UNITED STATES
FORM 10-K
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Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
| For the fiscal year ended July 31, 2002 or | ||
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
Commission File Number 0-21180
INTUIT INC.
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Delaware
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77-0034661 | |
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(State of incorporation)
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(IRS Employer Identification No.) | |
| 2535 Garcia Avenue, Mountain View, CA 94043 | ||
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| (Address of principal executive offices, including zip code) | ||
| (650) 944-6000 | ||
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| (Registrant’s telephone number, including area code) | ||
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Securities registered pursuant to
Section 12(b) of the Act:
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None | |
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Securities registered pursuant to
Section 12(g) of the Act:
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Common Stock, $0.01 par value
Preferred Stock Purchase Rights |
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 o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
As of August 30, 2002, there were 209,163,557 shares of the Registrant’s common stock, $0.01 par value, outstanding. This is the only outstanding class of common stock of the Registrant. As of that date, the aggregate market value of the shares of common stock held by non-affiliates of the Registrant (based on the closing price of $44.63 for the common stock as quoted by the Nasdaq Stock Market on that date), was approximately $8,559,693,295.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive Proxy Statement for its Annual Meeting of Stockholders to be held in December 2002 are incorporated by reference into Part III of this report on Form 10-K.
FISCAL 2002 FORM 10-K
INDEX
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PART I
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ITEM 1:
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Business
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3 | ||||
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ITEM 2:
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Properties
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16 | ||||
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ITEM 3:
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Legal Proceedings
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16 | ||||
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ITEM 4:
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Submission of Matters to a Vote of Security
Holders
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17 | ||||
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ITEM 4A:
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Executive Officers of the Registrant
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18 | ||||
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PART II
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ITEM 5:
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Market for Registrant’s Common Equity and
Related Stockholder Matters
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21 | ||||
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ITEM 6:
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Selected Financial Data
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22 | ||||
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ITEM 7:
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Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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24 | ||||
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ITEM 7A:
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Quantitative and Qualitative Disclosures About
Market Risk
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52 | ||||
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ITEM 8:
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Financial Statements and Supplementary Data
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54 | ||||
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ITEM 9:
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Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
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93 | ||||
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PART III
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ITEM 10:
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Directors and Executive Officers of the Registrant
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93 | ||||
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ITEM 11:
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Executive Compensation
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93 | ||||
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ITEM 12:
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Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
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93 | ||||
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ITEM 13:
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Certain Relationships and Related Transactions
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PART IV
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ITEM 14:
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Exhibits, Financial Statement Schedules and
Reports on Form 8-K
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Intuit, the Intuit logo, QuickBooks, Quicken, TurboTax, ProSeries, Lacerte, FundWare and QuickBase, among others, are registered trademarks and/or registered service marks of Intuit Inc. 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.
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PART I
CORPORATE BACKGROUND
Intuit began operations in March 1983 and was incorporated in California in March 1984. In March 1993, we reincorporated in Delaware and completed our initial public offering. Our principal executive offices are located at 2535 Garcia Avenue, Mountain View, California, 94043, and our telephone number is (650) 944-6000. When we refer to “we,” “our” or “Intuit” in this Form 10-K, we mean the current Delaware corporation (Intuit Inc.) and its California predecessor, as well as all of our consolidated subsidiaries.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
Throughout this Report, there are forward-looking statements that are based upon our current expectations, estimates and projections about our business and our industry, and that reflect our beliefs and assumptions based upon 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 upon 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 cause our results to differ are discussed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — 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 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.
BUSINESS OVERVIEW
Intuit’s Mission: Revolutionizing Financial and Business Management
Our mission is to revolutionize how people manage their financial lives, and how small businesses and accounting professionals manage their businesses. Our goal is to create changes so profound customers wouldn’t dream of going back to their old ways of keeping their books, doing their taxes or managing their personal finances. Intuit is a leading provider of small business, tax preparation and personal finance software products and services that simplify complex financial tasks for small businesses, consumers and accounting professionals. Our principal products and services include: small business accounting and business management solutions, including our QuickBooks® line of products and services as well as our Intuit® line of industry-specific business management solutions; TurboTax® consumer tax products and services; ProSeries® and Lacerte® professional tax products and services; and Quicken® personal finance products and services. Details about our products and services are provided in “Products and Services,” below.
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Company Growth Strategy
Intuit has a tradition of successful customer-driven innovation, using technology to address complex customer problems and develop solutions to make things easier. By applying strategic and operational rigor to this foundation, we believe we can accelerate our customer-driven innovation, and deliver stronger revenue and profit growth.
There are three key fundamentals that support our growth strategy:
| • | We deliberately choose to be in businesses where we have, or we believe we can achieve, the strategic and durable advantage to produce long-term profitable growth. | |
| • | Within these businesses, we create new growth by identifying large, underserved portions of the market, and delivering customer-driven, innovative solutions to address these unmet customer needs. | |
| • | By applying strategic and operational rigor, we can execute well to capitalize on these multiple, large growth opportunities. |
By being both disciplined and innovative, we can improve execution and deliver more — for example, by tightening development cycles, we can introduce more products faster. The new products drive stronger growth and give customers a broader range of offerings to best meet their needs.
“Right for Me” Product Strategy
We strive to deliver a range of products and services that can provide a compelling, “Right for Me” customer proposition for a wide range of customers with differing needs. Specifically, in September 2001, we announced our “Right for My Business” strategy to better address the small business management market opportunity and to expand our target customer segment to include larger small businesses with up to 250 employees. Our goal is to offer the right solution for each small business in our targeted markets. We have two primary methods of providing products and services that address the varying needs of different types of small businesses: solutions that are expansions of, or that integrate with, our QuickBooks line of small business products; and standalone business management solutions that operate independently of our current QuickBooks products. Here are the key elements of our Right for My Business strategy:
| • | We’ve been expanding our QuickBooks product line to offer industry-specific versions of QuickBooks — such as QuickBooks Premier: Accountant Edition for accountants, and QuickBooks Point of Sale products for retail businesses. | |
| • | We’re also offering versions of QuickBooks designed for bigger, more complex businesses — including QuickBooks Premier for small businesses needing more advanced accounting functionality, and QuickBooks Enterprise Solutions Business Management Software for businesses with up to 250 employees. | |
| • | We are continuously expanding the Intuit Developer Network. This initiative encourages third-party software developers to develop applications that exchange data with QuickBooks by giving them limited access to application programming interfaces for certain of our QuickBooks products. At the end of fiscal 2002, there were about 120 applications available for QuickBooks. These applications allow our QuickBooks customers to derive even more value from their QuickBooks software. | |
| • | We offer business solutions that go beyond accounting software to address a wider range of business management challenges that small businesses face. For example, we offer a broad range of payroll services and financial supplies, as well as software solutions that help businesses manage their information technology resources and assets. | |
| • | We provide industry-specific business management solutions to meet the specialized requirements of small businesses in selected vertical industries, including the construction industry; nonprofit |
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| organizations, universities and government agencies; commercial and residential property managers; and wholesale durable goods distributors. |
Our Right for Me strategy is also reshaping our tax and personal finance businesses. In fiscal 2002, we took the first steps in a multi-year implementation of our Right for Me strategy in these areas, when we launched a higher-end consumer tax product, TurboTax Premier, to address the unique needs of investors and rental property owners. The implementation of this strategy is continuing in fiscal 2003, starting with the August 2002 launch of Quicken Premier, which offers more robust investment and tax planning tools. In September 2002, we announced plans to provide three new versions of TurboTax in fiscal 2003 — TurboTax Retirement Planning Edition, TurboTax Investor Edition, and TurboTax en Español.
PRODUCTS AND SERVICES
Intuit offers products and services in seven business segments: Small Business, Employer Services, Consumer Tax, Professional Accounting Solutions, Personal Finance, Global Business and Small Business Verticals and Other. Our primary products and services are described below. In fiscal 2002 we combined the operations of our Small Business and Personal Finance divisions to leverage their business and operational synergies, but we continue to view the results of the businesses separately for reporting purposes. For financial information about these businesses, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 14 of the financial statements. For a description of principal risks associated with these businesses, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risks that Could Affect Future Results.” We sold our Quicken Loans mortgage business in July 2002. We accounted for Quicken Loans as a discontinued operation and, as a result, it is not discussed below. See Note 11 of the financial statements.
Small Business
QuickBooks Software and Services. Our QuickBooks product line brings extensive bookkeeping capabilities, as well as business management tools, to small business users in an easy-to-use design that does not require customers to be familiar with debit/credit accounting. We offer a range of products to suit the needs of different types of small businesses, including QuickBooks Basic, which provides accounting functionality suitable for smaller, less complex businesses; QuickBooks Pro, which supports up to five multiple simultaneous users; QuickBooks Premier, for small businesses needing more advanced accounting functionality; QuickBooks Premier: Accountant Edition, customized for accounting professionals with multiple QuickBooks clients; QuickBooks Point of Sale, which is designed for retail businesses; and QuickBooks Enterprise Solutions Business Management Software, for businesses with up to 250 employees. As part of our Right for My Business strategy, we expect to launch a number of additional versions of QuickBooks during fiscal 2003 and beyond. Our more recent QuickBooks products offer a variety of optional business management services for an additional fee, including QuickBooks Online Billing, which allows small businesses to bill and receive customer payments electronically; QuickBooks Merchant Account Service, which enables small businesses to accept credit card payments from their customers; and QuickBooks Credit Check Services, which gives small businesses access to credit reports designed specifically for small businesses. We also offer a variety of technical support plans to our QuickBooks customers through QuickBooks Service Solutions. Customers have a choice of different support plans at different prices depending on the response time they require.
Financial Supplies. We offer a range of financial supplies, such as paper checks, envelopes, invoices, deposit slips, stationery, business cards and holiday greeting cards, designed for small businesses and individuals. We also offer tax forms, tax return presentation folders and other similar items for professional tax preparers. Our customers can personalize many products to incorporate their logos and use a variety of color, font and design options.
Information Technology Management Solutions. In September 2002 we completed the acquisition of Blue Ocean Software, Inc., a leading provider of software solutions that help businesses manage their information technology resources and assets. Functionality includes PC inventory management, incident
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Employer Services
Our Employer Services business provides solutions to help small business owners better manage key tasks relating to their employees. Our current Employer Services offerings consist primarily of payroll solutions, and we currently provide three different payroll offerings. Our QuickBooks Do-It-Yourself Payroll (formerly Basic Payroll) consists of current payroll tax tables that are provided on a subscription basis to small businesses that need current tables to prepare their own payrolls. Our QuickBooks Assisted Payroll Service (formerly Deluxe Payroll) is an online payroll service that handles the back-end aspects of payroll processing, including tax payments and filings. It is integrated with QuickBooks, which minimizes customer data entry. Our Intuit Payroll Services — Complete Payroll provides traditional, full service payroll processing, tax payment and check delivery services. It encompasses our former Premier Payroll Service, as well as CBS Payroll, which we acquired in the fourth quarter of fiscal 2002. The acquisition of CBS Payroll significantly enhances our ability to expand and acquire customers for our full-service payroll offering. In September 2002, we announced plans to provide integration between our Complete Payroll service and QuickBooks, which we believe will offer a more attractive full-service payroll solution for QuickBooks customers.
Consumer Tax
Desktop Consumer Tax Software. Our TurboTax desktop products are designed to enable individuals and small business owners to prepare their own federal and state personal and business income tax returns easily, quickly and accurately. Our consumer tax products are designed to be easy to use, yet sophisticated enough for complicated tax returns. We offer basic and deluxe versions of the product, and in fiscal 2002, we introduced TurboTax Premier, which addresses the unique tax needs of investors and rental property owners. Our innovative Instant Data Entry feature enables taxpayers to import data directly into their tax returns from Form W-2s (wages), Form 1098s (mortgage interest) and Form 1099s (interest, dividends and stock transactions) from more than 45 participating financial institutions and payroll service companies. This feature saves significant time and increases accuracy.
Web-Based Consumer Tax Preparation and Electronic Filing Services. TurboTax for the Web is an interactive tax preparation service that enables individual taxpayers to prepare their federal and state income tax returns entirely online. This service allows us to reach a different segment of consumer tax customers than those who use our desktop products; a significant number of TurboTax for the Web customers in fiscal 2000 through fiscal 2002 had not used tax preparation software before. We offer basic, deluxe and premium versions of the service that have functionality similar to that of our desktop products. Through our electronic filing center, customers of our desktop and Web-based tax preparation software can electronically file their federal tax returns, as well as state returns in all states that support electronic filing. During fiscal 2002, we were the exclusive provider of online tax preparation services on the Yahoo!® Finance Tax Center, and our online tax services were also offered through the websites of more than 1,100 financial institutions, electronic retailers and other merchants.
Under the Intuit Tax Freedom Project, a philanthropic public service initiative of the Intuit Financial Freedom Foundation, we provide online tax preparation and electronic filing services at no charge to lower-income federal and state tax filers.
Professional Accounting Solutions
Our ProSeries and Lacerte tax preparation products are designed for tax professionals who prepare tax returns for their individual and business clients. Customers can elect to license professional tax products for a flat fee for unlimited annual use or to use them on a “pay-per-return” basis. ProSeries and Lacerte customers can file their customers’ tax returns through our electronic filing services. Our other professional accounting solutions include EasyACCT® Professional Accounting Series products, which allow
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Personal Finance
Quicken Software. Our Quicken line of desktop software products helps users organize, understand and manage their personal finances. Quicken allows customers to reconcile bank accounts, record credit card and other transactions, write checks, and track investments, mortgages and other assets and liabilities. Many customers use Quicken products to manage their home-based businesses. We offer basic and deluxe versions of the product, and in August 2002, we introduced our Quicken Premier product, which offers more robust investment and tax planning tools.
Quicken.com and Other Online Services. We provide a range of online services that help consumers manage their financial lives. Quicken.com TM is our primary personal finance Web site. It enables customers to automate financial management tasks and make better financial decisions by giving them software tools, resources and objective information about a variety of personal finance topics, including investing, mortgages, insurance, taxes, banking and retirement, in a single online destination. In September 2002, we launched Quicken Brokerage powered by Siebert, an online and telephone-based securities brokerage service for Quicken and Quicken.com customers made available through an exclusive strategic alliance with Siebert Financial Corp., the holding company for Muriel Siebert & Co. Inc. Other online services we offer include bill payment and online banking services thorough the Quicken desktop product, as well as a Quicken credit card. Quicken and/or Quicken.com customers can also link directly to third-party providers of other services, such as insurance and mortgages. We do not currently charge customers a fee to access most features on Quicken.com, but we receive revenue from financial institutions and other companies that advertise and/or sell their products or services through links from Quicken.com.
Global Business
We have business operations in Canada and Japan, and we also serve markets across Europe, Southeast Asia and other selected locations. We have established third-party relationships with local companies in certain countries to help us better address specific markets. In all international markets except Canada and Europe, we focus primarily on small business products.
Canada and United Kingdom. In Canada, we offer localized versions of QuickBooks and Quicken; the MYOB accounting product line, which we acquired during fiscal 2002; QuickTax TM consumer tax products; ProFile TM Financial Application Suite professional tax products; and Quicken.ca SM , a personal finance Web site with content similar to Quicken.com. In the United Kingdom, we also offer localized versions of QuickBooks and Quicken, as well as the TaxCalc TM consumer tax return product, which we acquired in fiscal 2002.
Japan. The principal product we offer in Japan, is Yayoi®, a small business accounting product that addresses the mid-sized companies segment of the small business market in Japan. Sales of Yayoi products also generate recurring revenue from ongoing support contracts that are sold with the software. During fiscal 2002, we discontinued our Japanese version of QuickBooks.
Other Locations. We offer localized versions of QuickBooks and Quicken products in selected European markets through local distributors and agents. We also offer localized versions of QuickBooks and Quicken products in Australia, New Zealand, Hong Kong, and Singapore through a development, marketing and distribution arrangement with Australia-based Reckon Limited.
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Small Business Verticals and Other
As part of our Right For My Business strategy, we have acquired several companies that enable us to provide accounting and business management solutions to customers in selected industries, which we refer to as “verticals.” These new businesses, which we report as a single business segment, include the following: Intuit Construction Business Solutions (formerly OMware, Inc.), which provides business management solutions for the construction industry; Intuit Public Sector Solutions (formerly American Fundware), which offers accounting and business management software solutions for nonprofit organizations, universities and government agencies; Intuit MRI Real Estate Solutions (formerly Management Reports, Inc.), which provides business management software solutions for commercial and residential property managers; and Intuit Eclipse Distribution Management Solutions (formerly Eclipse, Inc.), which offers business management software for the wholesale durable goods industry.
PRODUCT DEVELOPMENT
Historically, our desktop software products have tended to have a fairly predictable, structured development cycle of about a year, with annual releases. For our small business desktop products, we now supplement annual releases of our core QuickBooks products with ongoing releases of products that address the specialized requirements of selected vertical industries, as well as products for larger or more complex businesses. The development cycles for our service offerings are less predictable and are generally much shorter than for our desktop products. The development of tax preparation software presents a unique challenge because of the demanding development cycle required to incorporate annual tax law and tax form changes each year. For a description of other risks and challenges we face relating to our product development, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risks That Could Affect Future Results.”
During the past few years, we have devoted significant resources to developing new products and services, including QuickBooks Premier, QuickBooks Premier: Accountant Edition, QuickBooks Enterprise Solutions Business Management Software, the Intuit Developer Network and the Instant Data Entry feature of our TurboTax products and services. We supplement our internal development efforts by acquiring strategically important products and technology from third parties, or establishing other relationships that enable us to expand our business more rapidly. For example, during fiscal 2002, we acquired four companies that provide small business management products in vertical industries, we worked closely with a third party technology provider to develop our QuickBooks Point of Sale software, and we formed an exclusive strategic alliance with Siebert Financial Corp. to offer brokerage services to consumers.
We also devote resources to improving our existing products and services. For our desktop software products, our recent development efforts have focused on creating an easier end-to-end customer experience, as well as adding new features. We also incorporate technology in our products and services to address customer concerns about privacy and security while minimizing the impact on performance and ease of use. In addition, we have focused in recent years on developing technology that helps reduce unlicensed use of some of our tax products. Our fiscal 2002 professional tax products, as well as consumer tax products in Canada, contained product activation technology that restricted sharing of the products. In September 2002, we announced that federal tax versions of TurboTax desktop products for Windows for the 2002 tax season will include product activation technology that will prevent a customer from using a single copy of TurboTax to print or e-file a tax return from more than one personal computer.
During the past few years, we have made a number of improvements to our product development process. We now team technical support and product development personnel, so that we can anticipate feature usability and support issues early in the development process. By enhancing the design process for our QuickBooks 2002 products, we improved product quality and significantly lowered our customer service and technical support call volume. We have made other changes that have allowed us to shorten the development cycle, which is enabling us to launch new products more quickly.
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Our research and development expenses were $165.9 million in fiscal 2000, $203.7 million in fiscal 2001 and $203.5 million in fiscal 2002. During fiscal 2002, we significantly increased research and development spending in some of our highest-growth businesses — small business, consumer tax and professional accounting solutions — but these increases were offset by significant decreases in spending in less strategic areas and discontinued businesses. Over the next few years, we expect that our research and development efforts will be focused on developing new products and services to address customer needs in our more broadly defined market segments and adding complementary products and services to drive additional, recurring revenue from our core products, such as additional products and services for our small business customers. We strive to maintain a balance between relatively low-risk investments that address existing customer needs, and investments in more innovative but higher-risk projects with potentially greater returns.
MARKETING, SALES AND DISTRIBUTION
Markets
Recently, we have expanded both the markets that we serve, as well as the products and services that we offer in our target markets. Historically, our target markets were individuals and small businesses with less than 20 employees. We continue to serve those markets with products and services such as QuickBooks, TurboTax and Quicken. In addition to these markets, 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 the umbrella of 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 version of QuickBooks, and acquiring companies that offer business management solutions to small businesses in selected vertical markets. In addition, we recently 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 expanding in these directions over the next several years. See “Business Overview — “Right for Me” Product Strategy” and “Products and Services,” above, for more details about our product and service offerings.
Many of the markets in which we compete are characterized by rapidly changing customer demands, continuous technological changes and improvements, shifting industry standards and frequent new product introductions by competitors. Market and industry changes can quickly render existing products and services obsolete, so our success depends on our ability to respond rapidly to these changes with new or enhanced products and services, new business models, alternative distribution methods, different competitive strategies and other changes to the way we do business.
Distribution Channels
Over the past year we have been expanding our distribution channels to accommodate the recent expansion of both the markets we serve and the range of products and services we offer.
Direct Sales Channel. For our core desktop software products (QuickBooks, TurboTax and Quicken), we use various direct sales campaigns, including mail and telephone solicitations, direct-response newspaper and magazine advertising, and television and radio advertising, to generate software orders, stimulate retail demand and generally maintain and increase consumer awareness of our products. Direct marketing campaigns are one of the most effective ways to encourage existing customers to purchase additional products and services, including software upgrades. Direct sales made up a significant portion of our total desktop software revenue in fiscal 2002, as they often generate significantly higher revenue per unit than retail sales, particularly for our small business and tax products.
Many of our direct customers choose to order and/or take delivery of products electronically through our Web sites. Electronic ordering and delivery are generally more convenient for customers and more cost-efficient for Intuit. Electronic delivery has been a particularly effective method of distribution for our
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Our direct sales efforts have historically focused on generating sales of relatively inexpensive, off-the-shelf products to existing customers. Our service offerings, as well as our more sophisticated, higher-priced software products, require a more robust approach to direct sales than desktop software. As we have expanded our services offerings and introduced more high-end software products and business management solutions over the past year, we have been enhancing our direct sales capabilities to support revenue growth in these new areas, as well as in our core desktop software. We are investing in technology to consolidate and improve our management of customer contact data and order management tools across business divisions. Process excellence initiatives in fiscal 2002 have resulted in improvements in lead generation and order management, as well as more consultative selling by our customer service personnel. In addition, we have expanded our direct sales staff and broadened its role to include more extensive and personalized contact with existing and potential customers. In particular, some of the new products and services we now offer as a result of recent acquisitions are sold primarily through direct field sales organizations. As a result of all of these efforts, we expect that direct sales will become an increasingly important source of revenue over the next few years.
Retail Distribution Channel. We market our QuickBooks, TurboTax and Quicken desktop software in North America primarily through traditional retail software outlets, computer superstores, office supply superstores, warehouse clubs and general mass merchandisers. In international markets, we also rely on distributors, value-added resellers and other third parties, who sell products into the retail channel. In fiscal 2002 we began distributing our TurboTax products through Safeway Inc., one of the largest food and drug retailers in North America. This enabled us to reach a significant number of new customers. We expect to continue expanding our retail distribution locations to reach more new customers in fiscal 2003.
We continue to benefit from strong relationships with a number of major retailers, which allows us to minimize our dependency on any specific retailer. We are reducing our dependency on distributors as we ship more of our products directly to individual retail locations. See “Manufacturing and Distribution.” However, the recent slowdown in consumer demand for software has resulted in software becoming a less important category for retailers. As a result of this trend, we have faced challenges in ensuring good product placement within retail stores. See “Competition” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risks That Could Affect Future Results.”
We ship more products to our retailers than we expect them to sell in order to reduce the risk that they will run out of products. This is particularly true for our tax products. As a result, we often experience significant levels of product returns from the retail channel after the end of the tax season — during the fourth quarter as well as the first quarter of the following fiscal year. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risks That Could Affect Future Results.”
As we execute on our Right for My Business strategy, we are starting to offer more complex, higher-priced software products than our traditional retail software products. It is not yet clear whether the retail channel will be an effective distribution channel for some of these higher-end offerings.
OEM Channel. We have existing relationships with a number of personal computer “original equipment manufacturers,” or OEMs, including Dell Computer Corporation, Apple Computer Inc. and Hewlett-Packard, that enable us to generate sales of our core desktop software products in two ways. First, certain OEMs “pre-bundle” new-user versions of certain desktop software products on the computer systems that the OEMs sell to their customers. Although these pre-bundled OEM sales sometimes generate little revenue or initial profit for Intuit (due to the low prices that the OEMs may pay for the products and slow sales in their own businesses), they are a good source of new customers and future revenues. The second source of revenue from the OEM channel is “after-market” programs, in which customers who are purchasing computers can select and purchase software products at the same time.
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Third-Party “Value-Added” Distribution Arrangements. As we execute on our Right for My Business strategy, we are supplementing our direct sales capabilities and our retail distribution relationships with selected third-party distribution arrangements. We believe these relationships will enhance the growth opportunities for our expanded and higher-end product and service offerings by allowing us to benefit from the value-added marketing and sales expertise of these third parties. We currently have arrangements with third parties who have specialized expertise in marketing, selling and providing post-sale implementation services for the vertical business management solutions offered by our Construction Business Solutions and Public Sector Solutions businesses, which we acquired during fiscal 2002. During fiscal 2003 and beyond, we expect to expand our network of third-party relationships, to help increase revenue for some of our existing higher-end product and service offerings, as well as for additional products and service we anticipate offering as we execute our Right for My Business strategy.
COMPETITION
Overview
We face intense competition in almost all of our business areas, both domestically and globally. Some of our existing competitors have significantly greater financial, technical and marketing resources than we do. 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. In addition, the competitive landscape can shift rapidly as new companies enter markets in which we compete. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risks That Could Affect Future Results.”
For our TurboTax, Quicken and lower-end QuickBooks desktop software, we believe the most important competitive factors are product features, ease of use, size of the installed customer base, brand name recognition, price, product and support quality and access to distribution channels. We believe we compete effectively on most of these factors, as our three principal desktop software products are the leading products in the retail sales channel for their respective categories. For most of our products and services other than desktop software, we believe the most important competitive factors are features and ease of use, brand name recognition, speed in getting new products and services to market, and the ability to distribute them effectively (through online methods or through retailers, third party resellers and direct distribution). For our service offerings, service reliability and scalability of operations are also important factors. We believe we compete effectively on these factors.
Our most obvious competition comes from other companies that offer technology solutions similar to ours. These competitors are described below. However, for many of our products and services, the primary competitive alternatives for customers are manual tools and processes, or general purpose software. A significant portion of our new customers are people who have used pencil and paper or software such as word processors and spreadsheets, rather than competitors’ software and services, to perform financial tasks. For example: many taxpayers prepared their tax returns manually; a large number of small businesses used spreadsheets to keep their book and they processed their payroll using spreadsheets and manually-written checks; and most of our personal finance customers tracked their finances with spreadsheets, manually or not at all before purchasing Quicken.
Small Business, Employer Services and Small Business Verticals
Competitors for our small business accounting and business management offerings include companies such as Peachtree Software (which is owned by The Sage Group PLC), MYOB Group, Microsoft Corp. and the American Institute of Certified Public Accountants’ CPA2Biz subsidiary. Microsoft recently acquired a provider of integrated software solutions for small and medium-sized businesses, and Microsoft Great Plains recently acquired QuickSell retail point-of-sale applications. Another factor in the competitive environment is the increasing number of alliances between 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. In addition to established competitors, other potential competitors
11
Our financial supplies business competes with a number of business forms companies, including New England Business Service and Deluxe Business Systems, as well as with printing services offered by franchises such as Kinko’s and large office supply retailers such as Office Depot and Staples. Other competitors include direct mail check printers, banks and a number of smaller-scale Internet-based printing companies. In addition, our QuickBooks products include some features (such as customizable invoicing) that compete with our supplies products. Online bill payment services and online payroll services with direct deposit capabilities also offer competitive alternatives to printed checks. Significant competitive factors for the supplies business include ordering convenience, methods of reaching customers, product quality, speed of delivery and price. We believe our convenient access to our large QuickBooks and Quicken customer bases is a significant competitive advantage for us.
Our payroll services compete directly with traditional payroll service providers as well as Web-based service providers. Significant competitive factors include distribution channels, a highly fragmented market including financial institutions that are developing or promoting their own payroll services, and offerings by non-traditional competitors such as Microsoft’s bCentral. We face direct competition in our Intuit Payroll Services — Complete Payroll business from traditional payroll services offered by a number of companies, including Paychex and ADP. Our QuickBooks Assisted Payroll service competes directly with companies offering Web-based payroll services, and indirectly with companies offering other payroll solutions. Peachtree and others also offer tax table subscription services that compete directly with our QuickBooks Do-it-Yourself Payroll offering.
Consumer Tax
Competition in the consumer tax preparation market is intense. Our major domestic competitor for both desktop and Web-based consumer tax software continues to be H&R Block, the makers of TaxCut software. However, Microsoft offered a competitive product for one season (our fiscal 2000), and new competitors may enter these markets in the future. We also compete for customers with professional tax preparers, particularly those with franchise operations. Web-based tax preparation is still a relatively new service, and we expect the competitive landscape to evolve as more competitors enter the market and others consolidate. We also face potential competitive challenges from electronic tax preparation and filing services offered by state governments. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risks That Could Affect Future Results.”
Professional Accounting Solutions
The professional tax preparation software marketplace has many competitors. Our largest competitors in the U.S. are CCH Incorporated, with its ProSystem fx product line, and RIA, with its Creative Solutions and GoSystem offerings. In the past, the professional tax market has been highly fragmented, but it has experienced some consolidation in recent years.
Personal Finance
In desktop personal finance software, the Microsoft Money product is our primary domestic competition. We also face competition from Web-based personal finance tracking and management tools that are available at no cost to consumers. There are many competitors for our other personal finance products and services. For example, our Quicken.com site competes for traffic, and advertising and sponsorship sales, with online financial publishers, the financial areas on numerous online services such as Yahoo! and financially-oriented Web sites such as Microsoft’s Money Central. Our online brokerage offering through Siebert Financial Corp. competes with numerous other brokerage services. However, we believe that the ability of Quicken customers to integrate brokerage transaction data into their Quicken records gives us a
12
Global Business
In Canada, we face competition from a number of companies in the small business arena, including Computer Associates International, Inc. The primary competitor in Canada for our consumer tax business is Taxamatic, Inc., the makers of TAXWIZ, and the primary competitor for our professional tax business is CCH Canadian Limited. In Japan, our primary competitors in the small business accounting arena are OBC, PCA and Sorimachi. In Europe, we face competition from The Sage Group PLC (based in the United Kingdom), Bhuldata (Wiso), Microsoft and Microsoft Great Plains in the small business market, as well as competition from Web-based accounting products. Our primary global competitor in the personal finance arena is Microsoft.
CUSTOMER SERVICE AND TECHNICAL SUPPORT
We provide customer service and technical support by telephone, online chat, fax, e-mail, and our customer service and technical support Web sites. We have full-time customer service and technical support staffs, which we occasionally supplement with seasonal employees and outsourcing during periods of peak call volumes, such as during the tax return filing season, or following a major product launch.
During the past few years, we have focused on developing support capabilities that can supplement, or in some situations replace, telephone service and support. For example, customers can use our Web sites to find answers to commonly asked questions, check on the status of a product order and receive bug fixes electronically. Alternative service and support methods are less expensive for us and are often more efficient and effective for customers as well. We have completed a number of Six Sigma/ Process Excellence projects in our customer service and technical support operations to improve our call capacity forecasting, develop more flexible approaches to staffing and reduce support call volumes and handling times. We may also consider outsourcing a greater portion of our customer service and technical support operations. We believe these projects are critical to our ongoing efforts to provide better service to customers at the same or lower cost.
We generally charge customers for technical support, but we do not charge for product defect issues or self-help support through our technical support Web sites. Support alternatives and fees vary widely by product, from self-help to chat, to phone support, to onsite installation. Customers generally have a choice of different support alternatives at different prices depending on the response time they require.
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. When we experience customer service and support problems, they can adversely affect customer relationships and our financial results. Our Right For My Business strategy presents additional technical support challenges as we increase the number and complexity of the products we offer. In addition, we expect most of our growth over the next several years to come from our small business and tax products, which typically require more live technical support than personal finance products. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risks That Could Affect Future Results.”
MANUFACTURING AND DISTRIBUTION
Desktop Software
The major steps involved in manufacturing desktop software are duplicating CDs and floppy disks, printing boxes and related materials, and assembling and shipping the final products. We have a manufacturing agreement with Modus Media International, Inc. under which Modus provides substantially all outsourced manufacturing related to our retail and direct launches of QuickBooks, TurboTax and Quicken, as well as
13
We have multiple sources for all of our raw materials and availability has not been a problem for us in the past. Over the past few years we have taken steps to streamline our packaging and reduce our inventory and scrap costs, to generate greater profitability in our core desktop software businesses.
Our retail product launches have become operationally more complex over the past few years. We have evolved from shipping to a few hundred distribution centers (with distributors delivering products to individual retail locations) to a “direct to storefront” model in which we ship products directly to almost 10,000 individual retail locations. This allows us to be more responsive to the needs of our retail accounts. We have an agreement with Ingram Micro Logistics under which Ingram handles all logistics, fulfillment and similar functions for our retail sales. During the past year we have focused on better operational rigor at various points in our supply chain. As a result, we have significantly increased our on-time shipments, and significantly reduced our aggregate channel inventory levels. We have also reduced our dependency on distributors or on any individual retail account. One distributor, Ingram Micro Inc., accounted for 10% of total net revenue in fiscal 2000. No retailer accounted for 10% or more of our total net revenue during the past three fiscal years, and no distributor met this threshold in fiscal 2001 or 2002.
We believe that using these three vendors (Modus Media, Sony and Ingram Micro Logistics) to handle essentially all manufacturing and distribution, respectively, for our three primary retail product launches improves the efficiency and reliability of our product launches, and enables us to move more quickly to the direct-to-storefront model preferred by many of our retailers. It also allows us to better manage inventory levels. However, exclusive reliance on one vendor for specific functions can have severe negative consequences on our business, revenue and operating results if a vendor fails to perform for any reason. Accordingly, we continue to evaluate other vendors in order to increase efficiencies and facilitate contingency planning. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risks That Could Affect Future Results.”
Prior to major product releases, we tend to have significant levels of backlog, but at other times backlog is minimal and we normally ship products within a few days of receiving an order. Because of this fluctuation in backlog, we believe that backlog is not a reliable predictor of our future desktop software sales.
Internet-based Products and Services
Intuit’s data centers house most of the systems, networks and databases required to operate and deliver our Internet-based products and services, such as TurboTax for the Web, electronic tax filing, QuickBooks Assisted Payroll and Quicken.com. Through our data centers, we connect customers to products and services, and we store the vast amount of data that represents the content on our Web sites. Our data centers consist of approximately 2,200 servers and 400 databases located primarily in three locations. In an effort to reduce unavailability, or “down time” for our Internet-based products and services, we generally follow industry-standard practices for creating a fault-tolerant environment, but we do not have complete redundancy. Despite our efforts to maintain continuous and reliable server operations, like all providers of Internet-based products and services, we occasionally experience unplanned outages or technical difficulties. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risks That Could Affect Future Results.”
PRIVACY AND SECURITY OF CUSTOMER INFORMATION
Customers are concerned about the privacy and security of information they provide to product and services providers. This concern applies to information they provide in connection with Internet-based products and services, as well as information they provide through more traditional channels, such as
14
We have established guidelines and practices to help ensure that customers are aware of, and can control, how we use information about them. All publicly-accessible, Intuit-owned and operated Web sites at which customer data is collected (including Quicken.com, QuickBooks.com and TurboTax.com) have been certified by TRUSTe, an independent, non-profit privacy organization that operates a Web site certification program to alleviate users’ concerns about online privacy. Each of our Web sites, as well as our software products, has a privacy statement providing notice to customers of our privacy practices, as well as providing them the opportunity to furnish instructions with respect to use of their data.
To address security concerns, we use industry-standard security safeguards to help protect the information customers give to us from loss, misuse and unauthorized alteration. Whenever customers transmit sensitive information, such as a credit card number or tax return data, to us through our Web site, we provide them access to our servers that allow encryption of the information as it is transmitted to us. We work to protect personally identifiable information stored on the Web site’s servers from unauthorized access using commercially available computer security products, such as firewalls, as well as internally developed security procedures and practices.
We believe privacy and security issues pose a significant risk to Intuit and other companies, especially companies doing business over the Internet. Although we have made significant efforts to address customer concerns through our business practices, during the past few years we have faced lawsuits and negative publicity relating to privacy issues. Our response to these allegations has been that we do not share any personally identifiable information except as disclosed in our privacy policies. A major breach of customer privacy or security, even by another company, could have serious consequences for our businesses. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risks That Could Affect Future Results” and “Legal Proceedings.”
GOVERNMENT REGULATION
We offer several products and services that are subject to special regulatory requirements. For example, the brokerage-related services that Intuit offers through Quicken Brokerage powered by Siebert are provided in part by an Intuit subsidiary that is registered as a securities broker and is subject to certain federal and state broker-dealer regulations. In addition, some of the investment-related features in our products and services are offered by an Intuit subsidiary that is registered as an investment adviser with the SEC and is subject to some state regulatory laws as well. As we expand the depth and breadth of our small business offerings, we may become subject to additional government regulation, particularly in the areas of retirement planning and other employer services. We continually analyze new business opportunities, and new businesses that we pursue may require additional costs for regulatory compliance.
Current government regulation poses a number of risks to us, including potential liability to customers and/or penalties and sanctions by government regulators. Future regulation could hamper the growth of our businesses. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risks That Could Affect Future Results.”
INTELLECTUAL PROPERTY
We rely on a combination of copyright, patent, trademark and trade secret laws, and employee and third-party nondisclosure and license agreements to protect our software products and other proprietary technology. While our proprietary technology is important, we believe our success depends more heavily on
15
We consider our principal trademarks (including Intuit, QuickBooks, TurboTax and Quicken) to be important assets and have registered these and other trademarks and service marks in the U.S. and many foreign countries. The initial duration of trademark registrations varies from country to country and is 10 years in the U.S. Most registrations can be renewed perpetually at 10-year intervals.
We face a number of risks relating to our intellectual property, including persistent unauthorized use, and unauthorized copying or “piracy,” of our desktop software products. Although we have recently begun to incorporate technology in certain desktop software products to reduce unauthorized use, we expect piracy to be a persistent problem. We also face the risk of third parties claiming that our products or services infringe their intellectual property rights, and we face risks to the value of our brands when we grant trademark licenses to third parties. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risks That Could Affect Future Results.”
EMPLOYEES
As of August 31, 2002, we had approximately 6,500 employees, located primarily in the United States, Canada, Japan and the United Kingdom. We believe our future success and growth will depend on our ability to attract and retain qualified employees in all areas of our business. We do not currently have any collective bargaining agreements with our employees, and we believe employee relations are generally good. Although we have employment-related agreements with a number of key employees, these agreements do not guarantee continued service. We believe we offer competitive compensation and a good working environment. We were selected as one of Fortune magazine’s “100 Best Companies to Work For” in April 2002. However, we face intense competition for qualified employees, and we expect to face continuing challenges in recruiting and retention.
ITEM 2
Our principal offices and corporate headquarters are located in Mountain View, California. Our Mountain View facilities consist of approximately 500,000 square feet under leases that have expiration dates ranging from 2003 to 2010. We maintain a number of leased facilities in San Diego, California, consisting of approximately 385,000 square feet. We use these facilities for general office space, a data center and a manufacturing and distribution center. The San Diego leases have expiration dates ranging from 2003 through 2007. We lease approximately 140,000 square feet in Tucson, Arizona, where our primary customer call center is located, under a lease that expires in 2009. In Plano, Texas we lease approximately 165,000 square feet of space under a lease that expires in 2011, with two five-year renewal options. Our Professional Accounting Services group is headquartered in Plano, and we also have a data center there. In Reno, Nevada, the headquarters for our Employer Services business, we lease approximately 140,000 square feet under leases that have expiration dates ranging from 2002 to 2009. Our four Small Business Verticals are headquartered in Santa Rosa, California; Denver, Colorado; Shelton, Connecticut; and Beachwood, Ohio. We also lease or own facilities in a number of other domestic locations, including Waltham, Massachusetts; Fort Worth, Texas; New York, New York; and Washington, D.C. We also lease or own facilities in Canada, Japan and the United Kingdom. We believe our facilities are adequate for our current and near-term needs, and that we will be able to locate additional facilities as needed. See Note 16 of the financial statements for more information about our lease commitments.
ITEM 3
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
16
Intuit is subject to other 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.
ITEM 4
Not applicable.
17
ITEM 4A
The following table shows Intuit’s executive officers and their areas of responsibility as of September 1, 2002. We’ve included biographies after the table.
| Name | Age | Position | ||||
|
|
|
|
||||
|
Stephen M. Bennett
|
48 | President, Chief Executive Officer and Director | ||||
|
William V. Campbell
|
62 | Chairman of the Board of Directors | ||||
|
Scott D. Cook
|
50 | Chairman of the Executive Committee of the Board of Directors | ||||
|
Lorrie M. Norrington
|
42 | Executive Vice President, Small Business and Personal Finance Division | ||||
|
Dennis Adsit
|
43 | Senior Vice President, Operations | ||||
|
Thomas A. Allanson
|
44 | Senior Vice President, Consumer Tax Group | ||||
|
Richard William Ihrie
|
52 | Senior Vice President and Chief Technology Officer | ||||
|
Daniel L. Manack
|
44 | Senior Vice President, Professional Accounting Solutions | ||||
|
Greg J. Santora
|
51 | Senior Vice President and Chief Financial Officer | ||||
|
Raymond G. Stern
|
41 | Senior Vice President, Corporate Development and Strategy | ||||
|
Sherry Whiteley
|
43 | Senior Vice President, Human Resources | ||||
|
Caroline F. Donahue
|
41 | Vice President, Sales | ||||
|
Linda Fellows
|
54 | Vice President, Investor Relations and Treasury | ||||
|
Brooks Fisher
|
44 | Vice President, Vertical Strategy and Integration and Chief Marketing Officer | ||||
|
Jennifer Jones Hall
|
40 | Vice President and Chief Information Officer | ||||
|
Jeffrey N. Williams
|
51 | Vice President, Finance Operations and Corporate Controller | ||||
Mr. Bennett has been President and Chief Executive Officer and a member of the Board of Directors since January 2000. Prior to joining Intuit, Mr. Bennett was an Executive Vice President and a member of the board of directors of GE Capital, the financial services subsidiary of General Electric Corporation, from December 1999 to January 2000. From July 1999 to November 1999 he was President and Chief Executive Officer of GE Capital e-Business. He was President and Chief Executive Officer of GE Capital Vendor Financial Services from April 1996 through June 1999. He holds a Bachelor of Arts degree in Finance and Real Estate from the University of Wisconsin.
Mr. Campbell has been a director of Intuit since May 1994. He has served as Chairman of the Board since August 1998 and was Acting Chief Executive Officer from September 1999 until January 2000. He also served as Intuit’s President and Chief Executive Officer from April 1994 through July 1998. Mr. Campbell also serves on the board of directors of SanDisk Corporation (a computer storage devices company), Apple Computer, Inc. and Loudcloud, Inc. (a provider of Internet infrastructure services). Mr. Campbell holds both a Bachelor of Arts in Economics and a Masters degree from Columbia University.
Mr. Cook, a founder of Intuit, has been a director of Intuit since March 1984 and is currently Chairman of the Executive Committee of the Board. He served as Intuit’s Chairman of the Board from February 1993 through July 1998. From April 1984 to April 1994, he also served as President and Chief Executive Officer of Intuit. Mr. Cook also serves on the board of directors of Amazon.com, Inc., eBay Inc. and The Procter & Gamble Company and is on the board of visitors of the Harvard Business School Foundation. Mr. Cook holds a Bachelor of Arts degree in Economics and Mathematics from the University of Southern California and a Masters in Business Administration from Harvard Business School.
Ms. Norrington has been Executive Vice President, Small Business and Personal Finance since January 2002. She joined Intuit in July 2001 as Senior Vice President, Small Business Division. Prior to joining Intuit, Ms. Norrington served as an officer of General Electric Corporation and held a variety of senior
18
Mr. Adsit has been Senior Vice President, Operations since August 2002. He served as Vice President, Call Centers and Process Excellence of Intuit from May 2001 to August 2002. Mr. Adsit joined Intuit in July 2000 as Vice President, Process Excellence. Prior to joining Intuit, he was Senior Vice President, Six Sigma Practice Leader, at Rath and Strong, a division of AON Corporation (a risk management company) from April 1999 to June 2000. From June 1995 to April 1999, he also held Principal and Vice President positions in the Leadership & Organizational Effectiveness Practice at Rath and Strong Management Consultants. Mr. Adsit is a member of the Executive Advisory Panel for the Academy of Management’s Publication Executive. He holds a Bachelor of Science degree in Mathematics and Psychology from Bowling Green State University and a Masters and Ph.D. in Industrial and Organizational Psychology from the University of Minnesota.
Mr. Allanson has been Senior Vice President, Consumer Tax Group since April 2002. Prior to that he was Senior Vice President, Tax Division from April 2001 until April 2002. He joined Intuit in September 2000 as Vice President of Tax Strategy. Prior to joining Intuit, he was with General Electric Corporation from February 1993 through August 2000, serving as President of GE Capital Colonial Pacific Leasing from October 1998 to August 2000. He was Sales Effectiveness Leader and General Manager from September 1997 to October 1998 and was Marketing Manager, Equipment Business from May 1995 through September 1997. Mr. Allanson holds a Bachelor of Science degree in Mechanical Engineering from Auburn University.
Mr. Ihrie has been Senior Vice President and Chief Technology Officer since joining Intuit in November 2000. He was Acting Chief Information Officer from January 2001 to August 2001. Prior to joining Intuit, Mr. Ihrie served as Senior Vice President of Technology for ADP Claims Solutions Group (an automated information company) from July 1996 to October 2000, and Senior Vice President of Product Development for Dealer Services at ADP from August 1990 to July 1996. Mr. Ihrie holds Bachelor of Science degrees in Mathematics and Management from Massachusetts Institute of Technology and a Master of Science in Computer Science from the University of California, Berkeley.
Mr. Manack has been Senior Vice President, Professional Accounting Solutions since April 2002. Prior to that he was Vice President, Professional Products Group from January 2002 until April 2002. Before joining Intuit, Mr. Manack served as Senior Vice President of E-Markets Group Operations at Peregrine Systems, Inc. (an infrastructure management software company) from May 2001 to January 2002 and Senior Vice President at Peregrine Solutions from June 2000 to May 2001. Prior to the acquisition of Harbinger Corporation by Peregrine Systems, Inc. in June 2000, Mr. Manack was Executive Vice President of Operations at Harbinger Corporation from January 2000 to June 2000, Senior Vice President — Market Executive of New Clients from February 1999 to January 2000, Senior Vice President of World Professional Services from February 1998 to February 1999 and Vice President & General Manager of Professional Services and Outsourcing Practice from January 1997 to February 1998. Mr. Manack holds a Bachelor of Science degree in Industrial Engineering from West Virginia University and a Masters in Business Administration from the University of Dallas.
Mr. Santora has been Senior Vice President since March 1999 and Chief Financial Officer since July 1997. He served as Vice President of Finance from November 1996 to March 1999. He joined Intuit as Corporate Controller in January 1996. Mr. Santora, who is a certified public accountant, holds a Bachelor of Science degree in Accounting from the University of Illinois and a Masters in Business Administration from San Jose State University. In August 2002, Mr. Santora announced his plans to retire from Intuit at the end of calendar 2002.
19
Mr. Stern has been Senior Vice President, Corporate Development and Strategy since December 2000. Prior to that, he was Senior Vice President, Corporate Strategy and Marketing from March 2000 to December 2000 and he was Senior Vice President, Strategy, Corporate Development and Administration from March 1999 until March 2000. He joined Intuit in January 1998 as Senior Vice President of Strategy, Finance and Administration. Prior to joining Intuit, Mr. Stern spent over ten years with The Boston Consulting Group (a business consulting firm), where he was the partner responsible for the firm’s West Coast high technology practice from May 1994 to December 1997. Mr. Stern holds a Bachelor of Science degree in Mechanical Engineering from Stanford University and a Masters in Business Administration from Harvard Business School.
Ms. Whiteley has been Senior Vice President, Human Resources since January 2002. She joined Intuit in July 2000 as Vice President, Human Resources. Prior to joining Intuit, she served in several human resources positions with Silicon Graphics, Inc. (a data management company) from 1992 to July 2000, including HR Strategy from 1994 to 1996, Executive Coaching and Development, Leadership Development and Technical Education from 1996 to 1998 and Executive Recruiting from 1998 to July 2000. Ms. Whiteley holds a Bachelor of Arts degree in History from Santa Clara University.
Ms. Donahue has been Vice President, Sales since September 1997. She joined Intuit as Director of Sales in May 1995. Prior to joining Intuit, Ms. Donahue served as Director of Sales at Knowledge Adventure (an educational software company) and she worked in various sales and channel management positions at Apple Computer and Next, Inc. Ms. Donahue holds a Bachelor of Arts degree from Northwestern University.
Ms. Fellows has been Vice President, Investor Relations and Treasury since January 2000. She joined Intuit as Corporate Treasurer and Director of Investor Relations in May 1997. Prior to that, Ms. Fellows served as Treasurer and Director of Investor Relations of Bay Networks, Inc. (a communication services company) from October 1990 to April 1997. Ms. Fellows holds a Bachelor of Arts degree from Stanford University and a Masters in Business Administration from Santa Clara University.
Mr. Fisher has been Vice President, Vertical Strategy and Integration; and Chief Marketing Officer since May 2002. He was Vice President and Chief Marketing Officer from June 2001 until May 2002. He joined Intuit in March 1997 as Vice President, Consumer Internet Business. Prior to joining Intuit, Mr. Fisher served as a Vice President at Infoseek Corp. (an Internet search service company) from January 1996 to March 1997. Mr. Fisher holds a Bachelor of Arts degree in English from Williams College.
Ms. Hall has been Chief Information Officer since July 2002 and a Vice President of Intuit since April 1999. She joined Intuit in November 1992. Ms. Hall was at Pacific Bell from February 1985 through November 1992, where she held various positions, including director of electronic messaging. Ms. Hall holds a Bachelor of Science degree from San Francisco State University.
Mr. Williams has been Vice President, Finance Operations and Corporate Controller since joining Intuit in September 2001. Prior to joining Intuit, Mr. Williams was Chief Operating Officer and Chief Financial Officer of Edgewood Creek, Incorporated from September 2000 until March 2001, and served as Vice President of Finance and Chief Financial Officer of Reasoning, Incorporated (an information technology company) from June 1998 until September 2000. From July 1996 until June 1998, he served as Director of Finance at Remedy Corporation (a service management solutions company). Mr. Williams, who is a certified public accountant, holds a Bachelor of Science degree in Industrial Design from San Jose State University and a Masters degree in Business Administration from Santa Clara University. As a result of Intuit’s recent decision to relocate its Controller position from Mountain View to San Diego, California, Mr. Williams will be leaving Intuit in November 2002 to pursue other opportunities.
20
PART II
Market Information for Common Stock
Intuit’s common stock is quoted on the Nasdaq Stock Market under the symbol “INTU.” The following table shows the range of high and low sale prices reported on the Nasdaq Stock Market for the periods indicated. On August 30, 2002, the closing price of Intuit’s common stock was $44.63.
| High | Low | |||||||
|
|
|
|||||||
|
Fiscal year ended July 31, 2001
|
||||||||
|
First quarter
|
$ | 61.88 | $ | 34.25 | ||||
|
Second quarter
|
69.31 | 31.06 | ||||||
|
Third quarter
|
47.38 | 22.63 | ||||||
|
Fourth quarter
|
40.75 | 29.85 | ||||||
|
Fiscal year ended July 31, 2002
|
||||||||
|
First quarter
|
$ | 43.73 | $ | 28.54 | ||||
|
Second quarter
|
47.05 | 36.95 | ||||||
|
Third quarter
|
41.81 | 34.52 | ||||||
|
Fourth quarter
|
50.13 | 36.85 | ||||||
Stockholders
As of August 31, 2002, we had approximately 1,200 record holders of our common stock, and about 114,000 beneficial holders.
Dividends
Intuit has never paid any cash dividends on its common stock. We currently anticipate that we will retain all future earnings for use in our business, and do not anticipate paying any cash dividends in the foreseeable future.
Recent Sales of Unregistered Securities
In June 2002, we issued a total of 73,795 shares of our common stock to three former stockholders of CBS Employer Services, Inc. (the parent company of CBS Payroll) in connection with our acquisition of that company. We issued 0.0466352 shares of Intuit common stock plus $10.5580184 in cash in exchange for each share of CBS Class A common stock held by these stockholders. Intuit paid cash for all of the other shares of CBS stock. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 promulgated under Section 4(2). The transaction did not involve any general solicitation and the three purchasers are accredited investors. Intuit filed a Form D for the issuance.
21
ITEM 6
The following table shows selected consolidated
financial information for Intuit for the past five fiscal years.
The comparability of the information is affected by a variety of
factors, including acquisitions and dispositions of businesses
and gains and losses related to marketable securities and other
investments. In fiscal 2002, we sold our Quicken Loans mortgage
business and accounted for the sale as discontinued operations.
To better understand the information in the table, investors
should read “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in
Item 7, and the Consolidated Financial Statements and Notes
in Item 8.
FIVE-YEAR SUMMARY
Fiscal
1998
1999
2000
2001
2002
Consolidated Statement of Operations Data
(In thousands, except per share
data)
$
514,411
$
738,431
$
803,759
$
834,190
$
1,001,782
33,969
58,844
142,179
240,381
293,405
43,685
45,625
91,411
73,834
63,161
592,065
842,900
1,037,349
1,148,405
1,358,348
(7,646
)
384,020
322,178
(118,079
)
69,760
13,828
2,544
(16,517
)
20,972
70,400
—
—
—
14,314
—
$
6,182
$
386,564
$
305,661
$
(82,793
)
$
140,160
$
(0.05
)
$
2.01
$
1.60
$
(0.57
)
$
0.33
0.09
0.01
(0.08
)
0.10
0.33
—
—
—
0.07
—
$
0.04
$
2.02
$
1.52
$
(0.40
)
$
0.66
$
(0.05
)
$
1.92
$
1.53
$
(0.57
)
$
0.32
0.09
0.01
(0.08
)
0.10
0.32
—
—
—
0.07
—
$
0.04
$
1.93
$
1.45
$
(0.40
)
$
0.64
Accounting Principle
(Unaudited)
(a)
(a
)
$
382,438
$
299,100
(a
)
(a
)
(a
)
$
1.91
$
1.42
(a
)
(a
)
| (a) | This pro forma data relates to accounting for derivative instruments and is different from our company pro forma results, which are shown in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We adopted Statement of Financial Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities” in fiscal 2001 and recognized the cumulative effect of the change in how we accounted for options to purchase shares of |
22
| S1 Corporation as of August 1, 2000. Pro forma data presents our net income and diluted net income per share for fiscal 1999 and 2000 as if we had adopted SFAS 133 at the beginning of fiscal 1999. In accordance with SFAS 133, we included unrealized gains and losses on the S1 options in our fiscal 2001 and 2002 reported results until we sold them in the first quarter of fiscal 2002. Intuit did not have any derivative instruments or engage in hedging activities prior to fiscal 1999. See Note 1 of the financial statements, “Change in Accounting Principle.” |
| July 31, | ||||||||||||||||||||
|
|
||||||||||||||||||||
| 1998 | 1999 | 2000 | 2001 | 2002 | ||||||||||||||||
| Consolidated Balance Sheet Data |
|
|
|
|
|
|||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Cash, cash equivalents and short-term investments
|
$ | 382,832 | $ | 823,090 | $ | 1,420,770 | $ | 1,213,606 | $ | 1,250,429 | ||||||||||
|
Marketable securities
|
499,285 | 431,176 | 225,878 | 85,307 | 16,791 | |||||||||||||||
|
Working capital
|
632,713 | 842,213 | 1,321,957 | 1,359,960 | 1,262,716 | |||||||||||||||
|
Total assets
|
1,538,178 | 2,378,563 | 2,792,480 | 2,862,273 | 2,963,026 | |||||||||||||||
|
Long-term obligations
|
35,566 | 36,308 | 538 | 12,150 | 14,610 | |||||||||||||||
|
Total stockholders’ equity
|
$ | 1,127,943 | $ | 1,561,388 | $ | 2,071,289 | $ | 2,161,326 | $ | 2,215,639 | ||||||||||
23
ITEM 7
NOTE: For a more complete understanding of our
financial condition and results of operations, and some of the
risks that could affect future results, see “Risks That
Could Affect Future Results” in this Item 7. This
section should also be read in conjunction with the Consolidated
Financial Statements and related Notes in Item 8. As
discussed below, we sold our Quicken Loans mortgage business and
accounted for the sale as discontinued operations. Unless
otherwise noted, the following discussion pertains only to our
continuing operations.
Results of Operations
Three-Year Total Net Revenue and Net Income
(Loss) Trends
The following table shows trends in our total net
revenue and net income (loss) for the past three years. Net
income (loss) is shown in accordance with generally
accepted accounting principles (“GAAP”), and also on
an unaudited company pro forma basis. We present this company
pro forma financial information as a supplement to, but not a
substitute for, GAAP information, in order to provide investors
with an alternative way of assessing our results. Company pro
forma information is different from certain pro forma figures
required to be presented in our consolidated financial
statements and notes.
24
Reconciliation of GAAP Net Income (Loss) to
Pro Forma Net Income
The following table presents the reconciliation
of GAAP net income (loss) to unaudited company pro forma
net income for the periods shown. Company pro forma information
is prepared using the same consistent method from quarter to
quarter and year to year. Company pro forma net income excludes
acquisition-related charges, such as amortization of goodwill
and intangibles and impairment charges, and amortization of
purchased software and charges for purchased research and
development. It also excludes loss on impairment of long-lived
asset, gains and losses from marketable securities and other
investments, net gains and losses on divestitures, discontinued
operations, the cumulative effect of an accounting change (see
Note 1 of the financial statements) and the tax effects of
these transactions.
Overview
Intuit’s mission is to revolutionize how
people manage their financial lives, and how small businesses
and accounting professionals manage their businesses. Our goal
is to create changes so profound customers wouldn’t dream
of going back to their old ways of keeping their books, doing
their taxes or managing their personal finances. Intuit is a
leading provider of small business, tax preparation and personal
finance software products and services that simplify complex
financial tasks for small businesses, consumers and accounting
professionals. Our principal products and services include:
small business accounting and business management solutions,
including our QuickBooks® line of products and services as
well as our Intuit® line of industry-specific business
management solutions; TurboTax® consumer tax products and
services; ProSeries® and Lacerte® professional tax
products and services; and Quicken® personal finance
products and services.
The business models for many of our products and
services provide us with significant profit leverage, for three
primary reasons. First, these businesses have relatively high
fixed costs and low variable costs, so as we increase units
sold, we generate more profit per incremental unit sold. Second,
as we offer products and services with greater functionality, we
can increase prices to reflect the greater value that we deliver
to customers. Third, as customers move to some of our higher-end
products and services, the better product and service mix is
resulting in more revenue and profit per customer.
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. We
25
Acquisitions and dispositions of businesses and
assets have had a significant impact on the comparability of our
results year over year. During the past three years, we have
completed several acquisitions and dispositions. In fiscal 2002,
we sold our Quicken Loans mortgage business and accounted for
the sale as discontinued operations. See Notes 9, 10
and 11 of the financial statements. The impairment of
goodwill and other intangibles received in connection with
acquisitions has also had a significant impact on our operating
results. During fiscal 2001 and 2002, we recorded charges of
$78.7 million and $27.3 million for impairment of
goodwill and intangible assets. Total goodwill amortization
expense, including impairments, was $139.5 million in
fiscal 2001 and $122.6 million in fiscal 2002. We adopted
Statement of Financial Standards (“SFAS”) No. 142
on August 1, 2002. The adoption of this standard will
eliminate the amortization of goodwill commencing with the first
quarter of fiscal 2003. However, it is possible that in the
future we may incur impairment charges related to existing
goodwill, as well as to goodwill arising out of future
acquisitions. See Notes 1 and 5 of the financial statements for
more information regarding our goodwill and intangible assets
and the impact of impairment charges on our reported net income.
Gains and losses related to marketable securities
and other investments have had a significant impact on the
comparability of our yearly results as well. All of our
marketable securities and long-term investments are holdings in
high technology companies that have been extremely volatile
since we purchased them. In fiscal 2001 and 2002, the market
prices of a number of these companies’ securities declined
substantially from our initial investment due to the economic
downturn in the high technology industry. During fiscal 2001 and
2002, we recorded charges of $68.8 million and
$9.5 million for other-than-temporary declines in the value
of our available-for-sale marketable securities and other
investments, and a charge of $40.0 million during fiscal
2001 relating to the decline in the valuation of our trading
securities. See Note 3 of the financial statements for more
information regarding our investments in marketable securities
and the impact of our trading securities on our reported net
income.
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 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.
26
27
28
Total Net Revenue
The table below shows total net revenue and
percentage of total net revenue for each of our business
segments for fiscal years 2000, 2001 and 2002. We have
reclassified prior year information to conform to the current
year financial presentation for comparability. See Note 14
of the financial statements for additional information about our
business segments.
NM is a non-meaningful comparison.
29
Fiscal 2002 Compared to Fiscal 2001.
Total net revenue for fiscal 2002 was
$1,358.3 million, compared to $1,148.4 million in
fiscal 2001, representing an increase of 18%. The fiscal 2002
increase in net revenue was primarily due to growth of 31% in
our Employer Services segment, 29% in our Consumer Tax segment
and 20% in our Professional Accounting Solutions segments. Net
revenue from our Small Business segment increased 14% due to
growth in Quickbooks-related products. Personal Finance net
revenue declined 9% in fiscal 2002, reflecting a decrease in
Internet advertising revenue and lower sales of Quicken due to
the continuing overall decline in the personal finance desktop
software category.
Fiscal 2001 Compared to Fiscal
2000.
Total net revenue for fiscal
2001 was $1,148.4 million, compared to
$1,037.3 million in fiscal 2000, representing an increase
of 11%. Our Consumer Tax segment had a strong year with an
increase of 26% that was driven by Web-based tax return
preparation and electronic tax return filing services revenue,
which more than doubled from fiscal 2000. The revenue growth
also reflected a 57% increase in our Employer Services segment.
Growth in these segments was partially offset by a 16% decline
in the Personal Finance segment. Personal Finance was adversely
affected by the declining demand for Internet advertising as
well as by lower sales of Quicken due to an overall decline in
the personal finance desktop software category.
Total Net Revenue by Business
Segment
The following net revenue discussion is
categorized by our business segments, which reflect how we
manage our operations and how our chief operating decision maker
views results. The net revenue impact of the fiscal 2001
acquisition of Tax and Accounting Software Corporation is
discussed below under Professional Accounting Solutions. No
other acquisitions have had a material impact on net revenue in
the periods presented.
Small Business
Small Business product revenue is derived
primarily from QuickBooks desktop software products and
financial supplies. Small Business services revenue is derived
primarily from QuickBooks Service Solutions, our fee for support
plan. Our Small Business Verticals businesses are managed
separately from the Small Business segment, so their revenue is
included in the Small Business Verticals and Other segment below.
Fiscal 2002 Compared to Fiscal
2001.
Small Business total net revenue
increased 14% in fiscal 2002 compared to fiscal 2001. Total
QuickBooks-related revenue (which includes QuickBooks desktop
software products, QuickBooks support plans, QuickBooks Internet
Gateway and QuickBooks Online Edition) was 11% higher while
QuickBooks desktop product revenue alone grew 19%. The increase
in QuickBooks desktop product revenue reflected higher average
selling prices driven primarily by the November 2001 launch of
our higher-priced QuickBooks Premier products, as well as 12%
higher unit sales. The volume increase was driven by strong
upgrade sales, which we believe were due in part to our decision
to discontinue technical support and tax table services during
calendar 2002 for customers using certain older versions of
QuickBooks. We believe that the availability of a range of third
party offerings from the Intuit Developer Network to QuickBooks
2002 customers may also have contributed to the stronger upgrade
sales. Fiscal 2002 QuickBooks-related revenue growth also
reflected strong results from QuickBooks Service Solutions. In
August 2001, we began offering several higher-end support plans,
which resulted in significantly higher average selling prices
that more than offset declines in volume compared to fiscal
2001. Revenue growth in QuickBooks-related products and services
was partially offset by a decline in QuickBooks Internet Gateway
revenue. Revenue for this business decreased due to a sharp
decline in upfront fees received from Internet Gateway
participants, as well as a decrease in transaction-based fees
that reflects lower customer demand for Internet Gateway
services and fewer services being offered. Financial supplies
revenue increased modestly during the year.
We expect continued growth in our Small Business
segment in fiscal 2003. We expect QuickBooks-related revenue to
increase due to the fiscal 2002 introduction of products with
more advanced functionality such as QuickBooks Premier,
QuickBooks Premier: Accountant Edition and QuickBooks Enterprise
Solutions
30
Fiscal 2001 Compared to Fiscal
2000.
For fiscal 2001, total net
revenue for the Small Business segment increased 6% over fiscal
2000. Revenue from QuickBooks desktop products remained
relatively flat. While average selling prices increased for the
year, unit sales declined 17%. This was attributable to a
decline in the rate at which existing QuickBooks customers
upgraded to newer QuickBooks products, as well as to a lower
acquisition rate of new users. Product revenue from our
financial supplies and services revenue from our QuickBooks
Internet Gateway and QuickBooks Service Solutions increased in
fiscal 2001.
Employer Services
Employer Services product revenue is derived
primarily from our QuickBooks Do-It-Yourself Payroll (formerly
Basic Payroll) offering. Employer Services services revenue is
derived primarily from our QuickBooks Assisted Payroll Service
(formerly Deluxe Payroll) and Intuit Payroll
Services — Complete Payroll (formerly Premier Payroll).
Fiscal 2002 Compared to Fiscal
2001.
Employer Services total net
revenue increased 31% in fiscal 2002 compared to fiscal 2001,
reflecting 39% combined growth for the QuickBooks-branded
Do-It-Yourself Payroll and Assisted Payroll Service offerings,
with revenue for the Intuit Payroll Services —
Complete Payroll service roughly flat. Price increases accounted
for a significant portion of the Do-It-Yourself Payroll and
Assisted Payroll Service revenue growth, although the number of
customers for the combined offerings also increased by
approximately 12%.
We expect total net revenue to continue to
increase in our Employer Services business in fiscal 2003, due
in part to the acquisition of CBS Employer Services, Inc., a
provider of full-service outsourced payroll functions for small
businesses, in the fourth quarter of fiscal 2002.
Fiscal 2001 Compared to Fiscal
2000.
Employer Services total net
revenue increased 57% for fiscal 2001 compared to fiscal 2000.
Increases in our average selling prices for both our
Do-It-Yourself Payroll offering and our Assisted Payroll Service
contributed to this growth. The higher average selling prices
resulted from price increases as well as a shift toward a mix of
higher-priced products. The number of customers for the combined
offerings also grew approximately 7%.
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
electronic filing services.
Fiscal 2002 Compared to Fiscal 2001.
Consumer Tax total net revenue
increased 29% in fiscal 2002 compared to fiscal 2001. Revenue
from TurboTax desktop products was up 10%, due primarily to
higher average selling prices resulting from the introduction of
a higher-priced premium product. Revenue from TurboTax for the
Web was strong in fiscal 2002, reflecting a significant increase
in the mix of higher-end service offerings (TurboTax Premier) as
well as 84% unit growth. Electronic filing units and revenue
also contributed to the year-over-year growth. Overall, our
Consumer Tax customer base grew 19% in fiscal 2002.
Fiscal 2001 Compared to Fiscal
2000.
For fiscal 2001, Consumer Tax
total net revenue increased approximately 26% compared to fiscal
2000. The increase was due to a combination of higher average
selling prices resulting from price increases as well as
improved product mix and increased unit sales for both our
desktop products and Web-based tax preparation services. Our
Consumer Tax business also benefited from Microsoft’s
discontinuation of its desktop consumer tax preparation software
after the 1999 tax season which ended April 15, 2000. Our
Web-based tax preparation and electronic filing services also
experienced strong growth during fiscal 2001. Web-based tax
preparation revenue more than doubled from fiscal 2000 as a
result of increased prices as well as a 71% increase in unit
volume. In addition, our
31
We expect continued growth in our Consumer Tax
business in fiscal 2003 due to the continuing upward trend in
consumer use of the Web for tax return preparation and filing.
We also expect revenue growth as a result of product activation
features to be included in the tax year 2002 federal versions of
TurboTax desktop products for Windows®, which are designed
to reduce unauthorized sharing of those products.
Professional Accounting Solutions
Professional Accounting Solutions product revenue
is derived primarily from ProSeries and Lacerte professional tax
preparation products. Professional Accounting Solutions services
revenue is derived primarily from electronic filing and tax
advice services.
Fiscal 2002 Compared to Fiscal
2001.
Total net revenue from our
professional tax preparation products and services increased 20%
in fiscal 2002 compared to fiscal 2001. Approximately
$21.0 million or 11% of the growth compared to fiscal 2001
resulted from our acquisition of Tax and Accounting Software
Corporation in April 2001. Higher revenue from electronic filing
services was also a significant factor in the increase. Our
fiscal 2002 introduction of product activation technology that
restricted sharing of professional tax products and higher
average selling prices for our ProSeries and Lacerte
unlimited-use products also contributed to the revenue growth.
Renewal rates for our existing customer base remained strong
during fiscal 2002.
Fiscal 2001 Compared to Fiscal
2000.
Total net revenue from our
professional tax preparation products and services increased 10%
in fiscal 2001 compared to fiscal 2000. This growth resulted
from higher average selling prices for both our ProSeries and
Lacerte unlimited-use products and unit growth for our pay-per
return customers. Renewal rates for our existing customer base
were strong during fiscal 2001.
We expect continued growth in our Professional
Accounting Solutions business in fiscal 2003 but we expect the
rate of growth to slow compared to fiscal 2002. Fiscal 2002
growth rates for this business were unusually high due to the
acquisition of TAASC in late fiscal 2001.
Personal Finance
Personal Finance product revenue is derived
primarily from Quicken desktop products. Personal Finance
services revenue is minimal. Other revenue consists of
Quicken.com advertising revenue and royalties for online
transactions.
Fiscal 2002 Compared to Fiscal
2001.
Personal Finance total net
revenue decreased 9% in fiscal 2002 compared to fiscal 2001, due
primarily to a 15% decline in revenue from Quicken desktop
products and a 38% decline in Quicken.com revenue. Solid growth
in our online transactions business partially offset these
declines. The decrease in Quicken revenue reflected the
continuing overall decline in the personal finance desktop
software category. Our share of retail units in this category
remained above 70% in fiscal 2002. The decrease in Quicken.com
advertising revenue reflected the industry-wide decline in
spending by purchasers of Internet advertising. We expect these
trends to continue in fiscal 2003.
Fiscal 2001 Compared to Fiscal
2000.
Total net revenue from the
Personal Finance segment decreased 16% in fiscal 2001 compared
to fiscal 2000. This decline in revenue was attributable in part
to a 27% decline in unit sales for our Quicken desktop
products and a 31% decline in our Quicken.com Internet
advertising revenues. Quicken revenue was down due to an overall
decline in the personal finance desktop software category.
Advertising revenue declined compared to the prior year due to
the overall economic environment which resulted in reduced
advertising spending by purchasers of Internet advertising. We
experienced continued growth in our online transactions
business, which partially offset these declines.
32
Global Business
Global Business product revenue is derived
primarily from QuickBooks, Quicken and QuickTax desktop software
products in Canada and Yayoi small business desktop accounting
products in Japan. Global Business services revenue primarily
consists of revenue from software maintenance contracts sold
with Yayoi software in Japan.
Fiscal 2002 Compared to Fiscal
2001.
Global Business total net
revenue increased 10% in fiscal 2002 compared to fiscal 2001.
Revenue from Canada increased 29% year over year. This reflected
strong tax season results for QuickTax, due in part to the
preliminary success of our efforts to reduce unauthorized
sharing of desktop software. Canadian tax revenue growth was
partially offset by modest revenue declines for QuickBooks and
Quicken. Revenue in Japan declined 12% compared to fiscal 2001.
Japan’s product revenue decreased 17%, due primarily to our
discontinuation of the QuickBooks product line in Japan in the
second quarter of fiscal 2002. Revenue from Yayoi products was
roughly flat compared to fiscal 2001. The overall decline in
Japan’s product revenue was partially offset by increased
revenue from Yayoi support contracts.
Fiscal 2001 Compared to Fiscal
2000.
Global Division total net
revenue for fiscal 2001 increased 4% compared to fiscal 2000.
This increase was primarily due to 39% overall revenue growth in
Canada, which was driven by 45% growth in QuickBooks revenue. In
addition, Canada experienced 14% growth in professional tax
revenue as a result of an acquisition we made early in fiscal
2001. Revenue in Japan increased due to higher retail sales of
our Yayoi small business accounting software. This was partially
offset by declining sales of QuickBooks in Japan as well as
decreased royalties and an adverse foreign exchange rate impact
that resulted in lower average selling prices in U.S. dollars.
Small Business Verticals and Other
As part of our Right for My Business strategy, in
fiscal 2002 we acquired several companies that enable us to
provide accounting and business management solutions to
customers in selected industries, which we refer to as
“verticals.” These new businesses, which we report as
a single business segment, include the following: Intuit
Construction Business Solutions (formerly OMware, Inc.), which
provides business management software for the construction
industry; Intuit Public Sector Solutions (formerly The Flagship
Group), which offers accounting and business management software
solutions for nonprofit organizations, universities, and
government agencies; Intuit MRI Real Estate Solutions (formerly
Management Reports, Inc.), which provides business management
software for commercial and residential property managers; and
Intuit Eclipse Distribution Management Solutions (formerly
Eclipse, Inc.), which offers business management software for
the wholesale durable goods industry.
Three of the four acquisitions were completed in
the fourth quarter of fiscal 2002. As a result, total net
revenue from the Small Business Vertical and Other segment was
not significant in fiscal 2002 and consisted primarily of
revenue generated by OMware, Inc. There was no significant
revenue in this segment from sources other than the acquired
vertical businesses during fiscal 2002. Driving the growth of
the vertical businesses we have acquired so far, and acquiring
additional vertical businesses, are key business initiatives for
fiscal 2003. Therefore, we expect that we will continue to
report these businesses as a separate business segment in the
future.
33
There are four components of our cost of revenue:
(1) cost of products, which includes the direct cost of
manufacturing and shipping desktop 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.
Fiscal 2002 Compared to Fiscal 2001.
Cost of products as a percentage of
product revenue decreased slightly to 16% in fiscal 2002 from
17% in fiscal 2001. We lowered our per-unit materials,
manufacturing and shipping costs for our shrink-wrap software
products, resulting in significant cost savings. These savings
were nearly offset by increased costs associated with improving
our product distribution function. During the first quarter of
fiscal 2002, we established a new third-party retail
distribution relationship for our shrink-wrap software products.
This distribution relationship enables us to ship a larger
percentage of our products directly to individual retail stores
and allows us to provide inventory to our retail customers on a
more timely basis. By providing better service to our retailers,
we are reducing product returns and related costs. Because of
this and because we plan to continue redesigning the packaging
for many of our software products and further streamlining our
manufacturing processes, we expect cost of products as a
percentage of product revenue to decline in fiscal 2003.
Cost of services as a percentage of services
revenue decreased to 37% in fiscal 2002 from 46% in fiscal 2001.
This decrease was attributable primarily to our payroll and
Web-based tax businesses, which experienced significant revenue
growth with relatively fixed cost bases.
Cost of other revenue as a percentage of other
revenue increased to 39% in fiscal 2002 compared to 35% in
fiscal 2001. This increase was primarily due to increased data
center costs related to our Personal Finance segment’s
online transaction business, which experienced revenue growth in
fiscal 2002.
Amortization of purchased software decreased
slightly in fiscal 2002 compared to fiscal 2001. This reflected
lower amortization expense in the second half of fiscal 2002
that resulted from a lower base of assets to be amortized. This
decline was partially offset by impairment charges for certain
purchased software assets that were recorded in the second
quarter of fiscal 2002, which caused the decrease in the base of
assets. See Note 5 of the financial statements.
Fiscal 2001 Compared to Fiscal
2000.
Cost of products as a percentage
of product revenue decreased to 17% for fiscal 2001 compared to
20% for fiscal 2000. The decline was primarily attributable to
lower excess and obsolete inventory expenses for all of our
product lines due to improved inventory management. Cost of
services as a percentage of services revenue decreased to 46%
for fiscal 2001 compared to 51% for fiscal 2000 due primarily to
revenue growth in our payroll business with a relatively fixed
cost base. This factor was partially offset by increased data
center costs related to our Personal Finance segment’s
online transactions businesses. Cost of other revenue as a
percentage of other revenue increased to 35% for fiscal 2001
compared to 34% for fiscal 2000 due to a significant decrease in
Internet advertising revenue with a relatively fixed cost base.
34
Customer Service and Technical
Support
Fiscal 2002 Compared to Fiscal
2001.
Customer service and technical
support expenses were 13% of total net revenue in fiscal 2002
and 2001. We improved our efficiency in fiscal 2002 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 also
implemented a number of successful process excellence
initiatives that reduced costs while maintaining or increasing
service levels. However, these benefits were more than offset by
higher direct sales and support costs associated with converting
the customers of Tax Accounting and Software Company, a company
that we acquired in April 2001, to our ProSeries and Lacerte
professional tax products, and by increased demand for customer
service and technical support due to our growing customer base.
We expect customer service and technical support expenses to
decrease slightly as a percentage of total net revenue in fiscal
2003 as TAASC conversion costs gradually decline and as we
continue to benefit from lower cost, more scalable electronic
customer service and technical support delivery mechanisms.
Fiscal 2001 Compared to Fiscal 2000.
Customer service and technical support
expenses were flat at 13% of total net revenue in fiscal 2001
and 2000. This reflected the benefit of providing an increased
proportion of customer service and technical support more
efficiently and less expensively through Web sites and other
electronic means, and from the expansion of QuickBooks Service
Solutions, our fee for support program for QuickBooks customers.
These improvements were offset by the April 2001 start of
support costs to convert customers of our newly acquired TAASC
business to our ProSeries and Lacerte professional tax products.
Selling and Marketing
Fiscal 2002 Compared to Fiscal
2001.
Selling and marketing expenses
were 21% of total net revenue in fiscal 2002, compared to 20% in
fiscal 2001. In fiscal 2002, selling and marketing expenses
increased as we expanded our small business marketing programs
to support the Right for My Business strategy announced in
September 2001. We also incurred incremental marketing expenses
for our Construction Business Solutions products, which we
acquired in November 2001. 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 also donated
$8.0 million to The Intuit Foundation in fiscal 2002, which
will be used to benefit the community through contributions to
selected non-profit
35
Fiscal 2001 Compared to Fiscal
2000.
Selling and marketing expenses
were 20% of total net revenue in fiscal 2001, compared to 21% in
fiscal 2000. During fiscal 2000 we experienced relatively higher
sales and marketing expenses in the first half of the year due
to aggressive marketing programs to expand our Internet-based
businesses and to respond to Microsoft’s TaxSaver consumer
tax offering. In fiscal 2001 our payroll business also
experienced relatively lower marketing expenditures as it
continued to benefit from the marketing value of the Intuit
brand.
Research and Development
Fiscal 2002 Compared to Fiscal
2001.
During fiscal 2002, we increased
research and development spending in some of our highest-growth
businesses — small business, consumer tax and
professional tax — by approximately 10%. In
particular, we continued to invest in our Right for My Business
strategy, including new QuickBooks Premier, Point of Sale and
Enterprise products launched in the second quarter of fiscal
2002, the Intuit Developer Network, and other new products that
we expect to introduce in fiscal 2003. At the same time, we
significantly decreased or stopped spending in less strategic
areas and discontinued product lines. We also benefited from
improvements in our development process that resulted in shorter
development times and higher quality for our new QuickBooks
products. The net result was that research and development
expenses in fiscal 2002 were flat in absolute dollars and
declined as a percentage of total net revenue to 15% of total
net revenue, compared to 18% in fiscal 2001. During fiscal 2003,
we expect to continue to make significant investments in
research and development, particularly for new small business
products and services.
Fiscal 2001 Compared to Fiscal
2000.
For fiscal 2001 research and
development expenses were 18% of total net revenue in 2001,
compared to 16% of total net revenue in fiscal 2000. In both
fiscal 2001 and 2000, we invested significant amounts in our
services businesses, mostly focused in our Small Business and
Employer Services segments. This included research and
development efforts for QuickBooks Online Edition, our
QuickBooks Assisted Payroll Service (formerly Deluxe Payroll),
our QuickBase® information management tool and the Intuit
Developer Network.
General and Administrative
Fiscal 2002 Compared to Fiscal
2001.
General and administrative
expenses were 8% of total net revenue in fiscal 2002 and fiscal
2001. We experienced increased directors’ and
officers’ liability insurance costs and costs associated
with integrating our acquisitions of OMware, Inc. in November
2001 and EmployeeMatters, Inc. in December 2000. These increases
were offset by decreases in bad debt charges in fiscal 2002. We
had relatively high accounts receivable write-offs in fiscal
2001 due to the deteriorating financial condition of many
Internet companies with whom we did business. We expect general
and administrative expenses to increase as a percentage of total
net revenue in fiscal 2003 due to the costs of integrating our
fourth quarter fiscal 2002 acquisitions and other acquisitions
we expect to make in fiscal 2003, as well as to investments in
our internal audit function and process excellence
infrastructure. We also expect bad debt expense for fiscal 2003
to be somewhat higher than for fiscal 2002 because we
experienced unusually low levels of bad debt expense in fiscal
2002.
Fiscal 2001 Compared to Fiscal
2000.
General and administrative
expenses were 8% of total net revenue for fiscal 2001, compared
to 7% of total net revenue for fiscal 2000. During fiscal 2001,
we experienced an increase in our bad debt expense related to
the economic downturn in the high technology industry that
impacted many companies with whom we did business. Our general
and administrative expense for fiscal 2001 also included an
increase of $1.2 million in deferred compensation amortization
expense related to restricted stock we granted when we hired our
President and Chief Executive Officer in January 2000.
36
Charge for Purchased Research and
Development
In connection with certain acquisitions and with
the assistance of third-party appraisers, we determine the value
of in-process projects under development for which technological
feasibility has not been established. The value of the projects
is determined by estimating the costs to develop the in-process
technology into commercially feasible products, estimating the
net cash flows we believe would result from the products and
discounting these net cash flows back to their present value.
The resulting amount is recorded as a charge for purchased
research and development when we acquire certain new businesses.
In fiscal 2002, we recorded a charge of
$2.2 million for purchased research and development as a
result of our acquisition of Management Reports, Inc. (now
Intuit MRI Real Estate Solutions). In fiscal 2001, we
recorded a charge of $0.2 million for purchased research
and development when we acquired Tax Accounting and Software
Corporation. We recorded $1.3 million for purchased
research and development as a result of our Boston Light
Software Corporation and Hutchison Avenue Software Corporation
acquisitions in fiscal 2000.
Although we intend to continue to acquire
relatively mature businesses with products whose technological
feasibility has been demonstrated as part of our Right for My
Business Strategy, it is possible that we will incur additional
charges for purchased research and development in the future.
Charge 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. As a result, we recorded a charge
of $13.2 million. See Note 13 of the financial
statements.
Acquisition-Related Charges
Acquisition-related charges include the
amortization of goodwill, purchased intangible assets and
deferred compensation expenses arising from acquisitions, and
impairment charges relating to certain acquired assets. See
Note 5 of the financial statements.
The FASB recently adopted a new standard for
accounting for goodwill acquired in a business combination. It
continues to require us to recognize goodwill as an asset
whenever we pay more for a business than the total of its net
tangible and intangible assets, but it does not permit us to
amortize goodwill, which we were previously required to do.
Under the new statement, we must separately test goodwill for
impairment using a fair-value-based approach on an annual basis
or more frequently if an event occurs indicating potential
impairment. The shift from an amortization approach to an
impairment approach applies to all acquisitions completed after
June 30, 2001. The additional goodwill amortization charge
for businesses we acquired after June 30, 2001 would have
been approximately $8.8 million in fiscal 2002 had this new
standard not been in place. We will adopt the remaining elements
of this new standard in the first quarter of fiscal 2003 and
will therefore cease goodwill amortization for acquisitions we
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 most
purchased intangible assets and to assess those assets for
impairment as appropriate. In accordance with the new standard,
we transferred the balance of $1.9 million for assembled
workforce at August 1, 2002 to goodwill and will no longer
amortize that asset. See Note 1 of the financial statements.
Fiscal 2002 Compared to Fiscal
2001.
In fiscal 2002
acquisition-related charges were $181.6 million, compared
to $248.2 million in fiscal 2001. Acquisition-related
charges in fiscal 2002 included impairment charges totaling
$22.0 million that were related to our Internet-based
advertising business and our Site Solutions business. See
Notes 1 and 5 of the financial statements.
Acquisition-related charges in fiscal 2002 also reflected an
increase of $12.7 million in amortization of intangibles
associated with the acquisitions of EmployeeMatters, Inc. in
December 2000 and Tax Accounting and Software Corporation in
37
Fiscal 2001 Compared to Fiscal
2000.
In fiscal 2001
acquisition-related charges were $248.2 million, compared
to $156.4 million in fiscal 2000. The increase was
primarily attributable to impairment charges totaling
$78.7 million that were recorded in the second half of
fiscal 2001. During our review for impairment, events and
circumstances indicated possible impairment of goodwill and
intangible assets related to our acquisitions of Venture Finance
Software Corp., SecureTax.com and Hutchison Avenue Software
Corporation. See Notes 1 and 5 of the financial statements.
Based on our analysis we recorded impairment charges of
$51.0 million, $26.0 million and $1.7 million
associated with VFSC, SecureTax and Hutchison, respectively.
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 to reduce
the carrying value of this asset to its estimated fair value of
zero, reflecting the deteriorating financial condition of the
purchasing company. See Note 12 of the financial statements.
Non-Operating Income and
Expenses
Interest and Other Income
In fiscal 2002, interest and other income
decreased to $32.9 million, compared to $57.3 million in
fiscal 2001 and $48.5 million in fiscal 2000. The decrease
during fiscal 2002 was due to a sharp decline in the interest we
earned on our cash and short-term investment balances in fiscal
2002, reflecting significant decreases in market interest rates
during the period. The increase during fiscal 2001 resulted from
higher average cash and short-term investment balances, due in
part to sales of marketable securities as well as more cash
generated from operations compared to fiscal 2000. The total
fiscal 2001 increase was partially offset by the effect of lower
market interest rates compared to fiscal 2000. 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
As of July 31, 2002, we held marketable
securities and long-term investments in privately held companies
carried at $23.6 million on our balance sheet. This balance
was down from $109.4 million as of July 31, 2001 due
to sales and write-downs. We review the values of our
investments each quarter and make adjustments as appropriate.
See Notes 1 and 3 of the financial statements. The steep
decline in equity markets over the past few years has
significantly reduced the value of our marketable securities and
long-term investments. If the value of these remaining
securities continues to decline in the future, it would have a
negative impact on our financial results.
We considered our shares of Excite@Home and
724 Solutions common stock to be trading securities. As a
result, unrealized gains or losses due to market fluctuations in
these securities were included in our net income or loss on a
quarterly basis until we sold them in the first quarter of
fiscal 2002. We considered our other marketable securities to be
available-for-sale and did not reflect quarterly fluctuations in
their value in our net income or loss on a quarterly basis
unless we concluded that a decline in value was
other-than-temporary. See Note 3 of the financial
statements.
We recorded pre-tax net losses relating to
marketable securities and other investments of
$15.5 million in fiscal 2002 and $98.1 million in
fiscal 2001. In fiscal 2000, we recorded a pre-tax gain relating
to marketable securities and other investments of
$481.1 million. See Note 3 of the financial
statements. The
38
Net Gains (Losses) on Divestitures
In March 2002, we paid $12.0 million to
terminate our $20.3 million obligation under an interactive
services agreement related to our Quicken Bill Manager business,
which we sold in May 2001. When we terminated the interactive
services agreement, we recorded a pre-tax gain of
$8.3 million. See Note 10 of the financial statements.
In the first quarter of fiscal 2002, we wrote off the
$27.0 million asset acquired from the purchaser of our
Quicken Bill Manager business to loss on impairment of
long-lived asset in our statement of operations. See
Note 12 of the financial statements.
During fiscal 2001 we recorded a pre-tax net loss
of $15.3 million resulting from our divestitures of
businesses. During the second quarter of fiscal 2001 we realized
a pre-tax net gain of $1.6 million for the sale of certain
assets of our wholly owned subsidiary, Intuit Insurance
Services, Inc., which operated our Quicken Insurance business.
The gain was more than offset by a pre-tax net loss of
$16.9 million for the sale of the technology assets of our
Quicken Bill Manager business in the fourth quarter of fiscal
2001. See Note 10 of the financial statements. Neither of
these divestitures represented discontinued operations.
Income Tax (Benefit) Provision
For fiscal 2002, we recorded an income tax
provision of $15.2 million on pre-tax income from
continuing operations of $84.9 million, resulting in an
effective tax rate of approximately 18%. For fiscal 2001, we
recorded an income tax benefit of $12.5 million on a
pre-tax loss from continuing operations of $130.6 million,
resulting in an effective rate of approximately 10%. For fiscal
2000, we recorded an income tax provision of $216.6 million
on pre-tax income of $538.7 million, resulting in an
effective tax rate of approximately 40%. Our effective tax rate
for fiscal 2002 differs from the federal statutory rate
primarily due to a tax benefit related to a divestiture that
became available during the year and tax-exempt interest income,
offset by non-deductible merger related charges. Our effective
tax rate for fiscal 2001 differs from the federal statutory rate
primarily due to the net effect of non-deductible merger and
divestiture related charges offset by the benefit we received
from tax-exempt interest income. Our effective tax rate for
fiscal 2000 differs from the federal statutory rate primarily
due to the net effect of non-deductible merger charges offset by
the benefit received from tax-exempt interest income.
As of July 31, 2002, we had net deferred tax
assets of $244.4 million, which included a valuation
allowance of $9.3 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. See Note 20 of
the financial statements.
Discontinued Operations
We acquired the Quicken Loans business in
December 1999 in a transaction that was accounted for as a
pooling of interests. Accordingly, we did not record any
goodwill or other intangible assets.
On July 31, 2002, we sold our Quicken Loans
mortgage business segment and received consideration in the form
of a five-year interest bearing promissory note in the principal
amount of $23.3 million. This amount exceeded the net
shareholders’ equity of Quicken Loans by
$23.3 million. We accounted for the
39
Concurrent with the sale, we signed an agreement
to license the Quicken Loans brand and a distribution agreement
under which the purchasing company will provide mortgage
services on Quicken.com. We will receive minimum royalties of
$1.8 million a year for the next five years under the
licensing agreement and minimum fees of $0.8 million a year
for the next five years under the distribution agreement.
Royalties and fees under these agreements will be recorded as
earned and included in other income on our statement of
operations.
Cumulative Effect of Accounting
Change
During the first quarter of fiscal 2001, we
recorded a cumulative gain of $14.3 million, net of taxes,
as a result of a change in accounting principle when we adopted
SFAS 133,
“Accounting for Derivative Instruments and
Hedging Activities.”
We recognized the cumulative
effect of the change in how we accounted for options to purchase
shares of S1 Corporation as of August 1, 2000. See
Note 1 of the financial statements. Subsequent fluctuations
in the fair value of these options were included in our net
income or net loss until we sold them in the first quarter of
fiscal 2002.
Liquidity and Capital
Resources
At July 31, 2002 our cash, cash equivalents
and short-term investments totaled $1,250.4 million, a
$36.8 million increase from July 31, 2001.
We generated $358.2 million in cash from our
operations during fiscal 2002. The primary components of cash
provided by operations were net income from continuing
operations of $69.8 million and adjustments made for
non-cash expenses, including acquisition-related charges and
amortization of purchased software of $194.0 million,
depreciation charges of $59.9 million and an impairment
loss on a long-lived asset of $27.0 million.
We used $25.6 million in cash for investing
activities during fiscal 2002. Our primary use of cash was for
business acquisitions, which totaled $278.3 million net of
cash we acquired. Our short-term investments decreased
$304.0 million during the fiscal year, with proceeds of
$3.15 billion from the sale upon maturity of certain
short-term investments partially offset by reinvestments of
$2.85 billion. As a result of our continued investment in
information systems and infrastructure, we also purchased
property and equipment of $42.6 million and capitalized
internal use software development projects of $21.3 million
in fiscal 2002.
We used $210.5 million in cash for our
financing activities in fiscal 2002. The primary component of
cash used was $318.4 million for the repurchase of treasury
stock through our stock repurchase program. See Note 17 of
the financial statements. This was partially offset by proceeds
of $133.6 million we received from the issuance of common
stock under employee stock plans.
In the normal course of business, we enter into
leases for new or expanded facilities in both domestic and
global locations. We also evaluate, on an ongoing basis, the
merits of acquiring technology or businesses, or establishing
strategic relationships with and investing in other companies.
We may decide to use cash and cash equivalents to fund such
activities in the future.
In May 2001, Intuit’s Board of Directors
authorized the company to repurchase up to $500 million of
common stock over a three-year period. In July 2002, our Board
of Directors increased the authorized purchase amount by
$250 million. The stock repurchase program is intended to
help offset some of the dilution resulting from the issuance of
shares under Intuit’s employee stock plans. At
July 31, 2002, we had repurchased a total of
$326.8 million of common stock since the inception of the
program.
40
In connection with the sale of our Quicken Loans
mortgage business in July 2002, we have 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 expires on
January 31, 2003. The line is secured by the related
mortgage loans and had an outstanding balance of
$245.6 million at July 31, 2002. See Note 11 of
the financial statements.
Loans to executive officers and other employees
totaled $12.9 million at July 31, 2001 and
$21.3 million at July 31, 2002. Loans to executive
officers are primarily relocation loans and none of these were
made or modified since July 31, 2002. Loans are generally
interest-bearing, secured by real property and have maturity
dates of up to 10 years. See Note 22 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 at July 31, 2002:
Restricted cash July 31, 2002 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 also
included $5.5 million for rebates due our customers.
Other obligations at July 31, 2002 consisted
primarily of amounts we owe to former stockholders of CBS
Employer Services, Inc. in connection with Intuit’s
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 Notes 9 and 15 of the
financial statements.
Recent Pronouncements
On June 29, 2001, the Financial Accounting
Standards Board (“FASB”) issued SFAS 141,
“Business Combinations,”
and SFAS 142,
“Goodwill and Other Intangible Assets.”
SFAS 141 supercedes APB Opinion No. 16,
“Business Combinations,”
and eliminates the
pooling-of-interests method of accounting for business
combinations, thus requiring that all business combinations be
accounted for using the purchase method. In addition, in
applying the purchase method, SFAS 141 changes the criteria
for recognizing intangible assets other than goodwill and states
that the following criteria should be considered in determining
the classification of intangible assets: (1) whether the
intangible asset arises from contractual or other legal rights,
or (2) whether the intangible asset is separable or
dividable from the acquired entity and capable of being sold,
transferred, licensed, rented, or exchanged. If neither criteria
is met, the intangible assets are classified as goodwill and are
not amortized. We have applied the requirements of SFAS 141
to all business combinations initiated after June 30, 2001.
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
41
In connection with the transitional goodwill
impairment evaluation under SFAS 142, we will perform an
assessment of goodwill impairment as of August 1, 2002, the
date of adoption. To accomplish this, we will identify our
reporting units and determine the carrying value of each of them
by assigning the assets and liabilities, including existing
goodwill and intangible assets, to those reporting units as of
the date of adoption. We will then have up to six months from
the date of adoption to determine the fair value of each
reporting unit and compare it to the reporting unit’s
carrying amount. To the extent that a reporting unit’s
carrying amount exceeds its fair value, an indication exists
that the reporting unit’s goodwill may be impaired and we
must perform the second step of the transitional impairment
test. In the second step, we must compare the implied fair value
of the reporting unit’s goodwill to its carrying amount,
both of which will be measured as of the date of adoption. The
implied fair value of the reporting unit’s goodwill is
determined by allocating the reporting unit’s fair value to
all of its assets (recognized and unrecognized) and liabilities
in a manner similar to a purchase price allocation in accordance
with SFAS 141. This second step is required to be completed
as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as
the cumulative effect of a change in accounting principle in the
statement of operations.
As of the date of adoption of SFAS 142 on
August 1, 2002, we had an unamortized acquired intangible
assets balance of approximately $123.6 million, excluding
the balance of approximately $1.9 million for assembled
workforce reclassified to goodwill. As of that date, we also had
an unamortized goodwill balance of approximately
$430.8 million which included the amount of assembled
workforce reclassified to goodwill. These balances will be
subject to the transitional provisions of SFAS 141 and 142.
Transitional impairment losses that may be required to be
recognized upon adoption of SFAS 141 and 142 are
indeterminable at this time.
In October 2001, the FASB issued SFAS 144,
“Accounting for the Impairment or Disposal of Long-Lived
Assets,”
which applies to financial statements issued
for fiscal years beginning after December 15, 2001.
SFAS 144 supersedes FASB Statement 121,
“Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of,”
and portions
of APB Opinion No. 30,
“Reporting the Results of
Operations.”
SFAS 144 provides a single accounting
model for long-lived assets we expect to dispose of and
significantly changes the criteria for classifying an asset as
held-for-sale. This classification is important because
held-for-sale assets are not depreciated and are stated at the
lower of fair value or carrying amount. SFAS 144 also
requires expected future operating losses from discontinued
operations to be displayed in the period(s) in which the losses
are actually incurred, rather than when the amount of the loss
is estimated, as presently required. We adopted SFAS 144
effective August 1, 2002 and do not expect the adoption of
SFAS 144 to have a material impact on our financial
position, results of operations or cash flows.
In November 2001, the FASB’s Emerging Issues
Task Force released Issue No. 01-9,
“Accounting for
Consideration Given by a Vendor to a Customer or a Reseller of
the Vendor’s Product,”
which applies to annual or
interim financial statement periods beginning after
December 15, 2001. The release provides that cash
consideration (including sales incentives) that we give to our
customers or resellers should be accounted for as a reduction of
revenue rather than as an operating expense unless we receive a
benefit that we can identify and reasonably estimate. We adopted
this new release beginning in the third quarter of fiscal 2002.
The adoption of EITF Issue No. 01-9 did not have a material
impact on our total net revenue and as a result we did not
reclassify prior period financial statements.
42
In July 2002, the FASB issued SFAS 146,
“Accounting for Costs Associated with Exit and Disposal
Activities.”
This statement revises the accounting for
exit and disposal activities 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 a company
previously recorded under EITF Issue No. 94-3 are not
affected. We do not believe that the adoption of SFAS 146
will have a material impact on our financial position, results
of operations or cash flows.
43
RISKS THAT COULD AFFECT FUTURE
RESULTS
Fiscal
Fiscal
Fiscal
2000-2001
2001-2002
2000
2001
2002
% Change
% Change
$
1,037.3
$
1,148.4
$
1,358.3
11
%
18
%
305.7
(82.8
)
140.2
(127
)%
269
%
$
147.9
$
162.5
$
211.3
10
%
30
%
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Fiscal
Fiscal
Fiscal
2000
2001
2002
$
305.7
$
(82.8
)
$
140.2
8.8
15.0
12.4
1.3
0.2
2.2
156.3
248.2
181.6
—
—
27.0
(481.1
)
—
—
—
98.1
15.5
—
—
(8.3
)
—
15.3
—
140.4
(96.2
)
(88.9
)
(21.0
)
(70.4
)
16.5
—
—
—
(14.3
)
—
$
147.9
$
162.5
$
211.3
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•
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 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
certain contractual limitations, to return purchased products.
For product returns reserves, we consider the volume and price
mix of products in the retail channel, trends in retailer
inventory, economic trends that might impact customer demand for
our products (including the competitive environment and the
timing of new releases of our products) and other factors. 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 are typically entered into annually. Our
reserves for end-user rebates are estimated based on the terms
and conditions of the specific promotional program, actual sales
during the promotion, the amount of redemptions received,
historical redemption trends by product and by type of
promotional program and the economic value of the rebate.
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In the past, actual returns and rebates have not
generally exceeded our reserves. However, actual returns and
rebates in any future period are inherently uncertain. If we
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. As an example,
a change of 1% in our consumer tax product return rate
assumptions would have increased or reduced fiscal 2002 net
revenue by approximately $1.2 million. If the historical
data we use to calculate these estimates do not properly reflect
actual returns or rebates, then we would make a change in the
reserves in the period in which the determination is made.
•
Goodwill, Purchased Intangibles and Other
Long-Lived Assets — Impairment
Assessments.
Under current accounting
standards, which changed significantly at the start of fiscal
2003, we make judgments about the recoverability of goodwill,
purchased intangible assets and other long-lived assets whenever
events or changes in circumstances indicate an
other-than-temporary impairment in the remaining value of the
assets recorded on our balance sheet may exist. In order to
estimate the fair value of long-lived assets, we make various
assumptions about the future prospects for the business that the
asset relates to and typically estimate future cash flows to be
generated by these businesses. Based on these assumptions and
estimates, we determine whether we need to take an impairment
charge to reduce the value of the asset stated on our balance
sheet to reflect its estimated fair value. Assumptions and
estimates about future values and remaining useful lives are
complex and often subjective. They can be affected by a variety
of factors, including external factors such as industry and
economic trends, and internal factors such as changes in our
business strategy and our internal forecasts. Although we
believe the assumptions and estimates we have made in the past
have been reasonable and appropriate, different assumptions and
estimates could materially impact our reported financial
results. More conservative assumptions of the anticipated future
benefits from these businesses would result in greater
impairment charges, which would decrease net income and result
in lower asset values on our balance sheet. Conversely, less
conservative assumptions would result in smaller impairment
charges, higher net income and higher asset values. See
Note 1
“Goodwill, Purchased Intangible Assets and
Other Long-lived Assets”
and
“Recent
Pronouncements,”
and Notes 5 and 12 of the
financial statements for more information about how we make
these judgments.
•
Reserves for Uncollectible Accounts
Receivable.
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 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. See Note 1
of the financial statements,
“Concentration of Credit
Risk and Significant Customers and Suppliers,
” for more
information about our accounts receivable.
•
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 actual current tax exposure and
to assess temporary differences that result from differing
treatment of certain items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities,
which we show on our consolidated balance sheet. We must then
assess the likelihood that our deferred tax assets will be
recovered from future taxable income. To the extent we believe
that recovery is not likely, we establish
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a valuation allowance. When we establish a
valuation allowance or increase this allowance in an accounting
period, we must record a tax expense in 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 July 31, 2002 was $244.4 million, net
of the valuation allowance of $9.3 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 recoverable. While we have
considered future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for the
valuation allowance, we cannot assure that we will not be
required to increase the valuation allowance to take into
account additional deferred tax assets that we may be unable to
realize. If we increase the valuation allowance, it could have a
material adverse impact on our income tax provision and net
income in the period in which we make the increase. See
Note 20 of the financial statements.
Table of Contents
% Total
% Total
% Total
Fiscal
Net
Fiscal
Net
Fiscal
Net
2000-2001
2001-2002
2000
Revenue
2001
Revenue
2002
Revenue
% Change
% Change
(Dollars in millions)
$
275.3
$
278.0
$
318.8
20.2
32.6
51.4
16.0
18.0
4.4
311.5
30
%
328.6
29
%
374.6
28
%
6
%
14
%
30.6
60.1
81.7
44.8
58.1
72.4
—
—
0.2
75.4
7
%
118.2
10
%
154.3
11
%
57
%
31
%
170.5
168.2
219.4
40.9
100.5
128.4
4.8
3.4
3.3
216.2
21
%
272.1
24
%
351.1
26
%
26
%
29
%
Professional Accounting
Solutions
161.4
177.3
219.2
9.1
11.1
6.5
—
—
—
170.5
17
%
188.4
16
%
225.7
17
%
10
%
20
%
98.8
80.2
71.6
—
13.1
8.0
70.6
49.7
50.7
169.4
16
%
143.0
12
%
130.3
9
%
(16
)%
(9
)%
67.1
70.4
82.2
27.2
24.8
20.9
—
2.8
4.5
94.3
9
%
98.0
9
%
107.6
8
%
4
%
10
%
Small Business Verticals and Other
—
—
8.9
—
0.1
5.8
—
—
—
—
—
0.1
—
14.7
1
%
—
NM
$
1,037.3
100
%
$
1,148.4
100
%
$
1,358.3
100
%
11
%
18
%
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Cost of Revenue
% of
% of
% of
Fiscal
Related
Fiscal
Related
Fiscal
Related
2000-2001
2001-2002
2000
Revenue
2001
Revenue
2002
Revenue
% Change
% Change
$
158.8
20
%
$
143.3
17
%
$
163.5
16
%
(10
%)
14
%
72.4
51
%
110.1
46
%
108.4
37
%
52
%
(2
%)
30.7
34
%
26.0
35
%
24.9
39
%
(15
%)
(4
%)
8.8
—
15.0
—
12.4
—
70
%
(17
%)
$
270.7
26
%
$
294.4
26
%
$
309.2
23
%
9
%
5
%
Table of Contents
Operating Expenses
% Total
% Total
% Total
Fiscal
Net
Fiscal
Net
Fiscal
Net
2000-2001
2001-2002
2000
Revenue
2001
Revenue
2002
Revenue
% Change
% Change
$
138.6
13
%
$
145.5
13
%
$
173.1
13
%
5
%
19
%
221.2
21
%
235.3
20
%
278.8
21
%
6
%
18
%
165.9
16
%
203.7
18
%
203.5
15
%
23
%
0
%
74.3
7
%
95.7
8
%
110.4
8
%
29
%
15
%
1.3
0
%
0.2
0
%
2.2
0
%
NM
NM
—
—
—
—
13.2
1
%
—
—
156.4
15
%
248.2
22
%
181.6
13
%
59
%
(27
%)
—
—
—
—
27.0
2
%
—
—
$
757.7
73
%
$
928.6
81
%
$
989.8
73
%
23
%
7
%
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Payments Due by Period
(In millions)
Less than 1
1-3
4-5
After 5
Contractual Obligations
year
years
years
years
Total
$
11.3
$
—
$
—
$
—
$
11.3
17.9
—
—
17.9
—
8.1
2.7
3.8
14.6
31.2
50.6
41.9
29.5
153.2
25.4
—
—
—
25.4
$
85.8
$
58.7
$
44.6
$
33.3
$
222.4
Table of Contents
Table of Contents
Table of Contents
| Company-Wide Factors That Could Affect Future Results |
Our revenue and earnings are highly seasonal. Seasonality and other factors cause significant quarterly and annual fluctuations in our revenue and net income. Several of our businesses are highly seasonal — particularly our tax businesses, but also small business and personal finance to a lesser extent. This causes significant quarterly fluctuations in our financial results. Revenue and operating results are usually strongest during the second and third fiscal quarters ending January 31 and April 30. We experience lower revenues, and often significant operating losses, in the first and fourth quarters ending 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 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, earnings per share and asset values. Recent declines in interest rates have resulted in a significant decline in the interest income we earned on our investment portfolio during recent reporting periods, which has had a negative impact on our net income (loss) and net income (loss) per share. Declining interest rates can also reduce the value of our interest rate sensitive assets, such as certain assets that relate to our payroll business. See Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” for more details.
Our recent acquisitions have presented business integration challenges and we may not fully realize the intended benefits of these acquisitions. During the past few years, we have completed numerous acquisitions, including five during fiscal 2002. These acquisitions have expanded our product and service offerings, personnel and geographic locations. Integrating and organizing acquired businesses creates challenges for our operational, financial and management information systems, as well as for our product development processes. We might not be able to coordinate the diverse operating structures, policies and practices of companies we have acquired or successfully integrate the employees of the acquired companies into our organization and culture, which could harm employee morale and productivity. These difficulties may be increased by the various geographic locations of our acquired businesses, which include Colorado, Connecticut, Ohio and Texas. 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.
We expect to continue to make acquisitions, which could put a strain on our resources and adversely affect our financial results. 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. Integrating newly acquired organizations and technologies into our business could put a strain on our resources and be expensive and time consuming. In addition, we may not succeed in integrating acquired businesses or technologies and may not achieve anticipated financial benefits. Our acquisition strategy and future acquisitions could also result in the following risks:
| • | Increased competition for acquisition opportunities could inhibit our ability to complete suitable acquisitions, and could also increase the price we would have to pay to complete acquisitions. | |
| • | If we are unable to complete acquisitions successfully, we may not be able to develop and market products for new industries or applications with which we may not be familiar. | |
| • | Despite our due diligence reviews, acquired businesses may bring with them unanticipated liabilities, business or legal risks or operating costs that could harm our results of operations or business, reduce or eliminate any benefits of the acquisition or require unanticipated expenses. | |
| • | If we fail to retain the services of key employees of acquired companies for significant time periods after the acquisition of their companies, we may experience difficulty in managing the acquired company’s business and not realize the anticipated benefits of the acquisition. |
44
| • | The accounting treatment of acquisitions can result in significant acquisition-related accounting charges and expenses that would reduce our reported results of operations both at the time of the acquisition and in future periods. | |
| • | 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. |
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 intangibles and deferred compensation (which are reflected in operating expenses). Total acquisition-related costs in the categories identified above were $166.5 million in fiscal 2000, $263.4 million in fiscal 2001 (including charges of $78.7 million to write down the long-lived intangible assets related to three acquisitions), and $196.2 million in fiscal 2002 (including charges of $27.3 million to write down the long-lived intangible assets related to two acquisitions). Additional acquisitions, and any additional impairment of the value of purchased assets, could have a significant negative impact on our future operating results.
Recent changes to Financial Accounting Standards Board guidelines relating to accounting for goodwill could make our acquisition-related charges less predictable in any given reporting period. The new FASB standard for accounting for goodwill acquired in a business combination applies to all acquisitions initiated after June 30, 2001. In the first quarter of fiscal 2003, we adopted the new standard for acquisitions we completed before June 30, 2001. Under the new standard, we must continue to recognize goodwill as an asset but will not amortize goodwill as previously required. Instead, we must separately test goodwill for impairment using a fair-value-based approach at least annually and also when an event occurs indicating the potential for impairment. As a result of this shift from an amortization approach to an impairment approach, we will stop recording charges for goodwill amortization. However, it is possible that in the future, we may incur less frequent, but larger, impairment charges related to the goodwill already recorded and to goodwill arising out of future acquisitions as we continue to expand our business. As of August 1, 2002, we had an unamortized goodwill balance of approximately $430.8 million, which included the amount of assembled workforce reclassified to goodwill. These amounts could be subject to impairment charges in the future.
If we are required to account for options under our employee stock plans as a compensation expense, it would significantly reduce our net income and earnings per share. There has been increasing public debate about the proper accounting treatment for employee stock options. Although we are not currently required to record any compensation expense in connection with option grants that have an exercise price at or above fair market value, it is possible that future laws or regulations will require us to treat all stock options as a compensation expense. Note 17 of the financial statements shows the impact that such a change in accounting treatment would have had on our net income and earnings per share if it had been in effect during the past three fiscal years and if the compensation expense were calculated as described in Note 17.
A 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. We believe the economic decline was partially responsible for slower than expected growth in our Small Business segment during fiscal 2001 and the first half of fiscal 2002. Although we experienced solid revenue growth in most of our businesses during the second half of fiscal 2002, the future economic environment remains uncertain. If conditions decline, or fail to improve, in geographic areas that are significant to us, such as the United States, Canada and Japan, we could see a significant decrease in the overall demand for our products and services that could harm our operating results.
If we do not continue to successfully develop new products and services in a timely manner, our future financial results will suffer. We believe that it is necessary to continually develop new products and services and to improve existing products and services to remain competitive in the markets we serve.
45
The expansion of our product and service offerings through internal growth and through recent and anticipated acquisitions creates risks due to the number and complexity of our revenue models and the operational infrastructure required to support our expanded portfolio of products and services. The business models for our expanding range of products and services rely on more complex and varied revenue streams than our traditional desktop software businesses. In particular, the revenue recognition practices of several of the businesses we have recently acquired are more complex than the revenue recognition principles that apply to our existing products and services. We expect this trend to continue with future acquisitions. As a result of both acquisitions and internal growth, we expect to continue expanding our product offerings to larger enterprises, and we may begin to offer additional features and options as part of multiple-element sales arrangements. These dynamics may require us to defer a higher percentage of our product revenue at the time of sale than we do for current products, which would decrease revenue at the time products are shipped, but result in more revenue in fiscal periods after shipment. In addition, many of our newer businesses depend 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. In particular, the success of our Internet-based services requires us to maintain continuous and reliable operations at our data center. Despite our efforts, like all providers of Internet-based products and services, we occasionally experience unplanned outages or technical difficulties. Lengthy and/or frequent service outages — particularly for services that customers consider time-sensitive — can result in negative publicity, damage to our reputation and lost customers.
Despite our efforts to adequately staff and equip our customer service and technical support operations, we cannot always respond promptly to customer requests for assistance. We occasionally experience customer service and support problems, including longer than expected “hold” times when our staffing is inadequate to handle higher than anticipated call volume, and a large number of inquiries from customers checking on the status of product orders when the timing of shipments fails to meet customer expectations. This can adversely affect customer relationships and our financial performance. In order to improve our customer service and technical support, we must continue to focus on eliminating underlying causes of service and support calls through product improvements and better order fulfillment processes, and on more accurately anticipating demand for customer service and technical support.
We face risks relating to customer privacy and security and increasing regulation, which could hinder the growth of our businesses. Despite our efforts to address customer concerns about privacy and security, these issues still pose a significant risk, and we have experienced lawsuits and negative publicity relating to privacy issues. For example, during fiscal 2000 and fiscal 2001, there were press articles criticizing our privacy and security practices as they relate to the connectivity of our desktop software to our Web sites. We have faced lawsuits and negative press alleging that we improperly shared information about customers with third-party “ad servers” for our Web sites. A major breach of customer privacy or security by Intuit, or even by another company, could have serious consequences for our businesses, including reduced customer interest and/or additional regulation by federal or state agencies. In addition, the federal government has developed mandatory privacy and security standards and protocols, and we have incurred significant expenses to comply with these requirements. Additional similar federal and state laws, and/or
46
We face several risks relating to our retail distribution channel. We face ongoing challenges in negotiating favorable terms (including financial terms) with retailers, due in part to the recent trend of declining importance of software as a retail category. In addition, any termination or significant disruption of our relationship with any of our major resellers could result in a decline in our net revenue. Also, any financial difficulties of our resellers 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 true for our consumer tax products, which have a short selling season. Like most software companies, we have a liberal product return policy and we have historically accepted significant product returns. We establish reserves for product returns in our financial statements, based on estimated future returns of products. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Net Revenue — Return and Rebate Reserves.” We closely monitor levels of product sales and inventory in the retail channel in an effort to maintain reserves that are adequate to cover expected returns. In the past, returns have not generally exceeded these reserves. However, if we do experience actual returns that significantly exceed reserves, it would result in lower net revenue.
We face existing and potential government regulation in many of our businesses, which can increase our costs and hinder the growth of our businesses. We offer some regulated products and services through separate subsidiary corporations. Establishing and maintaining regulated subsidiaries can requires significant financial, legal and management resources. If any regulated subsidiary fails to comply with applicable regulations, it could face liability to customers and/or penalties and sanctions by government regulators. In addition, our Internet-based products and services are available in many states and foreign countries. As a result, we may be subject to regulation and/or taxation in many additional jurisdictions, which could substantially slow commercial use of the Internet and growth of our Internet-based businesses.
Gains and losses related to marketable securities and other investments can cause significant fluctuations in our net income. Our investment activities have had a significant impact on our net income. We recorded pre-tax net gains from marketable securities and other investments of $481.1 million in fiscal 2000 and pre-tax net losses of $98.1 million in fiscal 2001 and $15.5 million in fiscal 2002. As of July 31, 2002, our marketable securities balance was $16.8 million. Any additional significant long-term declines in value of these securities could reduce our net income in future periods.
Legal protection for our intellectual property is not always effective to prevent unauthorized use or copying. We rely on a combination of copyright, patent, trademark and trade secret laws, and employee and third-party nondisclosure and license agreements to protect our software products and other proprietary technology. 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
47
We do not own all of the software and other technologies used in our products and services. We have the licenses from third parties that we believe are necessary for using technology that we do not own in our current products and services. From time to time we may be required to renegotiate with these third parties to include their technology in our existing products, in new versions of our current products or in new products. We may not be able to renegotiate licenses on reasonable terms, or at all.
We may unintentionally infringe on the intellectual property rights of others, which could expose us to substantial damages or restrict our business operations. As the number of our products and services increases and their features and content continue to expand, we may increasingly become subject to infringement claims by third parties. Although we believe that we make reasonable efforts to ensure that our products and services do not violate the intellectual property rights of others, it is possible that third parties still may claim infringement. From time to time, we have received communications from third parties in which the claimant alleges that a product or service we offer infringes the claimant’s intellectual property rights. Occasionally these communications result in lawsuits. In many of these cases, it is difficult to assess the extent to which the intellectual property that is being asserted is valid or the extent to which we have any material exposure. Past claims have not resulted in any significant litigation, settlement or licensing expenses, but future claims could present an exposure of uncertain magnitude. Existing or future infringement claims or lawsuits against us, whether valid or not, may be time consuming and expensive to defend. Intellectual property litigation or claims could force us to do one or more of the following: cease selling, incorporating or using products or services that incorporate the challenged intellectual property; obtain a license from the holder of the infringed intellectual property, which may not be available on commercially favorable terms or at all; or redesign our software products or services, possibly in a manner that reduces their commercial appeal. Any of these actions may cause material harm to our business and financial results.
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. Other unpredictable events could also impact our ability to continue our business operations. For our Internet-based services, system failures of our internal server operations or those of various third-party service providers could result in interruption in our services to our customers. Any significant interruptions in our ability to conduct our business operations could reduce our revenue and operating income. Our business interruption insurance may not adequately compensate us for the impact of interruptions to our business operations.
Factors Relating to Competition
We face competitive pressures in all of our businesses, which can have a negative impact on our revenue, profitability and market position. There are formidable current and potential competitors, including competition from publicly-funded state government entities in the consumer tax area. Accordingly, we expect competition to remain intense during fiscal 2003 and beyond. In all our businesses, we face continual risks that competitors will introduce better products and services, reduce prices, gain better access to distribution channels, increase advertising (including advertising targeted at Intuit customers),
48
In the small business and employer services areas, we face a wide range of competitive risks that could impact our financial results. Our small business products and services face current competition from competitors’ desktop software, as well as from other Web-based small business services products. Microsoft offers several products and services targeted at similar size customers as our high-end QuickBooks products, and has recently acquired additional products and services that compete with our small business offerings. Other competitors and potential competitors have begun providing, or have expressed significant interest in providing, accounting and business management products and services to small businesses. As we implement our Right for My Business strategy we face increased competitive threats from larger companies in bigger markets than we have historically faced. For example, we face direct competition in our Intuit Payroll Services — Complete Payroll business from traditional payroll services offered by a number of companies, including Paychex and ADP. Our financial supplies business faces ongoing pricing pressures from many of our competitors.
We face intense competitive pressures in our consumer tax preparation software business, which can have a negative impact on our revenue, profitability and market position. There are formidable current and potential competitors in the private sector. We also face competition from publicly-funded state government entities that offer individual taxpayers electronic tax preparation and filing services, at no cost to individual taxpayers. If state governmental agencies were to be successful in their efforts to develop consumer tax preparation and filing services and to gain consumer acceptance of those services, it could have a significant negative impact on our financial results in future years. The federal government announced a proposal in August 2002 that would mitigate the risk of government encroachment in federal tax preparation and filing services. The policy proposes that, for at least the next three years, a number of private sector companies, rather than the federal government, would provide Web-based federal tax preparation and filing services at no cost to lower income taxpayers and other underserved taxpayers through voluntary public service initiatives such as our Intuit Tax Freedom Project. Despite this positive development, future administrative, regulatory or legislative activity in this area could adversely impact Intuit and other companies that provide tax preparation software and services. Intuit is actively working with others in the private sector, as well as with state government policy makers, to help clarify the appropriate roles for government agencies and the private sector in the electronic commerce marketplace.
Our personal finance products face aggressive competition that could have a negative impact on revenue, profitability and market position. Our Quicken products compete directly with Microsoft Money, which is aggressively promoted and priced. We expect competitive pressures for Quicken to continue, both from Microsoft Money and from Web-based personal finance tracking and management tools that are becoming increasingly available at no cost to consumers. Competitive pressures can result in reduced revenue and lower profitability for our Quicken product line. There are many competitors for our Internet-based personal finance products and services. However, the general downturn in Internet and technology stocks since March 2000 has resulted in significant consolidation, with fewer, but more financially sound, competitors surviving. This could make it more difficult for us to compete effectively.
Specific Factors Affecting Small Business
It is too early to provide any assurance that our Right for My Business strategy will generate substantial and sustained revenue growth in the small business accounting and business management segments. A key component of our Right for My Business strategy is to continue to expand our small business accounting and management products and services, through internal growth and from acquisitions. We don’t expect that sales of our QuickBooks desktop products alone will be adequate to meet our growth goals. We must generate revenue from a wider range of market and customer segments as well as from
49
| • | Our strategy depends on our successfully completing acquisitions and integrating acquired companies, which presents a number of challenges as described above under “Company-Wide Factors That Could Affect Future Results.” | |
| • | Our strategy is resulting in a dramatic increase in the number and complexity of the products and services that we offer. This is placing greater demands on our research and development, marketing and sales resources, as we must develop, market and sell both the new products and services as well as periodic enhancements to an expanding portfolio of products and services. This will also require us to continually develop, expand and modify our internal business operations systems and procedures to support new businesses, including our customer service and technical support call centers, and our customer management, order management, billing and other systems. | |
| • | Many of the new products and services we are and will be offering are much more complex than our traditional core desktop software products and are being priced accordingly. They will therefore require a more consultative sales process, and a higher level of post-sales support. If we are not able to effectively adapt our marketing, sales, distribution and customer support functions to accommodate these changes, we will not succeed in generating significant or sustained revenue from these new businesses. |
Our financial supplies business relies on two key single-source vendors. We have an exclusive contract with John H. Harland Company to print and fulfill supplies orders for all of our checks and most other products for our financial supplies business. Harland fulfilled orders for about 75% to 80% of our supplies revenue in fiscal 2000 and 2001, and about 85% of our supplies revenue in fiscal 2002. We believe that relying on one vendor improves customer service and maximizes operational efficiencies for our supplies business. However, if there are significant problems with Harland’s performance, it could have a material negative impact on sales of supplies and on Intuit’s business as a whole. We also have a sole-source vendor that operates our supplies sales website. If there are any significant problems with this vendor’s performance, it could have a negative impact on supplies revenue.
Specific Factors Affecting Employer Services
Our employer services business faces a number of risks that could have a negative impact on revenue and profitability. For our employer services, 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. For example, if we make errors in providing accurate and timely payroll information, cash deposits or tax return filings, we face potential liability to customers, additional expense to correct product errors and loss of customers. For our Internet-based offerings (including QuickBooks Do-it-Yourself Payroll and QuickBooks Assisted Payroll), we must also continue to improve our operations to provide reliable connectivity to our data centers to enable customers to transmit and receive data. In order to generate sustained growth for our Intuit Payroll Services — Complete Payroll, we will be required to successfully develop and manage a more extensive and proactive direct field sales operation, which is a different distribution method than those we have historically relied on. For future employer services we face the risk of potential delays in technology development, as well as dependency on the performance of third parties that may be key to our ability to deliver certain services. We also face the risk that we may not be able to successfully cross-sell employee administration products and services to the existing base of QuickBooks customers.
Specific Factors Affecting our Tax Businesses
We face intense competitive pressures in our consumer tax preparation software business, which can have a negative impact on our revenue, profitability and market position. There are formidable current and potential competitors in the private sector. We also face competition from publicly funded state government entities If state governmental agencies were to be successful in their efforts to develop
50
If we fail to maintain reliable and responsive service levels for our electronic tax offerings, we could lose revenue and customers. Our Web-based tax preparation and electronic filing services must effectively handle extremely heavy customer demand during the peak tax season. We face significant challenges in maintaining high service levels, particularly during peak volume service times. For example, we experienced relatively brief unscheduled interruptions in our electronic filing/and or tax preparation services during fiscal 2000 and 2001, and we reached maximum capacity for a short period on April 15, 2002. We do not believe any prior service outages had a material financial impact, prevented a significant number of customers from completing and filing their returns in a timely manner, or posed a risk that customer data would be lost or corrupted. However, we did experience negative publicity in some instances. The exact level of demand for Quicken TurboTax for the Web and electronic filing is impossible to predict. If we are unable to meet customer expectations in a cost-effective manner, we could lose customers, receive negative publicity and incur increased operating costs, any of which could have a significant negative impact on the financial and market success of these businesses.
Significant problems or delays in the development of our tax products would result in lost revenue and customers. The development of tax preparation software presents a unique challenge because of the demanding annual development cycle required to incorporate unpredictable tax law and tax form changes each year. The rigid development timetable increases the risk of errors in the products and the risk of launch delays. Any major defects could lead to negative publicity, customer dissatisfaction and incremental operating expenses — including expenses resulting from our commitment to reimburse penalties and interest paid by consumer customers due solely to calculation errors in our products. A 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. This would result in lost revenue in the current year and would make it more difficult for us to sell our products to those customers in future tax seasons.
Specific Factors Affecting Personal Finance
The long-term viability of personal finance business will depend on our ability to provide new products and services that attract customers and that can generate revenue sources other than just advertising revenue. The demand for personal finance software such as Quicken has been weakening over recent years, and the demand for Internet advertising on Web sites like Quicken.com has declined precipitously. We must identify and capitalize on additional sources of revenue to provide sustainable future growth for our personal finance business. In an effort to stimulate customer demand and generate revenue growth, we recently launched Quicken Brokerage powered by Siebert, an online and telephone-based securities brokerage service for Quicken and Quicken.com customers made available through an exclusive strategic alliance with Siebert Financial Corp., the holding company for Muriel Siebert & Co. Inc.. However, it is too early to tell whether this service will generate sustainable revenue growth. Furthermore, it is unlikely that the brokerage service, even if successful, will by itself be sufficient to sustain our personal finance business, so we must identify additional sources for growth.
Specific Factors Affecting our Global Business
Business conditions in international markets and other risks inherent in global operations may negatively impact our financial performance. Conducting business globally involves many risks, including potential volatility in the political and economic conditions of certain foreign countries; difficulties in managing operations in different locations (including hiring and retaining management personnel); a product development process that is often more time-consuming and costly than in the United States due in part to localization requirements; fluctuations in foreign currency exchange rates; and unanticipated changes in foreign regulatory requirements. In particular, the economic situation in Japan had a negative impact on global revenue and profits during recent fiscal years.
51
ITEM 7A
Short-Term Investment Portfolio
We do not hold derivative financial instruments
in our short-term investment portfolio. Our short-term
investments consist of instruments that meet quality standards
consistent with our investment policy. This policy dictates
that, for short-term investments, we diversify our holdings and
limit our short-term investments with any individual issuer in a
managed portfolio to a maximum of $5 million. The following
table of our short-term investments portfolio is classified by
the original maturity date listed on the security:
Principal Amounts by Stated Maturity
Years Ending July 31,
(In thousands, except interest rates)
2007
Fair Value
and
July 31,
2003
2004
2005
2006
Thereafter
Total
2002
$
282,560
—
—
—
—
$
282,560
$
282,560
1.56%
—
—
—
—
1.56%
$
230,716
$
141,942
—
$
10,626
$
432,058
$
815,342
$
815,342
1.54%
1.78%
—
1.42%
1.67%
1.65%
$
513,276
$
141,942
—
$
10,626
$
432,058
$
1,097,902
$
1,097,902
1.55%
1.78%
—
1.42%
1.67%
1.63%
Marketable Securities
We carried balances in marketable equity securities as of July 31, 2002 that are subject to considerable market risk due to their volatility. We considered all of our marketable securities held at that date to be available-for-sale. If our available-for-sale securities experience further declines in fair value that are considered other-than-temporary, we will reflect the additional loss in our net income (loss) in the period when the subsequent impairment becomes apparent. See Note 3 of the financial statements for more information regarding our investments in marketable securities and the impact our trading securities had on our reported net income (loss) in prior periods.
Interest Rate Risk
Interest rate risk represents a component of market risk to us because significant declines in interest rates will cause unfavorable changes in our net income (loss) and net income (loss) per share and in the value of our interest rate sensitive assets, liabilities and commitments, particularly those that relate to our payroll business. Interest rate movements affect the interest income earned on investments we hold in our short-term investment portfolio and the value of those investments.
Over the past few years, we have experienced significant reductions in our interest income due to declines in interest rates. A significant decrease in future interest rates will have a material impact on the interest income earned on our cash equivalents and short-term investments held at July 31, 2002.
Impact of Foreign Currency Rate Changes
We translate foreign currencies (primarily Canadian dollars, Japanese yen, and British pounds) into U.S. dollars for financial reporting purposes. Accordingly, currency fluctuations can have an impact on our financial results, though the historical impact has generally been immaterial. We believe that our exposure to currency exchange fluctuation risk is insignificant primarily because our global subsidiaries invoice customers and satisfy their financial obligations almost exclusively in their local currencies. Currency
52
53
ITEM 8
1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following financial statements are filed as part of this Report:
| Page | ||||
|
|
||||
| Report of Ernst & Young LLP, independent auditors | 55 | |||
| Consolidated Balance Sheets as of July 31, 2002 and 2001 | 56 | |||
|
Consolidated Statements of Operations for each of
the three years in the period ended
July 31, 2002 |
57 | |||
| Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended July 31, 2002 | 58 | |||
|
Consolidated Statements of Cash Flows for each of
the three years in the period ended
July 31, 2002 |
59 | |||
| Notes to Consolidated Financial Statements | 60 | |||
2. INDEX TO FINANCIAL STATEMENT SCHEDULES
| The following financial statement schedule is filed as part of this report and should be read in conjunction with the Consolidated Financial Statements: |
| Schedule | Page | |||||||
|
|
|
|||||||
| II | Valuation and Qualifying Accounts | 92 | ||||||
| All other schedules not listed above have been omitted because they are inapplicable or are not required. |
54
REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS
The Board of Directors and Stockholders of Intuit
Inc.
We have audited the accompanying consolidated
balance sheets of Intuit Inc. as of July 31, 2001 and 2002,
and the related consolidated statements of operations,
stockholders’ equity and cash flows for each of the three
years in the period ended July 31, 2002. Our audits also
included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Intuit Inc. at July 31,
2001 and 2002, and the consolidated results of its operations
and its cash flows for each of the three years in the period
ended July 31, 2002, in conformity with accounting
principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
San Francisco, California
55
/s/ ERNST & YOUNG LLP
Table of Contents
INTUIT INC.
July 31,
July 31,
2001
2002
(In thousands, except par value)
$
94,301
$
435,087
1,119,305
815,342
85,307
16,791
205,254
300,409
26,778
56,467
73,742
67,799
31,640
50,729
355,222
252,869
57,208
—
2,048,757
1,995,493
174,659
181,758
326,815
428,948
88,320
125,474
145,905
176,553
24,107
6,765
12,859
21,270
28,500
26,765
12,351
—
$
2,862,273
$
2,963,026
$
62,994
$
76,669
64,325
91,507
205,067
300,381
137,041
159,758
82,486
442
38,672
17,926
98,212
86,094
688,797
732,777
12,150
14,610
—
—
2,105
2,112
1,723,385
1,844,595
(8,497
)
(126,107
)
(21,720
)
(12,628
)
28,180
(3,675
)
437,873
511,342
2,161,326
2,215,639
$
2,862,273
$
2,963,026
See accompanying notes.
56
INTUIT INC.
Fiscal
2000
2001
2002
(In thousands, except per share data)
$
803,759
$
834,190
$
1,001,782
142,179
240,381
293,405
91,411
73,834
63,161
1,037,349
1,148,405
1,358,348
158,755
143,289
163,516
72,369
110,064
108,365
30,661
25,952
24,949
8,798
14,949
12,423
138,562
145,522
173,080
221,176
235,256
278,826
165,907
203,739
203,522
74,348
95,704
110,441
1,312
238
2,151
—
—
13,237
156,357
248,179
181,616
—
—
27,000
1,028,245
1,222,892
1,299,126
9,104
(74,487
)
59,222
48,494
57,303
32,944
481,130
(98,053
)
(15,535
)
—
(15,315
)
8,308
538,728
(130,552
)
84,939
216,550
(12,473
)
15,179
322,178
(118,079
)
69,760
(16,517
)
20,972
47,100
—
—
23,300
(16,517
)
20,972
70,400
—
14,314
—
$
305,661
$
(82,793
)
$
140,160
$
1.60
$
(0.57
)
$
0.33
(0.08
)
0.10
0.33
—
0.07
—
$
1.52
$
(0.40
)
$
0.66
200,770
207,959
211,794
$
1.53
$
(0.57
)
$
0.32
(0.08
)
0.10
0.32
—
0.07
—
$
1.45
$
(0.40
)
$
0.64
211,271
207,959
217,897
See accompanying notes.
57
INTUIT INC.
Other
Common Stock
Additional
Deferred
Comprehensive
Retained
Total
Paid In
Treasury
Stock
Income
Earnings
Stockholders’
Shares
Amount
Capital
Stock
Compensation
(Loss)
(Deficit)
Equity
196,348,524
$
1,963
$
1,265,248
$
(134
)
$
—
$
79,144
$
215,167
$
1,561,388
—
—
—
—
—
—
305,661
305,661
—
—
—
—
—
(23,558
)
—
(23,558
)
282,103
6,651,953
67
80,296
—
—
—
—
80,363
225,000
2
15,202
—
(15,202
)
—
—
2
355,281
4
9,771
—
—
—
—
9,775
719,197
7
55,618
—
—
—
—
55,625
—
—
93,515
—
—
—
—
93,515
—
—
—
—
(16,605
)
—
—
(16,605
)
—
—
—
—
5,285
—
—
5,285
—
—
—
—
—
—
(162
)
(162
)
204,299,955
2,043
1,519,650
(134
)
(26,522
)
55,586
520,666
2,071,289
—
—
—
—
—
—
(82,793
)
(82,793
)
—
—
—
—
—
(27,406
)
—
(27,406
)
(110,199
)
5,201,860
52
82,024
—
—
—
—
82,076
469,873
5
14,719
—
—
—
—
14,724
(239,542
)
(2
)
—
(8,363
)
—
—
—
(8,365
)
794,093
7
44,779
—
—
—
—
44,786
—
—
—
—
—
—
—
59,546
—
—
—
—
59,546
—
—
2,667
—
(2,667
)
—
—
—
—
—
—
—
7,469
—
—
7,469
210,526,239
2,105
1,723,385
(8,497
)
(21,720
)
28,180
437,873
2,161,326
—
—
—
—
—
—
140,160
140,160
—
—
—
—
—
(31,855
)
—
(31,855
)
108,305
5,961,161
60
(10,178
)
193,010
—
—
(66,691
)
116,201
584,053
6
10,178
7,656
—
—
—
17,840
(7,361,839
)
(74
)
—
(318,276
)
—
—
—
(318,350
)
1,454,027
15
67,964
—
—
—
—
67,979
—
—
53,246
—
—
—
—
53,246
—
—
—
(1,620
)
—
—
(1,620
)
—
—
—
—
10,712
—
—
10,712
211,163,641
$
2,112
$
1,844,595
$
(126,107
)
$
(12,628
)
$
(3,675
)
$
511,342
$
2,215,639
See accompanying notes.
58
INTUIT INC.
Fiscal
2000
2001
2002
$
322,178
$
(118,079
)
$
69,760
156,357
248,179
181,616
8,798
14,949
12,423
1,266
2,531
2,534
45,927
55,586
59,887
(481,130
)
98,053
15,535
1,312
238
2,151
—
—
13,237
—
—
27,000
—
15,315
(8,308
)
—
—
3,227
(133,582
)
(73,401
)
(24,705
)
93,515
59,546
53,246
(46,571
)
(27,460
)
(50,938
)
(3,897
)
40,709
(12,592
)
39,571
(12,938
)
(10,872
)
13,068
(23,406
)
9,182
10,100
16,542
21,177
45,854
28,069
51,087
41,584
29,727
11,845
(8,661
)
(55,620
)
(65,284
)
(13,828
)
(62,098
)
(2,990
)
77,220
(66,475
)
(49,385
)
91,861
236,442
358,218
(36,038
)
8,428
(9,552
)
(94,562
)
(48,747
)
(42,559
)
—
(23,441
)
(21,323
)
(18,800
)
—
—
681,014
29,635
23,435
(2,056,060
)
(3,169,430
)
(2,849,548
)
1,346,993
3,105,031
3,152,256
(76,714
)
(198,062
)
(278,265
)
(1,656
)
(3,079
)
—
(255,823
)
(299,665
)
(25,556
)
(3,323
)
(5,147
)
(25,673
)
89,978
96,797
133,565
—
(8,363
)
(318,350
)
86,655
83,287
(210,458
)
(69,610
)
(298,904
)
219,012
(498
)
2,591
(430
)
(147,415
)
(276,249
)
340,786
517,965
370,550
94,301
$
370,550
$
94,301
$
435,087
$
4,908
$
3,449
$
1,938
$
270,271
$
39,131
$
101,645
See accompanying notes.
59
INTUIT INC.
1. Summary of
Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the
financial statements of Intuit and its wholly owned
subsidiaries. All intercompany balances and transactions have
been eliminated in consolidation. Certain other previously
reported amounts have been reclassified to conform to the
current presentation. As discussed in Note 11, our Quicken
Loans mortgage business has been accounted for as discontinued
operations in accordance with Accounting Principles Board
(“APB”) Opinion No. 30. Accordingly, we have
reclassified our financial statements for all periods presented
to reflect Quicken Loans as a discontinued operation. Unless
noted otherwise, discussions herein pertain to our continuing
operations.
Investments in which we intend to maintain more
than a temporary 20% to 50% interest, or otherwise have the
ability to exercise significant influence, are accounted for
under the equity method. Investments in which we have less than
a 20% interest and over which we do not have the ability to
exercise significant influence are carried at the lower of cost
or estimated realizable value. We monitor both equity and cost
basis investments for other than temporary declines in value and
make reductions in carrying values when appropriate.
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. Estimates are used for reserves
for product returns, reserves for rebates, determining the
collectibility of accounts receivable, the valuation of deferred
tax assets and other amounts. We also use estimates to determine
the remaining economic lives and carrying values of goodwill,
purchased intangibles, property and equipment and other
long-lived assets. Despite our intention to establish accurate
estimates and assumptions, actual results may differ from our
estimates.
Net Revenue
For our shrink-wrapped software products, we
generally recognize revenue when we ship products (which is when
title passes) either to retailers and distributors or directly
to end user customers. We sell certain consumer tax products on
consignment. We recognize revenue for consigned software
products when the end-user sale has been confirmed. We recognize
revenue only if payment is probable and we have no significant
remaining obligations to the customer. We recognize revenue from
distributors and retailers net of returns reserves that are
based on historical returns experience and other factors such as
the volume and price mix of products in the retail channel,
trends in retailer inventory and economic trends that might
impact customer demand for our products. We recognize revenue
from end users net of rebate reserves that are based on the
terms and conditions of the specific promotional program, actual
sales during the promotion, the amount of redemptions received,
historical redemption trends by product and by type of
promotional program and the economic value of the rebate. In
some situations, we receive advance payments from our customers.
Revenue associated with these advance payments is deferred until
the products are shipped or services are provided. We also
reduce revenue by the estimated cost of rebates when products
are shipped.
We recognize revenue from payroll processing and
payroll tax filing services as the services are performed,
provided we have no other remaining obligations. We generally
require customers to remit payroll and payroll tax liability
funds to us in advance of the applicable payroll due date, via
electronic funds transfer. We include in total net revenue the
interest earned on invested balances resulting from timing
differences between the collection of these funds from customers
and the remittance of such 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.
60
We also offer several plans under which customers
pay for technical support assistance. We recognize support
revenue over the life of the plan, which is generally one year.
We include costs incurred for fee-for-support plans in cost of
revenue.
We recognize revenue from other products and
services when it is earned based on the nature of the particular
product or service. For products and services that we provide
over a period of time, we recognize revenue pro rata based on
the contractual time period. Where we provide or deliver the
product or service at a specific point in time and there are no
remaining obligations, we recognize revenue upon delivery of the
product or completion of the service.
Shipping and Handling Costs
We record costs incurred for the shipping and
handling of our software products as cost of products in our
statement of operations.
Customer Service and Technical
Support
Customer service and technical support costs
include the costs associated with performing order processing,
answering customer inquiries by telephone and through Web sites
and other electronic means and providing free technical support
assistance to customers. In connection with the sale of certain
products, we provide a limited amount of free technical support
assistance to customers. We do not defer the recognition of any
revenue associated with sales of these products, since the cost
of providing this free technical support is insignificant. The
technical support is provided within one year after the
associated revenue is recognized and free product enhancements
are minimal and infrequent. We accrue the estimated cost of
providing this free support upon product shipment.
Software Development Costs
Statement of Financial Accounting Standards, or
SFAS, No. 86,
“Accounting for Costs of Computer
Software to be Sold, Leased, or otherwise Marketed,”
requires companies to expense software development costs as they
incur them until technological feasibility has been established,
at which time those costs are capitalized until the product is
available for general release to customers. To date, our
software has been available for general release concurrent with
the establishment of technological feasibility and, accordingly,
we have not capitalized any development costs. SFAS 2,
“Accounting for Research and Development Costs”
establishes accounting and reporting standards for research and
development. In accordance with SFAS 2, costs we incur to
enhance our existing products or after the general release of
the service using the product are expensed in the period they
are incurred and included in research and development costs in
the statement of operations.
We capitalize costs related to the development of
computer software developed or obtained for internal use in
accordance with the American Institute of Certified Public
Accountants Statement of Position 98-1,
“Accounting
for the Costs of Computer Software Developed or Obtained for
Internal Use.”
Costs incurred in the application
development phase are capitalized and amortized over their
useful lives, generally not to exceed three years.
Advertising
We expense advertising costs as we incur them.
Advertising expense for the years ended July 31, 2000, 2001
and 2002 was approximately $50.9 million,
$36.9 million and $33.1 million, respectively.
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
61
Marketable Securities and Other Long-term
Investments
We classify our marketable securities as
available-for-sale, carry them at fair value and include
unrealized gains and losses on them, net of tax, in
stockholders’ equity. We use the specific identification
method to account for gains and losses on marketable equity
securities. We include realized gains and losses and declines in
value judged to be other-than-temporary on available-for-sale
securities in gains (losses) on marketable securities and other
investments, net in the statement of operations. Our other
long-term investments consist primarily of equity investments in
privately held companies and are stated at cost, adjusted for
declines in fair value that are considered other-than-temporary.
See Note 3.
Change in Accounting Principle
During fiscal 2001, we adopted SFAS 133,
“Accounting for Derivative Instruments and Hedging
Activities,”
which establishes accounting and reporting
standards for derivative instruments and hedging activities. It
requires us to recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments
at fair value. In May 1999, we completed a $50 million
investment (970,813 shares) in Security First Technologies,
now known as S1 Corporation. In connection with this
agreement, we received options to purchase 4.8 million
additional shares of S1 common stock, at a per share
purchase price of $51.50. These options contained a net-exercise
feature. In August 2000, we recorded the cumulative effect of
the change in accounting for derivatives for our
4.8 million S1 options held in long-term investments. This
resulted in a one-time cumulative effect of $14.3 million,
net of income taxes totaling $9.5 million, in the first
quarter of fiscal 2001. The one-time cumulative effect created
an increase of $0.07 per share in the basic and diluted net
loss per share for fiscal 2001. SFAS 133 requires the
derivatives to be carried at fair value, so subsequent
fluctuations in the fair value of these options were included in
our net income (loss) until we sold them. For fiscal 2001, these
fluctuations resulted in a loss of $9.7 million net of
income taxes, which increased the basic and diluted net loss per
share for the period by $0.05 per share. During the first
quarter of fiscal 2002, we sold these options and recorded a
realized loss of $1.9 million.
If we had adopted SFAS 133 as of the beginning of
fiscal 2000, adjusted pro forma net income would have been
$299.1 million compared to reported net income of
$305.7 million and adjusted pro forma diluted net income
per share would have been $1.42 compared to reported net income
per share of $1.45.
Property and Equipment
Property and equipment is stated at cost, net of
accumulated depreciation. We calculate depreciation using the
straight-line method over the estimated useful lives of the
assets, which range from 3 to 30 years. We amortize
leasehold improvements using the straight-line method over the
lesser of their estimated useful lives or remaining lease terms.
Goodwill, Purchased Intangible Assets and
Other Long-lived Assets
We record goodwill when the purchase price of net
tangible and intangible assets we acquire exceeds their fair
value. We generally amortized goodwill on a straight-line basis
over periods ranging from 3 to 5 years in all periods
presented. 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 intangibles on a straight-line basis over periods
ranging from 1 to 15 years.
62
We regularly perform reviews to determine if the
carrying values of our long-lived assets are impaired. We look
for facts or circumstances, either internal or external, that
indicate that we may not recover the carrying value of the asset.
We measure impairment loss related to long-lived
assets based on the amount by which the carrying amounts of such
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.
In June 2001, the Financial Accounting Standards
Board issued SFAS 142,
“Goodwill and Other
Intangible Assets.”
In October 2001, the FASB issued
SFAS 144,
“Accounting for the Impairment or
Disposal of Long-Lived Assets.”
We implemented both
SFAS 142 and SFAS 144 beginning in the first quarter
of fiscal 2003. See
“Recent Pronouncements”
below for more information.
Customer Deposits
Customer deposits represent cash held on behalf
of our customers in our payroll business.
Payroll Service Obligations
Payroll service obligations relate to our payroll
business and consist primarily of payroll taxes we owe on behalf
of our customers.
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 balances of short-term
investments, marketable securities and long-term private equity
investments, as well as risks related to the collectibility of
our trade accounts receivable. Our portfolio of short-term
investments consists primarily of investment-grade securities
that are diversified by limiting our holdings with any
individual issuer in a managed portfolio to a maximum of
$5 million. At July 31, 2002, we held approximately
$16.8 million in marketable securities, as described in
Note 3. See that note for a discussion of our marketable
securities. At July 31, 2002, we also held approximately
$6.8 million in long-term private equity investments, net
of reserves for declines in value that management has determined
to be other-than-temporary.
We sell a significant portion of our products
through third-party distributors and retailers. 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.
One distributor accounted for 10% of total net
revenue in fiscal 2000 and the same distributor accounted for
15% of accounts receivable at July 31, 2001. Due to changes
in our distributor relationships during fiscal 2002, we are
selling an increasing proportion of our software products
directly to a variety of retailers rather than through a few
major distributors. No distributor or retailer accounted for 10%
or more of total net revenue in fiscal 2001 or 2002, nor did any
customer account for 10% or more of accounts receivable at
July 31, 2002.
63
In connection with the sale of our Quicken Loans
mortgage business in July 2002, we have 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 is secured by the related
mortgage loans and had an outstanding balance of
$245.6 million at July 31, 2002. As part of the
consideration for the sale of the business, we also hold a
five-year promissory note in the principal amount of
$23.3 million from the purchasing company. See Note 11.
We rely on three third party vendors to handle
all outsourced aspects of our primary retail desktop software
product launches. We also have an exclusive contract with
another vendor to print and fulfill orders for all of our checks
and many other products for our financial supplies business.
While we believe that relying on two vendors for product
launches and replenishments and on one vendor for our supplies
improves the efficiency and reliability of these activities,
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.
Foreign Currency
The functional currency of all our foreign
subsidiaries is the local currency. Assets and liabilities of
our foreign subsidiaries are translated at the exchange rate on
the balance sheet date. Revenue, costs and expenses are
translated at average rates of exchange in effect during the
year. We report translation gains and losses as a separate
component of stockholders’ equity. We include net gains and
losses resulting from foreign exchange transactions in the
statement of operations and they were immaterial in all periods
presented.
Recent Pronouncements
On June 29, 2001, the Financial Accounting
Standards Board issued SFAS 141,
“Business
Combinations,
” and SFAS 142,
“Goodwill and
Other Intangible Assets.”
SFAS 141 supercedes APB Opinion No. 16,
“Business Combinations,
” and eliminates the
pooling-of-interests method of accounting for business
combinations, thus requiring that all business combinations be
accounted for using the purchase method. In addition, in
applying the purchase method, SFAS 141 changes the criteria
for recognizing intangible assets other than goodwill and states
that the following criteria should be considered in determining
the classification of intangible assets: (1) whether the
intangible asset arises from contractual or other legal rights,
or (2) whether the intangible asset is separable or
dividable from the acquired entity and capable of being sold,
transferred, licensed, rented, or exchanged. If neither criteria
is met, the intangible assets are classified as goodwill and are
not amortized. We have applied the requirements of SFAS 141
to all business combinations initiated after June 30, 2001.
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.
The additional goodwill amortization charge for businesses we
acquired subsequent to June 30, 2001 would have been
approximately $8.8 million in fiscal 2002 had this new
standard not been in place. Total goodwill amortization expense,
including impairments, was $139.5 million in fiscal 2001
and $122.6 million in fiscal 2002. We adopted the remaining
elements of this new standard in the first quarter of fiscal
2003 and therefore ceased goodwill amortization 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 most
purchased intangible assets and to assess those assets for
impairment as appropriate.
In connection with the transitional goodwill
impairment evaluation under SFAS 142, we will perform an
assessment of goodwill impairment as of August 1, 2002, the
date of adoption. To accomplish this, we will identify our
reporting units and determine the carrying value of each of them
by assigning the assets and
64
As of the date of adoption of SFAS 142 on
August 1, 2002, we had an unamortized acquired intangible
assets balance of approximately $123.6 million, excluding
the balance of approximately $1.9 million for assembled
workforce reclassified to goodwill. As of that date, we also had
an unamortized goodwill balance of approximately
$430.8 million which included the amount of assembled
workforce reclassified to goodwill. These balances will be
subject to the transitional provisions of SFAS 141 and 142.
Transitional impairment losses that may be required to be
recognized upon adoption of SFAS 141 and 142 are
indeterminable at this time.
The following table shows our financial results
as they would have been if we had adopted the non-amortization
provisions of SFAS 142 as of the beginning of fiscal 2000:
65
In October 2001, the FASB issued SFAS 144,
“Accounting for the Impairment or Disposal of Long-Lived
Assets,”
which applies to financial statements issued
for fiscal years beginning after December 15, 2001.
SFAS 144 supersedes FASB Statement 121,
“Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of,”
and portions of APB Opinion
No. 30,
“Reporting the Results of
Operations.”
SFAS 144 provides a single accounting
model for long-lived assets we expect to dispose of and
significantly changes the criteria for classifying an asset as
held-for-sale. This classification is important because
held-for-sale assets are not depreciated and are stated at the
lower of fair value or carrying amount. SFAS 144 also
requires expected future operating losses from discontinued
operations to be displayed in the period(s) in which the losses
are actually incurred, rather than when the amount of the loss
is estimated, as presently required. We adopted SFAS 144
effective August 1, 2002 and do not expect the adoption of
SFAS 144 to have a material impact on our financial
position, results of operations or cash flows.
In November 2001, the FASB’s Emerging Issues
Task Force released Issue No. 01-9,
“Accounting for
Consideration Given by a Vendor to a Customer or a Reseller of
the Vendor’s Product,”
which applies to annual or
interim financial statement periods beginning after
December 15, 2001. The release provides that cash
consideration (including sales incentives) that we give to our
customers or resellers should be accounted for as a reduction of
revenue rather than as an operating expense unless we receive a
benefit that we can identify and reasonably estimate. We adopted
this new release beginning in the third quarter of fiscal 2002.
The adoption of EITF Issue No. 01-9 did not have a material
impact on our total net revenue and as a result we did not
reclassify prior period financial statements.
In July 2002, the FASB issued SFAS 146,
“Accounting for Costs Associated with Exit and Disposal
Activities.”
This statement revises the accounting for
exit and disposal activities 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 a company previously recorded
under EITF Issue No. 94-3 are not affected. We do not
believe that the adoption of SFAS 146 will have a material
impact on our financial position, results of operations or cash
flows.
66
2. Short-Term
Investments
The following schedule summarizes the estimated
fair value of our short-term investments as of the dates
indicated:
The following table summarizes the estimated fair
value of our available-for-sale debt securities held in
short-term investments classified by the stated maturity date of
the security:
3. Marketable
Securities and Other Long-term Investments
We currently hold marketable securities that we
acquired in connection with strategic business transactions and
relationships. In accordance with SFAS 115, we classify
marketable securities that we buy and hold principally for the
purpose of selling in the near term as trading securities. We
report trading securities at estimated fair value and include
unrealized gains and losses on these securities in our net
income (loss). We classify our other marketable securities as
available-for-sale securities. We report available-for-sale
securities at estimated fair value and include unrealized gains
and losses on these securities in a separate component of
stockholders’ equity.
Marketable securities classified as trading and
available-for-sale at July 31, 2002 and 2001 are summarized
below. Estimated fair value is based on quoted market prices.
67
In fiscal 2002, proceeds from the sales of
available-for-sale securities totaled $25.0 million; gross
realized gains totaled $6.0 million and gross realized
losses totaled $2.9 million. In fiscal 2001, proceeds from
the sales of available-for-sale securities totaled
$21.5 million; gross realized gains totaled
$15.8 million and gross realized losses totaled
$4.9 million. We recorded charges of $40.2 million in
fiscal 2001 to write down certain available-for-sale securities
for which the decline in fair value below carrying value was
other-than-temporary.
Unrealized gains and losses on trading securities
are included in our net income (loss). We held no trading
securities at July 31, 2002.
Our marketable securities, which are quoted on
the Nasdaq Stock Market, are stocks of high technology companies
whose market prices have been extremely volatile and have
declined substantially during the past three years. These
declines have resulted, and could continue to result, in
material reductions in the carrying values of these assets. This
has a negative impact on our operating results. If these
securities experience further declines in fair value that are
considered other-than-temporary, we will reflect the additional
losses in our statement of operations in the period when the
subsequent impairment becomes apparent.
The fair values of our long-term investments
(consisting primarily of equity investments in privately held
companies) have also declined substantially since our initial
investments due to the volatility and economic downturn of the
high technology industry. We recorded losses of
$7.5 million in fiscal 2002 and $16.2 in fiscal 2001 and
charges of $9.5 million in fiscal 2002 and
$28.6 million in fiscal 2001, to write down certain
long-term investments for which the decline in fair value below
carrying value was other-than-temporary.
4. Property and
Equipment
Property and equipment consisted of the following
as of the dates indicated:
Capital in progress consists primarily of costs
related to internal use software projects. As discussed in
Note 1, “Software Development Costs,” we
capitalize costs related to the development of computer
68
5. Goodwill and
Intangible Assets
Goodwill and purchased intangible assets
consisted of the following at the dates indicated:
Accumulated amortization declined during fiscal
2002 due to the retirement of certain fully amortized goodwill
and intangible assets.
In June 2001, the FASB issued SFAS 142,
“Goodwill and Other Intangible Assets.”
We
adopted SFAS 142 on August 1, 2002. As a result,
goodwill will no longer be amortized but will be subject to
annual impairment tests. Most other intangible assets will
continue to be amortized over their estimated useful lives. In
accordance with the provisions of SFAS 142, effective
August 1, 2002 we transferred the net balance of $1.9
million for assembled workforce to goodwill and will no longer
amortize that intangible asset. See Note 1.
We summarize the following expenses on the
“acquisition-related charges” line of our statement of
operations:
69
As discussed in Note 1, we regularly perform
reviews to determine if the carrying values of our goodwill and
intangible assets may be impaired. We look for the existence of
facts and circumstances, either internal or external, which
indicate that the carrying value of the asset may not be
recovered.
Fiscal 2001
During fiscal 2001, events and circumstances
indicated possible impairment of certain long-lived assets,
consisting principally of acquired intangible assets and
goodwill recorded in connection with our acquisitions of Venture
Finance Software Corp. in August 2000, SecureTax.com in August
1999 and Hutchison Avenue Software Corporation in August 1999.
These indicators included the deterioration in the business
climate for Web-based companies and management’s intentions
relating to the continuation of certain services provided by our
Personal Finance segment.
We measured the impairment loss related to
long-lived assets based on the amount by which the carrying
amount of such assets exceeded their fair values. Our
measurement of fair value was based on an analysis of the future
discounted cash flows, as discussed in Note 1. In performing
this analysis, we used the best information available in the
circumstances, including reasonable and supportable assumptions
and projections. The discounted cash flow analysis considered
the likelihood of possible outcomes and was based on our best
estimate of projected future cash flows. For VFSC, we considered
the terminal value cash flows expected to result from the
disposition of the assets at the end of their useful lives. The
consideration from the disposition of a portion of VFSC, our
Quicken Bill Manager business, assisted management in the
determination of the fair value of the remaining assets. Based
on our analysis as described above, we recorded impairment
charges of $51.0 million, $26.0 million, and
$1.7 million, to reduce the carrying value of the goodwill
associated with VFSC, SecureTax and Hutchison, respectively. In
the second quarter of fiscal 2002, we reduced the carrying value
of the remaining VFSC goodwill to zero (see
Fiscal 2002
below).
Fiscal 2002
During the second quarter of fiscal 2002, events
and circumstances indicated impairment of goodwill and
intangible assets that we received in connection with our
acquisitions of an Internet-based advertising business from VFSC
in August 2000 (part of our Personal Finance segment) and the
Site Solutions business that we acquired from Boston Light Corp.
in August 1999 (part of our Small Business segment).
Indicators of impairment for our Internet-based
advertising business included a steep decline in demand for
online advertising reflecting the industry-wide decline in
Internet advertising spending, as well as management’s
assessment that revenues and profitability would continue to
decline in the future based on analyses and forecasts completed
during the second quarter of fiscal 2002. The primary indicator
of impairment for our Site Solutions business was
management’s decision to transition the customer base of
Site Solutions and collaborate with a third party to provide the
website building service. This collaboration, which began in the
second quarter of fiscal 2002, eliminated our use of technology
purchased from Boston Light.
In each case, we measured the impairment loss
based on the amount by which the carrying amount of the assets
exceeded their fair value based on lower projected profits and
decreases in cash flow. Our measurement of fair value was based
on an analysis of the future discounted cash flows as discussed
in Note 1. Based on our analyses, in the second quarter of
fiscal 2002 we recorded charges of $22.6 million
($17.4 million to acquisition-related charges and
$5.2 million to amortization of purchased software) to
reduce the carrying value of the assets associated with our
Internet-based advertising business to zero, and a charge of
$4.7 million ($4.6 million to acquisition-related
charges and $0.1 million to amortization of purchased
software) to reduce the carrying value of assets relating to our
Site Solutions business to zero.
6. 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
70
The components of accumulated other comprehensive
income (loss), net of income taxes, were as follows:
7. Deferred
Stock-based Compensation
When we assume unvested stock options in
connection with acquisitions, we record deferred stock
compensation as a reduction of stockholders’ equity. The
amount recorded is equal to the difference between the exercise
price of the options related to future vesting periods and the
fair market value of Intuit stock as of the closing date of the
acquisition. When we grant restricted stock to employees that is
subject to vesting, we also record deferred stock compensation
equal to the difference between the
71
The following table summarizes the activity in
deferred stock-based compensation:
8. Per Share
Data
We compute basic income or loss per share using
the weighted average number of common shares outstanding during
the period. We compute diluted income or loss per share using
the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Common
equivalent shares consist of the shares issuable upon the
exercise of stock options under the treasury stock method. In
loss periods, basic and dilutive loss per share are identical
since the effect of common equivalent shares is anti-dilutive
and therefore excluded.
The following table presents the numerators and
denominators and the computation of basic and diluted income or
loss per share for fiscal 2000, 2001 and 2002:
72
The effect of options to purchase
2.3 million and 8.3 million shares of common stock
were not included in the computation of diluted income per share
for fiscal 2000 and fiscal 2002, respectively, because the
option exercise prices were greater than the average market
price of common stock. For fiscal 2001, we excluded options to
purchase 14.6 million shares of common stock in our diluted
loss per share computation because we experienced a net loss for
the year.
9. Acquisitions
In December 1999, we acquired all of the
outstanding stock of Rock Financial Corporation
(“RFC”), a provider of consumer mortgages, and Title
Source Inc., a title insurance and escrow company affiliated
with RFC, in exchange for the issuance of approximately
$370.0 million or 8.8 million shares of Intuit common
stock. RFC subsequently changed its name to Quicken Loans Inc.
These acquisitions were accounted for as pooling of interests in
accordance with APB 16. In July 2002 we sold our Quicken
Loans mortgage business and accounted for the sale as
discontinued operations. See Note 11.
The acquisitions described below have been
accounted for as purchase transactions and, accordingly, the
results of operations and financial position of the acquired
businesses are included in Intuit’s consolidated financial
statements from the date of acquisition. We allocate the
difference between the purchase price and the net book value of
acquired tangible assets between identified tangible assets and
goodwill. Identified intangible assets consist of customer
lists, covenants not to compete, purchased technology, assembled
workforce and trade names and logos.
Fiscal 2000
In fiscal 2000, we acquired Boston Light Software
Corp., SecureTax.com, and Turning Mill Software, Inc. We
purchased all of the outstanding common and Series A
preferred stock of Boston Light, a developer of software and
Web-based products for small businesses based in Massachusetts,
for approximately $33.5 million in Intuit common stock. In
connection with the agreement, Intuit also assumed 482,910 of
Boston Light’s outstanding employee stock options, which
were converted into options to purchase 160,970 shares of Intuit
common stock. We acquired all of the outstanding common stock of
SecureTax, a developer of online tax preparation and electronic
filing services based in Georgia, for approximately
$52.0 million in cash. We also acquired all of the
outstanding common stock of Turning Mill, a developer
73
Fiscal 2001
In fiscal 2001, we purchased all of the
outstanding securities of Venture Finance Software Corp. which
were not already held by Intuit (approximately 51%) for
approximately $118.0 million in cash (including
approximately $4.5 million in option exercise and tax
payments in connection with VFSC options exercised immediately
prior to the purchase). We also purchased all of the outstanding
stock of EmployeeMatters, Inc., in exchange for approximately
$41.9 million in Intuit common stock, the elimination of
approximately $8.0 million in bridge loans we extended to
EmployeeMatters prior to the closing, and the assumption of
approximately $3.4 million in liabilities. We acquired
substantially all of the assets of Tax Accounting and Software
Corporation for $63.0 million in cash and the assumption of
approximately $7.8 million in liabilities.
Fiscal 2002
In November 2001, we acquired substantially all
of the assets of OMware, Inc. for $35.5 million or
924,973 shares of Intuit common stock, approximately
$2.1 million in the assumption of debt and bridge loans and
up to $8 million in Intuit common stock to be issued
contingent upon the achievement of future performance objectives
by the business unit. OMware provides business management
software solutions for construction companies. Pursuant to
separate agreements, Intuit will pay up to $2 million in
cash over two years as part of a senior management performance
program. These amounts will be recorded as compensation expense
as amounts are earned. With the assistance of a professional
valuation services firm, we allocated approximately
$27.1 million of the purchase price to goodwill and
$8.5 million of the purchase price to identified intangible
assets. The identified intangible assets are being amortized
over five years.
In May 2002, we purchased all of the outstanding
stock of The Flagship Group for approximately $23.3 million
or 455,259 shares of Intuit common stock, the assumption of
$4.7 million in debt and $3.3 million in cash.
Flagship is the parent company of American Fundware, Inc., which
offers financial accounting solutions for nonprofit
organizations. In connection with the agreement, we also assumed
Flagship’s outstanding employee stock options for 1,204,000
shares of Flagship common stock, which were converted into
options to purchase 130,316 shares of Intuit common stock. With
the assistance of a professional valuation services firm, we
allocated approximately $29.6 million of the purchase price
to goodwill and $4.2 million of the purchase price to
identified intangible assets. The identified intangible assets
are being amortized over terms ranging from three to twelve
years.
In June 2002, we acquired all of the outstanding
stock of CBS Employer Services, Inc. for approximately
$75.3 million in cash (of which $25.4 million is
unpaid but accrued at July 31, 2002) and $3.2 million
or 73,795 shares of Intuit common stock. CBS is a provider of
full-service outsourced payroll functions for small businesses.
In connection with the agreement, we also assumed CBS’s
outstanding employee stock options for 665,504 shares of CBS
common stock, which were converted into options to purchase
193,891 shares of Intuit common stock. With the assistance of a
professional valuation services firm, we allocated approximately
$74.8 million of the purchase price to goodwill and
$9.3 million of the purchase price to identified intangible
assets. The identified intangible assets are being amortized
over terms ranging from five to six years.
In July 2002, we purchased all of the outstanding
stock of Management Reports, Inc. for approximately
$92.2 million in cash. MRI provides business management
software solutions for commercial and residential property
managers. We recorded the transaction in the fourth quarter of
fiscal 2002 based on estimated financial information, which was
not materially different from the final information that became
available in the first quarter of fiscal 2003. With the
assistance of a professional valuation services firm, we
allocated approximately $73.4 million of the purchase price
to goodwill and $14.0 million of the
74
In July 2002, we acquired substantially all of
the assets of Eclipse, Inc. for approximately $88.3 million
in cash. Eclipse provides business management software solutions
for wholesale durable goods distributors. We recorded the
transaction in th
Table of Contents
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Table of Contents
Table of Contents
Table of Contents
Fiscal
2000
2001
2002
(In thousands, except per share data; pro
forma figures are unaudited)
$
322,178
$
(118,079
)
$
69,760
76,543
92,040
82,161
$
398,721
$
(26,039
)
$
151,921
$
305,661
$
(82,793
)
$
140,160
76,543
92,040
82,161
$
382,204
$
9,247
$
222,321
$
1.60
$
(0.57
)
$
0.33
0.38
0.44
0.39
$
1.98
$
(0.13
)
$
0.72
$
1.52
$
(0.40
)
$
0.66
0.38
0.44
0.39
$
1.90
$
0.04
$
1.05
Table of Contents
Fiscal
2000
2001
2002
$
1.53
$
(0.57
)
$
0.32
0.36
0.44
0.38
$
1.89
$
(0.13
)
$
0.70
$
1.45
$
(0.40
)
$
0.64
0.36
0.44
0.38
$
1.81
$
0.04
$
1.02
Table of Contents
July 31,
2001
2002
$
63,723
$
24,405
1,030,442
780,914
25,140
10,023
$
1,119,305
$
815,342
July 31,
2001
2002
$
215,205
$
230,716
221,620
141,942
—
—
682,480
442,684
$
1,119,305
$
815,342
Gross Unrealized
Cost
Estimated
July 31, 2002
Basis
Gains
Losses
Fair Value
$
—
$
—
$
—
$
—
24,866
—
(8,075
)
16,791
$
24,866
$
—
$
(8,075
)
$
16,791
Table of Contents
Gross Unrealized
Cost
Estimated
July 31, 2001
Basis
Gains
Losses
Fair Value
$
99,304
$
—
$
(97,288
)
$
2,016
35,621
37,215
—
72,836
7,741
2,714
—
10,455
$
142,666
$
39,929
$
(97,288
)
$
85,307
July 31,
Life in
Years
2001
2002
3-5
$
152,062
$
185,699
3
50,251
60,709
5
23,614
27,230
Note 1
65,701
71,044
NA / 30
21,285
26,509
—
8,540
18,016
321,453
389,207
(146,794
)
(207,449
)
$
174,659
$
181,758
Table of Contents
July 31,
Life in
Years
2001
2002
3-5
$
735,393
$
822,894
(408,578
)
(393,946
)
326,815
428,948
3-12
119,310
144,379
3-5
9,917
7,399
1-7
121,272
121,763
2-5
13,610
4,458
1-15
13,630
16,555
277,739
294,554
(189,419
)
(169,080
)
88,320
125,474
$
415,135
$
554,422
Fiscal
2000
2001
2002
$
115,974
$
139,455
$
122,629
26,936
25,022
28,327
4,019
4,938
8,654
—
78,686
22,006
9,428
78
—
$
156,357
$
248,179
$
181,616
Table of Contents
Table of Contents
Foreign
Marketable
Short-term
Currency
Securities
Investments
Translation
Total
(In thousands)
$
81,621
$
—
$
(2,477
)
$
79,144
287,391
—
—
287,391
(310,451
)
—
—
(310,451
)
—
—
(498
)
(498
)
(23,060
)
—
(498
)
(23,558
)
$
58,561
$
—
$
(2,975
)
$
55,586
$
58,561
$
—
$
(2,975
)
$
55,586
(27,433
)
4,686
—
(22,747
)
(7,170
)
—
—
(7,170
)
—
—
2,511
2,511
(34,603
)
4,686
2,511
(27,406
)
$
23,958
$
4,686
$
(464
)
$
28,180
$
23,958
$
4,686
$
(464
)
$
28,180
(27,123
)
(2,628
)
—
(29,751
)
(1,680
)
—
—
(1,680
)
—
—
(424
)
(424
)
(28,803
)
(2,628
)
(424
)
(31,855
)
$
(4,845
)
$
2,058
$
(888
)
$
(3,675
)
Table of Contents
Fiscal
2000
2001
2002
(In thousands)
$
—
$
26,522
$
21,720
31,807
2,667
1,620
(1,266
)
(2,531
)
(2,534
)
(4,019
)
(4,938
)
(8,654
)
(5,285
)
(7,469
)
(11,188
)
—
—
476
$
26,522
$
21,720
$
12,628
Fiscal
2000
2001
2002
(In
thousands, except per share data)
$
322,178
$
(118,079
)
$
69,760
(16,517
)
20,972
70,400
—
14,314
—
$
305,661
$
(82,793
)
$
140,160
200,770
207,959
211,794
10,501
—
6,103
211,271
207,959
217,897
Table of Contents
Fiscal
2000
2001
2002
(In
thousands, except per share data)
$
1.60
$
(0.57
)
$
0.33
(0.08
)
0.10
0.33
—
0.07
—
$
1.52
$
(0.40
)
$
0.66
$
1.53
$
(0.57
)
$
0.32
(0.08
)
0.10
0.32
—
0.07
—
$
1.45
$
(0.40
)
$
0.64
Table of Contents
Table of Contents