Form: 8-K

Current report filing

April 22, 2003

 

EXHIBIT 99.03

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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
    31  
Consolidated Balance Sheets as of July 31, 2002 and 2001
    32  
Consolidated Statements of Operations for each of the three years in the period ended July 31, 2002
    33  
Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended July 31, 2002
    35  
Consolidated Statements of Cash Flows for each of the three years in the period ended July 31, 2002
    36  
Notes to Consolidated Financial Statements
    37  

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     67  

     All other schedules not listed above have been omitted because they are inapplicable or are not required.

30


 

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.

/s/ ERNST & YOUNG LLP

San Francisco, California
August 14, 2002, except for Note 11,
as to which the date is February 7, 2003

31


 

INTUIT INC.
CONSOLIDATED BALANCE SHEETS

                         
            July 31,   July 31,
(In thousands, except par value)   2001   2002

 
 
ASSETS                
Current assets:
               
 
Cash and cash equivalents
  $ 66,910     $ 414,748  
 
Short-term investments
    1,119,305       815,342  
 
Marketable securities
    85,307       16,791  
 
Customer deposits
    205,254       300,409  
 
Accounts receivable, net of allowance for doubtful accounts of $15,851 and $5,696 respectively
    23,382       51,999  
 
Deferred income taxes
    72,675       67,799  
 
Income taxes receivable
    —       2,187  
 
Prepaid expenses and other current assets
    30,220       49,581  
 
Amounts due from discontinued operations entities
    349,742       241,616  
 
Net current assets of discontinued operations
    37,168       —  
 
   
     
 
     
Total current assets
    1,989,963       1,960,472  
Property and equipment, net
    171,439       179,122  
Goodwill, net
    326,815       428,948  
Purchased intangibles, net
    88,104       125,474  
Long-term deferred income taxes
    150,102       176,553  
Long-term investments
    24,107       6,765  
Loans to executive officers and other employees
    12,859       21,270  
Other assets
    26,795       25,089  
Net assets of discontinued operations
    13,295       4,312  
 
   
     
 
Total assets
  $ 2,803,479     $ 2,928,005  
 
   
     
 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities:
               
 
Accounts payable
  $ 58,054     $ 71,069  
 
Accrued compensation and related liabilities
    59,843       87,426  
 
Payroll service obligations
    205,067       300,381  
 
Deferred revenue
    123,760       147,120  
 
Income taxes payable
    82,486       —  
 
Short-term note payable
    8,683       2,277  
 
Other current liabilities
    92,110       81,795  
 
Net current liabilities of discontinued operations
    —       7,688  
 
   
     
 
     
Total current liabilities
    630,003       697,756  
Long-term obligations
    12,150       14,610  
Commitments and contingencies
               
Stockholders’ equity:
               
 
Preferred stock, $0.01 par value
               
    Authorized – 1,345 shares total; 145 shares designated Series A; 250 shares designated Series B Junior Participating                
    Issued and outstanding – None     —       —  
 
Common stock, $0.01 par value
               
    Authorized – 750,000 shares
Issued and outstanding – 210,526 and 211,164 shares, respectively
    2,105       2,112  
 
Additional paid-in capital
    1,723,385       1,844,595  
 
Treasury shares, at cost
    (8,497 )     (126,107 )
 
Deferred compensation
    (21,720 )     (12,628 )
 
Accumulated other comprehensive income (loss)
    28,180       (3,675 )
 
Retained earnings
    437,873       511,342  
 
   
     
 
     
Total stockholders’ equity
    2,161,326       2,215,639  
 
   
     
 
Total liabilities and stockholders’ equity
  $ 2,803,479     $ 2,928,005  
 
   
     
 

See accompanying notes.

32


 

INTUIT INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

                             
        Fiscal
       
        2000   2001   2002
       
 
 
(In thousands, except per share data)                        
Net revenue:
                       
 
Products
  $ 775,316     $ 805,684     $ 977,528  
 
Services
    114,991       216,544       273,575  
 
Other
    91,411       73,834       61,125  
 
   
     
     
 
   
Total net revenue
    981,718       1,096,062       1,312,228  
Costs and expenses:
                       
 
Cost of revenue:
                       
   
Cost of products
    149,445       135,559       157,373  
   
Cost of services
    71,184       108,349       107,634  
   
Cost of other revenue
    30,661       25,952       24,366  
   
Amortization of purchased software
    7,003       14,949       12,423  
 
Customer service and technical support
    128,979       137,171       164,875  
 
Selling and marketing
    200,672       217,769       263,721  
 
Research and development
    157,101       196,119       198,471  
 
General and administrative
    72,739       93,508       109,076  
 
Charge for purchased research and development
    1,312       238       2,151  
 
Charge for vacant facilities
    —       —       13,237  
 
Acquisition-related charges (includes impairment charges of $78,686 in 2001 and $22,006 in 2002) (see Note 1 regarding adoption of SFAS 142)
    150,208       247,806       181,401  
 
Loss on impairment of long-lived asset
    —       —       27,000  
 
   
     
     
 
   
Total costs and expenses
    969,304       1,177,420       1,261,728  
 
   
     
     
 
   
Income (loss) from continuing operations
    12,414       (81,358 )     50,500  
Interest and other income
    48,697       57,593       27,276  
Gains (losses) on marketable securities and other investments, net
    481,130       (98,053 )     (15,535 )
Gains (losses) on divestiture of businesses, net
    —       (15,315 )     8,308  
 
   
     
     
 
Income (loss) from continuing operations before income taxes and cumulative effect of accounting change
    542,241       (137,133 )     70,549  
Income tax (benefit) provision
    216,550       (12,477 )     16,934  
 
   
     
     
 
Net income (loss) from continuing operations before cumulative effect of accounting change
    325,691       (124,656 )     53,615  
 
   
     
     
 
Discontinued operations, net of income taxes (Note 11):
                       
 
Net income (loss) from Quicken Loans discontinued operations
    (16,517 )     20,972       47,100  
 
Gain on disposal of Quicken Loans discontinued operations
    —       —       23,300  
 
Net income (loss) from Intuit KK discontinued operations
    (3,513 )     6,577       16,145  
 
   
     
     
 
Net income (loss) from discontinued operations
    (20,030 )     27,549       86,545  
 
   
     
     
 
Cumulative effect of accounting change, net of income taxes of $9,543
    —       14,314       —  
 
   
     
     
 
Net income (loss)
  $ 305,661     $ (82,793 )   $ 140,160  
 
   
     
     
 
Basic net income (loss) per share from continuing operations before cumulative effect of accounting change
  $ 1.62     $ (0.60 )   $ 0.25  
Basic net income (loss) per share from discontinued operations
    (0.10 )     0.13       0.41  
Cumulative effect of accounting change per share
    —       0.07       —  
 
   
     
     
 
Basic net income (loss) per share
  $ 1.52     $ (0.40 )   $ 0.66  
 
   
     
     
 
Shares used in basic net income (loss) per share amounts
    200,770       207,959       211,794  
 
   
     
     
 

33


 

                             
        Fiscal
       
        2000   2001   2002
       
 
 
(In thousands, except per share data)                        
Diluted net income (loss) per share from continuing operations before cumulative effect of accounting change
  $ 1.54     $ (0.60 )   $ 0.24  
Diluted net income (loss) per share from discontinued operations
    (0.09 )     0.13       0.40  
Cumulative effect of accounting change per share
    —       0.07       —  
 
   
     
     
 
Diluted net income (loss) per share
  $ 1.45     $ (0.40 )   $ 0.64  
 
   
     
     
 
Shares used in diluted net income (loss) per share amounts
    211,271       207,959       217,897  
 
   
     
     
 

See accompanying notes.

34


 

INTUIT INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

                                                                   
                                              Other                
      Common Stock   Additional           Deferred   Comprehensive   Retained   Total
     
  Paid In   Treasury   Stock   Income   Earnings   Stockholders'
      Shares   Amount   Capital   Stock   Compensation   (Loss)   (Deficit)   Equity
     
 
 
 
 
 
 
 
(Dollars In thousands)                                                                
Balance at August 1, 1999
    196,348,524     $ 1,963     $ 1,265,248     $ (134 )   $ —     $ 79,144     $ 215,167     $ 1,561,388  
Components of comprehensive income:
                                                               
 
Net income
    —       —       —       —       —       —       305,661       305,661  
 
Other comprehensive loss, net of tax
    —       —       —       —       —       (23,558 )     —       (23,558 )
 
                                                           
 
 
Comprehensive income, net of tax
                                                            282,103  
Issuance of common stock upon exercise of options and other
    6,651,953       67       80,296       —       —       —       —       80,363  
Issuance of restricted common stock
    225,000       2       15,202       —       (15,202 )     —       —       2  
Issuance of common stock pursuant to Employee Stock Purchase Plan
    355,281       4       9,771       —       —       —       —       9,775  
Issuance of common stock pursuant to acquisitions
    719,197       7       55,618       —       —       —       —       55,625  
Tax benefit from employee stock option transactions
    —       —       93,515       —       —       —       —       93,515  
Deferred stock compensation
    —       —       —       —       (16,605 )     —       —       (16,605 )
Amortization of deferred compensation
    —       —       —       —       5,285       —       —       5,285  
Stockholders’ distributions
    —       —       —       —       —       —       (162 )     (162 )
 
   
     
     
     
     
     
     
     
 
Balance at July 31, 2000
    204,299,955       2,043       1,519,650       (134 )     (26,522 )     55,586       520,666       2,071,289  
Components of comprehensive loss:
                                                               
 
Net loss
    —       —       —       —       —       —       (82,793 )     (82,793 )
 
Other comprehensive loss, net of tax
    —       —       —       —       —       (27,406 )     —       (27,406 )
 
                                                           
 
 
Comprehensive loss, net of tax
                                                            (110,199 )
Issuance of common stock upon exercise of options and other
    5,201,860       52       82,024       —       —       —       —       82,076  
Issuance of common stock pursuant to Employee Stock Purchase Plan
    469,873       5       14,719       —       —       —       —       14,724  
Stock repurchase
    (239,542 )     (2 )     —       (8,363 )     —       —       —       (8,365 )
Issuance of common stock pursuant to acquisitions
    794,093       7       44,779       —       —       —       —       44,786  
Tax benefit from employee stock
    —       —       —       —       —                          
 
option transactions
    —       —       59,546       —       —       —       —       59,546  
Deferred stock compensation
    —       —       2,667       —       (2,667 )     —       —       —  
Amortization of deferred compensation
    —       —       —       —       7,469       —       —       7,469  
 
   
     
     
     
     
     
     
     
 
Balance at July 31, 2001
    210,526,239       2,105       1,723,385       (8,497 )     (21,720 )     28,180       437,873       2,161,326  
Components of comprehensive income:
                                                               
 
Net income
    —       —       —       —       —       —       140,160       140,160  
 
Other comprehensive loss, net of tax
    —       —       —       —       —       (31,855 )     —       (31,855 )
 
                                                           
 
 
Comprehensive income, net of tax
                                                            108,305  
Issuance of common stock upon exercise of options and other
    5,961,161       60       (10,178 )     193,010       —       —       (66,691 )     116,201  
Issuance of common stock pursuant to Employee Stock Purchase Plan
    584,053       6       10,178       7,656       —       —       —       17,840  
Stock repurchase
    (7,361,839 )     (74 )     —       (318,276 )     —       —       —       (318,350 )
Issuance of common stock pursuant to acquisitions
    1,454,027       15       67,964       —       —       —       —       67,979  
Tax benefit from employee stock option transactions
    —       —       53,246       —       —       —       —       53,246  
Deferred stock compensation
    —       —               —       (1,620 )     —       —       (1,620 )
Amortization of deferred compensation
    —       —       —       —       10,712       —       —       10,712  
 
   
     
     
     
     
     
     
     
 
Balance at July 31, 2002
    211,163,641     $ 2,112     $ 1,844,595     $ (126,107 )   $ (12,628 )   $ (3,675 )   $ 511,342     $ 2,215,639  
 
   
     
     
     
     
     
     
     
 

See accompanying notes.

35


 

INTUIT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 
            Fiscal
           
            2000   2001   2002
           
 
 
(In thousands)                        
Cash flows from operating activities:
                       
 
Net income (loss) from continuing operations
  $ 325,691     $ (124,656 )   $ 53,615  
 
Adjustments to reconcile net income (loss) to net cash
                       
   
provided by operating activities:
                       
   
Acquisition-related charges
    150,208       247,806       181,401  
   
Amortization of purchased software
    7,003       14,949       12,423  
   
Amortization of deferred compensation
    1,266       2,531       2,534  
   
Depreciation
    45,536       54,324       58,841  
   
Net (gains) losses from marketable securities and other investments
    (481,130 )     98,053       15,535  
   
Charge for purchased research and development
    1,312       238       2,151  
   
Charge for vacant facilities
    —       —       13,237  
   
Loss on impairment of long-lived asset
    —       —       27,000  
   
Net (gains) losses on divestiture of businesses
    —       15,315       (8,308 )
   
Loss on disposal of property and equipment
    —       —       3,227  
   
Deferred income tax benefit
    (133,742 )     (72,952 )     (21,575 )
   
Tax benefit from employee stock options
    93,515       59,546       53,246  
   
Changes in operating assets and liabilities:
                       
     
Customer deposits
    (46,571 )     (27,460 )     (50,938 )
     
Accounts receivable
    (6,288 )     38,409       (11,520 )
     
Income taxes receivable
    —       —       (2,187 )
     
Prepaid expenses and other current assets
    39,587       (13,324 )     (11,144 )
     
Accounts payable
    12,343       (20,252 )     8,522  
     
Accrued compensation and related liabilities
    9,402       16,203       21,578  
     
Payroll service obligations
    45,854       28,069       51,087  
     
Deferred revenue
    36,609       29,591       12,488  
     
Income taxes payable
    (8,661 )     (55,620 )     (65,726 )
     
Other current liabilities
    (4,866 )     (60,034 )     (1,187 )
 
   
     
     
 
       
Total changes in operating assets and liabilities
    77,409       (64,418 )     (49,027 )
 
   
     
     
 
     
Net cash provided by operating activities
    87,068       230,736       344,300  
 
   
     
     
 
Cash flows from investing activities:
                       
 
Change in other assets
    (35,549 )     7,764       (9,582 )
 
Purchases of property and equipment
    (93,375 )     (48,410 )     (42,096 )
 
Capitalization of internal use software
    —       (23,441 )     (21,323 )
 
Purchases of marketable securities
    (18,800 )     —       —  
 
Proceeds from the sale of marketable securities
    681,014       29,635       23,435  
 
Purchases of short-term investments
    (2,056,060 )     (3,169,430 )     (2,849,548 )
 
Liquidation and maturity of short-term investments
    1,346,975       3,104,983       3,152,256  
 
Acquisitions of businesses, net of cash acquired
    (76,714 )     (198,062 )     (278,265 )
 
Purchases of long-term investments, net
    (1,656 )     (3,079 )     —  
 
   
     
     
 
     
Net cash used in investing activities
    (254,165 )     (300,040 )     (25,123 )
 
   
     
     
 
Cash flows from financing activities:
                       
 
Principal payments on long-term debt and notes payable
    (4,856 )     (850 )     (11,333 )
 
Net proceeds from issuance of common stock
    89,978       96,797       133,565  
 
Purchase of treasury stock
    —       (8,363 )     (318,350 )
 
   
     
     
 
     
Net cash provided by (used in) financing activities
    85,122       87,584       (196,118 )
 
   
     
     
 
Net cash provided by (used in) discontinued operations
    (69,110 )     (303,087 )     225,210  
Effect of foreign currency translation
    103       2,538       (431 )
 
   
     
     
 
Net increase (decrease) in cash and cash equivalents
    (150,982 )     (282,269 )     347,838  
Cash and cash equivalents at beginning of period
    500,161       349,179       66,910  
 
   
     
     
 
Cash and cash equivalents at end of period
  $ 349,179     $ 66,910     $ 414,748  
 
   
     
     
 
Supplemental disclosure of cash flow information:
                       
 
Interest paid
  $ 4,721     $ 3,149     $ 1,768  
 
   
     
     
 
 
Income taxes paid
  $ 270,271     $ 39,131     $ 101,645  
 
   
     
     
 

See accompanying notes.

36


 

INTUIT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the financial statements of Intuit and its wholly owned subsidiaries. We have eliminated all intercompany balances and transactions in consolidation. We have reclassified certain other previously reported amounts to conform to the current presentation. As discussed in Note 11, the Quicken Loans mortgage business, which we sold on July 31, 2002, has been accounted for as discontinued operations in accordance with Accounting Principles Board (“APB”) Opinion No. 30. Also as discussed in Note 11, Intuit KK, our Japanese subsidiary, became a long-lived asset held for sale and a discontinued operation during the second quarter of fiscal 2003 in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144. The sale of Intuit KK closed on February 7, 2003. Accordingly, we have reclassified our financial statements for all periods presented to reflect Quicken Loans and Intuit KK as discontinued operations. Unless noted otherwise, discussions in these notes pertain to our continuing operations.

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.

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

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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

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 $42.3 million, $31.6 million and $28.9 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 debt securities are classified as current assets based upon our intent and ability to use any and all of these securities as necessary to satisfy the significant short-term liquidity requirements that may arise from the highly seasonal and cyclical nature of our businesses. Because of our significant business seasonality, cash flow requirements may fluctuate dramatically from quarter to quarter and require us to use a significant amount of the short-term investments held as available-for-sale securities. See Note 2.

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.

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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.

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.

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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.

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

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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 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.

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:

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          Fiscal
         
          2000   2001   2002
         
 
 
(In thousands, except per share data; pro forma figures are unaudited)
                       
 
Income (loss) from continuing operations before cumulative effect of accounting change:
                       
   
As reported
  $ 325,691     $ (124,656 )   $ 53,615  
   
Amortization of goodwill, net of tax
    73,014       92,040       82,161  
 
   
     
     
 
   
Pro forma
  $ 398,705     $ (32,616 )   $ 135,776  
 
   
     
     
 
 
Net income (loss):
                       
   
As reported
  $ 305,661     $ (82,793 )   $ 140,160  
   
Amortization of goodwill, net of tax
    73,014       92,040       82,161  
 
   
     
     
 
   
Pro forma
  $ 378,675     $ 9,247     $ 222,321  
 
   
     
     
 
 
Basic income (loss) per share from continuing operations before cumulative effect of accounting change:
                       
     
As reported
  $ 1.62     $ (0.60 )   $ 0.25  
     
Amortization of goodwill, net of tax
    0.36       0.44       0.39  
 
   
     
     
 
     
Pro forma
  $ 1.98     $ (0.16 )   $ 0.64  
 
   
     
     
 
 
Basic net income (loss) per share:
                       
     
As reported
  $ 1.52     $ (0.40 )   $ 0.66  
     
Amortization of goodwill, net of tax
    0.36       0.44       0.39  
 
   
     
     
 
     
Pro forma
  $ 1.88     $ 0.04     $ 1.05  
 
   
     
     
 
 
Diluted income (loss) per share from continuing operations before cumulative effect of accounting change:
                       
     
As reported
  $ 1.54     $ (0.60 )   $ 0.24  
     
Amortization of goodwill, net of tax
    0.35       0.44       0.38  
 
   
     
     
 
     
Pro forma
  $ 1.89     $ (0.16 )   $ 0.62  
 
   
     
     
 
 
Diluted net income (loss) per share:
                       
     
As reported
  $ 1.45     $ (0.40 )   $ 0.64  
     
Amortization of goodwill, net of tax
    0.35       0.44       0.38  
 
   
     
     
 
     
Pro forma
  $ 1.80     $ 0.04     $ 1.02  
 
   
     
     
 

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.

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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.

2. Short-Term Investments

The following schedule summarizes the estimated fair value of our short-term investments as of the dates indicated:

                   
      July 31,
     
      2001   2002
     
 
(In thousands)
               
 
Corporate notes
  $ 63,723     $ 24,405  
 
Municipal bonds
    1,030,442       780,914  
 
U.S. government securities
    25,140       10,023  
 
   
     
 
 
  $ 1,119,305     $ 815,342  
 
   
     
 

The following table summarizes the estimated fair value of our available-for-sale debt securities held in short-term investments classified by the stated maturity date of the security:

                 
    July 31,
   
    2001   2002
   
 
(In thousands)
               
Due within one year
  $ 215,205     $ 230,716  
Due within two years
    221,620       141,942  
Due within three years
    —       —  
Due after three years
    682,480       442,684  
 
 
     
 
 
  $ 1,119,305     $ 815,342  
 
   
     
 

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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.

                                 
    Cost   Gross Unrealized     Estimated
July 31, 2002   Basis   Gains   Losses   Fair Value

 
 
 
 
(In thousands)
                               
Trading securities
  $ —     $ —     $ —     $ —  
Securities available-for-sale:
                               
Checkfree Corporation common stock
    24,866       —       (8,075 )     16,791  
 
   
     
     
     
 
 
  $ 24,866     $ —     $ (8,075 )   $ 16,791  
 
   
     
     
     
 
                                 
    Cost   Gross Unrealized     Estimated
July 31, 2001   Basis   Gains   Losses   Fair Value

 
 
 
 
(In thousands)
                               
Trading securities
  $ 99,304     $ —     $ (97,288 )   $ 2,016  
Securities available-for-sale:
                               
Checkfree Corporation common stock
    35,621       37,215       —       72,836  
S1 Corporation common stock
    7,741       2,714       —       10,455  
 
   
     
     
     
 
 
  $ 142,666     $ 39,929     $ (97,288 )   $ 85,307  
 
   
     
     
     
 

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.

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4. Property and Equipment

Property and equipment consisted of the following as of the dates indicated:

                         
            July 31,
    Life in  
    Years   2001   2002
   
 
 
(Dollars in thousands)
                       
Equipment
    3-5     $ 147,361     $ 181,007  
Computer software
    3       50,014       60,461  
Furniture and fixtures
    5       23,614       27,230  
Leasehold improvements
  Note 1     63,814       69,059  
Land and buildings
  NA / 30     21,285       26,509  
Capital in progress
    —       8,540       18,016  
 
           
     
 
 
            314,628       382,282  
Less accumulated depreciation and amortization
            (143,189 )     (203,160 )
 
           
     
 
 
          $ 171,439     $ 179,122  
 
           
     
 

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 software for internal use in accordance with SOP 98-1. We capitalized approximately $23.4 million and $21.3 million of internal use software during fiscal 2001 and 2002, respectively. Costs related to internal use software projects are included in the capital in progress category of property and equipment until project completion, at which time they are transferred to the computer software category and amortized over their useful lives. Amortization expense for capitalized internal use software was $3.6 million in fiscal 2001 and $7.5 million in fiscal 2002. The net book value of completed capitalized internal use software was $11.3 million at July 31, 2001 and $15.6 million at July 31, 2002.

5. Goodwill and Intangible Assets

Goodwill and purchased intangible assets consisted of the following at the dates indicated:

                           
      Life in   July 31,
         
      Years   2001   2002
     
 
 
(Dollars in thousands)
                       
Goodwill
    3-5     $ 713,596     $ 822,894  
Accumulated amortization of goodwill
            (386,781 )     (393,946 )
 
           
     
 
 
Net goodwill
            326,815       428,948  
 
           
     
 
Customer lists
    3-12       119,310       144,379  
Covenants not to compete
    3-5       9,917       7,399  
Purchased technology
    1-7       107,855       121,763  
Assembled workforce
    2-5       11,882       4,458  
Trade names and logos
    1-15       12,004       16,555  
 
           
     
 
 
Total intangible assets
            260,968       294,554  
Accumulated amortization of intangible assets
            (172,864 )     (169,080 )
 
           
     
 
 
Net intangible assets
            88,104       125,474  
 
           
     
 
 
          $ 414,919     $ 554,422  
 
           
     
 

Accumulated amortization of intangible assets declined during fiscal 2002 due to the retirement of certain fully amortized 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.

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We summarize the following expenses on the “acquisition-related charges” line of our statement of operations:

                         
    Fiscal
   
    2000   2001   2002
   
 
 
(In thousands)
                       
Amortization of goodwill
  $ 110,628     $ 139,455     $ 122,629  
Amortization of intangibles
    26,133       24,649       28,112  
Acquisition-related amortization of deferred compensation
    4,019       4,938       8,654  
Acquisition-related impairment charges
    —       78,686       22,006  
Other
    9,428       78       —  
 
   
     
     
 
 
  $ 150,208     $ 247,806     $ 181,401  
 
   
     
     
 

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

46


 

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 components of other comprehensive income (loss) such as changes in the fair value of available-for-sale securities and foreign translation adjustments to be added to our net income (loss) to arrive at comprehensive income (loss). Other comprehensive income (loss) items have no impact on our net income (loss) as presented in our statement of operations.

The components of accumulated other comprehensive income (loss), net of income taxes, were as follows:

                                   
      Marketable           Foreign Currency        
      Securities   Short-term Investments   Translation   Total
     
 
 
 
(In thousands)
                               
Fiscal 2000
                               
Beginning balance, net of income taxes
  $ 81,621     $ —     $ (2,477 )   $ 79,144  
Unrealized gain, net of income tax provision of $191,594
    287,391       —       —       287,391  
Reclassification adjustment for realized gain included in net income, net of income tax benefit of $206,967
    (310,451 )     —       —       (310,451 )
Translation adjustment
    —       —       (498 )     (498 )
 
   
     
     
     
 
 
Other comprehensive loss
    (23,060 )     —       (498 )     (23,558 )
 
   
     
     
   
Ending balance, net of income taxes
  $ 58,561     $ —     $ (2,975 )   $ 55,586  
 
   
     
     
     
 
Fiscal 2001
                               
Beginning balance, net of income taxes
  $ 58,561     $ —     $ (2,975 )   $ 55,586  
Unrealized gain (loss), net of income tax benefit of $18,289 and provision of $3,124
    (27,433 )     4,686       —       (22,747 )
Reclassification adjustment for realized gain included in net loss, net of income tax benefit of $4,780
    (7,170 )     —       —       (7,170 )
Translation adjustment
    —       —       2,511       2,511  
 
   
     
     
     
 
 
Other comprehensive loss
    (34,603 )     4,686       2,511       (27,406 )
 
   
     
     
     
 
Ending balance, net of income taxes
  $ 23,958     $ 4,686     $ (464 )   $ 28,180  
 
   
     
     
     
 
Fiscal 2002
                               
Beginning balance, net of income taxes
  $ 23,958     $ 4,686     $ (464 )   $ 28,180  
Unrealized loss, net of income tax benefits of $18,082 and $1,752
    (27,123 )     (2,628 )     —       (29,751 )
Reclassification adjustment for realized gain included in net income, net of income tax benefit of $1,120
    (1,680 )     —       —       (1,680 )
Translation adjustment
    —       —       (424 )     (424 )
 
   
     
     
     
 
 
Other comprehensive loss
    (28,803 )     (2,628 )     (424 )     (31,855 )
 
   
     
     
     
 
Ending balance, net of income taxes
  $ (4,845 )   $ 2,058     $ (888 )   $ (3,675 )
 
   
     
     
     
 

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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 purchase price and the fair market value of the stock at the date of grant. Deferred stock compensation is amortized straight-line over the vesting term of these options and restricted stock grants.

The following table summarizes the activity in deferred stock-based compensation:

                           
      Fiscal
     
      2000   2001   2002
     
 
 
(In thousands)
                       
Beginning balance
  $ —     $ 26,522     $ 21,720  
Deferred stock compensation
    31,807       2,667       1,620  
Amortization:
                       
 
General and administrative expense
    (1,266 )     (2,531 )     (2,534 )
 
Acquisition-related charges
    (4,019 )     (4,938 )     (8,654 )
 
   
     
     
 
 
Total amortization
    (5,285 )     (7,469 )     (11,188 )
 
   
     
     
 
Other
    —       —       476  
 
   
     
     
 
Ending balance
  $ 26,522     $ 21,720     $ 12,628  
 
   
     
     
 

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:

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      Fiscal
     
      2000   2001   2002
     
 
 
(In thousands, except per share data)
                       
Numerator:
                       
Numerators for basic and diluted net income (loss) per share:
                       
 
Income (loss) from continuing operations before cumulative effect of accounting change
  $ 325,691     $ (124,656 )   $ 53,615  
 
Net income (loss) from discontinued operations, net of income taxes
    (20,030 )     27,549       86,545  
 
Cumulative effect of accounting change, net of income taxes
    —       14,314       —  
 
   
     
     
 
 
Net income (loss)
  $ 305,661     $ (82,793 )   $ 140,160  
 
   
     
     
 
Denominator:
                       
Denominator for basic net income (loss) per share:
                       
 
Weighted average common shares outstanding
    200,770       207,959       211,794  
 
Equivalent shares issuable upon exercise of options
    10,501       —       6,103  
 
   
     
     
 
Denominator for diluted net income (loss) per share
    211,271       207,959       217,897  
 
   
     
     
 
Basic:
                       
 
Income (loss) from continuing operations before cumulative effect of accounting change
  $ 1.62     $ (0.60 )   $ 0.25  
 
Net income (loss) from discontinued operations, net of income taxes
    (0.10 )     0.13       0.41  
 
Cumulative effect of accounting change, net of income taxes
    —       0.07       —  
 
   
     
     
 
 
Basic net income (loss) per share
  $ 1.52     $ (0.40 )   $ 0.66  
 
   
     
     
 
Diluted:
                       
 
Income (loss) from continuing operations before cumulative effect of accounting change
  $ 1.54     $ (0.60 )   $ 0.24  
 
Net income (loss) from discontinued operations, net of income taxes
    (0.09 )     0.13       0.40  
 
Cumulative effect of accounting change, net of income taxes
    —       0.07       —  
 
   
     
     
 
 
Diluted net income (loss) per share
  $ 1.45     $ (0.40 )   $ 0.64  
 
   
     
     
 

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

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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 of software and Web-based products headquartered in Massachusetts, for approximately $22.1 million in Intuit common stock.

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

50


 

purchase price to goodwill and $14.0 million of the purchase price to identified intangible assets. The identified intangible assets are being amortized over terms ranging from five to seven years.

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 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 $41.4 million of the purchase price to goodwill and $35.8 million of the purchase price to identified intangible assets. The identified intangible assets are being amortized over terms ranging from one to seven years.

The following table shows net revenue, income (loss) from continuing operations before cumulative effect of accounting change, net income (loss) and basic and diluted net income (loss) per share as they would have been if we had completed the fiscal 2002 acquisitions on August 1, 2000. Because the pro forma acquisition date is prior to June 30, 2001, these figures include the effects of amortization of goodwill and other identified intangible assets from the date of acquisition through July 31, 2002. Under the provisions of SFAS 142, goodwill amortization would cease on August 1, 2002. This unaudited summary information is presented for illustrative purposes and is not necessarily indicative of results that would have actually occurred had these acquisitions taken place at the beginning of fiscal 2001.

                                   
      Fiscal 2001   Fiscal 2002
     
 
      As   Pro   As   Pro
      Reported   Forma   Reported   Forma
     
 
 
 
(In thousands, except per share data)           (unaudited)           (unaudited)
Net revenue:
                               
 
Intuit, as reported
  $ 1,096,062     $ 1,096,062     $ 1,312,228     $ 1,312,228  
 
   
             
         
 
Fiscal 2002 acquisitions
            107,520               97,663  
 
           
             
   
 
Pro forma
          $ 1,203,582             $ 1,409,891  
 
           
             
 
Income (loss) from continuing operations before cumulative effect of accounting change:
                               
 
Intuit, as reported
  $ (124,656 )   $ (124,656 )   $ 53,615     $ 53,615  
 
   
             
         
 
Fiscal 2002 acquisitions
            8,118               5,763  
 
Amortization of goodwill and intangibles
            (61,631 )             (59,774 )
 
           
             
   
 
Pro forma
          $ (178,169 )           $ (396 )
 
           
             
 
Net income (loss):
                               
 
Intuit, as reported
  $ (82,793 )   $ (82,793 )   $ 140,160     $ 140,160  
 
   
             
         
 
Fiscal 2002 acquisitions
            8,118               5,763  
 
Amortization of goodwill and intangibles
            (61,631 )             (59,774 )
 
           
             
   
 
Pro forma
          $ (136,306 )           $ 86,149  
 
           
             
 
Basic net income (loss) per share
  $ (0.40 )   $ (0.66 )   $ 0.66     $ 0.41  
Diluted net income (loss) per share
    (0.40 )     (0.66 )     0.64       0.40  

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Purchase prices for the acquisitions described above have been allocated on the basis of their fair values on the acquisition dates as follows:

                           
      Fiscal
     
      2000   2001   2002
     
 
 
(In thousands)
                       
Intangible assets:
                       
 
Goodwill
  $ 88,748     $ 181,758     $ 246,542  
 
Customer lists
    2,900       16,489       38,395  
 
Covenant not to compete
    1,200       —       1,595  
 
Purchased technology
    714       45,113       30,197  
 
Assembled workforce
    622       2,940       —  
 
Trade names and logos
    —       1,308       7,251  
 
Deferred stock compensation
    6,823       855       1,620  
 
   
     
     
 
 
  $ 101,007     $ 248,463     $ 325,600  
 
   
     
     
 

Deferred stock compensation is recorded in stockholders’ equity and is being amortized over the vesting period of the applicable options using the straight-line method. Until July 31, 2002, goodwill was amortized over estimated useful lives which ranged from three to five years. We implemented 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, which range from one to fifteen years. 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 Notes 1 and 5.

Of the total goodwill acquired in fiscal 2000, none was deductible for income tax purposes. Of the total goodwill acquired in fiscal 2001 and 2002, $148,950 and $115,031, respectively, were deductible for income tax purposes.

The following table presents acquired goodwill by reportable business segment:

                         
    Fiscal
   
    2000   2001   2002
   
 
 
(In thousands)
                       
Small Business
  $ 40,480     $ —     $ —  
Employer Services
    —       32,808       —  
Consumer Tax
    48,268       —       —  
Professional Accounting Solutions
    —       53,801       —  
Personal Finance
    —       95,149       —  
Global Business
    —       —       2,395  
Small Business Verticals and Other
    —       —       244,147  
 
 
     
     
 
 
  $ 88,748     $ 181,758     $ 246,542  
 
   
     
     
 

10. Divestitures

In January 2001, we sold certain assets of our Quicken Insurance business to InsWeb Corporation for approximately $10.8 million of InsWeb common stock. As a result of the divestiture, we recorded a pre-tax gain of $1.6 million and a related tax provision of $0.6 million in fiscal 2001.

In May 2001, we sold the stock of Venture Finance Software Corp., which held the technology assets of our Quicken Bill Manager business, to Princeton eCom Corporation. In exchange for these assets, Intuit was entitled to receive, at Princeton eCom’s election, either approximately 20% of Princeton eCom fully diluted common stock or cash payments of a minimum of $37 million or a combination of stock and cash. In connection with this disposition, we recorded a pre-tax loss of $16.9 million and a related tax benefit of $6.4 million in fiscal 2001. At July 31, 2001, our contractual right to receive payment was valued at $27 million. In fiscal 2002, we determined that this asset was impaired and recorded a charge to reduce the carrying value of our investment to its fair value of zero. See Note 12.

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. When we terminated this agreement, we recorded a pre-tax non-operating gain of $8.3 million and related tax expense of $2.7 million in fiscal 2002.

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11.  Discontinued Operations

Quicken Loans

We acquired our Quicken Loans mortgage business segment in a transaction accounted for as a pooling of interests in December 1999. See Note 9. On July 31, 2002, we sold that business to a company called BRFC LLC. We transferred all of our capital stock in Quicken Loans Inc. and Title Source, Inc. to Rock Acquisition Corporation (“Rock”), a newly-created corporation, then subsequently sold all of the voting stock of Rock to BRFC. The voting stock represented 87.5% of Rock’s total outstanding common stock. We retain a 12.5% non-voting equity interest in Rock and our investment will be accounted for on a cost basis since we do not have the ability to exercise significant influence.

Prior to July 31, 2002, Quicken Loans Inc. and Title Source, Inc. repaid all outstanding intercompany balances and the net tangible shareholders’ equity in excess of $33.0 million to Intuit. We received $33.0 million from BFRC and a five-year secured promissory note in the principal amount of $23.3 million from Rock as consideration. The note will be repayable earlier if Rock achieves certain financial performance targets. We will earn market interest rates on the promissory note, which is recorded as a long-term note receivable in other assets on the balance sheet.

Rock continues to offer loans under the Quicken Loans brand and is licensing from Intuit the use of the Quicken Loans trademark for its residential home loan and home equity loan products. We will receive a minimum royalty of $1.8 million a year for each of the next five years under this licensing agreement. In addition, we entered into a five-year distribution agreement under which Quicken Loans will provide mortgage services on Quicken.com. We will receive a minimum fee of $0.8 million a year under this distribution agreement. The royalties from the licensing agreement and the fees from the distribution agreement will be recorded as earned and included in other income on our statement of operations. We have also agreed to continue providing 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 expires on January 31, 2003. The line of credit is secured by the related mortgage loans and the interest rate is based on the six-month LIBOR rate plus 1.5%. The balance outstanding on this line of credit of $245.6 million at July 31, 2002 is included on our balance sheet under amounts due from discontinued operations entities.

We accounted for the sale of Quicken Loans as discontinued operations. In accordance with APB Opinion No. 30, the net assets, operating results and cash flows of Quicken Loans have been segregated from continuing operations in our balance sheets, statements of operations and statements of cash flows. The sale resulted in a pretax gain of $23.3 million in the fourth quarter of fiscal 2002. We did not record the tax benefit related to the gain on the transaction because we cannot be assured that we will realize the tax benefit. We recorded the transaction based on preliminary financial information, which is subject to change based on an audit of the final tangible shareholders’ equity balance of Quicken Loans.

Intuit KK

On February 7, 2003, we sold our wholly-owned Japanese subsidiary, Intuit KK, to Advantage Partners, Inc., a private equity investment firm located in Japan. Under the terms of the agreement, Advantage Partners purchased 100 percent of the outstanding Intuit KK stock for 9.5 billion yen or approximately $79 million as of February 7, 2003.

In accordance with the provisions of SFAS 144, “Accounting for the Impairment or Disposal of Long-lived Assets,” we determined that Intuit KK became a long-lived asset held for sale during the second quarter of fiscal 2003 because management put a plan in place to sell this asset which met the conditions specified in the pronouncement. SFAS 144 provides that a long-lived asset classified as held for sale should be measured at the lower of its carrying amount or fair value less cost to sell. Since the carrying value of Intuit KK at January 31, 2003 was significantly lower than the fair value, no adjustment to the carrying value of this long-lived asset was necessary during the second quarter of fiscal 2003. Also in accordance with the provisions of SFAS 144, we determined that Intuit KK became a discontinued operation during the second quarter of fiscal 2003. The net assets, operating results and cash flows of Intuit KK have therefore been segregated from continuing operations in our balance sheets, statements of operations and statements of cash flows for all periods presented.

In December 2002, in order to minimize the impact of foreign currency exchange rates on the sale proceeds during the period between the announcement of the sale of Intuit KK and the closing of the transaction, we entered into a foreign currency hedge contract to sell 9.5 billion Japanese yen in February 2003.

53


 

Discontinued Operations Net Revenue and Income (Loss) from Discontinued Operations Before Income Taxes

Net revenue and income (loss) from discontinued operations before income taxes for the periods presented were as follows:

                           
      Fiscal
     
(In thousands)   2000   2001   2002
   
 
 
Net revenue from discontinued operations
                       
 
Quicken Loans
  $ 56,476     $ 113,056     $ 189,222  
 
Intuit KK
    55,631       52,343       46,120  
 
   
     
     
 
 
Total net revenue from discontinued operations
  $ 112,107     $ 165,399     $ 235,342  
 
   
     
     
 
Income (loss) from discontinued operations before
income taxes
                       
 
Quicken Loans
  $ (26,018 )   $ 34,010     $ 73,610  
 
Intuit KK
    (3,513 )     6,581       14,390  
 
   
     
     
 
 
Total discontinued operations before income taxes
  $ (29,531 )   $ 40,591     $ 88,000  
 
   
     
     
 

12.  Loss on Impairment of Long-lived Asset

In connection with the sale of our Quicken Bill Manager business in May 2001, we acquired a $27.0 million long-term asset related to future consideration from Princeton eCom which was recorded as other assets on the balance sheet at July 31, 2001. See Note 10.

As discussed in Note 1, 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 the carrying value of an asset cannot be recovered. During fiscal 2002, events and circumstances indicated impairment of this asset. These indicators included the deterioration of Princeton eCom’s financial position (including cash flows and liquidity) and the decreased likelihood that it would receive future funding. We considered the implied fair value of our investment based on Princeton eCom’s most recent round of planned funding, as well as the fair value of our investment if funding were received. Based on our analysis we recorded a charge of $27.0 million in fiscal 2002 to reduce the carrying value of this asset to its fair value of zero.

13.   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. The resulting $13.2 million charge was equal to the remaining future lease commitments for these facilities, net of estimated future sublease income. The estimated costs of abandoning these leased facilities reflected management’s best estimates based on market information and trend analyses compiled by our facilities management team with the help of a commercial real estate brokerage firm retained by Intuit.

During the fourth quarter of fiscal 2002, we made cash lease payments for these two buildings of $0.6 million, reducing the original $13.2 million reserve to a balance of $12.6 million at July 31, 2002. The short-term portion of the reserve is in other current liabilities and the long-term portion is in long-term obligations on our balance sheet. The total reserve is expected to be utilized by the end of fiscal 2010. Our actual future cash payments may exceed the total reserve balance by a maximum of $3.7 million if we are unable to sublease either of the properties.

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14.   Industry Segment and Geographic Information

SFAS 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for the way in which public companies disclose certain information about operating segments in the company’s financial reports. Due to the sale of our Quicken Loans mortgage business segment as well as to several acquisitions during fiscal 2002, we have reevaluated our operating segments. Consistent with SFAS 131, we have defined seven operating segments, described below, based on factors such as how we manage our operations and how our chief operating decision maker views results. All operating segments except Global Business are based in the United States and sell primarily to customers located there. We have reclassified prior year financial information to conform to the current year presentation for comparability.

Small Business product revenue is derived primarily from QuickBooks desktop software products and financial supplies. Small Business services revenue is derived primarily from QuickBooks support plans.

Employer Services product revenue is derived primarily from our Do-It-Yourself Payroll offering. Employer Services services revenue is derived primarily from our Assisted Payroll Service and Intuit Payroll Services – Complete Payroll services.

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.

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.

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 from online transactions revenue.

Global Business product revenue is derived primarily from QuickBooks, Quicken and QuickTax desktop software products in Canada. Global Business services revenue consists primarily of revenue from software maintenance contracts sold with QuickBooks in Canada.

Small Business Verticals and Other revenue is derived primarily from four businesses that we acquired in fiscal 2002 that provide small business management software solutions for vertical industries. Those businesses are Intuit Construction Business Solutions (formerly OMware, Inc.); Intuit Public Sector Solutions (formerly The Flagship Group); Intuit MRI Real Estate Solutions (formerly Management Reports, Inc.); and Intuit Eclipse Distribution Management Solutions (formerly Eclipse, Inc.). See Note 9.

The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies in Note 1. Intuit does not track assets by operating segments and, consequently, does not disclose assets by operating segments. The following results for the fiscal years ended July 31, 2000, 2001 and 2002 are broken out by our operating segments.

55


 

                                                                   
                                                      Small        
                                                      Business        
                              Professional                   Verticals        
      Small   Employer   Consumer   Accounting   Personal   Global   and        
Fiscal 2000   Business   Services   Tax   Solutions   Finance   Business   Other (1)   Consolidated

 
 
 
 
 
 
 
 
(In thousands)
                                                               
Product revenue
  $ 275,313     $ 30,613     $ 170,432     $ 161,413     $ 98,815     $ 38,730     $ —     $ 775,316  
Service revenue
    20,215       44,754       40,915       9,107       —       —       —       114,991  
Other revenue
    15,969       —       4,803       —       70,639       —       —       91,411  
 
   
     
     
     
     
     
     
     
 
 
Total net revenue
    311,497       75,367       216,150       170,520       169,454       38,730       —       981,718  
 
   
     
     
     
     
     
     
     
 
Segment operating income (loss)
    130,280       (3,878 )     99,032       82,092       35,528       10,338       (874 )     352,518  
Common expenses
    —       —       —       —       —       —       (181,581 )     (181,581 )
 
   
     
     
     
     
     
     
     
 
 
Sub-total
    130,280       (3,878 )     99,032       82,092       35,528       10,338       (182,455 )     170,937  
Acquisition-related costs
    —       —       —       —       —       —       (158,523 )     (158,523 )
Realized net gains on marketable securities
    —       —       —       —       —       —       481,130       481,130  
Interest and other income
    —       —       —       —       —       —       48,697       48,697  
 
   
     
     
     
     
     
     
     
 
Income (loss) from continuing operations before income taxes and cumulative effect of accounting change
  $ 130,280     $ (3,878 )   $ 99,032     $ 82,092     $ 35,528     $ 10,338     $ 188,849     $ 542,241  
 
   
     
     
     
     
     
     
     
 
                                                                   
                                                      Small        
                                                      Business        
                              Professional                   Verticals        
      Small   Employer   Consumer   Accounting   Personal   Global   And        
Fiscal 2001   Business   Services   Tax   Solutions   Finance   Business   Other (1)   Consolidated

 
 
 
 
 
 
 
 
(In thousands)
                                                               
Product revenue
  $ 277,992     $ 60,098     $ 168,169     $ 177,356     $ 80,182     $ 41,887     $ —     $ 805,684  
Service revenue
    32,635       58,103       100,536       11,060       13,136       979       95       216,544  
Other revenue
    17,952       —       3,423       —       49,685       2,774       —       73,834  
 
   
     
     
     
     
     
     
     
 
 
Total net revenue
    328,579       118,201       272,128       188,416       143,003       45,640       95       1,096,062  
 
   
     
     
     
     
     
     
     
 
Segment operating income (loss)
    123,600       13,175       145,975       90,671       21,415       5,605       (18,640 )     381,801  
Common expenses
    —       —       —       —       —       —       (200,166 )     (200,166 )
 
   
     
     
     
     
     
     
     
 
 
Sub-total
    123,600       13,175       145,975       90,671       21,415       5,605       (218,806 )     181,635  
Acquisition-related costs
    —       —       —       —       —       —       (262,993 )     (262,993 )
Realized net losses on marketable securities
    —       —       —       —       —       —       (98,053 )     (98,053 )
Interest and other income
    —       —       —       —       —       —       57,593       57,593  
Net loss on divestitures
    —       —       —       —       —       —       (15,315 )     (15,315 )
 
   
     
     
     
     
     
     
     
 
Income (loss) from continuing operations before income taxes and cumulative effect of accounting change
  $ 123,600     $ 13,175     $ 145,975     $ 90,671     $ 21,415     $ 5,605     $ (537,574 )   $ (137,133 )
 
   
     
     
     
     
     
     
     
 

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                                                      Small        
                                                      Business        
                              Professional                   Verticals        
      Small   Employer   Consumer   Accounting   Personal   Global   and        
Fiscal 2002   Business   Services   Tax   Solutions   Finance   Business   Other (1)   Consolidated

 
 
 
 
 
 
 
 
(In thousands)
                                                               
Product revenue
  $ 318,764     $ 81,731     $ 219,403     $ 219,252     $ 71,567     $ 57,896     $ 8,915     $ 977,528  
Service revenue
    51,453       72,380       128,354       6,495       8,035       1,115       5,743       273,575  
Other revenue
    4,400       219       3,340       —       50,683       2,483       —       61,125  
 
   
     
     
     
     
     
     
     
 
 
Total net revenue
    374,617       154,330       351,097       225,747       130,285       61,494       14,658       1,312,228  
 
   
     
     
     
     
     
     
     
 
Segment operating income (loss)
    141,346       19,061       214,095       115,162       33,856       15,690       (14,048 )     525,162  
Common expenses
    —       —       —       —       —       —       (251,687 )     (251,687 )
 
   
     
     
     
     
     
     
     
 
 
Sub-total
    141,346       19,061       214,095       115,162       33,856       15,690       (265,735 )     273,475  
Acquisition-related costs
    —       —       —       —       —       —       (195,975 )     (195,975 )
Loss on impairment of long-lived asset
    —       —       —       —       —       —       (27,000 )     (27,000 )
Realized net losses on marketable securities
    —       —       —       —       —       —       (15,535 )     (15,535 )
Interest and other income
    —       —       —       —       —       —       27,276       27,276  
Net gain on divestiture
    —       —       —       —       —       —       8,308       8,308  
 
   
     
     
     
     
     
     
     
 
Income (loss) from continuing operations before income taxes and cumulative effect of accounting change
  $ 141,346     $ 19,061     $ 214,095     $ 115,162     $ 33,856     $ 15,690     $ (468,661 )   $ 70,549  
 
   
     
     
     
     
     
     
     
 

(1)   Other includes revenue and segment operating income (loss) related to our vertical business operations as well as reconciling items such as acquisition-related costs, including amortization of purchased software and charges for purchased research and development, and other common costs not allocated to specific segments. Certain indirect operating costs were no longer allocated to our reporting segments beginning in fiscal 2002. As a result, segment operating income (loss) and common expenses for fiscal 2000 and 2001 have been reclassified to conform to the fiscal 2002 presentation for comparability.

15.  Other Current Liabilities

Other current liabilities at July 31, 2001 and 2002 were as follows:

                 
    July 31,
   
    2001   2002
   
 
(In thousands)
               
Reserve for product returns
  $ 27,899     $ 32,095  
Future cash payments due for CRI acquisition
    23,969       —  
Future cash payments due for CBS Payroll acquisition
    —       25,359  
Other acquisition and disposition related items
    18,001       4,667  
Rebates
    9,994       8,169  
Other accruals
    12,247       11,505  
 
   
     
 
 
  $ 92,110     $ 81,795  
 
   
     
 

57


 

16.   Commitments

Intuit leases office facilities and equipment under various operating lease agreements. The leases provide for annual rent increases of up to 10%. Annual minimum commitments under these leases are shown in the table below. The table includes leases for two vacant facilities in Mountain View, California and excludes any potential future sublease income for those facilities. See Note 13.

         
Fiscal Year   Commitments

 
(Dollars in thousands)
       
2003
  $ 28,984  
2004
    26,305  
2005
    24,052  
2006
    22,245  
2007
    19,597  
Thereafter
    29,524  
 
   
 
 
  $ 150,707  
 
   
 

Total lease expense for the years ended July 31, 2000, 2001 and 2002 was approximately $18.6 million, $23.2 million, and $23.9 million, respectively. Lease expense for fiscal 2002 does not include a charge of $13.2 million for the two vacant facilities referred to above. See Note 13.

In connection with the sale of our Quicken Loans mortgage business in July 2002, we agreed to continue providing a line of credit of up to $375.0 million to fund mortgage loans for the purchasing company for a transition period of up to six months. The line of credit is secured by the related mortgage loans. The balance outstanding on this line of credit of $245.6 million at July 31, 2002 is included on our balance sheet under amounts due from discontinued operations entities. See Note 11.

17.  Stockholders’ Equity

Stock Option Plans

On February 1, 1993, our stockholders adopted the 1993 Equity Incentive Plan. The 1993 Plan terminated on January 18, 2002 when our stockholders approved our 2002 Equity Incentive Plan. In connection with our adoption of the 2002 Plan (described below), we transferred 1,900,000 of the shares remaining available for grant under the 1993 Plan to the 2002 Plan and we ceased making new grants under the 1993 Plan. We removed the remaining 1,909,906 shares available for grant under the 1993 Plan from the pool of options available for grant when the plan terminated. All outstanding options under the 1993 Plan remain in effect in accordance with their terms. Under the 1993 Plan, we were permitted to grant incentive and non-qualified stock options, restricted stock awards and stock bonuses to employees, directors, consultants, and independent contractors of and advisors to Intuit. The Compensation Committee of the Board of Directors or its delegees determined who would receive grants, exercisability, exercise price and other terms. The option exercise price was generally the fair market value at the date of grant. The outstanding options generally vest over four years based on continued service and expire after ten years.

On October 7, 1996, we adopted the 1996 Directors Stock Option Plan. This plan provides for non-qualified stock options for a specified number of shares to be granted to all non-employee directors of Intuit. As of December 2001, Board members who serve on the Audit Committee and Compensation Committee receive additional annual grants. The option exercise price equals the fair market value at the date of grant. Most options are subject to vesting over time based on continued service, with vesting periods ranging from two to four years. All options expire after ten years.

On November 11, 1998, we adopted the 1998 Option Plan for Mergers and Acquisitions. Under the 1998 Plan, we may grant non-qualified stock options to individuals who we hire as a result of our acquisitions of, or mergers with, other companies. The 1998 Plan was designed to meet the “broadly based plans” exemption from the stockholder approval requirement for stock option plans under the Nasdaq Stock Market listing requirements at the time the plan was adopted and, accordingly, has not been submitted to Intuit stockholders for approval. Options under the 1998 Plan can only be granted to eligible individuals within 18 months following the completion of the relevant acquisition or merger. Options granted under the 1998 Plan have an exercise price not less than the fair market value of Intuit’s common stock on the date of grant. During fiscal 2002, Intuit changed its standard option vesting schedule so that future options granted generally become exercisable over a three-year period based on continued service and expire seven years after the grant date. Prior to that change, options generally vested over four years and

58


 

expired ten years after the grant date. Options granted to officers hired as a result of a merger or acquisition cannot exceed 45% of all shares reserved for grant under the 1998 Plan.

On January 18, 2002, our stockholders approved the 2002 Equity Incentive Plan. Under the 2002 Plan, we may grant incentive and non-qualified stock options, restricted stock awards and stock bonuses to employees, directors, consultants, and independent contractors of and advisors to Intuit. The Compensation Committee of the Board of Directors or its delegees determines who will receive grants, exercisability, exercise price and other terms. The option exercise price is generally the fair market value at the date of grant. During fiscal 2002, Intuit changed its standard option vesting schedule so that future options granted generally become exercisable over a three-year period based on continued service and expire seven years after the grant date. Prior to that change, options vested over four years and expired ten years after the grant date.

In addition, in several instances we have assumed the outstanding options of companies that we acquired. Intuit granted no further options under the acquired companies’ option plans after the date of acquisition. We assumed options in connection with our acquisitions of Boston Light Software Corp. and Hutchison Avenue Software Corporation in August 1999, Rock Financial Corporation in December 1999, EmployeeMatters, Inc. in January 2001, The Flagship Group in May 2002 and CBS Employer Services, Inc. in June 2002.

59


 

A summary of activity under all option plans is as follows:

                                     
                Options Outstanding
               
        Shares           Exercise   Weighted Average
        Available   Number of   Price Per   Exercise Price
        for Grant   Shares   Share   Per Share
       
 
 
 
Balance at July 31, 1999
    7,929,742       31,695,232     $ 0.02-$31.21     $ 16.13  
 
Additional shares authorized
    9,000,000       —       —       —  
 
Options assumed related to acquisitions
    964,941       —       —       —  
 
Options converted related to acquisitions
    (964,941 )     964,941       0.003 – 51.69       5.21  
 
Options granted
    (9,887,734 )     9,887,734       2.50 – 72.31       34.44  
 
Options exercised
    —       (6,651,954 )     0.003 – 33.53       11.49  
 
Options canceled or expired:
                     
   
Options canceled or expired and returned to option pool
  4,051,948       (4,051,948 )     7.25 – 64.81       22.92  
   
Options canceled from expired plans
    571,780       (571,780 )     0.39 – 29.11       15.69  
   
Options removed from shares available for grant
    (571,780 )     —       —       —  
 
   
     
                 
Balance at July 31, 2000
    11,093,956       31,272,225     $ 0.003 - $72.31     $ 23.43  
 
Additional shares authorized
    9,825,000       —       —       —  
 
Options assumed related to acquisitions
    74,235       —       —       —  
 
Options converted related to acquisitions
    (74,235 )     74,235       0.18 – 71.92       9.19  
 
Options granted
    (12,556,801 )     12,556,801       24.88 – 67.50       40.94  
 
Options exercised
    —       (5,201,860 )     0.003 – 51.06       15.69  
 
Options canceled or expired:
                     
   
Options canceled or expired and returned to option pool
  2,676,348       (2,676,348 )     7.25 – 67.50       34.65  
   
Options canceled from expired plans
    191,220       (191,220 )     0.18 – 51.69       33.33  
   
Options removed from shares available for grant
    (191,220 )     —       —       —  
 
   
     
                 
Balance at July 31, 2001
    11,038,503       35,833,833     $ 0.003-$72.31     $ 29.77  
 
Additional shares authorized
    8,090,000       —       —       —  
 
Options assumed related to acquisitions
    324,207       —       —       —  
 
Options converted related to acquisitions
    (324,207 )     324,207       6.93 – 43.10       26.26  
 
Options granted
    (8,887,021 )     8,887,021       7.29 – 67.50       39.03  
 
Options exercised
    —       (5,961,223 )     0.03 – 49.31       19.07  
 
Options and shares canceled or expired:
                     
   
Options canceled or expired and returned to option pool
  2,061,912       (2,061,912 )     7.25 – 67.50       38.09  
   
Options canceled from expired plans
    2,364,140       (2,364,140 )     0.18 – 67.50       36.58  
   
Options and shares removed from shares available for grant (1)
    (4,274,046 )     —       —       —  
 
   
     
                 
Balance at July 31, 2002
    10,393,488       34,657,786     $ 0.003-$72.31     $ 32.99  
 
   
     
                 

(1)   Includes 2,364,140 shares reflecting options that were canceled and not returned to any option pool because they were granted under expired plans, and 1,909,906 shares that were eliminated from shares available for grant in connection with the termination of the 1993 Plan.

We define net option grants as options granted less options canceled or expired and returned to the pool of options available for grant. For fiscal 2000, net option grants were 5,835,786 shares or 2.9% of the 204,299,955 shares outstanding at July 31, 2000. Net option grants for fiscal 2001 were 9,880,453 shares or 4.7% of the 210,526,239 shares outstanding at July 31, 2001. Net option grants for fiscal 2002 were 6,825,109 shares or 3.2% of the 211,163,641 shares outstanding at July 31, 2002. If net option grants are calculated by subtracting both canceled or expired options that were returned to the pool of options available for grant and options canceled from expired plans, net option grants were 5,264,006 shares or 2.6% of outstanding shares in fiscal 2000, 9,689,233 shares or 4.6% of outstanding shares in fiscal 2001 and 4,460,969 shares or 2.1% of outstanding shares in fiscal 2002.

There were 11,608,020, 15,551,666 and 18,264,940 options exercisable under the various plans at July 31, 2000, 2001 and 2002, respectively. At July 31, 2002, there were 171,875 shares available for grant under the 1996 Directors Stock Option Plan, 2,134,701 shares available for grant under the 1998 Plan and 8,086,912 shares available for grant under the 2002 Plan.

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The following table summarizes information about stock options outstanding as of July 31, 2002:

                                             
Options Outstanding                

               
                            Options Exercisable
                Weighted Average          
                Remaining   Weighted           Weighted
                Contractual   Average           Average
Exercise Price   Number   Life (Years)   Exercise Price   Number   Exercise Price

 
 
 
 
 
 
$0.003-$9.00
    3,487,650       4.66     $ 7.90       3,420,182     $ 7.96  
 
$9.10-$16.58
    3,621,057       5.80     $ 14.38       3,481,270     $ 14.37  
 
$16.94-$27.25
    3,541,319       6.92     $ 25.25       2,649,635     $ 25.09  
 
$27.71-$29.38
    3,628,234       7.71     $ 29.08       1,959,459     $ 28.94  
 
$29.85-$35.00
    4,957,399       8.12     $ 32.85       2,471,646     $ 32.71  
 
$35.31-$37.26
    4,723,441       8.93     $ 36.91       598,286     $ 36.08  
 
$38.05-$43.36
    4,081,544       8.67     $ 40.62       782,320     $ 39.66  
 
$43.73-$54.06
    3,535,537       7.71     $ 47.79       1,256,301     $ 49.56  
 
$57.75-$71.92
    3,059,105       7.86     $ 63.86       1,623,341     $ 63.64  
 
$72.31-$72.31
    22,500       7.57     $ 72.31       22,500     $ 72.31  
 
   
                     
         
 
$0.003-$72.31
    34,657,786       7.47     $ 32.99       18,264,940     $ 27.44  
 
   
                     
         

Stock Split

Intuit’s Board of Directors authorized a three-for-one stock split on September 8, 1999. This was effected by distributing a 200% stock dividend on September 30, 1999 to stockholders of record on September 20, 1999. We have restated all share and per share amounts referred to in the financial statements and notes to reflect this stock split.

Stock Repurchase Program

In May 2001, Intuit’s Board of Directors authorized the company to repurchase up to $500.0 million of common stock from time to time over a three-year period. In July 2002, our Board of Directors increased the authorized purchase amount by $250.0 million. Shares of stock repurchased under the program become treasury shares. During the fourth quarter of fiscal 2001, we repurchased 238,500 shares of our common stock under this program for an aggregate cost of approximately $8.4 million. During fiscal 2002, we repurchased 7,361,839 shares of our common stock under this program for an aggregate cost of approximately $318.4 million. During fiscal 2002, we reissued 4,621,793 million shares of treasury stock in connection with employee stock plans.

When we reissue treasury shares, if the proceeds from the sale are more than the average price we paid to acquire the shares we record an increase in additional paid-in capital. Conversely, if the proceeds from the sale are less than the average price we paid to acquire the shares, we record a decrease in additional paid-in capital to the extent of increases previously recorded for similar transactions and a decrease in retained earnings for any remaining amount.

Repurchases through July 31, 2002 have had no significant impact on our net income or loss per share. Intuit intends to continue using its cash and cash equivalents to fund these repurchases.

Employee Stock Purchase Plan

In October 1996, Intuit adopted an Employee Stock Purchase Plan under Section 423 of the Internal Revenue Code. A total of 3,800,000 shares of common stock are reserved for issuance under the plan. The plan allows eligible employees to purchase Intuit’s stock at 85% of the lower of the fair market value at the beginning of each 12-month offering period or at the end of the applicable six-month purchase period. During fiscal 2000, 2001 and 2002 employees purchased 355,281, 469,873 and 583,990 shares, respectively. At July 31, 2002, there were 1,261,479 shares available for issuance under this plan.

Stock-Based Compensation

We follow APB Opinion No. 25, “Accounting for Stock Issued to Employees,” in accounting for stock-based compensation. Accordingly, we are not required to record compensation expense when stock options are granted to employees, as long as the exercise price is not less than the fair market value of the stock when the option is granted,

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and we are not required to record compensation expense in connection with the Employee Stock Purchase Plan as long as the purchase price is not less than 85% of the lower of the fair market value at the beginning of each 12-month offering period or at the end of each applicable six-month purchase period. In October 1995, the FASB issued SFAS 123, “Accounting for Stock Based Compensation.” Although SFAS 123 allows us to continue to follow the present APB 25 guidelines, we are required to disclose pro forma net income (loss) and net income (loss) per share as if we had adopted SFAS 123. The pro forma impact of applying SFAS 123 in fiscal 2000, 2001 and 2002 will not necessarily be representative of the pro forma impact in future years.

We have elected to use the Black-Scholes model to estimate the fair value of options granted. This valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. This model requires the input of highly subjective assumptions including the expected stock price volatility. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect this estimate, we believe the Black-Scholes model does not necessarily provide a reliable single measure of the fair value of our employee stock options. Inputs used for the valuation model are as follows:

                                                 
    Options   Employee Stock Purchase Plan
   
 
    Fiscal   Fiscal
   
 
    2000   2001   2002   2000   2001   2002
   
 
 
 
 
 
Expected life (years)
    1.75–4.75       1.73–4.73       1.89–4.89       0.50       0.50       1.00  
Expected volatility factor
    0.73       0.76       0.74       0.73       0.76       0.74  
Risk-free interest rate (%)
    5.61–6.80       3.51–6.03       1.23–5.47       5.57–5.77       3.47–5.84       1.80–2.70  
Expected dividend yield (%)
    —       —       —       —       —       —  

Our pro forma net income (loss) and diluted net income (loss) per share would have been as follows if we had adopted SFAS 123 and recorded compensation expense for our stock option plans and Employee Purchase Plan in accordance with its provisions:

                           
      Fiscal
     
      2000   2001   2002
     
 
 
(In thousands, except per share data)
                       
Net income (loss)
         
 
As reported
  $ 305,661     $ (82,793 )   $ 140,160  
 
Pro forma
    210,376       (185,469 )     50,626  
Diluted net income (loss) per share
         
 
As reported
  $ 1.45     $ (0.40 )   $ 0.64  
 
Pro forma
    1.00       (0.89 )     0.23  

The weighted average fair values of options granted during fiscal 2000, 2001 and 2002 were approximately $23.27, $21.77 and $20.31, respectively.

18.   Performance Sharing and Benefit Plans

Performance Sharing Plan

Eligible employees participate in Intuit’s performance sharing plan. The Compensation Committee of the Board of Directors determines aggregate amounts to be paid under the plan. Performance-sharing expense for fiscal 2000, 2001 and 2002 was approximately $20.7 million, $21.9 million and $17.6 million, respectively.

Executive Deferred Compensation Plan

Intuit adopted the Executive Deferred Compensation Plan effective March 15, 2002. The plan allows executives who meet minimum compensation requirements to defer up to 50% of their salaries and up to 100% of their bonuses and commissions. We have agreed to credit the participants’ contributions with earnings that reflect the performance of certain independent investment funds. We may also make discretionary employer contributions to participant accounts. The timing, amounts and vesting schedules of employer contributions are at our sole discretion. The benefits under this plan are unsecured and are general assets of Intuit. Participants are generally eligible to receive payment of their vested benefit at the end of their elected deferral period or after termination of their employment with Intuit for any reason. Discretionary company contributions and the related earnings vest

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completely upon the participant’s disability, death or a change of control of Intuit. We made no employer contributions to the plan during fiscal 2002.

Benefit Plans

Employees who participate in the Intuit 401(k) Plan may contribute up to 20% of pre-tax salary to the plan, subject to IRS limitations. Intuit matches a specified portion of the employee contributions up to a maximum amount per employee per year. The amount is subject to change on an annual basis. At July 31, 2001 and 2002, the match was 75%, up to $2,500. Matching contributions were approximately $6.6 million, $6.9 million and $8.4 million, respectively, for the years ended July 31, 2000, 2001 and 2002. Participating employees age 50 or older may make catch-up contributions. These contributions are not matched.

19.   Stockholder Rights Plan

On April 29, 1998, the Board of Directors adopted a stockholder rights plan designed to protect the long-term value of Intuit for its stockholders during any future unsolicited acquisition attempt. In connection with the plan, the Board declared a dividend of one preferred share purchase right for each share of Intuit’s common stock outstanding on May 11, 1998 (the “Record Date”) and further directed the issuance of one such right with respect to each share of Intuit’s common stock that is issued after the Record Date, except in certain circumstances. If a person or a group (an “Acquiring Person”) acquires 20% or more of Intuit’s common stock, or announces an intention to make a tender offer for Intuit’s common stock, the consummation of which would result in a person or group becoming an Acquiring Person, then the rights will be distributed (the “Distribution Date”). After the Distribution Date, each right may be exercised for 1/3000th of a share of a newly designated Series B Junior Participating Preferred stock at an exercise price of approximately $83.33 per share. The preferred stock has been structured so that the value of 1/3000th of a share of such preferred stock will approximate the value of one share of common stock. The rights will expire on May 1, 2008. In July 2002, we adopted a policy that requires an independent committee of our Board of Directors to review the rights plan at least once every three years to consider whether maintaining the rights plan continues to be in the best interests of Intuit and its stockholders.

20.   Income Taxes

Income (loss) from continuing operations before income taxes included income (loss) from foreign operations of $7.9 million, $4.6 million and $8.0 million for fiscal 2000, 2001 and 2002, respectively. The provision (benefit) for income taxes from continuing operations consisted of the following:

                           
      Fiscal
     
(In thousands)   2000   2001   2002
   
 
 
Current:
                       
 
Federal
  $ 285,320     $ 46,025     $ 29,970  
 
State
    62,041       10,200       7,917  
 
Foreign
    2,771       4,699       3,752  
 
   
     
     
 
 
    350,132       60,924       41,639  
Deferred:
                       
 
Federal
    (110,490 )     (63,900 )     (21,617 )
 
State
    (23,092 )     (9,501 )     (3,088 )
 
   
     
     
 
 
    (133,582 )     (73,401 )     (24,705 )
 
   
     
     
 
Total provision (benefit) for income taxes
  $ 216,550     $ (12,477 )   $ 16,934  
 
   
     
     
 

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Differences between income taxes calculated using the federal statutory income tax rate of 35% and the provision (benefit) for income taxes from continuing operations were as follows:

                           
      Fiscal
     
(In thousands)   2000   2001   2002
   
 
 
Income (loss) from continuing operations before income taxes
  $ 542,241     $ (137,133 )   $ 70,549  
 
   
     
     
 
Statutory federal income tax
  $ 189,784     $ (47,997 )   $ 24,692  
State income tax, net of federal benefit
    25,317       699       4,829  
Federal research and experimental credits
    (5,000 )     (4,000 )     (4,000 )
Non-deductible merger related charges
    11,263       49,407       16,759  
Tax exempt interest
    (8,204 )     (13,633 )     (8,710 )
Tax benefit related to divestiture
    —       —       (25,770 )
Other, net
    3,390       3,047       9,134  
 
   
     
     
 
 
Total
  $ 216,550     $ (12,477 )   $ 16,934  
 
   
     
     
 

Tax savings from deductions associated with our various stock option plans are not reflected in the current federal and state provisions. Savings were approximately $93.5 million in fiscal 2000, $59.5 million in fiscal 2001 and $53.2 million in fiscal 2002. These amounts were credited to stockholders’ equity and reduced taxes payable.

Significant deferred tax assets and liabilities were as follows:

                     
        July 31,   July 31,
(In thousands)   2001   2002
   
 
Deferred tax assets:
               
 
Accruals and reserves not currently deductible
  $ 39,005     $ 48,494  
 
NOL and tax credits carryforward
    —       25,594  
 
State income taxes
    38,194       —  
 
Unrealized loss on marketable securities
    —       9,326  
 
Merger charges
    121,197       141,950  
 
Fixed asset adjustments
    29,656       18,735  
 
Other, net
    8,084       7,012  
 
   
     
 
   
Total deferred tax assets
    236,136       251,111  
 
   
     
 
Deferred tax liabilities:
               
 
Unrealized gain on marketable securities
    (1,948 )     —  
 
   
     
 
   
Total deferred tax liabilities
    (1,948 )     —  
 
   
     
 
Total net deferred tax assets
    234,188       251,111  
 
Valuation reserve
    (11,411 )     (6,759 )
 
   
     
 
Total net deferred tax assets (liabilities), net of valuation reserve
  $ 222,777     $ 244,352  
 
   
     
 

We have provided a valuation reserve related to the benefits of losses in our foreign subsidiaries and certain state capital loss carryforwards that we believe are unlikely to be realized. The valuation allowance decreased by $0.2 million in fiscal 2000, did not change in fiscal 2001 and decreased by $4.7 million in fiscal 2002.

At July 31, 2002, we had U.S. federal and foreign net operating loss carryforwards of approximately $26.1 million and $1.4 million, respectively. These net operating losses will expire at various dates beginning in fiscal 2005 if not utilized. At July 31, 2002, we also had various state tax credit carryforwards totaling approximately $13.8 million. The state credit carryforwards have no expiration date. Utilization of the net operating loss carryforwards may be subject to substantial annual limitation due to ownership change limitations provided by the Internal Revenue Code of 1986, as amended. The annual limitation may result in the expiration of net operating losses before utilization.

21.  Litigation

On March 3, 2000, a class action lawsuit, Bruce v. Intuit Inc., was filed in the United States District Court, Central District of California, Eastern Division. Two virtually identical lawsuits were later filed: Rubin v. Intuit Inc., was filed on March 8, 2000 in the United States District Court, Southern District of New York and Newby v. Intuit Inc. was filed on April 27, 2000, in the United States District Court, Central District of California, Eastern Division. The Bruce and Newby lawsuits were consolidated into one lawsuit, In re Intuit Privacy Litigation, filed on July 28, 2000 in the United States District Court, Central District of California, Eastern Division. Following Intuit’s successful motion to dismiss several of the claims, an amended complaint was filed on May 2, 2001. A similar lawsuit, Almanza v. Intuit Inc. was filed on March 22, 2000 in the Superior Court of the State of California, San Bernardino

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County, Rancho Cucamonga Division. An amended complaint in the Almanza suit was filed on October 26, 2000. These purported class actions alleged violations of various federal and California statutes and common law claims for invasion of privacy based upon the alleged intentional disclosure to third parties of personal and private customer information entered at Intuit’s Quicken.com Web site. The complaints sought injunctive relief, orders to disgorge profits related to the alleged acts, and statutory and other damages. In August 2001, Intuit and the plaintiffs’ counsel in all of the cases except Rubin reached an agreement in principle to resolve the cases, subject to court approval, based on terms that are not material to Intuit. The Rubin case was dismissed on November 19, 2001.

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.

22.   Related Party Transactions

We participated in the formation of Venture Finance Software Corp. in May 1998 in order to facilitate the development of certain Web-oriented finance products. At July 31, 2000, we held a 49% non-voting equity interest in VFSC. We entered into agreements with VFSC to provide it with services related to on-going development of Web-oriented finance products and received cost reimbursements of approximately $23.8 million in fiscal 2000 for development and administrative services provided in connection with this agreement. In August 2000, we acquired all of the outstanding securities of VFSC. See Note 9. In May 2001, we sold certain technology assets acquired from VFSC to Princeton eCom Corporation. See Note 10.

Loans to executive officers and other employees at July 31, 2001 and 2002 were as follows:

                 
    July 31,
   
    2001   2002
   
 
(In thousands)
               
Loans to executive officers
  $ 9,502     $ 14,865  
Loans to other employees
    3,357       6,405  
 
   
     
 
 
  $ 12,859     $ 21,270  
 
   
     
 

Loans to executive officers are primarily relocation loans. Of the total loans to executive officers at July 31, 2002, $9.5 million accrue no interest for either the term of the note or for up to four years. The remaining loans to executive officers at July 31, 2002 accrue interest at rates equal to the applicable federal rates in effect at the time the loans were made. Of the total outstanding loans to executive officers and other employees at July 31, 2002, loans with a remaining principal balance of $20.2 million are secured by real property. The loans have terms which range from one to ten years.

23.  Selected Quarterly Consolidated Financial Data (Unaudited)

The following tables contain selected quarterly consolidated financial data for fiscal years 2001 and 2002. We accounted for the July 2002 sale of our Quicken Loans mortgage business segment and the February 2003 sale of our Japanese subsidiary, Intuit KK, as discontinued operations. As a result, the operating results of Quicken Loans and Intuit KK have been segregated from continuing operations in our consolidated financial statements and in these tables. See Note 11.

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    Fiscal 2001 Quarter Ended
   
    October 31   January 31   April 30   July 31
   
 
 
 
(In thousands, except per share data)
                               
Total net revenue
  $ 159,953     $ 420,032     $ 377,204     $ 138,873  
Cost of revenue
    61,243       96,480       70,606       56,480  
All other costs and expenses
    190,095       231,305       283,276       187,935  
Income (loss) from continuing operations before cumulative effect of accounting change
    (48,245 )     24,562       (24,728 )     (76,245 )
Net income from discontinued operations
    166       2,000       10,427       14,956  
Net income (loss)
    (33,765 )     26,562       (14,301 )     (61,289 )
Basic net income (loss) per share from continuing operations before cumulative effect of accounting change
  $ (0.23 )   $ 0.12     $ (0.12 )   $ (0.36 )
Diluted net income (loss) per share from continuing operations before cumulative effect of accounting change
    (0.23 )     0.11       (0.12 )     (0.36 )
Basic net income per share from discontinued operations
    0.00       0.01       0.05       0.07  
Diluted net income per share from discontinued operations
    0.00       0.01       0.05       0.07  
                                 
    Fiscal 2002 Quarter Ended
   
    October 31   January 31   April 30   July 31
   
 
 
 
(In thousands, except per share data)
                               
Total net revenue
  $ 158,318     $ 475,908     $ 491,152     $ 186,850  
Cost of revenue
    61,711       113,421       69,006       57,658  
All other costs and expenses
    233,625       267,180       243,740       215,387  
Income (loss) from continuing operations before cumulative effect of accounting change
    (103,306 )     99,896       132,702       (75,677 )
Net income from discontinued operations
    10,879       19,972       11,779       43,915  
Net income (loss)
    (92,427 )     119,868       144,481       (31,762 )
Basic net income (loss) per share from continuing operations before cumulative effect of accounting change
  $ (0.49 )   $ 0.47     $ 0.63     $ (0.36 )
Diluted net income (loss) per share from continuing operations before cumulative effect of accounting change
    (0.49 )     0.46       0.62       (0.36 )
Basic net income per share from discontinued operations
    0.05       0.09       0.05       0.21  
Diluted net income per share from discontinued operations
    0.05       0.09       0.05       0.21  

24.   Subsequent Event (Unaudited)

On September 13, 2002, we completed the purchase of Blue Ocean Software, Inc. for approximately $170.0 million in cash. Blue Ocean offers software solutions that help businesses manage their information technology resources and assets. Intuit plans to operate Blue Ocean as a separate business unit under its Small Business division led by Blue Ocean’s chief executive officer and headquartered in Tampa, Florida.

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Schedule II

INTUIT INC.

VALUATION AND QUALIFYING ACCOUNTS

                                   
              Additions                
      Balance at   Charged to           Balance at
      Beginning of   Expense/           End of
      Period   Revenue   Deductions   Period
     
 
 
 
(In thousands)
                               
Year ended July 31, 2000
             
 
Allowance for doubtful accounts
  $ 11,215     $ 4,884     $ (7,462 )   $ 8,637  
 
Reserve for product returns
  $ 60,670     $ 48,077     $ (52,951 )   $ 55,796  
Year ended July 31, 2001
             
 
Allowance for doubtful accounts
  $ 8,637     $ 10,593     $ (3,379 )   $ 15,851  
 
Reserve for product returns
  $ 55,796     $ 53,660     $ (81,557 )   $ 27,899  
Year ended July 31, 2002
          )    
 
Allowance for doubtful accounts
  $ 15,851     $ 3,494     $ (13,649 )   $ 5,696  
 
Reserve for product returns
  $ 27,899     $ 92,798     $ (88,602 )   $ 32,095  

    Note: Additions to the allowance for doubtful accounts are charged to expense. Additions to the reserve for product returns are charged against revenue.

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