | 129,196 | ||||||||||||||||||||||||||||||||
Interest and other income | Interest and other income | 7,770 | 7,170 | 16,556 | 14,660 | ||||||||||||||||||||||||||||||||
Gains on marketable securities and other investments, net | Gains on marketable securities and other investments, net | 2,827 | 90 | 3,080 | 237 | ||||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||||||||
Income from continuing operations before income taxes | Income from continuing operations before income taxes | 181,276 | 225,870 | 94,858 | 144,093 | ||||||||||||||||||||||||||||||||
Income tax provision | Income tax provision | 55,905 | 76,804 | 29,936 | 48,992 | ||||||||||||||||||||||||||||||||
Net income from continuing operations | Net income from continuing operations | 99,896 | 125,371 | (3,410 | ) | 64,922 | Net income from continuing operations | 125,371 | 149,066 | 64,922 | 95,101 | ||||||||||||||||||||||||||
Discontinued operations, net of income taxes (Note 6): | |||||||||||||||||||||||||||||||||||||
Net income from Quicken Loans discontinued operations | 16,740 | — | 26,469 | — | |||||||||||||||||||||||||||||||||
Discontinued operations, net of income taxes: | Discontinued operations, net of income taxes: | ||||||||||||||||||||||||||||||||||||
Gain on disposal of Quicken Loans discontinued operations | — | — | — | 5,556 | 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 Intuit KK discontinued operations | 3,059 | — | 3,267 | — | ||||||||||||||||||||||||||||
Net income from discontinued operations | Net income from discontinued operations | 19,972 | 3,059 | 30,851 | 8,823 | Net income from discontinued operations | 3,059 | — | 8,823 | — | |||||||||||||||||||||||||||
Net income | Net income | $ | 119,868 | $ | 128,430 | $ | 27,441 | $ | 73,745 | Net income | $ | 128,430 | $ | 149,066 | $ | 73,745 | $ | 95,101 | |||||||||||||||||||
Basic net income per share from continuing operations | Basic net income per share from continuing operations | $ | 0.47 | $ | 0.61 | $ | (0.02 | ) | $ | 0.32 | Basic net income per share from continuing operations | $ | 0.61 | $ | 0.75 | $ | 0.32 | $ | 0.48 | ||||||||||||||||||
Basic net income per share from discontinued operations | Basic net income per share from discontinued operations | 0.09 | 0.01 | 0.15 | 0.04 | Basic net income per share from discontinued operations | 0.01 | — | 0.04 | — | |||||||||||||||||||||||||||
Basic net income per share | Basic net income per share | $ | 0.56 | $ | 0.62 | $ | 0.13 | $ | 0.36 | Basic net income per share | $ | 0.62 | $ | 0.75 | $ | 0.36 | $ | 0.48 | |||||||||||||||||||
Shares used in basic per share amounts | Shares used in basic per share amounts | 212,520 | 205,682 | 211,780 | 206,823 | Shares used in basic per share amounts | 205,682 | 197,665 | 206,823 | 198,206 | |||||||||||||||||||||||||||
Diluted net income per share from continuing operations | Diluted net income per share from continuing operations | $ | 0.46 | $ | 0.59 | $ | (0.01 | ) | $ | 0.31 | Diluted net income per share from continuing operations | $ | 0.59 | $ | 0.73 | $ | 0.31 | $ | 0.47 | ||||||||||||||||||
Diluted net income per share from discontinued operations | Diluted net income per share from discontinued operations | 0.09 | 0.01 | 0.14 | 0.04 | Diluted net income per share from discontinued operations | 0.01 | — | 0.04 | — | |||||||||||||||||||||||||||
Diluted net income per share | Diluted net income per share | $ | 0.55 | $ | 0.60 | $ | 0.13 | $ | 0.35 | Diluted net income per share | $ | 0.60 | $ | 0.73 | $ | 0.35 | $ | 0.47 | |||||||||||||||||||
Shares used in diluted net income per share amounts | 219,355 | 212,455 | 217,914 | 213,445 | |||||||||||||||||||||||||||||||||
Shares used in diluted per share amounts | Shares used in diluted per share amounts | 212,455 | 203,430 | 213,445 | 203,796 | ||||||||||||||||||||||||||||||||
See accompanying notes.
-4-
Six Months Ended | ||||||||||||||||||||||||
Six Months Ended | January 31, | |||||||||||||||||||||||
January 31, | 2003 | 2004 | ||||||||||||||||||||||
(In thousands; unaudited) | (In thousands; unaudited) | 2002 | 2003 | (In thousands; unaudited) | ||||||||||||||||||||
Cash flows from operating activities: | Cash flows from operating activities: | |||||||||||||||||||||||
Net income from continuing operations | $ | 64,922 | $ | 95,101 | ||||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||||||
Net income (loss) from continuing operations | $ | (3,410 | ) | $ | 64,922 | Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: | ||||||||||||||||||
Adjustments to reconcile net income (loss) from continuing operations to net cash used in operating activities: | Acquisition-related charges | 18,609 | 12,829 | |||||||||||||||||||||
Acquisition-related charges | 102,999 | 18,609 | Amortization of purchased software | 6,495 | 6,613 | |||||||||||||||||||
Amortization of purchased software | 8,877 | 6,495 | Amortization of other purchased intangible assets | — | 2,921 | |||||||||||||||||||
Amortization of deferred compensation | 1,379 | 1,267 | Charge for purchased research and development | 8,859 | — | |||||||||||||||||||
Charge for purchased research and development | — | 8,859 | Amortization of deferred compensation not related to acquisitions | 1,267 | 3,118 | |||||||||||||||||||
Depreciation | 29,593 | 36,119 | Depreciation | 36,119 | 38,588 | |||||||||||||||||||
Net (gains) losses from marketable securities and other investments | 10,622 | (3,080 | ) | Loss on disposal of property and equipment | 2,321 | 2,008 | ||||||||||||||||||
Loss on impairment of long-lived asset | 27,000 | — | Gain on foreign exchange transactions | (2,060 | ) | (4,107 | ) | |||||||||||||||||
Loss on disposal of property and equipment | 1,678 | 2,321 | Net gains from marketable securities and other investments | (3,080 | ) | (237 | ) | |||||||||||||||||
Deferred income tax benefit | 200 | 2,633 | Deferred income taxes | 2,633 | — | |||||||||||||||||||
Tax benefit from employee stock options | 23,697 | 30,379 | Tax benefit from employee stock options | 30,379 | 22,964 | |||||||||||||||||||
Subtotal | 202,635 | 168,524 | Subtotal | 166,464 | 179,798 | |||||||||||||||||||
Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | |||||||||||||||||||||||
Customer deposits | (12,470 | ) | 40,451 | Payroll customer deposits | 40,451 | 24,559 | ||||||||||||||||||
Accounts receivable | (229,891 | ) | (187,982 | ) | Accounts receivable | (187,982 | ) | (193,273 | ) | |||||||||||||||
Income taxes receivable | — | 2,187 | Income taxes receivable | 2,187 | — | |||||||||||||||||||
Prepaid expenses and other current assets | 3,235 | 10,745 | Prepaid expenses and other current assets | 10,745 | (24,948 | ) | ||||||||||||||||||
Accounts payable | 30,510 | 35,557 | Accounts payable | 35,557 | 45,449 | |||||||||||||||||||
Accrued compensation and related liabilities | 1,255 | 4,172 | Accrued compensation and related liabilities | 4,172 | (13,467 | ) | ||||||||||||||||||
Payroll service obligations | 12,657 | (40,423 | ) | Payroll service obligations | (40,423 | ) | (24,559 | ) | ||||||||||||||||
Deferred revenue | 21,350 | 16,686 | Deferred revenue | 16,686 | 24,581 | |||||||||||||||||||
Income taxes payable | (40,705 | ) | 23,096 | Income taxes payable | 23,096 | 26,706 | ||||||||||||||||||
Other current liabilities | 88,497 | 93,591 | Other current liabilities | 94,131 | 83,761 | |||||||||||||||||||
Total changes in operating assets and liabilities | (125,562 | ) | (1,920 | ) | Total changes in operating assets and liabilities | (1,380 | ) | (51,191 | ) | |||||||||||||||
Net cash provided by operating activities | 77,073 | 166,604 | Net cash provided by operating activities | 165,084 | 128,607 | |||||||||||||||||||
Cash flows from investing activities: | Cash flows from investing activities: | Cash flows from investing activities: | ||||||||||||||||||||||
Change in other assets | 1,616 | (2,324 | ) | Purchases of short-term investments | (653,284 | ) | (1,080,002 | ) | ||||||||||||||||
Purchases of property and equipment | (26,369 | ) | (54,970 | ) | Liquidation and maturity of short-term investments | 748,743 | 1,225,543 | |||||||||||||||||
Proceeds from the sale of marketable securities | 5,094 | 16,371 | Proceeds from the sale of marketable securities | 16,371 | — | |||||||||||||||||||
Purchases of short-term investments | (844,471 | ) | (653,284 | ) | Purchases of property and equipment | (54,970 | ) | (47,662 | ) | |||||||||||||||
Liquidation and maturity of short-term investments | 960,169 | 748,743 | Change in other assets | (2,324 | ) | (3,015 | ) | |||||||||||||||||
Acquisitions of businesses, net of cash acquired | (7,532 | ) | (185,227 | ) | Acquisitions of businesses, net of cash acquired | (185,227 | ) | (120,810 | ) | |||||||||||||||
Net cash provided by (used in) investing activities | 88,507 | (130,691 | ) | Net cash used in investing activities | (130,691 | ) | (25,946 | ) | ||||||||||||||||
Cash flows from financing activities: | Cash flows from financing activities: | Cash flows from financing activities: | ||||||||||||||||||||||
Change in notes payable | (330 | ) | (1,404 | ) | Change in long-term obligations | (1,944 | ) | (10,557 | ) | |||||||||||||||
Net proceeds from issuance of common stock | 57,612 | 90,593 | Net proceeds from issuance of common stock | 90,593 | 86,556 | |||||||||||||||||||
Purchase of treasury stock | (74,268 | ) | (423,210 | ) | Purchase of treasury stock | (423,210 | ) | (261,127 | ) | |||||||||||||||
Net cash used in financing activities | (16,986 | ) | (334,021 | ) | Net cash used in financing activities | (334,561 | ) | (185,128 | ) | |||||||||||||||
Net cash provided by (used in) discontinued operations | (95,923 | ) | 264,539 | |||||||||||||||||||||
Effect of foreign currency translation | 1,519 | (1,264 | ) | |||||||||||||||||||||
Net cash provided by discontinued operations | Net cash provided by discontinued operations | 264,539 | — | |||||||||||||||||||||
Effect of exchange rates on cash and cash equivalents | Effect of exchange rates on cash and cash equivalents | 796 | 255 | |||||||||||||||||||||
Net increase (decrease) in cash and cash equivalents | 54,190 | (34,833 | ) | |||||||||||||||||||||
Net decrease in cash and cash equivalents | Net decrease in cash and cash equivalents | (34,833 | ) | (82,212 | ) | |||||||||||||||||||
Cash and cash equivalents at beginning of period | Cash and cash equivalents at beginning of period | 66,910 | 414,748 | Cash and cash equivalents at beginning of period | 408,948 | 170,043 | ||||||||||||||||||
Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | $ | 121,100 | $ | 379,915 | Cash and cash equivalents at end of period | $ | 374,115 | $ | 87,831 | ||||||||||||||
See accompanying notes.
-5-
1. Summary of Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements include the financial statements of Intuit and its wholly-ownedwholly owned subsidiaries. We have eliminated all significant intercompany balances and transactions in consolidation. We have reclassified certain other amounts previously reported amountsin our financial statements to conform to the current presentation. As discussed in Note 6 , theWe sold our Quicken Loans mortgage business which we sold onin 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,and our Japanese subsidiary, became a long-lived asset heldIntuit KK, in February 2003 and accounted for sale during the second quartersales of fiscal 2003 in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144.these businesses as discontinued operations. 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 and the non-recurring adjustments described in Note 6for discontinued operations that we considerconsidered necessary to give a fair presentation of our operating results for the periods presented. Results for the three and six months ended January 31, 2003 do not necessarily indicate the results we expect for the fiscal year ending July 31, 2003 or any other future period. These condensed consolidated financial statements and accompanying notes should be read together with the audited consolidated financial statements for the fiscal year ended July 31, 20022003 included in Intuit’s Form 10-K, filed with the Securities and Exchange Commission on September 25, 2002. This Form 10-K reflected Quicken Loans as discontinued operations. We19, 2003. Results for the three and six months ended January 31, 2004 do not necessarily indicate the results we expect to file financial statements reclassified to reflect Intuit KK as a discontinued operation on Form 8-K.for the fiscal year ending July 31, 2004 or any other future period. Our tax businesses are highly seasonal, with sales of tax preparation products and services heavily concentrated in the period from November through April. These seasonal patterns mean that our quarterly total net revenue is usually highest during our second and third fiscal quarters.
Use of Estimates
We make estimates and assumptions that affect the amounts reported in the financial statements and the disclosures made in the accompanying notes. For example, we use estimates forin determining the appropriate levels of reserves for product returns and rebates, and to determine the collectibility of accounts receivable, and the valuerealizability of deferred tax assets. We use estimates to determineassets, the appropriate levels of various accruals and the remaining economic lives and carrying values of purchased intangibles,intangible assets, property 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. 1,“Stock-Based Incentive Programs.”Despite our intention to establish accurate estimates and use reasonable assumptions, actual results may differ from our estimates.
Net Revenue
We 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. 101,104, “Revenue Recognition in Financial StatementsRecognition..” 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.
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In some situations, we receive advance payments from our customers. We also offer multiple element arrangements to our customers. We defer revenue associated with these advance payments and the fair value of undelivered elements until we ship the products or perform the services. Deferred revenue consisted of the following at the dates indicated:
July 31, | January 31, | |||||||
2003 | 2004 | |||||||
(In thousands) | ||||||||
Product and product-related services | $ | 146,609 | $ | 166,017 | ||||
Customer support | 32,231 | 37,669 | ||||||
$ | 178,840 | $ | 203,686 | |||||
Product-related services include deferred revenue primarily for consumer electronic filing services and QuickBooks Do-It-Yourself Payroll.
In accordance with the Financial Accounting Standards Board’s (“FASB’s”)Board 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 rather than as an operating expense.expense unless we receive a benefit that we can identify and for which we can reasonably estimate the fair value.
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Product Revenue
We typically recognize revenue from the sale of our packaged software products and supplies when we ship the product (which isproducts or, in the case of certain agreements, when title passes) eitherproducts are delivered to retailers and distributors or directly to end-user customers.retailers. We sell some of our QuickBooks and consumer taxConsumer 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, return rates for prior releases of the product, trends in retailer inventory and economic trends that might impact customer demand for our products.products (including the competitive environment and the timing of new releases of our product). 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 and historical redemption trends by product and by type of promotional program and the economic value of the rebate.program.
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 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 ofwhen we collect these funds from customers and the remittance ofwhen we remit the 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.parties.
We offer several technical support plans. Weplans and recognize support revenue over the life of the plan, which is generally one year. We include costs incurred for these support plans in cost of revenue.
plans. Service revenue also includes revenue from consulting, training consulting and implementationWeb services such as TurboTax for the Web and electronic tax filing services. We generally recognize revenue as these services are performed, provided that we have no other remaining obligations to these customers.customers and that the services performed are not essential to the functionality of delivered products and services.
Other Revenue
Other revenue consists primarily of feesrevenue from revenue-sharing arrangements with third-party service providers and from online advertising agreements. We recognize transaction fees from revenue sharing arrangements as end-user sales are reported to us by these partners. We typically recognize revenue from online advertising agreements as the lesser of when the advertisements are served or pro rata based on the contractual time period.
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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”)or 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 allocate the 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 ofthe full 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 remaining products or services; and (4) we have an enforceable claim to receive the amount due in the event that we do not deliver the undelivered products or services;services.
For arrangements where undelivered services are essential to the functionality of delivered software, we recognize both the product license revenues and (5) as discussed above, there is evidenceservice revenues under the percentage of completion contract method in accordance with the fair valueprovisions of SOP 81-1,“Accounting for eachPerformance of the undelivered products or services.
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Construction Type and Certain Production Type Contracts.”To date, product license and service revenues recognized pursuant to SOP 81-1 have not been significant.
Shipping and Handling
We record the amounts we charge our customers for the shipping and handling of our software products as product revenue and we record the related costs as cost of products inproduct revenue on our statement of operations. Product revenue from shipping and handling is not significant.
Per Share Computations
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 and vested restricted stock awards. In loss periods, basic and diluted loss per share are identical since the effect of common equivalent shares is anti-dilutive and therefore excluded.
Our diluted net income per share computations for the second quarter of fiscal 2003 and 2004 included 6.8 million and 5.8 million common equivalent shares but the periods did not include the effect of options to purchase 4.1 million shares of common stock because the option exercise prices were greater than the average market price of our common stock. Our diluted net income per share computations for the first six months of fiscal 2003 and 2004 included 6.6 million and 5.6 million common equivalent shares but the periods did not include the effect of options to purchase 4.8 million shares of common stock because the option exercise prices were greater than the average market price of our common stock.
Cash Equivalents and Short-Term Investments
We consider highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Cash equivalents consist primarily of money market funds in all periods presented. Short-term investments consist of available-for-sale debt securities that we carry at fair value. We include unrealized gains and losses on short-term investments, net of tax, in stockholders’ equity. Available-for-sale debt securities are classified as current assets based upon our intent and ability to use any and all of these securities as necessary to satisfy the significant short-term liquidity requirements that may arise from the highly seasonal and cyclical nature of our
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businesses. Because 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.
Payroll Customer Deposits and Payroll Service Obligations
CustomerPayroll customer deposits represent cash held on behalf of our payroll customers. Payroll service obligations consist primarily of payroll taxes we owe on behalf of our 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. In previous fiscal years, including fiscal 2002, we generally amortized goodwill on a straight-line basis over periods ranging from three to five 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 amortize the cost of identified intangible assets on a straight-line basis over periods ranging from onetwo to 10seven years.
We regularly perform reviews to determine if the carrying values of our long-lived assets are impaired. WeIn accordance with Statement of Financial Accounting Standards No. 142,“Goodwill and Other Intangible Assets,”we review goodwill and other intangible assets that have indefinite useful lives for impairment at least annually in our fourth fiscal quarter, or more frequently if an event occurs indicating the potential for impairment. In accordance with SFAS 144,“Accounting for the Impairment or Disposal of Long-Lived Assets,”we review intangible assets that have finite useful lives and other long-lived assets when an event occurs indicating the potential for impairment. In our reviews, we look for facts or circumstances, either internal or external, indicating that we may not recover the carrying value of the asset. We measure impairment losslosses related to long-lived assets based on the amount by which the carrying amounts of suchthese assets exceed their fair values. Our measurement of fair value is generally based on an analysis of the present value of estimated future discounted cash 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.
Stock-Based Incentive ProgramPrograms
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.members. We apply the intrinsic value recognition and measurement principles of APBAccounting Principles Board 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 value of the stock when the option is granted. We are also not required to record compensation expense in connection with theour 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
In October 1995 the FASB issued SFAS 123, “Accounting for an illustrationStock 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 or loss and net income or 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 2003 and 2004 does not necessarily represent the pro forma impact in future quarters or years.
To determine the pro forma impact, we estimate the fair value of our options using the Black-Scholes option valuation model. This 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. Our stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimates.
Inputs used for the valuation model are set forth in the tables below. We base the volatility factor for stock options on the historical volatility of our stock over the most recent five-year period, which is approximately equal to the maximum expected life of our options.
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Options | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
January 31, | January 31, | January 31, | January 31, | |||||||||||||
2003 | 2004 | 2003 | 2004 | |||||||||||||
Expected life (years) | 1.92 - 4.92 | 1.99 - 4.99 | 1.91 - 4.92 | 1.95 - 4.99 | ||||||||||||
Expected volatility factor | 77 | % | 72 | % | 77-78 | % | 72-74 | % | ||||||||
Risk-free interest rate | 1.03 - 3.10 | % | 0.85 - 3.29 | % | 1.03 - 3.10 | % | 0.85 - 3.29 | % | ||||||||
Expected dividend yield | — | — | — | — |
Employee Stock Purchase Plan | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
January 31, | January 31, | January 31, | January 31, | |||||||||||||
2003 | 2004 | 2003 | 2004 | |||||||||||||
Expected life (years) | 1.00 | 1.00 | 1.00 | 1.00 | ||||||||||||
Expected volatility factor | 78 | % | 74 | % | 78 | % | 74-76 | % | ||||||||
Risk-free interest rate | 1.23 | % | 0.94 | % | 1.23 | % | 0.94 - 0.97 | % | ||||||||
Expected dividend yield | — | — | — | — |
The following table illustrates the effect on our net income (loss)or loss and net income (loss)or loss per share if we had applied the fair value recognition provisions of SFAS No. 123 “Accounting for Stock-Based Compensation,” to stock-based incentives.incentives using the Black Scholes valuation model. For purposes of this reconciliation, we add back to previously reported net income or loss all stock-based incentive expense we have recorded that relates to acquisitions. We then deduct the pro forma stock-based incentive expense determined under the fair value method for all awards including those that relate to acquisitions. 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 or loss.
Three Months Ended | Six Months Ended | ||||||||||||||||
January 31, | January 31, | January 31, | January 31, | ||||||||||||||
2003 | 2004 | 2003 | 2004 | ||||||||||||||
(In thousands, except per share amounts) | |||||||||||||||||
Net income | |||||||||||||||||
Net income, as reported | $ | 128,430 | $ | 149,066 | $ | 73,745 | $ | 95,101 | |||||||||
Add: Stock-based employee compensation expense included in reported net income, net of income taxes | 263 | 132 | 1,200 | 295 | |||||||||||||
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of income taxes | (23,997 | ) | (17,934 | ) | (46,871 | ) | (39,320 | ) | |||||||||
Pro forma net income | $ | 104,696 | $ | 131,264 | $ | 28,074 | $ | 56,076 | |||||||||
Net income per share | |||||||||||||||||
Basic - as reported | $ | 0.62 | $ | 0.75 | $ | 0.36 | $ | 0.48 | |||||||||
Basic - pro forma | $ | 0.51 | $ | 0.66 | $ | 0.14 | $ | 0.28 | |||||||||
Diluted - as reported | $ | 0.60 | $ | 0.73 | $ | 0.35 | $ | 0.47 | |||||||||
Diluted - pro forma | $ | 0.49 | $ | 0.65 | $ | 0.13 | $ | 0.28 | |||||||||
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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 significant balance of short-term investments as well as risks related to the collectibility of our trade accounts receivable.investments. Our portfolio of short-term investments consists primarily of investment-grade securities. Except for direct obligations of the United States government, securities thatissued by agencies of the United States government, and money market or cash management funds, we diversify our short-term investments by limiting our holdings with any individual issuer in a managed portfolio to a maximum of $5 million.
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$5.0 million in each of our three managed portfolios.
We sell a significant portion of our products through third-party retailers and distributors. As a result, we face risks related to the collectibility of our trade accounts receivable. To appropriately manage this risk, we perform ongoing evaluations of customer 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.
Due to changes in our distribution arrangements during fiscal 2002, we are selling an increasing proportion of our software products directly to a variety ofmany 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 20022003 or 2003, nor did any customer account for 10% or more2004. Amounts due from Rock Acquisition Corporation under certain licensing and distribution agreements comprised 10.8% of accounts receivable at July 31, 2002 or2003. One customer accounted for 12.6% of accounts receivable at January 31, 2003.
In connection with the sale of our Quicken Loans mortgage business in July 2002, we agreed to continue providing to the purchasing company a 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 secured by the related mortgage loans and had an outstanding balance of $245.6 million at July 31, 2002 and $180.1 million at October 31, 2002. The line was repaid in January 2003. As part of the consideration for the 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 6.2004.
We rely on three third partythird-party vendors to perform substantially all outsourced aspects of manufacturing and distribution for our 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 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.levels for any reason, including financial difficulties of the vendor.
Recent Accounting Pronouncements
On June 29, 2001, the FASB issued SFAS 142, “Goodwill and Other Intangible Assets.” 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. The shift from an amortization approach to an impairment approach applies to all acquisitions completed after June 30, 2001. We adopted the remaining elements of this new standard in the first quarter of fiscal 2003 and therefore ceased amortizing goodwill for acquisitions made prior to July 1, 2001. However, it is possible that in the future we may incur impairment charges related to the goodwill already recorded and to goodwill arising out of future acquisitions. In addition, we will continue to amortize our 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 JulyNovember 2002, the FASB issued SFAS 146,EITF reached a consensus on Issue No. 00-21,“Accounting for Costs AssociatedRevenue Arrangements with Exit and Disposal Activities.Multiple Deliverables.”This statement revises theIssue 00-21 provides guidance on accounting for activities relatingarrangements that involve the delivery or performance of multiple products, services and/or rights to exiting or disposing of businesses or assets under EITF Issue No. 94-3,“Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.”A 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.use assets. The provisions of SFAS 146 are effective prospectively for exit or disposal activities initiatedIssue 00-21 apply to revenue arrangements entered into in fiscal periods beginning 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.June 15, 2003. We adopted SFAS 146Issue 00-21 effective December 31, 2002August 1, 2003 and there was no impactthe adoption of this standard did not have a material effect 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, 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 148 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 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 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 modified 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 us to consolidate a variable interest entity if we are subject to a majority of the risk of loss from the 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 essentially 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 first fiscal year or interim period beginning after June 15, 2003. Some of the disclosure requirements apply to all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. We do not currently have any variable interest entities and, accordingly, we do not expect our adoption of FIN 46 to have a material impact on our financial position, results of operations or cash flows.
2. Short-Term Investments
The following schedule summarizes the estimated fair value of our short-term investments as of the dates indicated:
July 31, | January 31, | |||||||
(In thousands) | 2002 | 2003 | ||||||
Corporate notes | $ | 24,405 | $ | 40,277 | ||||
Municipal bonds | 780,914 | 673,152 | ||||||
U.S. government securities | 10,023 | 5,008 | ||||||
$ | 815,342 | $ | 718,437 | |||||
The following table summarizes the estimated fair value of our available-for-sale debt securities held in short-term investments classified by the stated maturity date of the security:
July 31, | January 31, | |||||||
(In thousands) | 2002 | 2003 | ||||||
Due within one year | $ | 230,716 | $ | 160,761 | ||||
Due within two years | 141,942 | 103,523 | ||||||
Due within three years | — | — | ||||||
Due after three years | 442,684 | 454,153 | ||||||
$ | 815,342 | $ | 718,437 | |||||
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3. Goodwill and Intangible Assets
Changes 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:
Life in | July 31, | January 31, | ||||||||||
Years | 2002 | 2003 | ||||||||||
(In thousands) | ||||||||||||
Customer lists | 3-7 | $ | 144,379 | $ | 145,957 | |||||||
Less accumulated amortization | (75,317 | ) | (89,337 | ) | ||||||||
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 | ||||||||
The increase in purchased technology in the first six months of fiscal 2003 was due primarily to our acquisition of Blue Ocean Software, Inc. in the first quarter of fiscal 2003. See Note 5.
-12-
We summarize the following expenses on the acquisition-related charges line of our statement of operations:
Three Months Ended | Six Months Ended | ||||||||||||||||
January 31, | January 31, | January 31, | January 31, | ||||||||||||||
2002 | 2003 | 2002 | 2003 | ||||||||||||||
(In thousands) | |||||||||||||||||
Amortization of goodwill | $ | 31,534 | $ | — | $ | 64,277 | $ | — | |||||||||
Amortization of purchased intangible assets | 6,927 | 8,716 | 13,632 | 16,609 | |||||||||||||
Amortization of acquisition-related deferred compensation | 1,541 | 438 | 3,084 | 2,000 | |||||||||||||
Impairment charges | 22,006 | — | 22,006 | — | |||||||||||||
Total acquisition-related charges | $ | 62,008 | $ | 9,154 | $ | 102,999 | $ | 18,609 | |||||||||
At January 31, 2003, we expected annual amortization of our purchased intangible assets by fiscal year to be as shown in the following table. Future acquisitions could cause these amounts to increase. In addition, if impairment events occur they could accelerate the timing of charges.
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 | ||||||
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. SFAS 130 requires the components of other comprehensive income (loss), such as changes in the fair value of available-for-sale securities and foreign translation adjustments, to be added 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.
-13-
The components of accumulated other comprehensive income (loss), net of income taxes, were as follows:
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 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 | ||||||||
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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allocated approximately $13.2 million of the purchase price to purchased technology and $150.5 million to goodwill. In addition, $7.8 million was allocated to in-process research and development and charged to expense 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 the 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 | |||
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.
-15-
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 minimize 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 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.
Discontinued 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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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.
-17-
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 | ||||||||||||||||
-19-
8. Commitments
Reserve for Vacant Facilities
During the third quarter 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 by subleasing the vacant space. The resulting $13.2 million charge was equal to the remaining future lease commitments for these facilities, net of estimated future sublease income. The estimated costs of abandoning these leased facilities reflected 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. We 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 exceed the total reserve balance at January 31, 2003 by a maximum of $3.7 million if we are unable to sublease either of the properties.
During the second quarter and first six months of fiscal 2003, we made cash lease payments for these two buildings of $0.6 million and $1.2 million and there was a balance of $11.3 million in the reserve at January 31, 2003. The short-term portion of the reserve ($2.1 million) is in other current liabilities and the remaining long-term portion is in long-term obligations on our balance sheet. We expect to use the total reserve by the end of fiscal 2010.
9. Other Current Liabilities
Other current liabilities were as follows at the dates indicated:
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 | |||||
10. Income Taxes
We compute our provision 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. We 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 rates for the second quarter and first six 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 were approximately 4% and 90%, respectively. 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 second quarter and first six months of fiscal 2002 would have been approximately 32% and 33%.
11. Stockholders’ Equity
Stock Repurchase Program
In May 2001, Intuit’s Board of Directors authorized the company to repurchase up to $500.0 million of common stock from time to time 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. Shares of stock repurchased under the program became treasury shares. From inception of the program through December 4, 2002, we repurchased a total of 16,602,583 shares of our common stock for an aggregate cost of approximately $750.0 million. The stock
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repurchase 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 the 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 expired and returned to the 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.
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. On January 6, 2003, a settlement between Intuit and the plaintiffs’ counsel in all of the remaining cases was preliminarily approved by the federal court with a final approval hearing scheduled for June 2003. The proposed settlement terms are not material to Intuit.
Intuit is subject to certain 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.
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 February 7, 2003, we completed the sale of our wholly-owned Japanese subsidiary, Intuit KK, to Advantage Partners, Inc., a private equity investment firm located in Japan. Under the terms of the final sale agreement, Advantage Partners purchased 100 percent of the outstanding Intuit KK stock for 9.5 billion yen or approximately $79 million as of February 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 $29 million in cash the rights to brand and market the offering to the Wells Fargo customers who currently use Intuit’s service.
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ITEM 2MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS
Caution about Forward-Looking Statements
Throughout this Report, we make forward-looking statements that are based on our current expectations, estimates and projections about our business and our industry, and that 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 words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” and other similar terms. These forward-looking statements include, among other things, projections of our future financial performance, our anticipated growth, our strategies and trends we anticipate in our businesses and the markets in which we operate and the competitive nature and anticipated growth of those markets.
We caution investors that forward-looking statements are only predictions, based on our current expectations about future events. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Our actual results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements. 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 caption “Risks That Could Affect Future Results.” 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 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 transform the way people run their businesses and manage their financial lives. Intuit is a leading provider of innovative small business and tax preparation software products and services that are designed for small businesses, consumers and accounting professionals. Our products and services fall into five principal categories: our QuickBooks line of small business accounting and business management solutions; small business products and services that include payroll, financial supplies, technical support and 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. Sales of tax preparation products and services are heavily concentrated in the period from November through April. 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 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 losses in our first and fourth quarters ending October 31 and July 31 when revenue from our tax businesses are minimal, but operating expenses to develop new products and services continue at relatively consistent levels.
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, and 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 intangibles and other acquisition-related charges of $62.0 million and $103.0 million, which included a total of $22.0 million in impairment 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 first half of fiscal 2003, to $9.2 million and $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.
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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Results of Operations
Total 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 by reportable segment for those periods. 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. See Note 7 of the financial statements for additional information about our reportable segments.
QuickBooks
QuickBooks product revenue is derived primarily from QuickBooks desktop software products. QuickBooks services revenue is derived from QuickBooks Online Edition.
QuickBooks total net revenue of $93.5 million increased 11% in the second 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 – 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 second quarter of fiscal 2003, also contributed to revenue growth.
QuickBooks total net revenue of $131.5 million increased 21% in the first six months of fiscal 2003 compared to the same period of the prior year. The increase was due primarily to 15% higher unit sales and 17% higher average selling prices due to the fiscal 2002 introduction of our higher-priced QuickBooks products. For the full fiscal year, we expect QuickBooks revenue to grow 20 to 30%.
Small Business Products and Services
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 and QuickBooks support plans. 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 acquired in the fourth quarter of fiscal 2002. 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 same periods of fiscal 2002. Growth in this segment was driven primarily by increases in payroll revenue and the acquisition of Intuit Information Technology Solutions (IITS), formerly Blue Ocean Software, Inc., in the first quarter of fiscal 2003.
Payroll 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 six months of fiscal 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 six months of fiscal 2003, while QuickBooks support revenue 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 remainder of fiscal 2003.
Consumer Tax
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.
Consumer Tax total net revenue of $95.2 million and $101.3 million increased 11% and 12% in the second 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 2003. Desktop units were down 8% in the second quarter due in part to our increasing use of retail consignment, for which revenue is not recognized until the end 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 delaying revenue to the time customers use and pay for the product, rather than when they purchase it at a retail store or from Intuit directly. Due to the seasonal nature of our Consumer Tax business, first quarter fiscal 2002 and fiscal 2003 revenue was nominal.
Since fiscal 2000, we have seen an increasing portion of our Consumer Tax annual revenue growth during the third quarter compared to the second quarter, and we expect that trend to continue during fiscal 2003. This trend results in part from more customers using our Web-based tax offerings, for which revenue peaks later in the tax season. However, 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.
We 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 Consumer 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 the uncertain impact of product activation.
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Professional Tax and Accountants’ Solutions
Professional Tax and Accountants’ Solutions (“PTAS”) product revenue is derived primarily from ProSeries and Lacerte professional 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 same periods of the prior year. The increases are due to price increases related to product enhancements, an increase in cross-sell efforts to the existing tax client base and an increase in the number of customers. Our PTAS business is highly seasonal and we will not have complete results for the entire 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 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.
These vertical businesses contributed $24.0 million to second quarter 2003 revenue and $42.8 million to revenue for the first six months of fiscal 2003. We expect 10% to 30% revenue growth for these businesses in the aggregate during fiscal 2003, over their aggregate revenue for the comparable period before we acquired them.
Other Businesses
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.
Other Businesses total net revenue of $73.5 million and $115.4 million was essentially flat in the second quarter and first six months of fiscal 2003 compared to the second quarter and first six months of fiscal 2002. Personal finance total net revenue 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 six months of fiscal 2003 compared to the same periods of fiscal 2002 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 of $31.2 million and $33.3 million increased 45%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 targeted at investors, those who maintain home offices and taxpayers preparing for retirement increased average selling prices by 24% and unit sales by 20% in the fiscal 2003 periods.
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Cost of Revenue
% of | % of | % of | % of | ||||||||||||||||||||||||||||||||||||||
Q2 | Related | Q2 | Related | Q2 % | YTD | Related | YTD | Related | YTD % | ||||||||||||||||||||||||||||||||
(Dollars in millions) | FY02 | Revenue | FY03 | Revenue | Change | FY02 | Revenue | FY03 | Revenue | Change | |||||||||||||||||||||||||||||||
Cost of revenue: | |||||||||||||||||||||||||||||||||||||||||
Cost of products | $ | 71.6 | 17 | % | $ | 71.1 | 15 | % | (1 | %) | $ | 102.3 | 20 | % | $ | 99.8 | 16 | % | (2 | %) | |||||||||||||||||||||
Cost of services | 28.5 | 63 | % | 39.6 | 53 | % | 39 | % | 52.7 | 68 | % | 76.2 | 58 | % | 45 | % | |||||||||||||||||||||||||
Cost of other revenue | 6.2 | 35 | % | 5.2 | 30 | % | (16 | %) | 11.3 | 34 | % | 9.8 | 30 | % | (13 | %) | |||||||||||||||||||||||||
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 | $ | 113.5 | 24 | % | $ | 119.4 | 21 | % | 5 | % | $ | 175.2 | 28 | % | $ | 192.3 | 25 | % | 10 | % | |||||||||||||||||||||
There are four components of our cost of revenue: (1) cost of products, which includes the direct cost of manufacturing and shipping our 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 generating advertising and marketing and online transactions revenue; and (4) amortization of purchased software, which represents the cost of depreciating products we obtained through acquisitions over their useful lives.
Cost of products as a percentage of product revenue decreased to 15% and 16% in the second quarter and first half of fiscal 2003 from 17% and 20% 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 packaging 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 cost savings. We expect both of these factors to continue during the remainder of fiscal 2003, resulting in slightly lower cost of products as a percentage of product revenue for the full fiscal year compared to fiscal 2002.
Cost of services as a percentage of services revenue decreased to 53% and 58% 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 of fiscal 2003 we will no longer pay royalties on our Premier payroll business to Wells Fargo Bank. See Note 14 of the financial statements.
Cost of other revenue as a percentage of other revenue decreased to 30% in the second quarter and 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 second quarter and first six months of fiscal 2002 included a $5.2 million impairment charge for intangible assets related to Quicken.com advertising revenue. Routine amortization charges increased in the second quarter and first six months of fiscal 2003 compared to the same periods of fiscal 2002 as a result of additional amortization for purchased intangible assets relating to the acquisitions we completed in the fourth quarter of fiscal 2002.
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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 Operating Expenses
Total operating expenses were essentially flat in the second quarter and first half of fiscal 2003 compared to the same periods of fiscal 2002. 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 for goodwill or intangible assets during the second quarter and first six months of fiscal 2003.
Customer Service and Technical Support
Customer service and technical support expenses were 10% and 12% of total net revenue in the second quarter and first six months of fiscal 2003, compared to 11% and 14% in the same periods of fiscal 2002. We continued to improve our efficiency in fiscal 2003 by increasing the proportion of customer service and technical support we provide through less expensive methods such as Web sites, online chat, email and other electronic means. We 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 are to some extent driven by unit sales, we also began to experience somewhat lower support costs as a percentage of total net revenue due to the addition to the product mix of our 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 TurboTax desktop products. We expect to continue to benefit from lower cost, more scalable electronic customer service and technical support delivery mechanisms and from product mix in the remainder of fiscal 2003.
Selling and Marketing
Selling and marketing expenses were 18% and 22% of total net revenue in the second quarter and first half of fiscal 2003, compared to 16% and 21% in the second quarter and first half of fiscal 2002. In fiscal 2003, selling and marketing expenses increased in absolute dollars and as a percentage of total net revenue as we continued to expand our small business marketing programs to support the Right for My Business strategy announced in September 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 we 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 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 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 in the remainder of fiscal 2003.
Research and Development
Research and development expenses were 12% and 17% of total net revenue in the second quarter and first six months of fiscal 2003, compared to 11% and 16% in the same periods of fiscal 2002. Research and development expenses in absolute dollars increased 29% and 32% in the second quarter and first half of fiscal 2003 compared to the second quarter and first half of fiscal 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 and Consumer Tax Right for Me strategies. We also added research and development expenses for our newly acquired vertical business management solutions. During the remainder of fiscal 2003, we expect to continue to make significant investments in research and development, particularly for new small business and vertical business management solutions products and services.
General and Administrative
General and administrative expenses were 7% and 10% of total net revenue in the second quarter and first six months of fiscal 2003, compared to 6% and 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 companies we acquired in the fourth quarter of fiscal 2002 and higher insurance costs. We expect general and administrative expenses as a percentage of total net revenue to continue to exceed fiscal 2002 levels because of these factors.
Acquisition-Related Charges
In the second quarter and first half of fiscal 2003, acquisition-related charges were $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. They also included impairment charges of $22.0 million. Beginning with the first quarter of fiscal 2003, acquisition-related charges no longer included amortization of goodwill due to our adoption of SFAS 142. See Note 1,“Recent Pronouncements,”and Note 3 of the financial statements.
Loss on Impairment of Long-lived Asset
The fiscal 2002 loss on impairment of long-lived asset related to the impairment of the asset we received from the purchaser of our Quicken Bill Manager business in May 2001. 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 $27.0 million in the first quarter of fiscal 2002 to reduce the carrying value of this asset to its estimated fair value of zero, reflecting the deteriorating financial condition of the purchasing company.
Non-Operating Income and Expenses
Interest and Other Income
In the second quarter and first six months of fiscal 2003, interest and other income was $7.8 million and $16.6 million, compared to $7.6 million and $17.5 million in the same periods of fiscal 2002. In general, the interest income that we earn on our cash and short-term investment balances has 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 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
We recorded pre-tax net gains relating to marketable securities and other investments of $2.8 million and $3.1 million in the second quarter and first half of fiscal 2003. We recorded a pre-tax net gain of $1.6 million in the second quarter of fiscal 2002 and a pre-tax net loss of $10.6 million in the first six months of fiscal 2002. The net loss in the first six months of fiscal 2002 included charges of $7.2 million for declines during the period in the market prices of our trading securities and S-1 options and $3.3 million to write down certain long-term investments for which the decline in fair value below carrying value was other-than-temporary. We sold all of our trading securities in the first quarter of fiscal 2002.
Income Taxes
In the second quarter and first six months of fiscal 2003, we recorded income tax provisions of $55.9 million and $29.9 million on pre-tax income from continuing operations of $181.3 million and $94.9 million, resulting in effective tax rates of approximately 31% and 32%. In the second quarter of fiscal 2002, 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 second quarter and first six months of fiscal 2002 would have been approximately 32% and 33%.
As of January 31, 2003, we had net deferred tax assets of $234.1 million, which included a valuation allowance of $6.8 million for net operating loss carryforwards relating to our international subsidiaries and certain state capital loss carryforwards. The allowance reflects management’s assessment that we may not receive the benefit of certain loss 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.
Discontinued Operations
On July 31, 2002, we sold our Quicken Loans mortgage business segment 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. In October 2002, we sold our residual equity interest in the purchasing company and recognized a gain of $5.6 million, net of income taxes, on the transaction. See Note 6 of the financial statements.
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 third quarter of fiscal 2003. In accordance with SFAS No. 144, the operating results of Intuit KK have been segregated from continuing operations in our statement of operations for all periods presented. See Note 6 and Note 14 of the financial statements.
Liquidity and Capital Resources
At January 31, 2003, our cash and cash equivalents and short-term investments totaled $1.1 billion, a $131.7 million decrease from July 31, 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 $166.6 million in cash from our operations during the six months ended January 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 $64.9 million and
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adjustments made for non-cash expenses, including depreciation charges of $36.1 million and acquisition-related charges, charges for purchased research and development and amortization of purchased software totaling $34.0 million. Cash generated by these and other operating activities was partially offset by an increase of $188.0 million in accounts receivable, reflecting the seasonality of our business.
We used $130.7 million in cash for investing activities during the 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 generated cash from short-term investments of $95.4 million during the period, with proceeds of $748.7 million from the sale upon maturity of certain short-term investments partially offset by reinvestments of $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.
We used $334.0 million in cash for our financing activities in the first six months of fiscal 2003. The primary component of cash used in financing activities was $423.2 million for the repurchase of treasury stock through our stock repurchase program. See Note 11 of the financial statements. This was partially offset by proceeds of $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 connection with the sale of our Quicken Loans mortgage business in July 2002, we agreed to continue providing to the purchasing company an interest-bearing 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 secured by the related mortgage loans and had an outstanding balance of $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 do not intend to make or modify executive loans in the future. See Note 13 of the financial statements.
We believe that our cash, cash equivalents and short-term investments will be sufficient to meet anticipated seasonal working capital and capital expenditure requirements for at least the next twelve months.
The following table summarizes our contractual obligations to make future payments at January 31, 2003:
Payments Due by Period | |||||||||||||||||||||
(In millions) | Less than 1 | 1-3 | 3-5 | More than 5 | |||||||||||||||||
Contractual Obligations | year | years | years | years | Total | ||||||||||||||||
Restricted cash | $ | 10.8 | $ | — | $ | — | $ | — | $ | 10.8 | |||||||||||
Short-term notes payable | 2.7 | — | — | — | 2.7 | ||||||||||||||||
Long-term debt | — | 7.4 | 2.3 | 3.1 | 12.8 | ||||||||||||||||
Operating leases | 30.2 | 43.6 | 29.6 | 19.8 | 123.2 | ||||||||||||||||
Other obligations | 24.4 | — | — | — | 24.4 | ||||||||||||||||
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 escrow period expires in June 2003. Restricted cash at January 31, 2003 also included $5.0 million for product rebates due our customers.
Other obligations at January 31, 2003 consisted of amounts we owe to former stockholders of CBS Employer Services, Inc. in connection with our acquisition of that company in the fourth quarter of fiscal 2002. This contractual obligation is included in other current liabilities on our balance sheet. See Note 9 of the financial statements.
Reserves for Returns and Rebates
Activity in our reserves for product returns and for rebates during the first six months of fiscal 2003 and comparative balances at January 31, 2002 were as follows:
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 were slightly higher at January 31, 2003 compared to January 31, 2002 because of revenue growth and 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 January 31, 2002 because of an increase in end-user rebates in fiscal 2003.
Recent Pronouncements
On June 29, 2001, the FASB issued SFAS 142, “Goodwill and Other Intangible Assets.” 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. The shift from an amortization approach to an impairment approach applies to all acquisitions completed after June 30, 2001. We adopted the remaining elements of this new standard in the first quarter of fiscal 2003 and therefore ceased amortizing goodwill for acquisitions made prior to July 1, 2001. However, it is possible that in the future we may incur impairment charges related to the goodwill already recorded and to goodwill arising out of future acquisitions. In addition, we will continue to amortize our 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 July 2002, the FASB issued SFAS 146,“Accounting for Costs Associated with Exit and Disposal Activities.”This statement revises the accounting for activities relating to exiting or disposing of businesses or assets under EITF Issue No. 94-3,“Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.”A 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, 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 148 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 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 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 modified 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 us to consolidate a variable interest entity if we are subject to a majority of the risk of loss from the 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 essentially 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 first fiscal year or interim period beginning after JuneDecember 15, 2003. Some ofWe anticipate that the disclosure requirements apply to all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. We do not currently have any variable interest entities and, accordingly, we do not expect our adoption of FIN 46 towill not have a material impact on our financial position, results of operations or cash flows.
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2. Short-Term Investments
As discussed in Note 1,“Concentration of Credit Risk and Significant Customers and Suppliers,”our portfolio of short-term investments consists primarily of investment-grade securities. Except for direct obligations of the United States government, securities issued by agencies of the United States government, and money market or cash management funds, we diversify our short-term investments by limiting our holdings with any individual issuer to a maximum of $5.0 million in each of our three managed portfolios.
The following schedule summarizes the estimated fair value of our short-term investments at the dates indicated.
July 31, | January 31, | |||||||
2003 | 2004 | |||||||
(In thousands) | ||||||||
Corporate notes | $ | 50,471 | $ | 15,558 | ||||
Municipal bonds | 931,374 | 856,550 | ||||||
U.S. government securities | 54,913 | 18,973 | ||||||
$ | 1,036,758 | $ | 891,081 | |||||
The following table summarizes the estimated fair value of our available-for-sale debt securities held in short-term investments classified by the stated maturity date of the security:
July 31, | January 31, | |||||||
2003 | 2004 | |||||||
(In thousands) | ||||||||
Due within one year | $ | 241,110 | $ | 211,127 | ||||
Due within two years | 270,900 | 217,483 | ||||||
Due within three years | 3,088 | 8,881 | ||||||
Due after three years | 521,660 | 453,590 | ||||||
$ | 1,036,758 | $ | 891,081 | |||||
Unrealized gains and losses on short-term investments at July 31, 2003 and January 31, 2004 were not material. Realized gains and losses from the sale of short-term investments were not material in the second quarter or first six months of fiscal 2003 or 2004.
3. Goodwill and Intangible Assets
Changes in the carrying value of goodwill by reportable segment during the first six months of fiscal 2004 were as follows. Our reportable segments are described in Note 6.
Balance | Increase | Effect of | Balance | |||||||||||||
July 31, | (Decrease) | Exchange | January 31, | |||||||||||||
2003 | in Goodwill | Rates | 2004 | |||||||||||||
(In thousands) | ||||||||||||||||
Small Business Products and Services | $ | 308,785 | $ | 98,716 | $ | — | $ | 407,501 | ||||||||
Consumer Tax | 11,204 | 113 | — | 11,317 | ||||||||||||
Professional Accounting Solutions | 90,507 | — | — | 90,507 | ||||||||||||
Vertical Business Management Solutions | 170,522 | 170 | — | 170,692 | ||||||||||||
Other Businesses | 10,073 | — | 676 | 10,749 | ||||||||||||
$ | 591,091 | $ | 98,999 | $ | 676 | $ | 690,766 | |||||||||
The net increase in goodwill was related primarily to our acquisition of Innovative Merchant Solutions LLC in the first quarter of fiscal 2004. See Note 5.
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Purchased intangible assets consisted of the following at the dates indicated:
Life in | July 31, | January 31, | ||||||||||
Years | 2003 | 2004 | ||||||||||
(Dollars in thousands) | ||||||||||||
Customer lists | 3-7 | $ | 171,237 | $ | 187,622 | |||||||
Less accumulated amortization | (105,771 | ) | (118,999 | ) | ||||||||
65,466 | 68,623 | |||||||||||
Purchased technology | 2-7 | 143,605 | 147,247 | |||||||||
Less accumulated amortization | (93,694 | ) | (100,348 | ) | ||||||||
49,911 | 46,899 | |||||||||||
Trade names and logos | 3-7 | 17,199 | 17,302 | |||||||||
Less accumulated amortization | (10,293 | ) | (11,708 | ) | ||||||||
6,906 | 5,594 | |||||||||||
Covenants not to compete | 2-5 | 9,410 | 11,382 | |||||||||
Less accumulated amortization | (6,248 | ) | (7,633 | ) | ||||||||
3,162 | 3,749 | |||||||||||
Total purchased intangible assets | 341,451 | 363,553 | ||||||||||
Total accumulated amortization | (216,006 | ) | (238,688 | ) | ||||||||
Total net purchased intangible assets | $ | 125,445 | $ | 124,865 | ||||||||
The increases in customer lists and covenants not to compete during the first six months of fiscal 2004 were due primarily to our acquisition of Innovative Merchant Solutions LLC. See Note 5.
We summarize the following expenses on the acquisition-related charges line of our statement of operations:
Three Months Ended | Six Months Ended | ||||||||||||||||
January 31, | January 31, | January 31, | January 31, | ||||||||||||||
2003 | 2004 | 2003 | 2004 | ||||||||||||||
(In thousands) | |||||||||||||||||
Amortization of purchased intangible assets | $ | 8,716 | $ | 6,560 | $ | 16,609 | $ | 12,336 | |||||||||
Amortization of acquisition-related deferred compensation | 438 | 220 | 2,000 | 493 | |||||||||||||
Total acquisition-related charges | $ | 9,154 | $ | 6,780 | $ | 18,609 | $ | 12,829 | |||||||||
We expect annual amortization of our purchased intangible assets by fiscal year to be as shown in the following table. Amortization of purchased intangible assets is charged primarily to amortization of purchased software in cost of revenue and to acquisition-related charges in operating expenses on our statement of operations. Amounts include amortization of intangible assets purchased in fiscal 2004. Future acquisitions could cause these amounts to increase. In addition, if impairment events occur they could accelerate the timing of charges.
Expected | |||||
(Dollars in thousands) | Amortization | ||||
Fiscal year ending July 31, | Expense | ||||
2004 | $ | 42,823 | |||
2005 | 36,578 | ||||
2006 | 30,429 | ||||
2007 | 20,194 | ||||
2008 | 9,966 | ||||
Thereafter | 6,709 | ||||
Total expected future amortization expense | $ | 146,699 | |||
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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. SFAS 130 requires the components of other comprehensive income (loss), such as changes in the fair value of available-for-sale securities and foreign translation adjustments, to be added 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 on our statement of operations.
The components of accumulated other comprehensive income (loss), net of income taxes, were as follows:
Marketable | Short-term | Foreign Currency | |||||||||||||||
Securities | Investments | Translation | Total | ||||||||||||||
(In thousands) | |||||||||||||||||
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 | ||||||||
Six months ended January 31, 2004 | |||||||||||||||||
Beginning balance, net of income taxes | $ | 105 | $ | 213 | $ | (1,107 | ) | $ | (789 | ) | |||||||
Unrealized gain, net of income tax provision of $99 | 149 | — | — | 149 | |||||||||||||
Unrealized loss, net of income tax benefit of $55 | — | (81 | ) | — | (81 | ) | |||||||||||
Translation adjustment | — | — | (1,895 | ) | (1,895 | ) | |||||||||||
Other comprehensive income (loss) | 149 | (81 | ) | (1,895 | ) | (1,827 | ) | ||||||||||
Ending balance, net of income taxes | $ | 254 | $ | 132 | $ | (3,002 | ) | $ | (2,616 | ) | |||||||
Three Months Ended | Six Months Ended | |||||||||||||||
January 31, | January 31, | January 31, | January 31, | |||||||||||||
2003 | 2004 | 2003 | 2004 | |||||||||||||
(In thousands) | ||||||||||||||||
Net income | $ | 128,430 | $ | 149,066 | $ | 73,745 | $ | 95,101 | ||||||||
Other comprehensive income (loss) | 2,227 | (1,077 | ) | 7,278 | (1,827 | ) | ||||||||||
Comprehensive net income, net of income taxes | $ | 130,657 | $ | 147,989 | $ | 81,023 | $ | 93,274 | ||||||||
Income tax provision netted against other comprehensive income (loss) | $ | 1,686 | $ | (61 | ) | $ | 5,158 | $ | 44 | |||||||
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5. Acquisitions
On October 4, 2003, we acquired all of the membership interests of Innovative Merchant Solutions LLC and a related entity doing business as Innovative Gateway Solutions (together, “IMS”) for an aggregate purchase price of approximately $116.7 million in cash. Of the total purchase price, $86.3 million was paid to the members of IMS and $30.4 million was deposited into a third-party escrow account at closing. Of the cash deposited into escrow, $10.4 million is payable to former IMS members in January 2005 and the remaining $20.0 million will be paid to former IMS members from escrow in installments of $12.0 million and $8.0 million in October 2004 and October 2005 upon the satisfaction of certain operating contingencies.
IMS offers a full range of merchant account services to small businesses nationwide, including credit and debit card processing services. We acquired IMS as part of our Right for My Business strategy to offer a wider range of business solutions for small businesses. IMS became part of our Small Business Products and Services segment.
On a preliminary basis, we allocated approximately $17.3 million of the IMS purchase price to identified intangible assets and recorded the excess purchase price of $98.4 million as goodwill. We do not expect that any adjustments to the purchase price or the purchase price allocation will be material. The identified intangible assets are being amortized over terms ranging from two to four years. All of the goodwill acquired in this transaction will be deductible for income tax purposes.
IMS’s results of operations from the date of acquisition forward have been included in our consolidated results of operations and were not material. IMS’s results of operations for periods prior to the date of acquisition were also not material when compared to our consolidated results.
The preliminary purchase price allocation for the IMS acquisition was as follows:
Purchase | ||||||
Price | ||||||
Allocation | ||||||
(In thousands) | ||||||
Tangible assets | $ | 5,393 | ||||
Intangible assets: | ||||||
Goodwill | 98,366 | |||||
Customer lists | 15,600 | |||||
Covenant not to compete | 1,700 | |||||
Acquisition costs | (500 | ) | ||||
Other tangible liabilities | (3,860 | ) | ||||
Cash consideration paid | $ | 116,699 | ||||
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6. Industry Segment and Geographic Information
SFAS 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for the way in which public companies disclose certain information about operating segments in their financial reports. Consistent with SFAS 131, 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. We define the chief operating decision maker as our chief executive officer, the office of the chief executive officer, our chief financial officer, certain executives reporting directly to our chief executive officer and our Board of Directors.
All reportable segments except Small Business Products and Services, Vertical Business Management Solutions and Other Businesses operate solely in the United States. All segments sell primarily to customers located in the United States. International total net revenue was less than 7% of consolidated total net revenue for all periods presented.
QuickBooks product revenue is derived primarily from QuickBooks desktop software products. QuickBooks service 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 information technology management software. Service revenue for this segment is derived primarily from outsourced payroll services, QuickBooks support plans and merchant account services. Other revenue for this segment consists of royalties from small business online transactions and interest earned on customer payroll deposits.
Consumer Tax product revenue is derived primarily from TurboTax federal and state consumer desktop tax return preparation software. Consumer Tax service revenue is derived primarily from TurboTax for the Web online tax return preparation services and consumer electronic filing services. Other revenue for this segment is nominal.
Professional Accounting Solutions product revenue is derived primarily from ProSeries and Lacerte professional tax preparation software products. Professional Accounting Solutions service revenue is derived primarily from electronic filing and training services.
Vertical Business Management Solutions, or VBMS, revenue is derived from four businesses that we acquired in fiscal 2002 that provide small business management solutions for selected industries, which we call “Verticals.” Those businesses are Intuit Distribution Management Solutions, MRI Real Estate Solutions, Intuit Construction Business Solutions and Intuit Public Sector Solutions. VBMS product revenue is derived from business management software for these industries. VBMS service revenue consists primarily of technical support, 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 service revenue is nominal while Personal Finance 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 and TaxWiz consumer desktop tax return preparation software and ProFile professional tax preparation products. Service 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, we do not generally track assets by reportable segment and, consequently, we do not disclose assets by reportable segment.
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The following tables show our financial results by reportable segment for the second quarter and first six months of fiscal 2003 and 2004.
Small | Vertical | ||||||||||||||||||||||||||||||||
Business | Professional | Business | |||||||||||||||||||||||||||||||
Three months ended | Products & | Consumer | Accounting | Mgmt | Other | ||||||||||||||||||||||||||||
January 31, 2003 | QuickBooks | Services | Tax | Solutions | Solutions | Businesses | Corporate | Consolidated | |||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||||
Product revenue | $ | 93,154 | $ | 68,727 | $ | 78,256 | $ | 146,385 | $ | 10,017 | $ | 60,701 | $ | — | $ | 457,240 | |||||||||||||||||
Service revenue | 823 | 47,496 | 16,094 | 4,026 | 13,946 | 853 | — | 83,238 | |||||||||||||||||||||||||
Other revenue | — | 4,704 | 909 | — | 58 | 11,927 | — | 17,598 | |||||||||||||||||||||||||
Total net revenue | 93,977 | 120,927 | 95,259 | 150,411 | 24,021 | 73,481 | — | 558,076 | |||||||||||||||||||||||||
Segment operating income (loss) | 50,813 | 37,298 | 30,222 | 118,595 | (3,465 | ) | 32,378 | — | 265,841 | ||||||||||||||||||||||||
Common expenses | — | — | — | — | — | — | (81,420 | ) | (81,420 | ) | |||||||||||||||||||||||
Subtotal | 50,813 | 37,298 | 30,222 | 118,595 | (3,465 | ) | 32,378 | (81,420 | ) | 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 | $ | 50,813 | $ | 37,298 | $ | 30,222 | $ | 118,595 | $ | (3,465 | ) | $ | 32,378 | $ | (84,565 | ) | $ | 181,276 | |||||||||||||||
Small | Vertical | ||||||||||||||||||||||||||||||||
Business | Professional | Business | |||||||||||||||||||||||||||||||
Three months ended | Products & | Consumer | Accounting | Mgmt | Other | ||||||||||||||||||||||||||||
January 31, 2004 | QuickBooks | Services | Tax | Solutions | Solutions | Businesses | Corporate | Consolidated | |||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||||
Product revenue | $ | 100,339 | $ | 80,066 | $ | 102,905 | $ | 151,542 | $ | 9,440 | $ | 64,720 | $ | — | $ | 509,012 | |||||||||||||||||
Service revenue | 927 | 59,215 | 25,780 | 5,261 | 16,604 | 1,769 | — | 109,556 | |||||||||||||||||||||||||
Other revenue | — | 6,059 | 1,287 | — | 101 | 10,274 | — | 17,721 | |||||||||||||||||||||||||
Total net revenue | 101,266 | 145,340 | 129,972 | 156,803 | 26,145 | 76,763 | — | 636,289 | |||||||||||||||||||||||||
Segment operating income (loss) | 48,128 | 52,123 | 62,406 | 119,189 | 161 | 35,477 | — | 317,484 | |||||||||||||||||||||||||
Common expenses | — | — | — | — | — | — | (88,770 | ) | (88,770 | ) | |||||||||||||||||||||||
Subtotal | 48,128 | 52,123 | 62,406 | 119,189 | 161 | 35,477 | (88,770 | ) | 228,714 | ||||||||||||||||||||||||
Acquisition-related costs | — | — | — | — | — | — | (10,104 | ) | (10,104 | ) | |||||||||||||||||||||||
Realized net gain on marketable securities | — | — | — | — | — | — | 90 | 90 | |||||||||||||||||||||||||
Interest and other income | — | — | — | — | — | — | 7,170 | 7,170 | |||||||||||||||||||||||||
Income (loss) from continuing operations before income taxes | $ | 48,128 | $ | 52,123 | $ | 62,406 | $ | 119,189 | $ | 161 | $ | 35,477 | $ | (91,614 | ) | $ | 225,870 | ||||||||||||||||
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Small | Vertical | ||||||||||||||||||||||||||||||||
Business | Professional | Business | |||||||||||||||||||||||||||||||
Six months ended | Products & | Consumer | Accounting | Mgmt | Other | ||||||||||||||||||||||||||||
January 31, 2003 | QuickBooks | Services | Tax | Solutions | Solutions | Businesses | Corporate | Consolidated | |||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||||
Product revenue | $ | 130,992 | $ | 127,115 | $ | 82,111 | $ | 152,735 | $ | 15,647 | $ | 90,543 | $ | — | $ | 599,143 | |||||||||||||||||
Service revenue | 1,404 | 86,026 | 18,099 | 4,138 | 27,114 | 2,061 | — | 138,842 | |||||||||||||||||||||||||
Other revenue | — | 8,994 | 1,104 | — | 63 | 22,802 | — | 32,963 | |||||||||||||||||||||||||
Total net revenue | 132,396 | 222,135 | 101,314 | 156,873 | 42,824 | 115,406 | — | 770,948 | |||||||||||||||||||||||||
Segment operating income (loss) | 56,418 | 70,084 | 15,152 | 101,847 | (10,677 | ) | 37,527 | — | 270,351 | ||||||||||||||||||||||||
Common expenses | — | — | — | — | — | — | (161,166 | ) | (161,166 | ) | |||||||||||||||||||||||
Subtotal | 56,418 | 70,084 | 15,152 | 101,847 | (10,677 | ) | 37,527 | (161,166 | ) | 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 | $ | 56,418 | $ | 70,084 | $ | 15,152 | $ | 101,847 | $ | (10,677 | ) | $ | 37,527 | $ | (175,493 | ) | $ | 94,858 | |||||||||||||||
Small | Vertical | ||||||||||||||||||||||||||||||||
Business | Professional | Business | |||||||||||||||||||||||||||||||
Six months ended | Products & | Consumer | Accounting | Mgmt | Other | ||||||||||||||||||||||||||||
January 31, 2004 | QuickBooks | Services | Tax | Solutions | Solutions | Businesses | Corporate | Consolidated | |||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||||
Product revenue | $ | 142,282 | $ | 152,093 | $ | 105,217 | $ | 158,451 | $ | 18,978 | $ | 92,176 | $ | — | $ | 669,197 | |||||||||||||||||
Service revenue | 1,820 | 104,404 | 28,486 | 5,276 | 32,619 | 3,218 | — | 175,823 | |||||||||||||||||||||||||
Other revenue | — | 11,942 | 1,438 | — | 841 | 19,576 | — | 33,797 | |||||||||||||||||||||||||
Total net revenue | 144,102 | 268,439 | 135,141 | 163,727 | 52,438 | 114,970 | — | 878,817 | |||||||||||||||||||||||||
Segment operating income (loss) | 50,404 | 91,401 | 40,497 | 100,090 | 1,044 | 40,258 | — | 323,694 | |||||||||||||||||||||||||
Common expenses | — | — | — | — | — | — | (175,056 | ) | (175,056 | ) | |||||||||||||||||||||||
Subtotal | 50,404 | 91,401 | 40,497 | 100,090 | 1,044 | 40,258 | (175,056 | ) | 148,638 | ||||||||||||||||||||||||
Acquisition-related costs | — | — | — | — | — | — | (19,442 | ) | (19,442 | ) | |||||||||||||||||||||||
Realized net gain on marketable securities | — | — | — | — | — | — | 237 | 237 | |||||||||||||||||||||||||
Interest and other income | — | — | — | — | — | — | 14,660 | 14,660 | |||||||||||||||||||||||||
Income (loss) from continuing operations before income taxes | $ | 50,404 | $ | 91,401 | $ | 40,497 | $ | 100,090 | $ | 1,044 | $ | 40,258 | $ | (179,601 | ) | $ | 144,093 | ||||||||||||||||
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7. Other Current Liabilities
July 31, | January 31, | |||||||
2003 | 2004 | |||||||
(In thousands) | ||||||||
Reserve for product returns | $ | 34,406 | $ | 58,319 | ||||
Reserve for rebates | 10,401 | 37,431 | ||||||
Executive deferred compensation plan | 6,245 | 11,200 | ||||||
Acquisition-related items | 2,619 | 12,607 | ||||||
Sales tax accrual | 1,906 | 11,986 | ||||||
Other accruals | 3,552 | 14,110 | ||||||
$ | 59,129 | $ | 145,653 | |||||
8. Commitments
Reserve for Vacant Facilities
During the third quarter 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 by subleasing the vacant space. In that quarter, we recorded a $13.2 million reserve that was equal to the remaining future lease commitments for these facilities, net of estimated future sublease income. During the fourth quarter of fiscal 2003, we decided that we would reoccupy one of the two vacant buildings and that the reserve for the other vacant building should be increased to reflect our revised estimate of future sublease income for that facility. We recorded a net adjustment of $0.5 million to the reserve that resulted in a credit for vacant facilities on our statement of operations in that quarter. Our actual future cash payments may exceed the total Mountain View reserve balance at January 31, 2004 by a maximum of $2.8 million if we are unable to sublease the remaining vacant Mountain View property. The lease related to this facility ends in fiscal 2010.
Activity in the reserve for vacant Mountain View facilities for the second quarter and first six months of fiscal 2003 and 2004 was as follows:
Three Months Ended | Six Months Ended | ||||||||||||||||
January 31, | January 31, | January 31, | January 31, | ||||||||||||||
2003 | 2004 | 2003 | 2004 | ||||||||||||||
(In thousands) | |||||||||||||||||
Beginning balance | $ | 11,897 | $ | 9,264 | $ | 12,478 | $ | 9,701 | |||||||||
Cash lease payments applied against the reserve | (584 | ) | (310 | ) | (1,165 | ) | (747 | ) | |||||||||
Ending balance | $ | 11,313 | $ | 8,954 | $ | 11,313 | $ | 8,954 | |||||||||
The short-term and long-term components of this reserve and their location on our balance sheet were as follows at the dates indicated.
July 31, | January 31, | ||||||||
2003 | 2004 | ||||||||
(In thousands) | |||||||||
Short-term portion of reserve in other current liabilities | $ | 1,394 | $ | 1,258 | |||||
Long-term portion of reserve in long-term obligations | 8,307 | 7,696 | |||||||
Total reserve | $ | 9,701 | $ | 8,954 | |||||
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CBS Employer Services Acquisition Accrual
We acquired CBS Employer Services, Inc. in the fourth quarter of fiscal 2002. In connection with this acquisition, we recorded a total accrual of $26.4 million that included $21.6 million for purchase price deferrals and $4.8 million for restructuring and transaction costs. Activity in this reserve for the six months ended January 31, 2003 and 2004 was as follows:
Beginning | Cash | Ending | ||||||||||
Balance | Payments | Balance | ||||||||||
(In thousands) | ||||||||||||
Six months ended January 31, 2003 | ||||||||||||
Non-compete clause | $ | 1,700 | $ | — | $ | 1,700 | ||||||
Purchase price deferrals | 13,143 | (445 | ) | 12,698 | ||||||||
Shareholder escrow | 5,800 | — | 5,800 | |||||||||
Restructuring and transaction costs | 4,716 | (480 | ) | 4,236 | ||||||||
$ | 25,359 | $ | (925 | ) | $ | 24,434 | ||||||
Six months ended January 31, 2004 | ||||||||||||
Non-compete clause | $ | 1,700 | $ | — | $ | 1,700 | ||||||
Purchase price deferrals | 13,306 | — | 13,306 | |||||||||
Shareholder escrow | 2,499 | — | 2,499 | |||||||||
Restructuring and transaction costs | — | — | — | |||||||||
$ | 17,505 | $ | — | $ | 17,505 | |||||||
The CBS acquisition accrual totaled $17.5 million at July 31, 2003 and was included in long-term obligations on our balance sheet. During the second quarter of fiscal 2004, we changed our intention with respect to $11.9 million of payments owed to former owners. Therefore, this amount was reclassified to other current liabilities on our balance sheet as of January 31, 2004. This amount will be paid in the third quarter of fiscal 2004.
Operating Lease and Other Contractual Obligations
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations” in Item 2 for information on our operating lease and other contractual obligations.
9. Income Taxes
We compute our provision 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. Our effective tax rates for the second quarter and first six months of fiscal 2003 were approximately 31% and 32%. Our effective tax rates for the second quarter and first six months of fiscal 2004 were approximately 34%. Our effective tax rate for the second quarter of fiscal 2003 differed from the federal statutory rate primarily due to the net effect of the benefit received from tax-exempt interest income and various tax credits offset by state taxes. Our effective tax rate for the first six months of fiscal 2003 differed from the federal statutory rate primarily due to the net effect of the benefit received from tax-exempt interest income and various tax credits offset by state taxes and acquisition-related charges recorded in the first quarter of fiscal 2003. Our effective tax rates for the second quarter and first six months of fiscal 2004 differed from the federal statutory rate primarily due to the net effect of the benefit received from tax-exempt interest income and various tax credits offset by state taxes.
10. Stockholders’ Equity
Stock Repurchase Program
In May 2001, Intuit’s Board of Directors initiated Repurchase Plan I and authorized the Company to repurchase up to $500.0 million of its common stock from time to time over a three-year period. In July 2002, our Board of
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Directors increased the authorized purchase amount by $250.0 million to a total of $750.0 million. Repurchase Plan I was concluded in December 2002 when the authorized purchase amount under the program was reached. In March 2003, Intuit’s Board of Directors initiated Repurchase Plan II and authorized the Company to repurchase up to $500.0 million of its common stock from time to time over a three-year period. Repurchase Plan II was concluded in November 2003 when the authorized purchase amount under the program was reached. In August 2003, Intuit’s Board of Directors initiated Repurchase Plan III and authorized the Company to repurchase up to $500.0 million of its common stock from time to time over a three-year period.
The following table summarizes our stock repurchase activity under these plans, including broker commissions, through January 31, 2004:
Plan I | Plan II | Plan III | Average | |||||||||||||||||||||||||
Price | ||||||||||||||||||||||||||||
Fiscal Year | Shares | Amount | Shares | Amount | Shares | Amount | Per Share | |||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||
2001 | 238,500 | $ | 8,358 | — | $ | — | — | $ | — | $ | 35.04 | |||||||||||||||||
2002 | 7,361,839 | 318,422 | — | — | — | — | 43.25 | |||||||||||||||||||||
2003 | 9,002,244 | 423,211 | 8,937,809 | 390,432 | — | — | 45.35 | |||||||||||||||||||||
2004 to date | — | — | 2,342,800 | 109,525 | 2,954,100 | 151,602 | 49.30 | |||||||||||||||||||||
16,602,583 | $ | 749,991 | 11,280,609 | $ | 499,957 | 2,954,100 | $ | 151,602 | 45.45 | |||||||||||||||||||
When we reissue treasury shares, if the proceeds from the sale are more than the average price we paid to acquire the shares we record an increase in additional paid-in capital. Conversely, if the proceeds from the sale are less than the average price we paid to acquire the shares, we record a decrease in additional paid-in capital to the extent of increases previously recorded for similar transactions and a decrease in retained earnings for any remaining amount.
Shares repurchased under the plans described above from the inception of the plans increased our basic and diluted net income per share by $0.04 and $0.09 in the second quarter of fiscal 2003 and 2004 and by $0.03 and $0.06 in the first six months of fiscal 2003 and 2004.
Distribution and Dilutive Effect of Options
The following table shows option grants to “Named Executives” and to all employees for the 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 2003.
Twelve Months Ended | Six Months | |||||||||||
Ended | ||||||||||||
July 31, | July 31, | January 31, | ||||||||||
2002 | 2003 | 2004 | ||||||||||
Net option grants during the period as a percentage of outstanding shares | 3.2 | % | 2.7 | % | 0.7 | % | ||||||
Grants to Named Executives during the period as a percentage of total options granted | 3.5 | % | 8.9 | % | 6.9 | % | ||||||
Grants to Named Executives during the period as a percentage of outstanding shares | 0.1 | % | 0.3 | % | 0.1 | % | ||||||
Options held by Named Executives as a percentage of total options outstanding | 9.0 | % | 11.6 | % | 12.7 | % |
We define net option grants as options granted less options canceled or expired and returned to the 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.
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11. Litigation
Leonard Knable et al. v. Intuit Inc. was filed in Los Angeles County Superior Court on February 24, 2003. The original complaint alleged various claims for unfair practices and deceptive and misleading advertising, fraud and deceit and product liability, on behalf of a purported class. The allegations were based on allegedly defective design and operation of the product activation feature in Intuit’s TurboTax 2002 for Windows desktop software and Intuit’s representations and disclosures about product activation. The complaint sought disgorgement of revenue from the sale of the product, compensatory and punitive damages, injunctive relief and attorneys’ fees and costs. On Intuit’s motion, the court dismissed the complaint on September 29, 2003, but granted plaintiffs leave to amend. Plaintiffs filed an amended complaint on October 30, 2003, adding causes of action for trespass to chattels, breach of contract, breach of the covenant of good faith and fair dealing, and negligent misrepresentation. Intuit filed a motion to dismiss the amended complaint on December 4, 2003. The court granted the motion and dismissed the action in its entirety without leave to amend on January 30, 2004.
On September 17, 2003, Muriel Siebert & Co., Inc. v. Intuit Inc. was filed in the Supreme Court of the State of New York, County of New York. The lawsuit alleges various claims for breach of contract, breach of express and implied covenants of good faith and fair dealing, breach of fiduciary duty, misrepresentation and/or fraud, and promissory estoppel. The allegations relate to Quicken Brokerage powered by Siebert, a strategic alliance between the two companies. The complaint seeks compensatory, punitive, and other damages. On September 22, 2003, Intuit filed an arbitration demand against Siebert & Co., Inc. in San Jose, CA seeking arbitration of all claims asserted by both parties. The New York court is currently determining whether the matter will proceed in New York state court or in arbitration. Intuit believes this lawsuit is without merit and intends to defend the litigation vigorously.
Intuit is subject to certain 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, regardless of outcome, litigation can have an adverse impact on Intuit because of defense costs, diversion of management resources and other factors.
12. Related Parties
Loans to Executive Officers and Other Employees
Prior to July 30, 2002, loans to executive officers were generally made in connection with their relocation and purchase of a residence near their new place of work. Consistent with the requirements of The Sarbanes-Oxley Act of 2002, we have not made or modified any loans to executive officers since July 30, 2002 and we do not intend to make or modify any loans to executive officers in the future.
Loans to executive officers and other employees outstanding as of the dates indicated were as follows:
July 31, | January 31, | |||||||
2003 | 2004 | |||||||
(In thousands) | ||||||||
Loans to executive officers | $ | 14,891 | $ | 13,672 | ||||
Loans to other employees | 4,799 | 4,534 | ||||||
$ | 19,690 | $ | 18,206 | |||||
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ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Caution Regarding Forward-Looking Statements
Throughout this Report, we make forward-looking statements that are based on our current expectations, estimates and projections about our business and our industry, and that 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 words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” and other similar terms. These forward-looking statements include, among other things, projections of our future financial performance, our anticipated growth, the strategies and trends we anticipate in our businesses and the customer segments in which we operate, and the competitive nature and anticipated growth of those segments.
We caution investors that forward-looking statements are only predictions based on our current expectations about future events. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Our actual results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements. 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 caption “Risks That Could Affect Future Results.” 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 2003 (filed with the SEC on September 19, 2003) and in our other filings with the SEC, before deciding to invest in our stock or to maintain or change your investment. 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 transform the way people run their businesses and manage their financial lives. Our products and services fall into the following principal categories: QuickBooks® small business accounting and business management solutions; small business products and services that include payroll, financial supplies, technical support and information technology management solutions; TurboTax® consumer tax products and services; ProSeries® and Lacerte® professional tax products and services; and Intuit-branded business management solutions designed to meet the specialized requirements of businesses in selected industries, which we call “Verticals.” Our other businesses consist primarily of Quicken® personal finance products and services and our Canadian business.
Expanding Product and Service Offerings. During the last two years, we have expanded the products and services that we offer. Under our Right for My Business strategy we have expanded our QuickBooks product line to offer easy-to-use, industry-specific versions of QuickBooks, which we call “flavors.” We have also introduced new versions of QuickBooks for companies that, due to their larger size or complexity, have more demanding accounting needs. We have introduced business solutions that go beyond accounting software to address a wider range of business management challenges that small businesses face. Finally, we are acquiring companies that offer more complete and customizable business management solutions to businesses in selected industries. 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. Finally, as we add products and services that are complementary to our core products, we are focusing on strengthening our cross-selling capabilities. We expect that these increased capabilities will allow us to generate additional revenue from our existing customers, particularly our small business customers.
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Seasonality. Our tax businesses are highly seasonal. Sales of tax preparation products and services are heavily concentrated in the period from November through April. These seasonal patterns mean that our quarterly total net revenue is usually highest during our second and third quarters ending January 31 and April 30. Although since fiscal 2000 we have recognized an increasing portion of our Consumer Tax annual revenue during the third quarter compared to the second quarter, this trend appears to be moderating and may not continue. We typically report losses in our first quarter ending October 31 and fourth quarter ending July 31 when revenue from our tax businesses is minimal, while operating expenses to develop new products and services continue at relatively consistent levels.
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 or loss and net income or loss, 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. Senior management has discussed the development and selection of these critical policies and their disclosure in this Report with the Audit Committee of our Board of Directors.
• | Net Revenue – Revenue Recognition. Intuit derives revenue 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.”We generally 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 undelivered services are essential to the functionality of the delivered products and services, to determine whether vendor-specific evidence of fair value exists for each undelivered 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. Amounts invoiced relating to arrangements where revenue cannot be recognized are reflected on our balance sheet as deferred revenue and recognized over time as the applicable revenue recognition criteria are satisfied. | |
• | Net Revenue – Return and Rebate Reserves. As part of our revenue recognition policy, we estimate future product returns and rebate payments and establish reserves against revenue at the time of sale based on these estimates. Product returns by distributors and retailers principally relate to the return of obsolete products. Our return policy allows distributors and retailers, subject to contractual limitations, to return purchased products. For product returns reserves, we consider the volume and price mix of products in the retail channel, historical return rates for prior releases of the product, trends in retailer inventory and economic trends that might impact customer demand for our products (including the competitive environment and the timing of new releases of our products). We fully reserve for obsolete products in the distribution channels. | |
Our rebate reserves include distributor and retailer sales incentive rebates and end-user rebates. Our estimated reserves for distributor and retailer incentive rebates are based on distributors’ and retailers’ actual performance against the terms and conditions of rebate programs, which we typically establish annually. Our reserves for end-user rebates are estimated based on the terms and conditions of the specific promotional rebate program, actual sales during the promotion, the amount of redemptions received and historical redemption trends by product and by type of promotional program. | ||
In the past, actual returns and rebates have approximated and not generally exceeded the reserves that we have established. However, actual returns and rebates in any future period are inherently uncertain. If we were to change our assumptions and estimates, our revenue reserves would change, which would impact the net revenue we report. If actual returns and rebates are significantly greater than the reserves we have established, the actual results would decrease our future reported revenue. Conversely, if actual returns and rebates are significantly less than our reserves, this would increase our future reported revenue. |
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• | Allowance for Doubtful Accounts. We make ongoing assumptions relating to the collectibility of our accounts receivable. The accounts receivable amount on our balance sheet includes a reserve for accounts that might not be paid. In determining the amount of the reserve, we consider our historical level of credit losses. We also make judgments about the creditworthiness of significant customers based on ongoing credit evaluations, and we assess current economic trends that might impact the level of credit losses in the future. Our reserves have generally been adequate to cover our actual credit losses. However, since we cannot reliably predict future changes in the financial stability of our customers, we cannot guarantee that our reserves will continue to be adequate. If actual credit losses are significantly greater than the reserve we have established, that would increase our general and administrative expenses and reduce our reported net income. Conversely, if actual credit losses are significantly less than our reserve, this would eventually decrease our general and administrative expenses and increase our reported net income. | |
• | Goodwill, Purchased Intangibles and Other Long-Lived Assets – Impairment Assessments. We make judgments about the recoverability of 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 typically make various assumptions about the future prospects for the business that the asset relates to, consider market factors specific to that business and estimate future cash flows to be generated by that business. Based on these assumptions and estimates, we determine whether we need to record an impairment charge to reduce the value of the asset 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 affect our reported financial results. More conservative assumptions of the anticipated future benefits from these businesses could result in greater impairment charges, which would decrease net income and result in lower asset values on our balance sheet. Conversely, less conservative assumptions could result in smaller or no impairment charges, higher net income and higher asset values. At January 31, 2004, we had $690.8 million in goodwill and $124.9 million in intangible assets on our balance sheet. | |
• | Accounting for Stock-Based Incentive Programs. We currently measure compensation expense for our stock-based incentive programs using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees.”Under this method, we do not record compensation expense when stock options are granted to eligible participants as long as the exercise price is not less than the fair market value of the stock when the option is granted. We also do not record compensation expense in connection with our 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 of the stock at the beginning of each offering period or at the end of each purchase period. In accordance with Statement of Financial Accounting Standards No. 123,“Accounting for Stock-Based Compensation,”and SFAS 148,“Accounting for Stock-Based Compensation – Transition and Disclosure,”we disclose our pro forma net income or loss and net income or loss per share as if the fair value-based method had been applied in measuring compensation expense for our stock-based incentive programs. We have elected to follow APB 25 because the fair value accounting provided for under SFAS 123 requires the use of option valuation models that were not developed for use in valuing incentive stock options and employee stock purchase plan shares. | |
On April 22, 2003, the Financial Accounting Standards Board decided to require all companies to expense the value of incentive stock options. Companies will be required to measure the cost of incentive stock options according to their fair value. The FASB has indicated that it plans to issue an exposure draft of a new accounting standard addressing this matter. This new accounting standard could become effective as early as 2004. Prior to issuance of this exposure draft, the FASB has indicated that it will be addressing several significant technical issues. A method to determine the fair value of incentive stock options must be established. Current accounting standards require the use of an option-pricing model, such as the Black-Scholes model, to determine fair value and provide guidance on adjusting some of the input factors used in the model. This valuation approach has received significant criticism and may be subject to changes that could have a significant impact on the calculated fair value of incentive stock options under the new standard. Among other things, the FASB must also determine the extent to which the new accounting standard will permit adjustments to recognized expense for actual option forfeitures and actual performance outcomes. This determination will affect the timing and amount of compensation expense recognized. |
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We monitor progress at the FASB and other developments with respect to the general issue of stock-based incentive compensation. In the future, should we expense the value of stock-based incentive compensation, either out of choice or due to new requirements issued by the FASB, and/or decide to alter our current employee compensation programs to provide other benefits in place of incentive stock options, we may have to recognize substantially more compensation expense in future periods that could have a material adverse impact on our results of operations | ||
• | Income Taxes – Estimates of Effective Tax Rates, Deferred Taxes and Valuation Allowance. When we prepare our consolidated financial statements, we estimate our income taxes based on the various jurisdictions where we conduct business. This requires us to estimate our current tax exposure and to assess temporary differences that result from differing treatments of certain items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which we show on our balance sheet. We must then assess the likelihood that our deferred tax assets will be realized. To the extent we believe that realization is not likely, we establish a valuation allowance. When we establish a valuation allowance or increase this allowance in an accounting period, we record a corresponding tax expense on our statement of operations. | |
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, 2004 was $217.9 million, net of the valuation allowance of $7.5 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 in assessing the need for the valuation allowance, we could 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
Total net revenue of $636.3 million increased 14% in the second quarter of fiscal 2004 compared to the second quarter of fiscal 2003. Total net revenue of $878.8 million increased 14% in the first six months of fiscal 2004 compared to the same period of fiscal 2003. Total net revenue was higher in both of the fiscal 2004 periods due primarily to growth in our Small Business Products and Services, Consumer Tax and QuickBooks segments.
Intuit had net income from continuing operations of $149.1 million for the second quarter of fiscal 2004, up 19% from $125.4 million in the second quarter of fiscal 2003. Net income from continuing operations was $95.1 million for the six months ended January 31, 2004, up 47% from $64.9 million for the six months ended January 31, 2003. The growth in net income from continuing operations in excess of the growth in revenue for the quarter and six months ended January 31, 2004 was primarily due to less acquisition-related charges and no purchased research and development expenses in fiscal 2004.
Diluted net income per share from continuing operations was $0.73 for the second quarter of fiscal 2004, up 24% from $0.59 per diluted share in the second quarter of fiscal 2003. Diluted net income per share from continuing operations was $0.47 for the six months ended January 31, 2004, up 52% from $0.31 per diluted share in the six months ended January 31, 2003. The growth in diluted net income per share from continuing operations in excess of the growth in net income from continuing operations for both of the fiscal 2004 periods was primarily due to the net reduction of shares outstanding resulting from our share buyback plan.
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Total Net Revenue
We operate in six business segments. The following represents the net revenue for those six segments for the quarter and six months ended January 31, 2004 and 2003.
% Total | % Total | % Total | % Total | |||||||||||||||||||||||||||||||||||||||
Q2 | Net | Q2 | Net | Q2 % | YTD | Net | YTD | Net | YTD % | |||||||||||||||||||||||||||||||||
FY03 | Revenue | FY04 | Revenue | Change | FY03 | Revenue | FY04 | Revenue | Change | |||||||||||||||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||||||||||||||||||||
QuickBooks | ||||||||||||||||||||||||||||||||||||||||||
Product | $ | 93.2 | $ | 100.4 | $ | 131.0 | $ | 142.3 | ||||||||||||||||||||||||||||||||||
Service | 0.8 | 0.9 | 1.4 | 1.8 | ||||||||||||||||||||||||||||||||||||||
Other | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
Subtotal | 94.0 | 17 | % | 101.3 | 16 | % | 8 | % | 132.4 | 17 | % | 144.1 | 16 | % | 9 | % | ||||||||||||||||||||||||||
Small Business | ||||||||||||||||||||||||||||||||||||||||||
Products and | ||||||||||||||||||||||||||||||||||||||||||
Services | ||||||||||||||||||||||||||||||||||||||||||
Product | 68.7 | 80.1 | 127.1 | 152.1 | ||||||||||||||||||||||||||||||||||||||
Service | 47.5 | 59.2 | 86.0 | 104.4 | ||||||||||||||||||||||||||||||||||||||
Other | 4.7 | 6.0 | 9.0 | 11.9 | ||||||||||||||||||||||||||||||||||||||
Subtotal | 120.9 | 22 | % | 145.3 | 23 | % | 20 | % | 222.1 | 29 | % | 268.4 | 31 | % | 21 | % | ||||||||||||||||||||||||||
Consumer Tax | ||||||||||||||||||||||||||||||||||||||||||
Product | 78.2 | 102.9 | 82.1 | 105.2 | ||||||||||||||||||||||||||||||||||||||
Service | 16.1 | 25.8 | 18.1 | 28.5 | ||||||||||||||||||||||||||||||||||||||
Other | 0.9 | 1.3 | 1.1 | 1.5 | ||||||||||||||||||||||||||||||||||||||
Subtotal | 95.2 | 17 | % | 130.0 | 20 | % | 36 | % | 101.3 | 13 | % | 135.2 | 15 | % | 33 | % | ||||||||||||||||||||||||||
Professional | ||||||||||||||||||||||||||||||||||||||||||
Accounting | ||||||||||||||||||||||||||||||||||||||||||
Solutions | ||||||||||||||||||||||||||||||||||||||||||
Product | 146.4 | 151.5 | 152.8 | 158.4 | ||||||||||||||||||||||||||||||||||||||
Service | 4.0 | 5.3 | 4.1 | 5.3 | ||||||||||||||||||||||||||||||||||||||
Other | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
Subtotal | 150.4 | 27 | % | 156.8 | 25 | % | 4 | % | 156.9 | 20 | % | 163.7 | 19 | % | 4 | % | ||||||||||||||||||||||||||
Vertical | ||||||||||||||||||||||||||||||||||||||||||
Business | ||||||||||||||||||||||||||||||||||||||||||
Management | ||||||||||||||||||||||||||||||||||||||||||
Solutions | ||||||||||||||||||||||||||||||||||||||||||
Product | 10.0 | 9.4 | 15.6 | 19.0 | ||||||||||||||||||||||||||||||||||||||
Service | 14.0 | 16.6 | 27.1 | 32.6 | ||||||||||||||||||||||||||||||||||||||
Other | 0.1 | 0.1 | 0.1 | 0.8 | ||||||||||||||||||||||||||||||||||||||
Subtotal | 24.1 | 4 | % | 26.1 | 4 | % | 9 | % | 42.8 | 6 | % | 52.4 | 6 | % | 22 | % | ||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||||||||||||||||||
Businesses | ||||||||||||||||||||||||||||||||||||||||||
Product | 60.7 | 64.7 | 90.5 | 92.2 | ||||||||||||||||||||||||||||||||||||||
Service | 0.9 | 1.8 | 2.1 | 3.2 | ||||||||||||||||||||||||||||||||||||||
Other | 11.9 | 10.3 | 22.8 | 19.6 | ||||||||||||||||||||||||||||||||||||||
Subtotal | 73.5 | 13 | % | 76.8 | 12 | % | 4 | % | 115.4 | 15 | % | 115.0 | 13 | % | 0 | % | ||||||||||||||||||||||||||
Total net revenue | $ | 558.1 | 100 | % | $ | 636.3 | 100 | % | 14 | % | $ | 770.9 | 100 | % | $ | 878.8 | 100 | % | 14 | % | ||||||||||||||||||||||
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QuickBooks
QuickBooks product revenue is derived primarily from QuickBooks desktop software products. QuickBooks service revenue is derived from QuickBooks Online Edition.
QuickBooks total net revenue of $101.3 million and $144.1 million increased 8% and 9% in the second quarter and first six months of fiscal 2004 compared to the same periods of fiscal 2003. The revenue increases reflected a mix shift to higher-priced industry-specific and enterprise versions of QuickBooks. This was partially offset by lower QuickBooks Pro and Basic unit sales and the increased use of consignment sales to retailers in the second quarter and first six months of fiscal 2004, which delays revenue recognition to the time of the end-user sale. In addition, fewer customers were affected by our elimination of technical support for older products in the quarter and six months ended January 31, 2004 than in the same periods of fiscal 2003. This resulted in a smaller number of customers upgrading to newer versions of QuickBooks in the quarter and six months ended January 31, 2004 than in the same periods of fiscal 2003.
Small Business Products and Services
Small Business Products and Services product revenue is comprised of QuickBooks Do-It-Yourself Payroll, which offers payroll tax tables, forms and electronic tax payment and filing services on a subscription basis to small businesses that prepare their own payrolls; financial supplies such as paper checks, envelopes and invoices; and information technology management software. Services revenue for this segment is derived primarily from outsourced payroll services, QuickBooks support plans and merchant account services. Other revenue for this segment consists primarily of royalties from small business online services and interest earned on customer payroll deposits.
Small Business Products and Services total net revenue of $145.3 million increased 20% in the second quarter of fiscal 2004 compared to the second quarter of fiscal 2003. Growth in this segment was driven primarily by an increase in QuickBooks Do-It-Yourself Payroll, or DIY, revenue and by our October 2003 acquisition of Innovative Merchant Solutions. DIY revenue was higher in the second quarter of fiscal 2004 than in the same quarter of the prior year due to growth in the average customer base and the full impact in fiscal 2004 of a December 2002 price increase.
Small Business Products and Services total net revenue of $268.4 million increased 21% in the first six months of fiscal 2004 compared to the same period of fiscal 2003. Growth in DIY and information technology management software revenue and our acquisition of Innovative Merchant Solutions in October 2003 drove the year to date increase.
Consumer Tax
Consumer Tax product revenue is derived primarily from TurboTax federal and state consumer desktop tax return preparation products. Consumer Tax service revenue is derived primarily from TurboTax for the Web online tax return preparation services and consumer electronic filing services. Paid Web units exclude tax filing units that we donate under the Intuit Tax Freedom Project.
Consumer Tax total net revenue of $130.0 million and $135.2 million increased 36% and 33% in the second quarter and first six months of fiscal 2004 compared to the same periods of fiscal 2003. Desktop revenues were up in the second quarter of fiscal 2004 and desktop net selling prices were higher due primarily to the elimination of rebates for certain products. TurboTax for the Web revenue increased in the second quarter of fiscal 2004 due to unit growth and higher average selling prices. Electronic filing revenue was also up in the second quarter of fiscal 2004 due to unit growth. Due to the highly seasonal nature of our Consumer Tax business, first quarter fiscal 2004 and 2003 revenue was nominal. We will not have complete results for the entire 2003 tax season until late in fiscal 2004.
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Professional Accounting Solutions
Professional Accounting Solutions, or PAS, product revenue is derived primarily from ProSeries and Lacerte professional tax preparation software products. PAS service revenue is derived primarily from electronic filing and training services.
PAS total net revenue of $156.8 million and $163.7 million increased 4% in the second quarter and first six months of fiscal 2004 compared to the same periods of fiscal 2003. The second quarter fiscal 2004 increase was due to the availability of more tax forms in our professional tax products which results in accelerated revenue as additional product is deemed to be delivered and to higher average selling prices related to product enhancements. Due to the highly seasonal nature of our PAS business, first quarter fiscal 2004 and 2003 revenue was nominal. We will not have complete results for the entire 2003 tax season until late in fiscal 2004.
Vertical Business Management Solutions
Vertical Business Management Solutions, or VBMS, revenue is derived from four businesses that we acquired in fiscal 2002 that provide business management solutions for companies in selected industries. Those businesses are Intuit Distribution Management Solutions, whose Intuit Eclipse™ line of products and services offers business management software for the wholesale durable goods industry; MRI Real Estate Solutions, whose Intuit MRI line of products and services provides business management software solutions for commercial and residential property managers; Intuit Construction Business Solutions, whose Intuit MasterBuilder™ line of products and services provides business management solutions for the construction industry; and Intuit Public Sector Solutions, whose Intuit Fundware™ line of products and services offers accounting and business management software solutions for nonprofit organizations, universities and government agencies. VBMS product revenue is derived from business management software for these vertical industries. VBMS service revenue consists primarily of technical support, consulting and training services.
VBMS total net revenue of $26.1 million and $52.4 million increased 9% and 22% in the second quarter and first six months of fiscal 2004 compared to the same periods of fiscal 2003. Growth in this segment was driven primarily by increased service and implementation revenue sold to new and existing customers.
Other Businesses
Other Businesses revenue is derived primarily from Personal Finance products and services and revenue from our Canadian operations. Personal Finance product revenue is derived primarily from Quicken desktop software products. Personal Finance service revenue is nominal while Personal Finance 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 and TaxWiz consumer desktop tax return preparation software and ProFile professional tax preparation products. Service revenue in Canada consists primarily of revenue from software maintenance contracts sold with QuickBooks.
Other Businesses total net revenue of $76.8 million and $115.0 million increased 4% in the second quarter and remained flat for the first six months of fiscal 2004 compared to the same periods of fiscal 2003. Lower Quicken revenue, reflecting the continuing lack of growth in the personal finance desktop software category, was offset by higher revenue in Canada. Aggregate average selling prices for Quicken in the fiscal 2004 periods were higher due to a mix shift to our higher-priced Quicken Premier and Home and Business products. However, lower overall Quicken unit sales due to increased use of consignment, which delays revenue recognition to the time of the end-user sale, more than offset the higher average selling prices in the fiscal 2004 periods. Personal Finance other revenue also declined due to the termination of a contract with our largest online advertising customer.
Total net revenue from Canada increased 14% in the second quarter of fiscal 2004 compared to the second quarter of fiscal 2003 due to a more favorable average foreign exchange rate on revenue. The Canadian dollar strengthened compared to the U.S. dollar in the second quarter of fiscal 2004 versus the same period in fiscal 2003 which increased revenues by $5.8 million, or 19%. Total net revenue in Canadian dollars decreased 4% in the second quarter of fiscal 2004 compared to the second quarter of fiscal 2003 primarily due to a reduction in QuickTax net revenue due to lower volume related to a revised channel inventory strategy. Total net revenue from Canada in the first quarter of fiscal 2004 and fiscal 2003 was nominal, reflecting the seasonality of that business.
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Cost of Revenue
�� | |||||||||||||||||||||||||||||||||||||||||
% of | % of | % of | % of | ||||||||||||||||||||||||||||||||||||||
Q2 | Related | Q2 | Related | Q2 % | YTD | Related | YTD | Related | YTD % | ||||||||||||||||||||||||||||||||
FY03 | Revenue | FY04 | Revenue | Change | FY03 | Revenue | FY04 | Revenue | Change | ||||||||||||||||||||||||||||||||
(Dollars in millions) | |||||||||||||||||||||||||||||||||||||||||
Cost of revenue: | |||||||||||||||||||||||||||||||||||||||||
Cost of product revenue | $ | 71.1 | 16 | % | $ | 65.9 | 13 | % | (7 | %) | $ | 99.8 | 17 | % | $ | 97.9 | 15 | % | (2 | %) | |||||||||||||||||||||
Cost of service revenue | 39.6 | 48 | % | 42.5 | 39 | % | 7 | % | 76.2 | 55 | % | 78.3 | 45 | % | 3 | % | |||||||||||||||||||||||||
Cost of other revenue | 5.2 | 30 | % | 6.9 | 39 | % | 33 | % | 9.8 | 30 | % | 13.7 | 41 | % | 40 | % | |||||||||||||||||||||||||
Amortization of purchased software | 3.5 | n/a | 3.3 | n/a | (6 | %) | 6.5 | n/a | 6.6 | n/a | 2 | % | |||||||||||||||||||||||||||||
Total cost of revenue | $ | 119.4 | 21 | % | $ | 118.6 | 19 | % | (1 | %) | $ | 192.3 | 25 | % | $ | 196.5 | 22 | % | 2 | % | |||||||||||||||||||||
There are four components of our cost of revenue: (1) cost of product revenue, which includes the direct cost of manufacturing and shipping our software products; (2) cost of service revenue, 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 generating advertising and marketing and online transactions revenue; and (4) amortization of purchased software, which represents the cost of depreciating products we obtained through acquisitions over their useful lives.
Cost of service revenue as a percentage of service revenue decreased to 39% and 45% in the second quarter and first six months of fiscal 2004 from 48% and 55% in the same periods of fiscal 2003. These decreases were primarily attributable to growth in service revenue combined with lower service costs for businesses we acquired during fiscal 2003 and 2004, notably Blue Ocean Software, Inc. and Innovative Merchant Solutions LLC. In addition, starting in the third quarter of fiscal 2003 we no longer paid royalties to Wells Fargo Bank for our Premier payroll business. Although we now amortize the $29.2 million purchase price of the right to market to this customer base to cost of services revenue over five years, the amortization expense is less than the royalties that would have been incurred under the old agreement.
Cost of other revenue as a percentage of other revenue increased to 39% and 41% in the second quarter and first six months of fiscal 2004 from 30% in the comparable periods of fiscal 2003. This was primarily due to declining Personal Finance other revenue resulting from the fiscal 2004 termination of a contract with our largest online advertising customer which had little or no cost.
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Operating Expenses
% Total | % Total | % Total | % Total | ||||||||||||||||||||||||||||||||||||||
Q2 | Net | Q2 | Net | Q2 % | YTD | Net | YTD | Net | YTD % | ||||||||||||||||||||||||||||||||
FY03 | Revenue | FY04 | Revenue | Change | FY03 | Revenue | FY04 | Revenue | Change | ||||||||||||||||||||||||||||||||
(Dollars in millions) | |||||||||||||||||||||||||||||||||||||||||
Customer service and technical support | $ | 55.6 | 10 | % | $ | 63.2 | 10 | % | 14 | % | $ | 95.2 | 12 | % | $ | 104.2 | 12 | % | 9 | % | |||||||||||||||||||||
Selling and marketing | 97.8 | 17 | % | 107.6 | 17 | % | 10 | % | 172.6 | 23 | % | 199.6 | 23 | % | 16 | % | |||||||||||||||||||||||||
Research and development | 66.1 | 12 | % | 73.3 | 12 | % | 11 | % | 130.2 | 17 | % | 144.7 | 17 | % | 11 | % | |||||||||||||||||||||||||
General and administrative | 38.4 | 7 | % | 48.1 | 7 | % | 25 | % | 78.0 | 10 | % | 91.8 | 10 | % | 18 | % | |||||||||||||||||||||||||
Subtotal | 257.9 | 46 | % | 292.2 | 46 | % | 13 | % | 476.0 | 62 | % | 540.3 | 62 | % | 14 | % | |||||||||||||||||||||||||
Charge for purchased research and development | 1.1 | 0 | % | — | n/a | n/a | 8.9 | 1 | % | — | n/a | n/a | |||||||||||||||||||||||||||||
Acquisition-related charges | 9.2 | 2 | % | 6.8 | 1 | % | (26 | %) | 18.6 | 2 | % | 12.8 | 1 | % | (31 | %) | |||||||||||||||||||||||||
Total operating expenses | $ | 268.2 | 48 | % | $ | 299.0 | 47 | % | 11 | % | $ | 503.5 | 65 | % | $ | 553.1 | 63 | % | 10 | % | |||||||||||||||||||||
Overview of Operating Expenses
Total operating expenses increased 11% and 10% in the second quarter and first six months of fiscal 2004 compared to the same periods of fiscal 2003. Core operating expenses (which are subtotaled in the table above) increased 13% and 14% in the same periods. Core operating expenses, individually and in the aggregate, as a percentage of total net revenue of 46% and 62% in the second quarter and first six months of fiscal 2004 remained consistent with the same periods of fiscal 2003. We believe core operating expenses represent the controllable costs of running our business.
Charge for Purchased Research and Development
In the first six months of fiscal 2003, we recorded charges for purchased research and development totaling $8.9 million, primarily in connection with our acquisition of Blue Ocean.
Acquisition-Related Charges
Acquisition-related charges were $6.8 million and $12.8 million in the second quarter and first six months of fiscal 2004 compared to $9.2 million and $18.6 million in the same periods of fiscal 2003. Increases in fiscal 2004 acquisition-related charges due to our acquisition of Innovative Merchant Solutions in the first quarter of fiscal 2004 were more than offset by decreases in those charges as older intangible assets and certain deferred compensation balances related to prior acquisitions became fully amortized.
Non-Operating Income and Expenses
Interest and Other Income
Total interest and other income for the second quarter and first six months of fiscal 2004 was $7.2 million and $14.7 million compared to $7.8 million and $16.6 million in the same periods of fiscal 2003. The interest income that we earn on our cash and short-term investment balances decreased $2.3 million and $6.1 million in the second quarter and first six months of fiscal 2004 compared to the same periods of fiscal 2003 due to our reinvestment of maturing instruments in new instruments that generally yield lower current market interest rates. In the second quarter of fiscal 2004, we also recorded other income of $2.2 million related to receipt of an insurance settlement.
Interest and other income includes net gains and losses resulting from foreign exchange transactions. Due primarily to the effect of the weakening U.S. dollar on intercompany balances with our Canadian subsidiary, we recorded net foreign exchange gains of $0.8 million and $4.1 million in the second quarter and first six months of fiscal 2004 compared to $1.4 million and $2.1 million in the same periods of fiscal 2003.
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Income Taxes
In the second quarter and first six months of fiscal 2004, we recorded income tax provisions of $76.8 million and $49.0 million on pre-tax income from continuing operations of $225.9 million and $144.1 million, resulting in an effective tax rate of approximately 34% for each of those periods. Our effective tax rates for the second quarter and first six months of fiscal 2004 differed from the federal statutory rate primarily due to the net effect of the benefit received from tax-exempt interest income and various tax credits offset by state taxes.
In the second quarter and first six months of fiscal 2003, we recorded income tax provisions of $55.9 million and $29.9 million on pre-tax income from continuing operations of $181.3 million and $94.9 million, resulting in effective tax rates of approximately 31% and 32% for those periods. Our effective tax rate for the second quarter of fiscal 2003 differed from the federal statutory rate primarily due to the net effect of the benefit received from tax-exempt interest income and various tax credits offset by state taxes. Our effective tax rate for the first six months of fiscal 2003 differed from the federal statutory rate primarily due to the net effect of the benefit received from tax-exempt interest income and various tax credits offset by state taxes and acquisition-related charges recorded in the first quarter of fiscal 2003.
Discontinued Operations
In July 2002, we sold our Quicken Loans mortgage business segment and accounted for the sale as discontinued operations. In October 2002, we sold our residual equity interest in the purchasing company and recognized a gain of $5.6 million on the transaction.
In February 2003, we sold our wholly owned Japanese subsidiary, Intuit KK, and accounted for the sale as discontinued operations. In accordance with SFAS 144, we have segregated the operating results of Intuit KK from continuing operations in our statement of operations for all periods prior to the sale.
Liquidity and Capital Resources
At January 31, 2004, our cash and cash equivalents and short-term investments totaled $978.9 million, a $227.9 million decrease from July 31, 2003. The decrease was primarily due to our use of cash for our stock repurchase programs and for an acquisition partially offset by cash provided by continuing operations.
We generated $128.6 million in cash from our operations during the first six months of fiscal 2004. Net income from continuing operations totaled $95.1 million. Adjustments for non-cash expenses included depreciation of $38.6 million and acquisition-related charges, amortization of purchased software and amortization of other purchased intangible assets totaling $22.4 million. Other current liabilities increased $83.8 million due mainly to higher reserves for returns and rebates, income taxes payable increased $26.7 million and deferred revenue increased $24.6 million, each reflecting the seasonality of our business. Cash generated by these and other operating activities was partially offset by an increase of $193.3 million in accounts receivable, again reflecting the seasonality of our business.
We used $25.9 million in cash from investing activities during the first six months of fiscal 2004. We drew net cash of $145.5 million from short-term investments during the period, with proceeds of $1.226 billion from the sale upon maturity of certain short-term investments more than offsetting reinvestments of $1.080 billion. Our primary use of cash for investing activities was for the acquisition of Innovative Merchant Solutions, which totaled $116.7 million. As a result of our continued investment in information systems and infrastructure, we also purchased a total of $47.7 million in property and equipment which included $9.5 million in labor costs capitalized in connection with internal use software projects.
We used $185.1 million in cash for our financing activities in the first six months of fiscal 2004. The primary component of cash used in financing activities was $261.1 million for the repurchase of treasury stock through our stock repurchase programs. See Note 10 of the financial statements. This was partially offset by proceeds of $86.6 million we received from the issuance of common stock under employee stock plans.
In March 2003, Intuit’s Board of Directors initiated Repurchase Plan II and authorized the Company to repurchase up to $500.0 million of common stock from time to time over a three-year period. Shares of stock repurchased
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under this program become treasury shares. During the first six months of fiscal 2004, we repurchased a total of 2.3 million shares of our common stock for an aggregate cost of approximately $109.5 million under this program. Repurchase Plan II was concluded in November 2003 when the authorized purchase amount under the program was reached.
In August 2003, our Board of Directors initiated Repurchase Plan III and authorized the Company to repurchase up to $500.0 million of common stock from time to time over a three-year period. Shares of stock repurchased under this program become treasury shares. During the first six months of fiscal 2004, we repurchased a total of 3.0 million shares of our common stock for an aggregate cost of approximately $151.6 million under this program. Authorized funds of $348.4 million remain available under this program at January 31, 2004.
Outstanding loans to executive officers and other employees totaled $18.2 million at January 31, 2004 and $19.7 million at July 31, 2003. Loans to executive officers are primarily relocation loans that are generally secured by real property and have maturity dates of up to 10 years. As of January 31, 2004, all interest payments were current in accordance with the terms of the loan agreements. Consistent with the requirements of The Sarbanes-Oxley Act of 2002, no loans to executive officers have been made or modified since July 30, 2002 and we do not intend to make or modify loans to executive officers in the future. See Note 12 of the financial statements.
We 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.
We believe that our cash, cash equivalents and short-term investments will be sufficient to meet anticipated seasonal working capital and capital expenditure requirements for at least the next twelve months.
Contractual Obligations
The following table summarizes our contractual obligations to make future payments at January 31, 2004:
Payments Due by Period | |||||||||||||||||||||
Less than 1 | 1-3 | 3-5 | After 5 | ||||||||||||||||||
year | years | years | years | Total | |||||||||||||||||
(In millions) | |||||||||||||||||||||
Amounts due employees under deferred compensation plans | $ | — | $ | 11.2 | $ | — | $ | — | $ | 11.2 | |||||||||||
Short-term amounts due CBS Employer Services | 11.9 | — | — | — | 11.9 | ||||||||||||||||
Short-term portion of vacancy reserve | 1.3 | — | — | — | 1.3 | ||||||||||||||||
Long-term obligations | — | 10.2 | 3.5 | 5.2 | 18.9 | ||||||||||||||||
Operating leases | 30.3 | 54.9 | 36.1 | 62.1 | 183.4 | ||||||||||||||||
Total contractual cash obligations | $ | 43.5 | $ | 76.3 | $ | 39.6 | $ | 67.3 | $ | 226.7 | |||||||||||
Long-term obligations at January 31, 2004 included the $7.7 million long-term portion of our reserve for vacant Mountain View facilities. Long-term obligations also included $5.6 million for amounts we owe to former stockholders of CBS Employer Services in connection with our acquisition of that company in the fourth quarter of fiscal 2002. See Note 8 of the financial statements.
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Reserves for Returns and Rebates
Activity in our reserves for product returns and for rebates during the first six months of fiscal 2004 and comparative balances at January 31, 2003 were as follows:
Additions | ||||||||||||||||||||
Balance | Charged | Balance | Balance | |||||||||||||||||
July 31, | Against | Returns/ | January 31, | January 31, | ||||||||||||||||
2003 | Revenue | Redemptions | 2004 | 2003 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Reserve for product returns | $ | 34,406 | $ | 125,168 | $ | (101,255 | ) | $ | 58,319 | $ | 69,924 | |||||||||
Reserve for rebates | 10,401 | 93,052 | (66,022 | ) | 37,431 | 55,463 |
Due to the seasonality of our business, the returns and rebate reserve balances at January 31, 2004 should be compared to the reserve balances at January 31, 2003. The returns reserve balance at January 31, 2004 is lower than the balance at January 31, 2003 as we have worked with our retail customers to reduce the amount of inventory they need to serve their customers and improve the timeliness of returns. In addition we are selling more units to major retail customers on a consignment basis. For consignment sales, revenue is not recognized until the retailer sells units to their customers and returns reserves are therefore much lower.
We have reduced our reserve for rebates primarily because some of our major retail customers are participating in a program where they sell our tax products without rebates, we have reduced other rebate programs and we are now selling more units to our retail customers on a consignment basis where the rebates are recognized upon sale to the end user.
Recent Accounting Pronouncements
In November 2002, the EITF reached a consensus on Issue No. 00-21,“Revenue Arrangements with Multiple Deliverables.”Issue 00-21 provides guidance on accounting for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of Issue 00-21 apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. We adopted Issue 00-21 effective August 1, 2003 and the adoption of this standard did not have a material effect on our financial position, results of operations or cash flows.
In January 2003, the FASB issued FIN 46,“Consolidation of Variable Interest Entities.”FIN 46 requires us to consolidate a variable interest entity if we are subject to a majority of the risk of loss from the 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 essentially 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 first fiscal year or interim period beginning after December 15, 2003. We anticipate that the adoption of FIN 46 will not have a material impact on our financial position, results of operations or cash flows.
Risks That Could Affect Future Results
The factors discussed below are cautionary statements that identify important risks 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 Report. Our fiscal 20022003 Form 10-K and other SEC filings contain additional details about these risks, as well as other risks that could affect future results.
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Company-Wide Risk Factors That Could Affect Future Results
Our revenue and earnings are highly seasonal. Seasonality and other factors cause significant quarterly and annual fluctuationsWe face intense competitive pressures in our revenue and net income.Severalall of our businesses, are highly seasonal — particularly our tax businesses, but also small business 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 experience lower revenues, and often significant operating losses, in the first and fourth quarters ending October 31 and July 31. Recently wewhich can 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 revenue, profitability and market position.We have formidable current and potential competitors. Accordingly, we expect competition to remain intense during fiscal 2004 and beyond. Our competitors in all our businesses may introduce new and improved products and services, reduce prices, gain better access to distribution channels, increase advertising (including advertising targeted at Intuit customers), and release new products and services before we do. Any of these competitive actions – particularly any prolonged price competition – could diminish our net income (loss)revenue and net income (loss) per share. Declining interest rates canprofitability. They could also reduceaffect our ability to keep existing customers and acquire new customers.
We are implementing new information systems that are important for our ability to execute on our growth strategy, and problems with the valuedesign or implementation of these systems could interfere with our business and operations.We are in the process of implementing new information systems to replace our existing systems. As a part of this effort, we began implementing in fiscal 2003, and will continue to implement in fiscal 2004, new software applications to manage our business and finance operations. We may not successfully implement these new systems and transition data, and even if we do succeed, the implementation may be much more costly than we anticipated. Any disruptions relating to these systems enhancements could adversely impact our ability to do the following in a timely and accurate manner: take customer orders, ship products, provide services and support to our customers, bill and track our customers, fulfill contractual obligations and otherwise run our business. In addition, many of our interest rate sensitive assets, such as certain assets that relate tonewer businesses depend on a different operational infrastructure than 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 acquireddesktop software 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:
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 $263.0 million in fiscal 2001, $196.0 million in fiscal 2002 and $34.0 million in the first half of fiscal 2003. Fiscal 2003 acquisition-related costs have declined primarily because of a change in accounting for goodwill. However, we may incur less frequent, but larger, impairment charges related to the goodwill already recorded and to goodwill arising out of future acquisitionsencounter difficulties as we continuedevelop, expand and modify our internal systems and procedures – including call center, customer management, order management, billing and other systems – 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.
support these businesses. If we are requiredunable to account for options undersuccessfully implement new information systems, our employeefinancial position, results of operations, cash flows and 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.
The general decline in economic conditions could lead to reduced demand for our products and services.The continuing downturn in general economic conditions has led to reduced demand for a variety of goods and services, including software and other technology products. If conditions decline, or fail to improve, in geographic areas that are significant to us, such as the United States and Canada, we could see a significant decrease in the overall demand for our products and services that could harm our operating results.be adversely affected.
If we do not continue to successfully develop new products and services in a timely and efficient manner, our future financial results will suffer.OverWe must continually develop new products and services and improve existing products and services so that we can remain competitive in the past two years,markets we serve and in the markets we seek to enter. In executing our customer-focused product strategies, we have introduced a number of new desktop software products and services that are specially designed for specific businesses and consumer needs. We believeMany of our offerings have posed new product development challenges for us because they require that it is necessary to continually develop new products and services and to improve existing products and services to remain competitive in the markets we serve. Failure to do so may give competitors opportunities to improve their competitive position at our expense and result in declines in our revenue and earnings. However, developing and improving our products and services becomes more complex as we increase the number of softwareintegrate with one another and with both our web sites and our internal information systems. In addition, our customers expect – and our business model contemplates – increased functionality and greater inter-operability among our products that we offer. Theand services. Moreover, our development and enhancement processes involve several risks, including challenges in hiring and retaining highly qualified employees, the risk of delays in product and service launches, and the risk of defects that hinder performance.performance and the risk that consumers will not buy new or modified offerings. Failure to timely and successfully develop new products and services would harm our competitive position and result in declines in our revenue and earnings.
The expansion ofExpanding our product and service offerings creates risks due to the increasing complexity and decreasing predictability of our revenue streams.Our expanding range of products and services generates more varied revenue streams than our traditional desktop software businesses. The accounting policies that apply to these revenue streams are more complex than those that apply to our traditional products and services. We expect this trend to continue with future acquisitions.as we acquire additional companies. 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 product revenue at the time of sale than we do for traditional products, whichproducts. This would decrease revenue at the time products are shipped, but result in moreincreased revenue in fiscal periods after shipment. In addition, some of our newerVertical Business Management Solutions businesses offer higher-priced business management software products and services. Revenue attributable to these higher priced products and services with significantly higher prices than we have traditionally offered. Revenue from these offerings tends to be less predictable than revenue from our traditional desktop products, due to longer sales and implementation cycles. These businesses also tend to rely on a relatively small number of large orders for a substantial portion of their revenue in a particular quarter, which could cause our quarterly revenue from these businesses to fluctuate.
The expansionAny significant failure in our technology systems or other interruption to our business could harm our operations and our financial performance.We rely on a variety of technology systems to take and fulfill customer orders, handle customer service requests, host our Web-based activities, support internal operations, store customer and company data and perform other functions. Our technology systems could be damaged or interrupted, lose customer data or otherwise fail to perform at levels necessary to support our business operations. In addition, our business operations are concentrated in San Diego, California and Mountain View, California and are vulnerable to interruption by fire, earthquake, power loss, terrorist acts and other events beyond our control. Any significant failure
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in our technology systems or business operations could prevent us from accepting and fulfilling customer orders and adversely impact our revenues. To reduce the likelihood of interruptions, we must continually upgrade our systems and processes to ensure that we have adequate recoverability and redundancy, which is costly and time consuming. While we have backup systems for certain aspects of our operations, our systems are not fully redundant and our disaster recovery planning may not be sufficient for all eventualities. In addition, we may have inadequate insurance coverage or insurance limits to compensate us for losses from a major interruption. If our technology systems were to fail or if our business operations were interrupted, it could harm our financial performance, damage our reputation and be expensive to remedy.
Business integration of acquired companies presents several challenges and we may not fully realize the intended benefits of our acquisitions if we do not successfully integrate them with our operations.During the past few years, we have completed numerous acquisitions (one in fiscal 2004, two in fiscal 2003 and five in fiscal 2002), and we expect to continue to pursue acquisitions as part of our business strategy. These acquisitions expand our product and service offerings, personnel and geographic locations and require us to integrate different company cultures, management teams and business infrastructures. The integration process can strain our resources and be expensive and time consuming, particularly if we are integrating multiple companies at the same time. Promptly and efficiently integrating acquired businesses creates risks due tochallenges for our operational, financial and management information systems, as well as for our product development processes. Depending on the operational infrastructure required to supportsize and complexity of an acquisition, and the number of acquisitions we are concurrently integrating, our expanded portfoliosuccessful integration of products and services.Many of our newer businesses dependthe entity depends on a different operational infrastructure than our desktop software businesses, and we must continually develop, expand and modify our internal systems and procedures – including call center, customer management, order management, billing and other systems – to support these businesses.variety of factors, including:
• | Retaining key employees | |
• | Managing facilities and employees in different geographic areas | |
• | Retaining key customers, and | |
• | Integrating or coordinating research and development, product manufacturing, and sales and marketing programs. |
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 technical support problems, including longer than expected waiting times for customers when our staffing isand systems are inadequate to
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handle a higher than anticipatedhigher-than-anticipated volume of requests. These situationsWhen we experience these problems, they can adversely affect customer relationships and our financial performance.results (due to lost revenue because of our inability to accept orders for our products or increased costs). We also risk losing service at any one of our customer contact centers and our redundancy systems could prove inadequate to provide backup support. In order toaddition, our customer-focused business strategy presents additional technical support challenges as we increase the number and complexity of the products we offer, particularly for our QuickBooks, Consumer Tax and Vertical Business Management Solutions segments. To improve our customer service and technical support,performance in this area, we must continue to focus on eliminatingeliminate underlying causes of customer requests for service and support requests through product improvements, better order fulfillment processes, and more robust self-help tools. We must also improve our ability to accurately anticipatetools, and better forecasting of demand for customer servicesupport services. Implementing any of these improvements can be expensive, time consuming 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.ultimately prove unsuccessful.
We face several risks relating toGiven the nature of the products and services that we offer, our retail distribution channel.revenue and earnings are highly seasonal.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 disruptionSeveral of our relationship with anybusinesses are highly seasonal – particularly our tax businesses, but also our small business software and service offerings 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, which end January 31 and April 30. We experience lower revenues, and we often experience significant operating losses, in the first and fourth quarters, which end October 31 and July 31. Our financial results can also fluctuate from quarter to quarter and year to year due to a variety of factors, including changes in product sales mix that affect average selling prices, product release dates, the timing of sales of our major resellers could result inhigher-priced Vertical Business Management Solutions offerings, our methods for distributing our products, including the shift to 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 third-party vendors to handle substantially all outsourced aspects of manufacturing and distribution for our primary retail desktop software 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 manufacturing relationships with Modus Media and Sony, and a distribution arrangement with Ingram Micro Logistics. While we believe that relying on only three 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, including but not limited to financial difficulties of the vendor.
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 trueconsignment model for our consumer tax products which have a short selling season. Like most software companies,that we have a liberal product return policysell through retail distribution channels, and we have historically acceptedthe timing of acquisitions, dispositions, and goodwill and purchased intangible asset impairment charges.
Acquisition-related costs can cause significant product returns. We establish reserves for product returnsfluctuation in our financial statements, based on estimated future returnsnet income. Our recent acquisitions have resulted in significant expenses, including amortization of products. See “Management’s Discussionpurchased software (which is reflected in cost of revenue), as well as charges for in-process research and Analysisdevelopment, and amortization and impairment of Financial Conditiongoodwill, purchased intangible assets and Results of Operations — Critical Accounting Policies — Net Revenue — Return and Rebate Reserves.” We closely monitor levels of product sales and inventorydeferred compensation (which are reflected in operating expenses). Total acquisition-related costs in the retail channelcategories identified above were $196.0 million in an effort to maintain reserves that are adequate to cover expected returns. Infiscal 2002, $56.6 million in fiscal 2003 and $19.4 million in the past, returnsfirst six months of fiscal 2004. Fiscal 2003 and 2004 acquisition-related costs have not generally exceeded these reserves. However, if we do experience actual returns that significantly exceed reserves, it would result in lower net revenue.declined primarily
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 the laws of 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 events.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. Any significant
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interruptionsbecause of a change in the accounting treatment of goodwill. However, we may incur less frequent, but larger, impairment charges related to the goodwill already recorded and to goodwill arising out of future acquisitions. As of January 31, 2004, we had an unamortized goodwill balance of approximately $690.8 million, which could be subject to impairment charges in the future. Additional acquisitions, and any impairment of the value of purchased assets, could have a significant negative impact on our ability to conduct our business operations could reduce our revenue andfuture operating income. Our business interruption insurance may not adequately compensate us for the impact of interruptions to our business operations.results.
Specific Factors Affecting Our QuickBooks, Small Business Products and Services and Vertical Business Management Solutions Segments
Despite positive early indicators, itIn our QuickBooks and our Small Business Products and Services businesses, we face a wide range of competitive risks that could impact our financial results. Our QuickBooks business faces current competition from competitors’ desktop and Web-based software offerings. 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 expand the depth and breadth of our small business offerings, we face additional competition from others who are already offering industry-specific small business solutions and business management tools and services for larger small businesses. Microsoft has several small business offerings that compete with our small business offerings, including Microsoft Business Solutions Small Business Manager, Microsoft Business Solutions CRM and Business Contact Manager for Microsoft Office Outlook® 2003. We expect that Microsoft small business offerings will continue to compete with our small business offerings, perhaps even more directly in the future. In addition, we face direct competition in our Intuit Payroll Services Complete Payroll business from traditional payroll services offered by a number of companies, including ADP and Paychex. Our financial supplies business faces ongoing pricing pressures from many of our competitors. 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.
We face competitive pressures in our Vertical Business Management Solutions segment. All of our Vertical Business Management Solutions businesses operate in highly competitive and fragmented environments where no competitor has a significant share of the market segment. We may experience pricing pressure in these market segments because we compete with many small companies, who have fewer resources than larger companies and are therefore more likely to focus on near-term sales. In each of these market segments, the possibility exists that through either consolidation within the market segment or the entry into the market segment of new companies a significant competitor will emerge.
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 accountingour QuickBooks, Small Business Products and business managementServices and Vertical Business Management Solutions 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 weThere are encouraged by early results, there are still a number ofmany risks associated with our growth strategy, including the following:including:
• | We may have difficulty identifying potential targets for acquisition. | ||
• | Our | ||
• | Many of the new products and services we |
We faceOur acquisition strategy entails a wide rangenumber of competitive riskschallenges that could impactlimit our financial results.Insuccessful implementation of 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 implementstrategy.A key component of our Right for My Business strategy is to continue to expand our product and service offerings, and we expect to derive a portion of this expansion from acquisitions. We could face increased competitive threats from larger companiesthe following risks relating to our strategy and future acquisitions, in bigger markets than we have historically faced.addition to the integration challenges noted above:
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• | 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. | |
• | 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. | |
• | 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. | |
• | If we fail to retain the services of key employees of acquired companies for significant time periods after we acquire their companies, we may experience difficulty in managing the acquired company’s business and not realize the anticipated benefits of the acquisition. |
Revenue growth for our vertical business management solutionsVertical Business Management Solutions segment may be hindered by a variety of factors, which could have a negative impact on overall company revenue growth.Revenue growth for our verticalVertical Business Management Solutions business management solutions is subject to numerous risks, includingmany risks. Among these are the negative impact of the current economic environment on customer purchases of the relatively high-priced software solutions offered by these businesses, strong pricing pressure in these markets because we compete with many small companies, who have fewer resources than larger companies and are therefore more likely to focus on near-term sales,our vertical businesses,ability to successfully acquire other companies and the potential disruption to the businesses of the acquired companies 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 facesbusinesses face a number of risks that could have a negative impact on revenue and profitability.For our payroll offerings,businesses, 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 outsourcedWe must also accurately and timely develop new and upgraded payroll products to enable our customers to meet the various regulatory deadlines associated with employer-related payroll activities. If we failed to timely deliver any of our payroll products, it could cause our current and prospective customers to choose a competitor’s product for that year’s payroll and not to purchase Intuit products in the future. Since our payroll businesses involve processing large amounts of payroll funds and remitting large amounts of income taxes, there is a potential for errors in processing the payments or misappropriation of payroll funds by either our customers’ employees or our own employees. Any such error or misappropriation could subject Intuit to liabilities that could be substantial. In addition, we are authorized by our customers to transfer money from their bank accounts to fund amounts owed to their employees and taxing authorities. It is possible that we could be held liable for such amounts in the event the client has insufficient funds to cover them. Moreover, our payroll businesses, other than our Do-It-Yourself product, include as part of their revenue interest on customer deposits as part of their revenue.not yet remitted to taxing authorities or to customers’ employees. If interest rates continuedecline, or regulatory changes occur that either decrease the amount of taxes withheld or allow less time to decline,remit taxes to taxing authorities, it would result in less interest revenue for those businesses. In orderIf any of the above eventualities came to generate sustainedpass, it could have a negative impact on the revenue, profitability and future growth forof 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.payroll businesses.
Specific Factors Affecting Our Consumer Tax Segmentand Professional Accounting Solutions Segments
We face intense competitive pressures from both the private sectorand public sectors in our consumer tax preparation software business.Consumer Tax and Professional Tax businesses that could have a negative impact on revenue, profitability and market position.There are formidable current and potential competitors in the private sector for both our consumer and professional tax products, and we expect competition to remain
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intense during fiscal 2003in the future. Our major domestic competitor for both desktop and beyond. These competitive pressures can have a negative impact on our revenue, profitability and market position.
OurWeb-based consumer tax preparation business also faces competition from publicly funded government entities. Wesoftware continues to be H&R Block, and our largest professional tax competitors are CCH Incorporated; Kleinrock Publishing; and the Thomson Corporation. In addition, we face current and potential competition from a number of publicly-fundedpublicly funded state and federal 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 effortsable 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 announcedsigned a proposal in August 2002 that would mitigate the risk of government encroachment in federal tax preparation and filing services. Under anthree-year Free File Alliance agreement signed in October 2002 for at least the next three years,under which a number of private sector companies, rather than the federal government, will provideare providing Web-based federal tax preparation and filing services at no cost to lower income taxpayers and other underserved taxpayers through voluntary public serviceservices initiatives such as our Intuit Tax Freedom Project. Despite this positive development, However,
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future administrative, regulatory or legislative activity in this area could adverselyhave a strong adverse impact Intuitthe financial performance of our Consumer Tax 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.Professional Tax businesses.
The product activation technology that we introduced into certain TurboTax desktop products last year could have an adverse impact on this season has increased the uncertainty relating to the short-term financialyear’s results for our Consumer Tax businessbusiness.. FederalDuring tax year 2002, federal versions of TurboTax desktop products for Windows now includeincluded product activation technology that helpshelped 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 believeWhile we have publicly announced that we will not include product activation is an appropriate measure to protect Intuit’s intellectual property by reducing organized piracy and unauthorized sharingin retail versions of our product. In turn, this should result in more users ofTurboTax for Windows for the product purchasing licensed copies. However, in the short-term,upcoming tax season, there is uncertainty about whether the negative publicity and customer reactions to, and experiences with, this technology last year will impact our Consumer Tax business this year. Any significant negative repercussions relating to product activation could adversely impact our fiscal 2004 results this season.for our Consumer Tax business, in particular, and our financial performance as a whole.
Significant problems or delays in developing our Consumer Tax and Professional Tax products would result in lost revenue and customers.Developing tax preparation software presents unique challenges because of the demanding annual development cycle required to incorporate unpredictable tax law and tax form changes each year and because our customers expect high levels of accuracy and a timely launch of these products. Our tax preparation software business, which represents a substantial portion of our annual revenue, is highly seasonal since the customers in that market generally prepare and file their taxes by April 15. A significantly late product launch could cause our current and prospective customers to choose a competitor’s product for that year’s tax season or to choose not to purchase tax preparation software at all, which would result in lost revenue in the current tax year and would make it more difficult for us to sell our products to customers in future tax seasons. Moreover, the rigid development timetable increases the risk of bugs or errors in our products. Any major defects could lead to negative publicity, customer dissatisfaction, lost revenue and increased operating expenses, including expenses resulting from correcting defects or errors in our products, expenses resulting from increased activity at our customer contact centers and, expenses resulting from our commitment to reimburse penalties and interest paid by consumer customers due solely to calculation errors in our products.
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.season and the exact level of demand for these offerings is difficult to predict. We face significant risks and challenges in maintaining highthese services and maintaining adequate service levels, particularly during peak volume service times. The exact level of demand for TurboTax for the Web andFor example, we experienced a relatively brief unscheduled interruption in our electronic filing is impossibleservice on April 15, 2003 during which certain users of our professional tax products were unable to predict.receive confirmation from us that their electronic filing had been accepted, and we reached maximum capacity for a short period on April 15, 2002. We also face risks related to the performance of our redundancy and data recoverability systems in these businesses. If our redundancy and data recoverability systems are inadequate, then we could lose the ability to provide these services – or provide these services at inadequate levels – to our customers. If we are unable to meet customer expectations in a cost-effective manner,experience any prolonged difficulties with our Web-based tax preparation or electronic filing service at any time during the tax season, we could lose current and future 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 Businessbusinesses and have a negative impact on our near-term and long-term financial results.
The long-term viability of our personal finance business will depend on our abilityIf we are unable 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,increase accountant-facilitated sales, 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 profitabilitygrowth.We are currently focused on developing relationships with accounting professionals in order to expand our opportunities to sell small business products 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 costservices to consumers. Competitive pressures could result in reduced revenue and lower profitabilitytheir clients under our “Right for My Firm, Right for My Clients” strategy. We view this strategy as an important driver for our Quicken product line.Professional Accounting Solutions segment, as well as our QuickBooks and Small Business Products and Services businesses. However, since this is a new model for us, we face several risks associated with it, including the risk that we will not be able to effectively execute this strategy and the risk that we will not derive the anticipated benefits (including financial benefits) from this strategy. Moreover, we face intense competition in this effort, as there are an increasing number of alliances between accountants and other professional tax preparers and providers of small business software and services that aim to capitalize on accountant-facilitated sales of small business products and services to their clients.
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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 dictatesspecifies that, except for short-term investments,direct obligations of the United States government, securities issued by agencies of the United States government, and money market or cash management funds, we diversify our holdings and limit our short-term investments with any individual issuer in a managed portfolio to a maximum of $5 million.$5.0 million in each of our three managed portfolios.
Interest Rate Risk
Our cash equivalents and short-term investment portfolio are subject to market risk due to changes in interest rates. Interest rate movements affect the interest income we earn on cash equivalents and short-term investments and the value of those investments. Should interest rates increase by 100 basis points from the levels of January 31, 2004, the value of our short-term investments would decline by approximately $5.4 million.
Over the past few years, we have experienced significant reductions in our interest income due to declines in interest rates. These declines have led to interest rates that are low by historical standards and we do not believe that further decreases in interest rates will have a material impact on the interest income earned on our cash equivalents and short-term investments held at January 31, 2003.2004.
Impact of Foreign Currency Rate Changes
The functional currency of all our international 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 period. We report translation gains and losses as a separate component of stockholders’ equity. We include net gains and losses resulting from foreign exchange transactions on our statement of operations.
Since we translate foreign currencies (primarily Canadian dollars and British pounds) into U.S dollars for financial reporting purposes. Accordingly,purposes, currency fluctuations can have an impact on our financial results, though theresults. The historical impact of currency fluctuations has generally been immaterial. We believe that our exposure to currency exchange fluctuation risk is insignificantnot significant primarily because our globalinternational subsidiaries invoice customers and satisfy their financial obligations almost exclusively in their local currencies. For eachDue primarily to the effect of the weakening U.S. dollar on intercompany balances with our Canadian subsidiary, we recorded foreign currency exchange gains of $5.4 million in fiscal years ended July 31, 2000, 20012003 and 2002 and for$4.1 million in the first six months of fiscal 2003, there was an immaterial currency exchange impact from our intercompany transactions.2004. Although the impact of currency fluctuations on our financial results has generally been immaterial in 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 January 31, 2003,2004, we had onedid not engage in foreign currency hedge contract that related to the sale of our Japanese subsidiary. See Note 6 to the financial statements.hedging activities.
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ITEM 4
CONTROLS AND PROCEDURES
(a) | Evaluation of Disclosure Controls and Procedures | |
(b) | Changes in Internal | |
There |
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On March 3, 2000, a class action lawsuit, Bruce v. Intuit Inc., was filed in the United States District Court, Central District of California, Eastern Division. Two virtually identical lawsuits were later filed: Rubin v. Intuit Inc., was filed on March 8, 2000 in the United States District Court, Southern District of New York and NewbyLeonard Knable et al. v. Intuit Inc. was filed in Los Angeles County Superior Court on April 27, 2000,February 24, 2003. The original complaint alleged various claims for unfair practices and deceptive and misleading advertising, fraud and deceit and product liability, on behalf of a purported class. The allegations were based on allegedly defective design and operation of the product activation feature in Intuit’s TurboTax 2002 for Windows desktop software and Intuit’s representations and disclosures about product activation. The complaint sought disgorgement of revenue from the United States District Court, Central Districtsale of California, Eastern Division. The Rubin case wasthe product, compensatory and punitive damages, injunctive relief and attorneys’ fees and costs. On Intuit’s motion, the court dismissed the complaint on November 19, 2001. The BruceSeptember 29, 2003, but granted plaintiffs leave to amend. Plaintiffs filed an amended complaint on October 30, 2003, adding causes of action for trespass to chattels, breach of contract, breach of the covenant of good faith and Newby lawsuits were consolidated into one lawsuit, In refair dealing, and negligent misrepresentation. Intuit Privacy Litigation, filed on July 28, 2000 in the United States District Court, Central District of California, Eastern Division. Following Intuit’s successfula motion to dismiss several of the claims, an amended complaint was filed on May 2, 2001. A similar lawsuit, AlmanzaDecember 4, 2003. The court granted the motion and dismissed the action in its entirety without leave to amend on January 30, 2004.
On September 17, 2003, Muriel Siebert & Co., Inc. v. Intuit Inc. was filed on March 22, 2000 in the SuperiorSupreme Court of the State of California, San BernardinoNew York, County Rancho Cucamonga Division. An amended complaint in the Almanza suit was filed on October 26, 2000. These purported class actions alleged violations of New York. The lawsuit alleges various federal and California statutes and common law claims for invasionbreach of privacy based uponcontract, breach of express and implied covenants of good faith and fair dealing, breach of fiduciary duty, misrepresentation and/or fraud, and promissory estoppel. The allegations relate to Quicken Brokerage powered by Siebert, a strategic alliance between the alleged intentional disclosure to third parties of personal and private customer information entered at Intuit’s Quicken.com Web site.two companies. The complaints sought injunctive relief, orders to disgorge profits related to the alleged acts, and statutorycomplaint seeks compensatory, punitive, and other damages. On January 6,September 22, 2003, a settlement between Intuit filed an arbitration demand against Siebert & Co., Inc. in San Jose, CA seeking arbitration of all claims asserted by both parties. The New York court is currently determining whether the matter will proceed in New York state court or in arbitration. Intuit believes this lawsuit is without merit and intends to defend the plaintiffs’ counsel in all of the remaining cases was preliminarily approved by the federal court with a final approval hearing scheduled for June 2003. The proposed settlement terms are not material to Intuit.litigation vigorously.
Intuit is subject to certain 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 2CHANGES 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 4SUBMISSION 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:
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 |
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ITEM 5
OTHER MATTERS
CHANGES IN EXECUTIVE OFFICERS
In August 2002, Greg J. Santora, Intuit’s then-current Senior Vice President and Chief Financial Officer, announcedEffective January 12, 2004, Thomas Weigman terminated his plans to retire from Intuit at the end of calendar 2002. Mr. Santora resigned as an officer of Intuit on January 5, 2003.
Robert B. (“Brad”) Henske was appointedemployment as Senior Vice President and Chief Financial OfficerMarketing Officer.
Raymond Stern, Senior Vice President of Intuit onCorporate Strategy and Development, has added chief marketing officer responsibilities to his duties.
Effective January 6, 2003. He served29, 2004, Nicholas Spaeth resigned as Senior Vice President, General Counsel and Chief Financial OfficerCorporate Secretary.
Effective February 2, 2004, Thomas Allanson terminated his employment as Senior Vice President, Consumer Tax Group.
Effective February 13, 2004, Daniel Manack terminated his employment as Senior Vice President, Professional Accounting Solutions.
ANNUAL MEETING DATE
Intuit’s next Annual Meeting of Synopsys, Inc.,Stockholders is scheduled for December 9, 2004. This date is more than 30 days after the date of the annual meeting in 2003. Any Intuit stockholder who intends to present a supplierproposal at the annual meeting must submit the proposal, in writing, so that Intuit receives it at our principal executive offices by July 9, 2004 in order for the proposal to be included in our proxy statement and proxy for the meeting. Any Intuit stockholder who wishes to submit a proposal for the annual meeting, but does not seek to include it in our proxy materials, must provide written notice of electronic design automation software,the proposal to Intuit’s Secretary, at our principal executive offices, between July 17, 2004 and August 16, 2004. In addition, our stockholders must comply with the procedural requirements in our bylaws. Stockholders can obtain a copy of our bylaws from May 2000 until January 2003. From January 1997us upon request. The bylaws are also on file with the SEC. We reserve the right to reject, rule out of order or take other appropriate action with respect to any proposal that does not comply with these and other applicable requirements.
RELATED PARTY TRANSACTIONS
In December 1999, Mr. Henske2003 the Intuit Foundation contributed $2.5 million to a foundation directed by a member of our board of directors. The Intuit Foundation may contribute an additional $2.5 million to this foundation through November 2006.
The Intuit Foundation was established by Intuit as an independent charitable foundation in accordance with IRS code 501(c)(3). Intuit’s initial contribution to the Intuit Foundation was $3.0 million in April 2002, and Intuit expects to make additional contributions to the Intuit Foundation over time. The Intuit Foundation was created to foster economic empowerment both nationally and in communities where Intuit has a partner at Oak Hill Capital Management, a Robert M. Bass Group private equity investment firm. Mr. Henske holds a Bachelorsignificant number of Science degree in Chemical Engineering from Rice University and an MBA in finance and strategic management from The Wharton School, University of Pennsylvania.employees.
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ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
We have filed the following exhibits as part of this report:
Exhibit | ||||||||||
No. | Exhibit Description | |||||||||
10.01# | ||||||||||
10.02# | Sixth Addendum to the Supply Agreement for the addition of Manual Checks Products, dated as of August 1, 2003, between Intuit Inc. and the John H. Harland Company | |||||||||
10.04# | ||||||||||
Amendment No. 2, dated as of December 15, 2003, to the Supply Agreement between Intuit Inc. | ||||||||||
10.05+ | ||||||||||
10.06+ | from Intuit Inc. to Nicholas J. Spaeth | |||||||||
10.07+ | ||||||||||
10.09+ | Separation Terms and Release Agreement dated January 8, 2004 between Thomas E. Weigman and Intuit Inc. | |||||||||
10.10+ | Separation Terms and release Agreement dated January 20, 2004 between Dan Manack and Intuit Inc. | |||||||||
10.11+ | Separation Terms and Release Agreement dated January 22, 2004 between Thomas A. Allanson and Intuit Inc. | |||||||||
31.01 | Rule 13a-14(a) Certification (Chief Executive Officer)* | |||||||||
31.02 | Rule 13a-14(a) Certification (Chief Financial Officer)* | |||||||||
32.01 | Section 1350 Certification (Chief Executive Officer) | |||||||||
32.02 | Section 1350 Certification (Chief Financial Officer) |
+ Management compensatory plan or arrangement.
* | This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that Intuit specifically incorporates it by reference. | |
# | We have requested confidential treatment for certain portions of this document pursuant to an application for confidential treatment sent to the Securities and Exchange Commission. We omitted such portions from this filing and filed them separately with the SEC. | |
+ | Indicates a management contract or compensatory plan or arrangement |
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Reports on Form 8-K filed during the second quarter of fiscal 2003:2004:
1. | On November | |
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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: | March 9, 2004 | By: | /s/ | |||
Robert B. (“Brad”) 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:
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CERTIFICATION
I, Robert B. Henske, certify that:
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EXHIBIT INDEX
Exhibit | ||
No. | Exhibit Description | |
10.01# | Fifth Addendum to the Supply Agreement for the addition of Shipping Label Products, dated | |
10.02# | Sixth Addendum to the Supply Agreement for the addition of Manual Checks Products, dated | |
10.03# | Amendment No. 1, dated as of November 12, 2003, to the Supply Agreement between Intuit Inc. and | |
10.04# | Amendment No. 2, dated as of December 15, 2003, to the Supply Agreement | |
10.05+ | ||
10.06+ | ||
10.07+ | Terms of Separation Letter dated January 30, 2004 between Nicholas J. Spaeth and Intuit Inc. | |
10.08+ | Letter to Nicholas J. Spaeth regarding relocation benefits dated January 30, 2004. | |
10.09+ | Separation Terms and Release Agreement dated January 8, 2004 between Thomas E. Weigman and Intuit Inc. | |
10.10+ | Separation Terms and Release Agreement dated January 20, 2004 between Dan Manack and Intuit Inc. | |
10.11+ | Separation Terms and Release Agreement dated January 22, 2004 between Thomas A. Allanson and Intuit Inc. | |
31.01 | Rule 13a-14(a) Certification (Chief Executive Officer)* | |
31.02 | Rule 13a-14(a) Certification (Chief Financial Officer)* | |
32.01 | Section 1350 Certification (Chief Executive Officer) | |
32.02 | Section 1350 Certification (Chief Financial Officer) |
* | This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the | |
# | We have requested confidential treatment for certain portions of this document pursuant to an application for confidential treatment sent to the Securities and Exchange Commission. We omitted such portions from this filing and filed them separately with the SEC. | |
+ | Indicates a management contract or compensatory plan or |
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