Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

     
[X]   Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended January 31, 2004 or
     
[  ]   Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ________ to ________.

Commission File Number 0-21180

INTUIT INC.


(Exact name of registrant as specified in its charter)
     
Delaware   77-0034661

 
(State of incorporation)   (IRS employer identification no.)

2535 Garcia Avenue, Mountain View, CA 94043


(Address of principal executive offices)

(650) 944-6000


(Registrant’s telephone number, including area code)

Indicate by a check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.
Yes   [X]   No   [  ]

Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes   [X]   No   [  ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Approximately 196,862,515 shares of Common Stock, $0.01 par value, as of February 27, 2004

 


INTUIT INC.
FORM 10-Q
INDEX

           
      Page
      Number
     
       
       
      3  
      4  
      5  
      6  
    23  
    40  
    41  
       
    42  
    43  
    44  
      46  
 EXHIBIT 10.01
 EXHIBIT 10.02
 EXHIBIT 10.03
 EXHIBIT 10.04
 EXHIBIT 10.05
 EXHIBIT 10.06
 EXHIBIT 10.07
 EXHIBIT 10.08
 EXHIBIT 10.09
 EXHIBIT 10.10
 EXHIBIT 10.11
 EXHIBIT 31.01
 EXHIBIT 31.02
 EXHIBIT 32.01
 EXHIBIT 32.02

Intuit, the Intuit logo, QuickBooks, Quicken, TurboTax, ProSeries, Lacerte, QuickBase, FundWare and Track-it!, among others, are registered trademarks and/or registered service marks of Intuit Inc., or one of its subsidiaries, in the United States and other countries. Intuit Master Builder, MRI and Intuit Eclipse, among others, are trademarks and/or service marks of Intuit Inc., or one of its subsidiaries, in the United States and other countries. Other parties’ marks are the property of their respective owners and should be treated as such.

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PART I

ITEM 1
FINANCIAL STATEMENTS

INTUIT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

                         
            July 31,   January 31,
            2003   2004
(In thousands; unaudited)  
 
ASSETS
               
Current assets:
               
 
Cash and cash equivalents
  $ 170,043     $ 87,831  
 
Short-term investments
    1,036,758       891,081  
 
Payroll customer deposits
    306,007       281,448  
 
Accounts receivable, net
    88,156       283,959  
 
Deferred income taxes
    34,824       34,824  
 
Prepaid expenses and other current assets
    33,082       61,554  
 
 
   
     
 
   
Total current assets
    1,668,870       1,640,697  
Property and equipment, net
    188,253       196,913  
Goodwill, net
    591,091       690,766  
Purchased intangible assets, net
    125,445       124,865  
Long-term deferred income taxes
    183,061       183,061  
Loans to executive officers and other employees
    19,690       18,206  
Other assets
    13,857       18,630  
 
 
   
     
 
Total assets
  $ 2,790,267     $ 2,873,138  
 
 
   
     
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
 
Accounts payable
  $ 56,786     $ 104,448  
 
Accrued compensation and related liabilities
    118,678       105,401  
 
Payroll service obligations
    306,007       281,448  
 
Deferred revenue
    178,840       203,686  
 
Income taxes payable
    76,725       103,523  
 
Other current liabilities
    59,129       145,653  
 
 
   
     
 
   
Total current liabilities
    796,165       944,159  
 
 
   
     
 
Long-term obligations
    29,265       18,864  
 
 
   
     
 
Commitments and contingencies
               
Stockholders’ equity:
               
 
Preferred stock
    —       —  
 
Common stock and additional paid-in capital
    1,921,554       1,944,273  
 
Treasury shares, at cost
    (672,326 )     (795,505 )
 
Deferred compensation
    (25,850 )     (21,988 )
 
Accumulated other comprehensive income (loss)
    (789 )     (2,616 )
 
Retained earnings
    742,248       785,951  
 
 
   
     
 
   
Total stockholders’ equity
    1,964,837       1,910,115  
 
 
   
     
 
Total liabilities and stockholders’ equity
  $ 2,790,267     $ 2,873,138  
 
 
   
     
 

See accompanying notes.

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INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                                     
        Three Months Ended   Six Months Ended
        January 31,   January 31,
        2003   2004   2003   2004
(In thousands, except per share amounts; unaudited)  
 
 
 
Net revenue:
                               
 
Product
  $ 457,240     $ 509,012     $ 599,143     $ 669,197  
 
Service
    83,238       109,556       138,842       175,823  
 
Other
    17,598       17,721       32,963       33,797  
 
 
   
     
     
     
 
   
Total net revenue
    558,076       636,289       770,948       878,817  
 
 
   
     
     
     
 
Costs and expenses:
                               
 
Cost of revenue:
                               
   
Cost of product revenue
    71,062       65,895       99,774       97,913  
   
Cost of service revenue
    39,557       42,472       76,169       78,308  
   
Cost of other revenue
    5,164       6,889       9,754       13,673  
   
Amortization of purchased software
    3,518       3,324       6,495       6,613  
 
Customer service and technical support
    55,591       63,215       95,221       104,206  
 
Selling and marketing
    97,796       107,640       172,617       199,589  
 
Research and development
    66,080       73,333       130,207       144,664  
 
General and administrative
    38,405       48,131       78,021       91,826  
 
Charge for purchased research and development
    1,070       —       8,859       —  
 
Acquisition-related charges
    9,154       6,780       18,609       12,829  
 
 
   
     
     
     
 
   
Total costs and expenses
    387,397       417,679       695,726       749,621  
 
 
   
     
     
     
 
Income from continuing operations
    170,679       218,610       75,222       129,196  
Interest and other income
    7,770       7,170       16,556       14,660  
Gains on marketable securities and other investments, net
    2,827       90       3,080       237  
 
 
   
     
     
     
 
Income from continuing operations before income taxes
    181,276       225,870       94,858       144,093  
Income tax provision
    55,905       76,804       29,936       48,992  
 
 
   
     
     
     
 
Net income from continuing operations
    125,371       149,066       64,922       95,101  
Discontinued operations, net of income taxes:
                               
 
Gain on disposal of Quicken Loans discontinued operations
    —       —       5,556       —  
 
Net income from Intuit KK discontinued operations
    3,059       —       3,267       —  
 
 
   
     
     
     
 
Net income from discontinued operations
    3,059       —       8,823       —  
 
 
   
     
     
     
 
Net income
  $ 128,430     $ 149,066     $ 73,745     $ 95,101  
 
 
   
     
     
     
 
Basic net income per share from continuing operations
  $ 0.61     $ 0.75     $ 0.32     $ 0.48  
Basic net income per share from discontinued operations
    0.01       —       0.04       —  
 
 
   
     
     
     
 
Basic net income per share
  $ 0.62     $ 0.75     $ 0.36     $ 0.48  
 
 
   
     
     
     
 
Shares used in basic per share amounts
    205,682       197,665       206,823       198,206  
 
 
   
     
     
     
 
Diluted net income per share from continuing operations
  $ 0.59     $ 0.73     $ 0.31     $ 0.47  
Diluted net income per share from discontinued operations
    0.01       —       0.04       —  
 
 
   
     
     
     
 
Diluted net income per share
  $ 0.60     $ 0.73     $ 0.35     $ 0.47  
 
 
   
     
     
     
 
Shares used in diluted per share amounts
    212,455       203,430       213,445       203,796  
 
 
   
     
     
     
 

See accompanying notes.

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INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                         
            Six Months Ended
            January 31,
            2003   2004
(In thousands; unaudited)  
 
Cash flows from operating activities:
               
 
Net income from continuing operations
  $ 64,922     $ 95,101  
 
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
               
   
Acquisition-related charges
    18,609       12,829  
   
Amortization of purchased software
    6,495       6,613  
   
Amortization of other purchased intangible assets
    —       2,921  
   
Charge for purchased research and development
    8,859       —  
   
Amortization of deferred compensation not related to acquisitions
    1,267       3,118  
   
Depreciation
    36,119       38,588  
   
Loss on disposal of property and equipment
    2,321       2,008  
   
Gain on foreign exchange transactions
    (2,060 )     (4,107 )
   
Net gains from marketable securities and other investments
    (3,080 )     (237 )
   
Deferred income taxes
    2,633       —  
   
Tax benefit from employee stock options
    30,379       22,964  
 
 
   
     
 
       
Subtotal
    166,464       179,798  
 
 
   
     
 
   
Changes in operating assets and liabilities:
               
     
Payroll customer deposits
    40,451       24,559  
     
Accounts receivable
    (187,982 )     (193,273 )
     
Income taxes receivable
    2,187       —  
     
Prepaid expenses and other current assets
    10,745       (24,948 )
     
Accounts payable
    35,557       45,449  
     
Accrued compensation and related liabilities
    4,172       (13,467 )
     
Payroll service obligations
    (40,423 )     (24,559 )
     
Deferred revenue
    16,686       24,581  
     
Income taxes payable
    23,096       26,706  
     
Other current liabilities
    94,131       83,761  
 
 
   
     
 
     
Total changes in operating assets and liabilities
    (1,380 )     (51,191 )
 
 
   
     
 
     
Net cash provided by operating activities
    165,084       128,607  
 
 
   
     
 
Cash flows from investing activities:
               
 
Purchases of short-term investments
    (653,284 )     (1,080,002 )
 
Liquidation and maturity of short-term investments
    748,743       1,225,543  
 
Proceeds from the sale of marketable securities
    16,371       —  
 
Purchases of property and equipment
    (54,970 )     (47,662 )
 
Change in other assets
    (2,324 )     (3,015 )
 
Acquisitions of businesses, net of cash acquired
    (185,227 )     (120,810 )
 
 
   
     
 
     
Net cash used in investing activities
    (130,691 )     (25,946 )
 
 
   
     
 
Cash flows from financing activities:
               
 
Change in long-term obligations
    (1,944 )     (10,557 )
 
Net proceeds from issuance of common stock
    90,593       86,556  
 
Purchase of treasury stock
    (423,210 )     (261,127 )
 
 
   
     
 
     
Net cash used in financing activities
    (334,561 )     (185,128 )
 
 
   
     
 
Net cash provided by discontinued operations
    264,539       —  
Effect of exchange rates on cash and cash equivalents
    796       255  
 
 
   
     
 
Net decrease in cash and cash equivalents
    (34,833 )     (82,212 )
Cash and cash equivalents at beginning of period
    408,948       170,043  
 
 
   
     
 
Cash and cash equivalents at end of period
  $ 374,115     $ 87,831  
 
 
   
     
 

See accompanying notes.

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INTUIT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. Summary of Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements include the financial statements of Intuit and its wholly owned subsidiaries. We have eliminated all significant intercompany balances and transactions in consolidation. We have reclassified certain other amounts previously reported in our financial statements to conform to the current presentation. We sold our Quicken Loans mortgage business in July 2002 and our Japanese subsidiary, Intuit KK, in February 2003 and accounted for the sales of these businesses as discontinued operations. Accordingly, we have reclassified our financial statements for all periods presented to reflect Quicken Loans and Intuit KK as discontinued operations. Unless noted otherwise, discussions in these notes pertain to our continuing operations.

We have included all normal recurring adjustments and the adjustments for discontinued operations that we considered necessary to give a fair presentation of our operating results for the periods presented. These condensed consolidated financial statements and accompanying notes should be read together with the audited consolidated financial statements for the fiscal year ended July 31, 2003 included in Intuit’s Form 10-K, filed with the Securities and Exchange Commission on September 19, 2003. Results for the three and six months ended January 31, 2004 do not necessarily indicate the results we expect for the fiscal year ending July 31, 2004 or any other future period. Our tax businesses are highly seasonal, with sales of tax preparation products and services heavily concentrated in the period from November through April. These seasonal patterns mean that our quarterly total net revenue is usually highest during our second and third fiscal quarters.

Use of Estimates

We make estimates and assumptions that affect the amounts reported in the financial statements and the disclosures made in the accompanying notes. For example, we use estimates in determining the appropriate levels of reserves for product returns and rebates, the collectibility of accounts receivable, the realizability of deferred tax assets, the appropriate levels of various accruals and the remaining economic lives and carrying values of purchased intangible assets, property and equipment and other long-lived assets. We also use assumptions when employing the Black-Scholes valuation model to estimate the fair value of stock options granted for pro forma disclosures. See Note 1, “Stock-Based Incentive Programs.” Despite our intention to establish accurate estimates and use reasonable assumptions, actual results may differ from our estimates.

Net Revenue

We derive revenues from the sale of packaged software products and supplies, product support, professional services, outsourced payroll services and multiple element arrangements that may include any combination of these items. We recognize revenue for software products and related services in accordance with Statement of Position 97-2, “Software Revenue Recognition,” as modified by SOP 98-9. For other offerings, we follow Staff Accounting Bulletin No. 104, “Revenue Recognition.” We recognize revenue when persuasive evidence of an arrangement exists, we have delivered the product or performed the service, the fee is fixed or determinable and collectibility is probable.

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In some situations, we receive advance payments from our customers. We also offer multiple element arrangements to our customers. We defer revenue associated with these advance payments and the fair value of undelivered elements until we ship the products or perform the services. Deferred revenue consisted of the following at the dates indicated:

                 
    July 31,   January 31,
    2003   2004
(In thousands)  
 
Product and product-related services
  $ 146,609     $ 166,017  
Customer support
    32,231       37,669  
 
   
     
 
 
  $ 178,840     $ 203,686  
 
   
     
 

Product-related services include deferred revenue primarily for consumer electronic filing services and QuickBooks Do-It-Yourself Payroll.

In accordance with Financial Accounting Standards Board Emerging Issues Task Force Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Product,” we generally account for cash consideration (such as sales incentives) that we give to our customers or resellers as a reduction of revenue rather than as an operating expense unless we receive a benefit that we can identify and for which we can reasonably estimate the fair value.

Product Revenue

We typically recognize revenue from the sale of our packaged software products and supplies when we ship the products or, in the case of certain agreements, when products are delivered to retailers. We sell some of our QuickBooks and Consumer Tax products on consignment to a limited number of resellers. We recognize revenue for these consignment transactions only when the end-user sale has occurred.

We reduce product revenue from distributors and retailers for estimated returns that are based on historical returns experience and other factors, such as the volume and price mix of products in the retail channel, return rates for prior releases of the product, trends in retailer inventory and economic trends that might impact customer demand for our products (including the competitive environment and the timing of new releases of our product). We also reduce product revenue for the estimated redemption of rebates on certain current product sales. Our estimated reserves for distributor and retailer sales incentive rebates are based on distributors’ and retailers’ actual performance against the terms and conditions of rebate programs, which we typically establish annually. End user rebate reserves are estimated based on the terms and conditions of the specific promotional rebate program, actual sales during the promotion, the amount of redemptions received and historical redemption trends by product and by type of promotional program.

Service Revenue

We recognize revenue from outsourced payroll processing and payroll tax filing services as the services are performed, provided we have no other remaining obligations to these customers. We generally require customers to remit payroll and payroll tax 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 when we collect these funds from customers and when we remit the funds to outside parties.

We offer several technical support plans and recognize support revenue over the life of the plans. Service revenue also includes revenue from consulting, training and Web services such as TurboTax for the Web and electronic tax filing services. We generally recognize revenue as these services are performed, provided that we have no other remaining obligations to these customers and that the services performed are not essential to the functionality of delivered products and services.

Other Revenue

Other revenue consists primarily of revenue from revenue-sharing arrangements with third-party service providers and from online advertising agreements. We recognize transaction fees from revenue sharing arrangements as end-user sales are reported to us by these partners. We typically recognize revenue from online advertising agreements as the lesser of when the advertisements are served or pro rata based on the contractual time period.

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Multiple Element Arrangements

We enter into certain revenue arrangements for which we are obligated to deliver multiple products and/or services (multiple elements). For these arrangements, which generally include software products, we allocate and defer revenue for the undelivered elements based on their vendor-specific objective evidence, or VSOE, of fair value. VSOE is generally the price charged when that element is sold separately.

In situations where VSOE exists for all elements (delivered and undelivered), we allocate the total revenue to be earned under the arrangement among the various elements, based on their relative fair value. For transactions where VSOE exists only for the undelivered elements, we defer the full fair value of the undelivered elements and recognize the difference between the total arrangement fee and the amount deferred for the undelivered items as revenue. If VSOE does not exist for undelivered items that are services, then we recognize the entire arrangement fee ratably over the remaining service period. If VSOE does not exist for undelivered elements that are specified products or features, we defer revenue until the earlier of the delivery of all elements or the point at which we determine VSOE for these undelivered elements.

We recognize revenue related to the delivered products or services only if: (1) the above revenue recognition criteria are met; (2) any undelivered products or services are not essential to the functionality of the delivered products and services; (3) payment for the delivered products or services is not contingent upon delivery of the remaining products or services; and (4) we have an enforceable claim to receive the amount due in the event that we do not deliver the undelivered products or services.

For arrangements where undelivered services are essential to the functionality of delivered software, we recognize both the product license revenues and service revenues under the percentage of completion contract method in accordance with the provisions of SOP 81-1, “Accounting for Performance of Construction Type and Certain Production Type Contracts.” To date, product license and service revenues recognized pursuant to SOP 81-1 have not been significant.

Shipping and Handling

We record the amounts we charge our customers for the shipping and handling of our software products as product revenue and we record the related costs as cost of product revenue on our statement of operations. Product revenue from shipping and handling is not significant.

Per Share Computations

We compute basic income or loss per share using the weighted average number of common shares outstanding during the period. We compute diluted income or loss per share using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Common equivalent shares consist of the shares issuable upon the exercise of stock options under the treasury stock method and vested restricted stock awards. In loss periods, basic and diluted loss per share are identical since the effect of common equivalent shares is anti-dilutive and therefore excluded.

Our diluted net income per share computations for the second quarter of fiscal 2003 and 2004 included 6.8 million and 5.8 million common equivalent shares but the periods did not include the effect of options to purchase 4.1 million shares of common stock because the option exercise prices were greater than the average market price of our common stock. Our diluted net income per share computations for the first six months of fiscal 2003 and 2004 included 6.6 million and 5.6 million common equivalent shares but the periods did not include the effect of options to purchase 4.8 million shares of common stock because the option exercise prices were greater than the average market price of our common stock.

Cash Equivalents and Short-Term Investments

We consider highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Cash equivalents consist primarily of money market funds in all periods presented. Short-term investments consist of available-for-sale debt securities that we carry at fair value. We include unrealized gains and losses on short-term investments, net of tax, in stockholders’ equity. Available-for-sale debt securities are classified as current assets based upon our intent and ability to use any and all of these securities as necessary to satisfy the significant short-term liquidity requirements that may arise from the highly seasonal and cyclical nature of our

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businesses. Because of our significant business seasonality, cash flow requirements may fluctuate dramatically from quarter to quarter and require us to use a significant amount of the short-term investments held as available-for-sale securities. See Note 2.

Payroll Customer Deposits and Payroll Service Obligations

Payroll customer deposits represent cash held on behalf of our payroll customers. Payroll service obligations consist primarily of payroll taxes we owe on behalf of our payroll customers.

Goodwill, Purchased Intangible Assets and Other Long-lived Assets

We record goodwill when the purchase price of net tangible and intangible assets we acquire exceeds their fair value. We amortize the cost of identified intangible assets on a straight-line basis over periods ranging from two to seven years.

We regularly perform reviews to determine if the carrying values of our long-lived assets are impaired. In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” we review goodwill and other intangible assets that have indefinite useful lives for impairment at least annually in our fourth fiscal quarter, or more frequently if an event occurs indicating the potential for impairment. In accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we review intangible assets that have finite useful lives and other long-lived assets when an event occurs indicating the potential for impairment. In our reviews, we look for facts or circumstances, either internal or external, indicating that we may not recover the carrying value of the asset. We measure impairment losses related to long-lived assets based on the amount by which the carrying amounts of these assets exceed their fair values. Our measurement of fair value is generally based on an analysis of the present value of estimated future discounted cash flows. Our analysis is based on available information and reasonable and supportable assumptions and projections. The discounted cash flow analysis considers the likelihood of possible outcomes and is based on our best estimate of projected future cash flows. If necessary, we perform subsequent calculations to measure the amount of the impairment loss based on the excess of the carrying value over the fair value of the impaired assets.

Stock-Based Incentive Programs

We provide equity incentives to our employees and to our Board members. We apply the intrinsic value recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” in accounting for stock-based incentives. Accordingly, we are not required to record compensation expense when stock options are granted to eligible participants as long as the exercise price is not less than the fair market value of the stock when the option is granted. We are also not required to record compensation expense in connection with our Employee Stock Purchase Plan as long as the purchase price of the stock is not less than 85% of the lower of the fair market value at the beginning of each offering period or at the end of each purchase period.

In October 1995 the FASB issued SFAS 123, “Accounting for Stock Based Compensation,” and in December 2002 the FASB issued SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” Although these pronouncements allow us to continue to follow the APB 25 guidelines and not record compensation expense for most stock-based compensation, we are required to disclose our pro forma net income or loss and net income or loss per share as if we had adopted SFAS 123 and SFAS 148. The pro forma impact of applying SFAS 123 and SFAS 148 in the second quarter and first six months of fiscal 2003 and 2004 does not necessarily represent the pro forma impact in future quarters or years.

To determine the pro forma impact, we estimate the fair value of our options using the Black-Scholes option valuation model. This model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. This model also requires the input of highly subjective assumptions including the expected stock price volatility. Our stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimates.

Inputs used for the valuation model are set forth in the tables below. We base the volatility factor for stock options on the historical volatility of our stock over the most recent five-year period, which is approximately equal to the maximum expected life of our options.

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    Options
   
    Three Months Ended   Six Months Ended
   
 
    January 31,   January 31,   January 31,   January 31,
    2003   2004   2003   2004
   
 
 
 
Expected life (years)
    1.92 - 4.92       1.99 - 4.99       1.91 - 4.92       1.95 - 4.99  
Expected volatility factor
    77 %     72 %     77-78 %     72-74 %
Risk-free interest rate
    1.03 - 3.10 %     0.85 - 3.29 %     1.03 - 3.10 %     0.85 - 3.29 %
Expected dividend yield
    —       —       —       —  
                                 
    Employee Stock Purchase Plan
   
    Three Months Ended   Six Months Ended
   
 
    January 31,   January 31,   January 31,   January 31,
    2003   2004   2003   2004
   
 
 
 
Expected life (years)
    1.00       1.00       1.00       1.00  
Expected volatility factor
    78 %     74 %     78 %     74-76 %
Risk-free interest rate
    1.23 %     0.94 %     1.23 %     0.94 - 0.97 %
Expected dividend yield
    —       —       —       —  

The following table illustrates the effect on our net income or loss and net income or loss per share if we had applied the fair value recognition provisions of SFAS 123 to stock-based incentives using the Black Scholes valuation model. For purposes of this reconciliation, we add back to previously reported net income or loss all stock-based incentive expense we have recorded that relates to acquisitions. We then deduct the pro forma stock-based incentive expense determined under the fair value method for all awards including those that relate to acquisitions. The pro forma stock-based incentive expense has no impact on our cash flow. In the future, we may elect or be required to use a different valuation model, which could result in a significantly different impact on our pro forma net income or loss.

                                   
      Three Months Ended   Six Months Ended
     
 
      January 31,   January 31,   January 31,   January 31,
      2003   2004   2003   2004
(In thousands, except per share amounts)  
 
 
 
Net income
                               
 
Net income, as reported
  $ 128,430     $ 149,066     $ 73,745     $ 95,101  
 
Add: Stock-based employee compensation expense included in reported net income, net of income taxes
    263       132       1,200       295  
 
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of income taxes
    (23,997 )     (17,934 )     (46,871 )     (39,320 )
 
 
   
     
     
     
 
 
Pro forma net income
  $ 104,696     $ 131,264     $ 28,074     $ 56,076  
 
 
   
     
     
     
 
Net income per share
                               
 
Basic - as reported
  $ 0.62     $ 0.75     $ 0.36     $ 0.48  
 
 
   
     
     
     
 
 
Basic - pro forma
  $ 0.51     $ 0.66     $ 0.14     $ 0.28  
 
 
   
     
     
     
 
 
Diluted - as reported
  $ 0.60     $ 0.73     $ 0.35     $ 0.47  
 
 
   
     
     
     
 
 
Diluted - pro forma
  $ 0.49     $ 0.65     $ 0.13     $ 0.28  
 
 
   
     
     
     
 

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Concentration of Credit Risk and Significant Customers and Suppliers

We operate in markets that are highly competitive and rapidly changing. Significant technological changes, changes in customer requirements, the emergence of competitive products or services with new capabilities and other factors could negatively impact our operating results.

We are also subject to risks related to changes in the values of our significant balance of short-term investments. Our portfolio of short-term investments consists primarily of investment-grade securities. Except for direct obligations of the United States government, securities issued by agencies of the United States government, and money market or cash management funds, we diversify our short-term investments by limiting our holdings with any individual issuer to a maximum of $5.0 million in each of our three managed portfolios.

We sell a significant portion of our products through third-party retailers and distributors. As a result, we face risks related to the collectibility of our accounts receivable. To appropriately manage this risk, we perform ongoing evaluations of customer credit and limit the amount of credit extended as we deem appropriate but generally do not require collateral. We maintain reserves for estimated credit losses and these losses have historically been within our expectations. However, since we cannot necessarily predict future changes in the financial stability of our customers, we cannot guarantee that our reserves will continue to be adequate.

Due to changes in our distribution arrangements during fiscal 2002, we are selling an increasing proportion of our software products directly to many retailers rather than through a few major distributors. No distributor or individual retailer accounted for 10% or more of total net revenue in the second quarter or first six months of fiscal 2003 or 2004. Amounts due from Rock Acquisition Corporation under certain licensing and distribution agreements comprised 10.8% of accounts receivable at July 31, 2003. One customer accounted for 12.6% of accounts receivable at January 31, 2004.

We rely on three third-party vendors to perform substantially all outsourced aspects of manufacturing and distribution for our primary retail desktop software products. We also have a key single-source vendor for our financial supplies business that prints and fulfills orders for all of our checks and most other products for our financial supplies business. While we believe that relying heavily on key vendors improves the efficiency and reliability of our business operations, relying on any one vendor for a significant aspect of our business can have a significant negative impact on our revenue and profitability if that vendor fails to perform at acceptable service levels for any reason, including financial difficulties of the vendor.

Recent Accounting Pronouncements

In November 2002, the EITF reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” Issue 00-21 provides guidance on accounting for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of Issue 00-21 apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. We adopted Issue 00-21 effective August 1, 2003 and the adoption of this standard did not have a material effect on our financial position, results of operations or cash flows.

In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities.” FIN 46 requires us to consolidate a variable interest entity if we are subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. A variable interest entity is a corporation, partnership, trust or any other legal structure used for business purposes that either does not have equity investors with voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property. A variable interest entity may be essentially passive or it may engage in research and development or other activities on behalf of another company. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after December 15, 2003. We anticipate that the adoption of FIN 46 will not have a material impact on our financial position, results of operations or cash flows.

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2. Short-Term Investments

As discussed in Note 1, “Concentration of Credit Risk and Significant Customers and Suppliers,” our portfolio of short-term investments consists primarily of investment-grade securities. Except for direct obligations of the United States government, securities issued by agencies of the United States government, and money market or cash management funds, we diversify our short-term investments by limiting our holdings with any individual issuer to a maximum of $5.0 million in each of our three managed portfolios.

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

                 
    July 31,   January 31,
    2003   2004
(In thousands)  
 
Corporate notes
  $ 50,471     $ 15,558  
Municipal bonds
    931,374       856,550  
U.S. government securities
    54,913       18,973  
 
   
     
 
 
  $ 1,036,758     $ 891,081  
 
   
     
 

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

                 
    July 31,   January 31,
    2003   2004
(In thousands)  
 
Due within one year
  $ 241,110     $ 211,127  
Due within two years
    270,900       217,483  
Due within three years
    3,088       8,881  
Due after three years
    521,660       453,590  
 
   
     
 
 
  $ 1,036,758     $ 891,081  
 
   
     
 

Unrealized gains and losses on short-term investments at July 31, 2003 and January 31, 2004 were not material. Realized gains and losses from the sale of short-term investments were not material in the second quarter or first six months of fiscal 2003 or 2004.

3.     Goodwill and Intangible Assets

Changes in the carrying value of goodwill by reportable segment during the first six months of fiscal 2004 were as follows. Our reportable segments are described in Note 6.

                                 
    Balance   Increase   Effect of   Balance
    July 31,   (Decrease)   Exchange   January 31,
    2003   in Goodwill   Rates   2004
(In thousands)  
 
 
 
Small Business Products and Services
  $ 308,785     $ 98,716     $ —     $ 407,501  
Consumer Tax
    11,204       113       —       11,317  
Professional Accounting Solutions
    90,507       —       —       90,507  
Vertical Business Management Solutions
    170,522       170       —       170,692  
Other Businesses
    10,073       —       676       10,749  
 
   
     
     
     
 
 
  $ 591,091     $ 98,999     $ 676     $ 690,766  
 
   
     
     
     
 

The net increase in goodwill was related primarily to our acquisition of Innovative Merchant Solutions LLC in the first quarter of fiscal 2004. See Note 5.

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Purchased intangible assets consisted of the following at the dates indicated:

                         
    Life in   July 31,   January 31,
    Years   2003   2004
(Dollars in thousands)  
 
 
Customer lists
    3-7     $ 171,237     $ 187,622  
Less accumulated amortization
            (105,771 )     (118,999 )
 
           
     
 
 
            65,466       68,623  
 
           
     
 
Purchased technology
    2-7       143,605       147,247  
Less accumulated amortization
            (93,694 )     (100,348 )
 
           
     
 
 
            49,911       46,899  
 
           
     
 
Trade names and logos
    3-7       17,199       17,302  
Less accumulated amortization
            (10,293 )     (11,708 )
 
           
     
 
 
            6,906       5,594  
 
           
     
 
Covenants not to compete
    2-5       9,410       11,382  
Less accumulated amortization
            (6,248 )     (7,633 )
 
           
     
 
 
            3,162       3,749  
 
           
     
 
Total purchased intangible assets
            341,451       363,553  
Total accumulated amortization
            (216,006 )     (238,688 )
 
           
     
 
Total net purchased intangible assets
          $ 125,445     $ 124,865  
 
           
     
 

The increases in customer lists and covenants not to compete during the first six months of fiscal 2004 were due primarily to our acquisition of Innovative Merchant Solutions LLC. See Note 5.

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

                                   
      Three Months Ended   Six Months Ended
     
 
      January 31,   January 31,   January 31,   January 31,
      2003   2004   2003   2004
     
 
 
 
(In thousands)                                
Amortization of purchased intangible assets
  $ 8,716     $ 6,560     $ 16,609     $ 12,336  
Amortization of acquisition-related deferred compensation
    438       220       2,000       493  
 
   
     
     
     
 
 
Total acquisition-related charges
  $ 9,154     $ 6,780     $ 18,609     $ 12,829  
 
   
     
     
     
 

We expect annual amortization of our purchased intangible assets by fiscal year to be as shown in the following table. Amortization of purchased intangible assets is charged primarily to amortization of purchased software in cost of revenue and to acquisition-related charges in operating expenses on our statement of operations. Amounts include amortization of intangible assets purchased in fiscal 2004. Future acquisitions could cause these amounts to increase. In addition, if impairment events occur they could accelerate the timing of charges.

           
      Expected
(Dollars in thousands)   Amortization
Fiscal year ending July 31,   Expense

 
2004
  $ 42,823  
2005
    36,578  
2006
    30,429  
2007
    20,194  
2008
    9,966  
Thereafter
    6,709  
 
   
 
 
Total expected future amortization expense
  $ 146,699  
 
   
 

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4. Comprehensive Net Income (Loss)

SFAS 130, “Reporting Comprehensive Income,” establishes standards for reporting and displaying comprehensive net income (loss) and its components in stockholders’ equity. SFAS 130 requires the components of other comprehensive income (loss), such as changes in the fair value of available-for-sale securities and foreign translation adjustments, to be added to our net income (loss) to arrive at comprehensive net income (loss). Other comprehensive income (loss) items have no impact on our net income (loss) as presented on our statement of operations.

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

                                   
      Marketable   Short-term   Foreign Currency        
      Securities   Investments   Translation   Total
(In thousands)  
 
 
 
Six months ended January 31, 2003
                               
Beginning balance, net of income taxes
  $ (4,845 )   $ 2,058     $ (888 )   $ (3,675 )
Unrealized gain, net of income tax provision of $7,285
    10,927       —       —       10,927  
Unrealized loss, net of income tax benefit of $578
    —       (867 )     —       (867 )
Reclassification adjustment for realized gain included in net income, net of income tax benefit of $1,549
    (2,323 )     —       —       (2,323 )
Translation adjustment
    —       —       (459 )     (459 )
 
   
     
     
     
 
 
Other comprehensive income (loss)
    8,604       (867 )     (459 )     7,278  
 
   
     
     
     
 
Ending balance, net of income taxes
  $ 3,759     $ 1,191     $ (1,347 )   $ 3,603  
 
   
     
     
     
 
Six months ended January 31, 2004
                               
Beginning balance, net of income taxes
  $ 105     $ 213     $ (1,107 )   $ (789 )
Unrealized gain, net of income tax provision of $99
    149       —       —       149  
Unrealized loss, net of income tax benefit of $55
    —       (81 )     —       (81 )
Translation adjustment
    —       —       (1,895 )     (1,895 )
 
   
     
     
     
 
 
Other comprehensive income (loss)
    149       (81 )     (1,895 )     (1,827 )
 
   
     
     
     
 
Ending balance, net of income taxes
  $ 254     $ 132     $ (3,002 )   $ (2,616 )
 
   
     
     
     
 
                                 
    Three Months Ended   Six Months Ended
   
 
    January 31,   January 31,   January 31,   January 31,
    2003   2004   2003   2004
(In thousands)  
 
 
 
Net income
  $ 128,430     $ 149,066     $ 73,745     $ 95,101  
Other comprehensive income (loss)
    2,227       (1,077 )     7,278       (1,827 )
 
   
     
     
     
 
Comprehensive net income, net of income taxes
  $ 130,657     $ 147,989     $ 81,023     $ 93,274  
 
   
     
     
     
 
Income tax provision netted against other comprehensive income (loss)
  $ 1,686     $ (61 )   $ 5,158     $ 44  
 
   
     
     
     
 

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5. Acquisitions

On October 4, 2003, we acquired all of the membership interests of Innovative Merchant Solutions LLC and a related entity doing business as Innovative Gateway Solutions (together, “IMS”) for an aggregate purchase price of approximately $116.7 million in cash. Of the total purchase price, $86.3 million was paid to the members of IMS and $30.4 million was deposited into a third-party escrow account at closing. Of the cash deposited into escrow, $10.4 million is payable to former IMS members in January 2005 and the remaining $20.0 million will be paid to former IMS members from escrow in installments of $12.0 million and $8.0 million in October 2004 and October 2005 upon the satisfaction of certain operating contingencies.

IMS offers a full range of merchant account services to small businesses nationwide, including credit and debit card processing services. We acquired IMS as part of our Right for My Business strategy to offer a wider range of business solutions for small businesses. IMS became part of our Small Business Products and Services segment.

On a preliminary basis, we allocated approximately $17.3 million of the IMS purchase price to identified intangible assets and recorded the excess purchase price of $98.4 million as goodwill. We do not expect that any adjustments to the purchase price or the purchase price allocation will be material. The identified intangible assets are being amortized over terms ranging from two to four years. All of the goodwill acquired in this transaction will be deductible for income tax purposes.

IMS’s results of operations from the date of acquisition forward have been included in our consolidated results of operations and were not material. IMS’s results of operations for periods prior to the date of acquisition were also not material when compared to our consolidated results.

The preliminary purchase price allocation for the IMS acquisition was as follows:

             
        Purchase
        Price
        Allocation
       
(In thousands)        
Tangible assets
  $ 5,393  
Intangible assets:
       
 
Goodwill
    98,366  
 
Customer lists
    15,600  
 
Covenant not to compete
    1,700  
Acquisition costs
    (500 )
Other tangible liabilities
    (3,860 )
 
   
 
   
Cash consideration paid
  $ 116,699  
 
   
 

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6. Industry Segment and Geographic Information

SFAS 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for the way in which public companies disclose certain information about operating segments in their financial reports. Consistent with SFAS 131, we have defined six reportable segments, described below, based on factors such as how we manage our operations and how our chief operating decision maker views results. We define the chief operating decision maker as our chief executive officer, the office of the chief executive officer, our chief financial officer, certain executives reporting directly to our chief executive officer and our Board of Directors.

All reportable segments except Small Business Products and Services, Vertical Business Management Solutions and Other Businesses operate solely in the United States. All segments sell primarily to customers located in the United States. International total net revenue was less than 7% of consolidated total net revenue for all periods presented.

QuickBooks product revenue is derived primarily from QuickBooks desktop software products. QuickBooks service revenue is derived from QuickBooks Online Edition.

Small Business Products and Services product revenue is comprised of QuickBooks Do-It-Yourself Payroll, financial supplies and information technology management software. Service revenue for this segment is derived primarily from outsourced payroll services, QuickBooks support plans and merchant account services. Other revenue for this segment consists of royalties from small business online transactions and interest earned on customer payroll deposits.

Consumer Tax product revenue is derived primarily from TurboTax federal and state consumer desktop tax return preparation software. Consumer Tax service revenue is derived primarily from TurboTax for the Web online tax return preparation services and consumer electronic filing services. Other revenue for this segment is nominal.

Professional Accounting Solutions product revenue is derived primarily from ProSeries and Lacerte professional tax preparation software products. Professional Accounting Solutions service revenue is derived primarily from electronic filing and training services.

Vertical Business Management Solutions, or VBMS, revenue is derived from four businesses that we acquired in fiscal 2002 that provide small business management solutions for selected industries, which we call “Verticals.” Those businesses are Intuit Distribution Management Solutions, MRI Real Estate Solutions, Intuit Construction Business Solutions and Intuit Public Sector Solutions. VBMS product revenue is derived from business management software for these industries. VBMS service revenue consists primarily of technical support, consulting and training services.

Other Businesses consist primarily of Personal Finance and Canada. Personal Finance product revenue is derived primarily from Quicken desktop software products. Personal Finance service revenue is nominal while Personal Finance other revenue consists of fees from consumer online transactions and Quicken.com advertising revenue. In Canada, product revenue is derived primarily from localized versions of QuickBooks and Quicken as well as QuickTax and TaxWiz consumer desktop tax return preparation software and ProFile professional tax preparation products. Service revenue in Canada consists primarily of revenue from software maintenance contracts sold with QuickBooks.

Corporate includes costs such as corporate general and administrative expenses that are not allocated to specific segments. Corporate also includes reconciling items such as acquisition-related costs (which include acquisition-related charges, amortization of purchased software and charges for purchased research and development), realized net gains or losses on marketable securities and interest and other income.

The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in Note 1. Except for goodwill and purchased intangible assets, we do not generally track assets by reportable segment and, consequently, we do not disclose assets by reportable segment.

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The following tables show our financial results by reportable segment for the second quarter and first six months of fiscal 2003 and 2004.

                                                                   
              Small                   Vertical                        
              Business           Professional   Business                        
Three months ended           Products &   Consumer   Accounting   Mgmt   Other                
January 31, 2003   QuickBooks   Services   Tax   Solutions   Solutions   Businesses   Corporate   Consolidated
(In thousands)  
 
 
 
 
 
 
 
Product revenue
  $ 93,154     $ 68,727     $ 78,256     $ 146,385     $ 10,017     $ 60,701     $ —     $ 457,240  
Service revenue
    823       47,496       16,094       4,026       13,946       853       —       83,238  
Other revenue
    —       4,704       909       —       58       11,927       —       17,598  
 
   
     
     
     
     
     
     
     
 
 
Total net revenue
    93,977       120,927       95,259       150,411       24,021       73,481       —       558,076  
 
   
     
     
     
     
     
     
     
 
Segment operating income (loss)
    50,813       37,298       30,222       118,595       (3,465 )     32,378       —       265,841  
Common expenses
    —       —       —       —       —       —       (81,420 )     (81,420 )
 
   
     
     
     
     
     
     
     
 
 
Subtotal
    50,813       37,298       30,222       118,595       (3,465 )     32,378       (81,420 )     184,421  
Acquisition-related costs
    —       —       —       —       —       —       (13,742 )     (13,742 )
Realized net gain on marketable securities
    —       —       —       —       —       —       2,827       2,827  
Interest and other income
    —       —       —       —       —       —       7,770       7,770  
 
   
     
     
     
     
     
     
     
 
Income (loss) from continuing operations before income taxes
  $ 50,813     $ 37,298     $ 30,222     $ 118,595     $ (3,465 )   $ 32,378     $ (84,565 )   $ 181,276  
 
   
     
     
     
     
     
     
     
 
                                                                   
              Small                   Vertical                        
              Business           Professional   Business                        
Three months ended           Products &   Consumer   Accounting   Mgmt   Other                
January 31, 2004   QuickBooks   Services   Tax   Solutions   Solutions   Businesses   Corporate   Consolidated
(In thousands)  
 
 
 
 
 
 
 
Product revenue
  $ 100,339     $ 80,066     $ 102,905     $ 151,542     $ 9,440     $ 64,720     $ —     $ 509,012  
Service revenue
    927       59,215       25,780       5,261       16,604       1,769       —       109,556  
Other revenue
    —       6,059       1,287       —       101       10,274       —       17,721  
 
   
     
     
     
     
     
     
     
 
 
Total net revenue
    101,266       145,340       129,972       156,803       26,145       76,763       —       636,289  
 
   
     
     
     
     
     
     
     
 
Segment operating income (loss)
    48,128       52,123       62,406       119,189       161       35,477       —       317,484  
Common expenses
    —       —       —       —       —       —       (88,770 )     (88,770 )
 
   
     
     
     
     
     
     
     
 
 
Subtotal
    48,128       52,123       62,406       119,189       161       35,477       (88,770 )     228,714  
Acquisition-related costs
    —       —       —       —       —       —       (10,104 )     (10,104 )
Realized net gain on marketable securities
    —       —       —       —       —       —       90       90  
Interest and other income
    —       —       —       —       —       —       7,170       7,170  
 
   
     
     
     
     
     
     
     
 
Income (loss) from continuing operations before income taxes
  $ 48,128     $ 52,123     $ 62,406     $ 119,189     $ 161     $ 35,477     $ (91,614 )   $ 225,870  
 
   
     
     
     
     
     
     
     
 

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              Small                   Vertical                        
              Business           Professional   Business                        
Six months ended           Products &   Consumer   Accounting   Mgmt   Other                
January 31, 2003   QuickBooks   Services   Tax   Solutions   Solutions   Businesses   Corporate   Consolidated
(In thousands)  
 
 
 
 
 
 
 
Product revenue
  $ 130,992     $ 127,115     $ 82,111     $ 152,735     $ 15,647     $ 90,543     $ —     $ 599,143  
Service revenue
    1,404       86,026       18,099       4,138       27,114       2,061       —       138,842  
Other revenue
    —       8,994       1,104       —       63       22,802       —       32,963  
 
   
     
     
     
     
     
     
     
 
 
Total net revenue
    132,396       222,135       101,314       156,873       42,824       115,406       —       770,948  
 
   
     
     
     
     
     
     
     
 
Segment operating income (loss)
    56,418       70,084       15,152       101,847       (10,677 )     37,527       —       270,351  
Common expenses
    —       —       —       —       —       —       (161,166 )     (161,166 )
 
   
     
     
     
     
     
     
     
 
 
Subtotal
    56,418       70,084       15,152       101,847       (10,677 )     37,527       (161,166 )     109,185  
Acquisition-related costs
    —       —       —       —       —       —       (33,963 )     (33,963 )
Realized net gain on marketable securities
    —       —       —       —       —       —       3,080       3,080  
Interest and other income
    —       —       —       —       —       —       16,556       16,556  
 
   
     
     
     
     
     
     
     
 
Income (loss) from continuing operations before income taxes
  $ 56,418     $ 70,084     $ 15,152     $ 101,847     $ (10,677 )   $ 37,527     $ (175,493 )   $ 94,858  
 
   
     
     
     
     
     
     
     
 
                                                                   
              Small                   Vertical                        
              Business           Professional   Business                        
Six months ended           Products &   Consumer   Accounting   Mgmt   Other                
January 31, 2004   QuickBooks   Services   Tax   Solutions   Solutions   Businesses   Corporate   Consolidated
(In thousands)  
 
 
 
 
 
 
 
Product revenue
  $ 142,282     $ 152,093     $ 105,217     $ 158,451     $ 18,978     $ 92,176     $ —     $ 669,197  
Service revenue
    1,820       104,404       28,486       5,276       32,619       3,218       —       175,823  
Other revenue
    —       11,942       1,438       —       841       19,576       —       33,797  
 
   
     
     
     
     
     
     
     
 
 
Total net revenue
    144,102       268,439       135,141       163,727       52,438       114,970       —       878,817  
 
   
     
     
     
     
     
     
     
 
Segment operating income (loss)
    50,404       91,401       40,497       100,090       1,044       40,258       —       323,694  
Common expenses
    —       —       —       —       —       —       (175,056 )     (175,056 )
 
   
     
     
     
     
     
     
     
 
 
Subtotal
    50,404       91,401       40,497       100,090       1,044       40,258       (175,056 )     148,638  
Acquisition-related costs
    —       —       —       —       —       —       (19,442 )     (19,442 )
Realized net gain on marketable securities
    —       —       —       —       —       —       237       237  
Interest and other income
    —       —       —       —       —       —       14,660       14,660  
 
   
     
     
     
     
     
     
     
 
Income (loss) from continuing operations before income taxes
  $ 50,404     $ 91,401     $ 40,497     $ 100,090     $ 1,044     $ 40,258     $ (179,601 )   $ 144,093  
 
   
     
     
     
     
     
     
     
 

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7. Other Current Liabilities

                 
    July 31,   January 31,
    2003   2004
(In thousands)  
 
Reserve for product returns
  $ 34,406     $ 58,319  
Reserve for rebates
    10,401       37,431  
Executive deferred compensation plan
    6,245       11,200  
Acquisition-related items
    2,619       12,607  
Sales tax accrual
    1,906       11,986  
Other accruals
    3,552       14,110  
 
   
     
 
 
  $ 59,129     $ 145,653  
 
   
     
 

8. Commitments

Reserve for Vacant Facilities

During the third quarter of fiscal 2002, we concluded that we would not occupy two vacant leased buildings in Mountain View, California and that we would be unable to recover a substantial portion of our lease obligations by subleasing the vacant space. In that quarter, we recorded a $13.2 million reserve that was equal to the remaining future lease commitments for these facilities, net of estimated future sublease income. During the fourth quarter of fiscal 2003, we decided that we would reoccupy one of the two vacant buildings and that the reserve for the other vacant building should be increased to reflect our revised estimate of future sublease income for that facility. We recorded a net adjustment of $0.5 million to the reserve that resulted in a credit for vacant facilities on our statement of operations in that quarter. Our actual future cash payments may exceed the total Mountain View reserve balance at January 31, 2004 by a maximum of $2.8 million if we are unable to sublease the remaining vacant Mountain View property. The lease related to this facility ends in fiscal 2010.

Activity in the reserve for vacant Mountain View facilities for the second quarter and first six months of fiscal 2003 and 2004 was as follows:

                                   
      Three Months Ended   Six Months Ended
     
 
      January 31,   January 31,   January 31,   January 31,
      2003   2004   2003   2004
     
 
 
 
(In thousands)                                
Beginning balance
  $ 11,897     $ 9,264     $ 12,478     $ 9,701  
Cash lease payments applied against the reserve
    (584 )     (310 )     (1,165 )     (747 )
 
   
     
     
     
 
 
Ending balance
  $ 11,313     $ 8,954     $ 11,313     $ 8,954  
 
   
     
     
     
 

     The short-term and long-term components of this reserve and their location on our balance sheet were as follows at the dates indicated.

                   
      July 31,   January 31,
      2003   2004
     
 
(In thousands)                
Short-term portion of reserve in other current liabilities
  $ 1,394     $ 1,258  
Long-term portion of reserve in long-term obligations
    8,307       7,696  
 
   
     
 
 
Total reserve
  $ 9,701     $ 8,954  
 
   
     
 

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CBS Employer Services Acquisition Accrual

We acquired CBS Employer Services, Inc. in the fourth quarter of fiscal 2002. In connection with this acquisition, we recorded a total accrual of $26.4 million that included $21.6 million for purchase price deferrals and $4.8 million for restructuring and transaction costs. Activity in this reserve for the six months ended January 31, 2003 and 2004 was as follows:

                         
    Beginning   Cash   Ending
    Balance   Payments   Balance
   
 
 
(In thousands)                        
Six months ended January 31, 2003
                       
Non-compete clause
  $ 1,700     $ —     $ 1,700  
Purchase price deferrals
    13,143       (445 )     12,698  
Shareholder escrow
    5,800       —       5,800  
Restructuring and transaction costs
    4,716       (480 )     4,236  
 
   
     
     
 
 
  $ 25,359     $ (925 )   $ 24,434  
 
   
     
     
 
Six months ended January 31, 2004
                       
Non-compete clause
  $ 1,700     $ —     $ 1,700  
Purchase price deferrals
    13,306       —       13,306  
Shareholder escrow
    2,499       —       2,499  
Restructuring and transaction costs
    —       —       —  
 
   
     
     
 
 
  $ 17,505     $ —     $ 17,505  
 
   
     
     
 

The CBS acquisition accrual totaled $17.5 million at July 31, 2003 and was included in long-term obligations on our balance sheet. During the second quarter of fiscal 2004, we changed our intention with respect to $11.9 million of payments owed to former owners. Therefore, this amount was reclassified to other current liabilities on our balance sheet as of January 31, 2004. This amount will be paid in the third quarter of fiscal 2004.

Operating Lease and Other Contractual Obligations

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations” in Item 2 for information on our operating lease and other contractual obligations.

9. Income Taxes

We compute our provision for or benefit from income taxes by applying the estimated annual effective tax rate to income or loss from recurring operations and other taxable items. Our effective tax rates for the second quarter and first six months of fiscal 2003 were approximately 31% and 32%. Our effective tax rates for the second quarter and first six months of fiscal 2004 were approximately 34%. Our effective tax rate for the second quarter of fiscal 2003 differed from the federal statutory rate primarily due to the net effect of the benefit received from tax-exempt interest income and various tax credits offset by state taxes. Our effective tax rate for the first six months of fiscal 2003 differed from the federal statutory rate primarily due to the net effect of the benefit received from tax-exempt interest income and various tax credits offset by state taxes and acquisition-related charges recorded in the first quarter of fiscal 2003. Our effective tax rates for the second quarter and first six months of fiscal 2004 differed from the federal statutory rate primarily due to the net effect of the benefit received from tax-exempt interest income and various tax credits offset by state taxes.

10. Stockholders’ Equity

Stock Repurchase Program

In May 2001, Intuit’s Board of Directors initiated Repurchase Plan I and authorized the Company to repurchase up to $500.0 million of its common stock from time to time over a three-year period. In July 2002, our Board of

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Directors increased the authorized purchase amount by $250.0 million to a total of $750.0 million. Repurchase Plan I was concluded in December 2002 when the authorized purchase amount under the program was reached. In March 2003, Intuit’s Board of Directors initiated Repurchase Plan II and authorized the Company to repurchase up to $500.0 million of its common stock from time to time over a three-year period. Repurchase Plan II was concluded in November 2003 when the authorized purchase amount under the program was reached. In August 2003, Intuit’s Board of Directors initiated Repurchase Plan III and authorized the Company to repurchase up to $500.0 million of its common stock from time to time over a three-year period.

The following table summarizes our stock repurchase activity under these plans, including broker commissions, through January 31, 2004:

                                                         
    Plan I   Plan II   Plan III   Average
   
 
 
  Price
Fiscal Year   Shares   Amount   Shares   Amount   Shares   Amount   Per Share

 
 
 
 
 
 
 
(Dollars in thousands)                                                        
2001
    238,500     $ 8,358       —     $ —       —     $ —     $ 35.04  
2002
    7,361,839       318,422       —       —       —       —       43.25  
2003
    9,002,244       423,211       8,937,809       390,432       —       —       45.35  
2004 to date
    —       —       2,342,800       109,525       2,954,100       151,602       49.30  
 
   
     
     
     
     
     
         
 
    16,602,583     $ 749,991       11,280,609     $ 499,957       2,954,100     $ 151,602       45.45  
 
   
     
     
     
     
     
         

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

Shares repurchased under the plans described above from the inception of the plans increased our basic and diluted net income per share by $0.04 and $0.09 in the second quarter of fiscal 2003 and 2004 and by $0.03 and $0.06 in the first six months of fiscal 2003 and 2004.

Distribution and Dilutive Effect of Options

The following table shows option grants to “Named Executives” and to all employees for the periods indicated. Named Executives are defined as the Company’s chief executive officer and each of the four other most highly compensated executive officers during fiscal 2003.

                         
    Twelve Months Ended   Six Months
   
  Ended
    July 31,   July 31,   January 31,
    2002   2003   2004
   
 
 
Net option grants during the period as a percentage of outstanding shares
    3.2 %     2.7 %     0.7 %
Grants to Named Executives during the period as a percentage of total options granted
    3.5 %     8.9 %     6.9 %
Grants to Named Executives during the period as a percentage of outstanding shares
    0.1 %     0.3 %     0.1 %
Options held by Named Executives as a percentage of total options outstanding
    9.0 %     11.6 %     12.7 %

We define net option grants as options granted less options canceled or expired and returned to the pool of options available for grant. Options granted to our Named Executives as a percentage of the total options granted to all employees will vary significantly from quarter to quarter, due in part to the timing of annual performance-based grants to Named Executives.

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11. Litigation

Leonard Knable et al. v. Intuit Inc. was filed in Los Angeles County Superior Court on February 24, 2003. The original complaint alleged various claims for unfair practices and deceptive and misleading advertising, fraud and deceit and product liability, on behalf of a purported class. The allegations were based on allegedly defective design and operation of the product activation feature in Intuit’s TurboTax 2002 for Windows desktop software and Intuit’s representations and disclosures about product activation. The complaint sought disgorgement of revenue from the sale of the product, compensatory and punitive damages, injunctive relief and attorneys’ fees and costs. On Intuit’s motion, the court dismissed the complaint on September 29, 2003, but granted plaintiffs leave to amend. Plaintiffs filed an amended complaint on October 30, 2003, adding causes of action for trespass to chattels, breach of contract, breach of the covenant of good faith and fair dealing, and negligent misrepresentation. Intuit filed a motion to dismiss the amended complaint on December 4, 2003. The court granted the motion and dismissed the action in its entirety without leave to amend on January 30, 2004.

On September 17, 2003, Muriel Siebert & Co., Inc. v. Intuit Inc. was filed in the Supreme Court of the State of New York, County of New York. The lawsuit alleges various claims for breach of contract, breach of express and implied covenants of good faith and fair dealing, breach of fiduciary duty, misrepresentation and/or fraud, and promissory estoppel. The allegations relate to Quicken Brokerage powered by Siebert, a strategic alliance between the two companies. The complaint seeks compensatory, punitive, and other damages. On September 22, 2003, Intuit filed an arbitration demand against Siebert & Co., Inc. in San Jose, CA seeking arbitration of all claims asserted by both parties. The New York court is currently determining whether the matter will proceed in New York state court or in arbitration. Intuit believes this lawsuit is without merit and intends to defend the litigation vigorously.

Intuit is subject to certain routine legal proceedings, as well as demands, claims and threatened litigation, that arise in the normal course of our business. We currently believe that the ultimate amount of liability, if any, for any pending claims of any type (either alone or combined) will not materially affect our financial position, results of operations or liquidity. However, the ultimate outcome of any litigation is uncertain and, regardless of outcome, litigation can have an adverse impact on Intuit because of defense costs, diversion of management resources and other factors.

12. Related Parties

Loans to Executive Officers and Other Employees

Prior to July 30, 2002, loans to executive officers were generally made in connection with their relocation and purchase of a residence near their new place of work. Consistent with the requirements of The Sarbanes-Oxley Act of 2002, we have not made or modified any loans to executive officers since July 30, 2002 and we do not intend to make or modify any loans to executive officers in the future.

Loans to executive officers and other employees outstanding as of the dates indicated were as follows:

                 
    July 31,   January 31,
    2003   2004
   
 
(In thousands)                
Loans to executive officers
  $ 14,891     $ 13,672  
Loans to other employees
    4,799       4,534  
 
   
     
 
 
  $ 19,690     $ 18,206  
 
   
     
 

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ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Caution Regarding Forward-Looking Statements

Throughout this Report, we make forward-looking statements that are based on our current expectations, estimates and projections about our business and our industry, and that reflect our beliefs and assumptions based on information available to us at the date of this Report. In some cases, you can identify these statements by words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” and other similar terms. These forward-looking statements include, among other things, projections of our future financial performance, our anticipated growth, the strategies and trends we anticipate in our businesses and the customer segments in which we operate, and the competitive nature and anticipated growth of those segments.

We caution investors that forward-looking statements are only predictions based on our current expectations about future events. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Our actual results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements. Some of the important factors that could impact our future operating results and could cause our results to differ are discussed in this Item 2 under the caption “Risks That Could Affect Future Results.” We encourage you to read that section carefully. You should carefully consider those risks, in addition to the other information in this Report, in our Form 10-K for fiscal 2003 (filed with the SEC on September 19, 2003) and in our other filings with the SEC, before deciding to invest in our stock or to maintain or change your investment. We undertake no obligation to revise or update any forward-looking statement for any reason, except as required by law.

Overview

Intuit’s Mission. Intuit’s mission is to transform the way people run their businesses and manage their financial lives. Our products and services fall into the following principal categories: QuickBooks® small business accounting and business management solutions; small business products and services that include payroll, financial supplies, technical support and information technology management solutions; TurboTax® consumer tax products and services; ProSeries® and Lacerte® professional tax products and services; and Intuit-branded business management solutions designed to meet the specialized requirements of businesses in selected industries, which we call “Verticals.” Our other businesses consist primarily of Quicken® personal finance products and services and our Canadian business.

Expanding Product and Service Offerings. During the last two years, we have expanded the products and services that we offer. Under our Right for My Business strategy we have expanded our QuickBooks product line to offer easy-to-use, industry-specific versions of QuickBooks, which we call “flavors.” We have also introduced new versions of QuickBooks for companies that, due to their larger size or complexity, have more demanding accounting needs. We have introduced business solutions that go beyond accounting software to address a wider range of business management challenges that small businesses face. Finally, we are acquiring companies that offer more complete and customizable business management solutions to businesses in selected industries. We expect to continue to expand in these directions over the next several years.

Evolving Distribution Channels. We have been expanding our distribution channels to accommodate the expansion of the customer segments we serve and the range of products and services we offer. In the retail channel, we are selling an increasing proportion of our software products directly to a variety of retailers rather than through a few major distributors. As we offer more complex, higher priced software products than our traditional retail software products, we expect that direct sales will continue to become an increasingly important source of revenue and new customers. The direct channel is also becoming a more important channel for our traditional desktop products. Finally, as we add products and services that are complementary to our core products, we are focusing on strengthening our cross-selling capabilities. We expect that these increased capabilities will allow us to generate additional revenue from our existing customers, particularly our small business customers.

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Seasonality. Our tax businesses are highly seasonal. Sales of tax preparation products and services are heavily concentrated in the period from November through April. These seasonal patterns mean that our quarterly total net revenue is usually highest during our second and third quarters ending January 31 and April 30. Although since fiscal 2000 we have recognized an increasing portion of our Consumer Tax annual revenue during the third quarter compared to the second quarter, this trend appears to be moderating and may not continue. We typically report losses in our first quarter ending October 31 and fourth quarter ending July 31 when revenue from our tax businesses is minimal, while operating expenses to develop new products and services continue at relatively consistent levels.

Critical Accounting Policies

In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our net revenue, operating income or loss and net income or loss, as well as on the value of certain assets and liabilities on our balance sheet. We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Senior management has discussed the development and selection of these critical policies and their disclosure in this Report with the Audit Committee of our Board of Directors.

•   Net Revenue – Revenue Recognition. Intuit derives revenue from the sale of packaged software products, product support, professional services, outsourced payroll services and multiple element arrangements that may include any combination of these items. We follow the appropriate revenue recognition rules for each type of revenue. See Note 1 of the financial statements, “Net Revenue.” We generally recognize revenue when persuasive evidence of an arrangement exists, we have delivered the product or performed the service, the fee is fixed or determinable and collectibility is probable. However, determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we report. For example, for multiple element arrangements we must make assumptions and judgments in order to allocate the total price among the various elements we must deliver, to determine whether undelivered services are essential to the functionality of the delivered products and services, to determine whether vendor-specific evidence of fair value exists for each undelivered element and to determine whether and when each element has been delivered. If we were to change any of these assumptions or judgments, it could cause a material increase or decrease in the amount of revenue that we report in a particular period. Amounts invoiced relating to arrangements where revenue cannot be recognized are reflected on our balance sheet as deferred revenue and recognized over time as the applicable revenue recognition criteria are satisfied.
 
•   Net Revenue – Return and Rebate Reserves. As part of our revenue recognition policy, we estimate future product returns and rebate payments and establish reserves against revenue at the time of sale based on these estimates. Product returns by distributors and retailers principally relate to the return of obsolete products. Our return policy allows distributors and retailers, subject to contractual limitations, to return purchased products. For product returns reserves, we consider the volume and price mix of products in the retail channel, historical return rates for prior releases of the product, trends in retailer inventory and economic trends that might impact customer demand for our products (including the competitive environment and the timing of new releases of our products). We fully reserve for obsolete products in the distribution channels.
 
    Our rebate reserves include distributor and retailer sales incentive rebates and end-user rebates. Our estimated reserves for distributor and retailer incentive rebates are based on distributors’ and retailers’ actual performance against the terms and conditions of rebate programs, which we typically establish annually. Our reserves for end-user rebates are estimated based on the terms and conditions of the specific promotional rebate program, actual sales during the promotion, the amount of redemptions received and historical redemption trends by product and by type of promotional program.
 
    In the past, actual returns and rebates have approximated and not generally exceeded the reserves that we have established. However, actual returns and rebates in any future period are inherently uncertain. If we were to change our assumptions and estimates, our revenue reserves would change, which would impact the net revenue we report. If actual returns and rebates are significantly greater than the reserves we have established, the actual results would decrease our future reported revenue. Conversely, if actual returns and rebates are significantly less than our reserves, this would increase our future reported revenue.

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•   Allowance for Doubtful Accounts. We make ongoing assumptions relating to the collectibility of our accounts receivable. The accounts receivable amount on our balance sheet includes a reserve for accounts that might not be paid. In determining the amount of the reserve, we consider our historical level of credit losses. We also make judgments about the creditworthiness of significant customers based on ongoing credit evaluations, and we assess current economic trends that might impact the level of credit losses in the future. Our reserves have generally been adequate to cover our actual credit losses. However, since we cannot reliably predict future changes in the financial stability of our customers, we cannot guarantee that our reserves will continue to be adequate. If actual credit losses are significantly greater than the reserve we have established, that would increase our general and administrative expenses and reduce our reported net income. Conversely, if actual credit losses are significantly less than our reserve, this would eventually decrease our general and administrative expenses and increase our reported net income.
 
•   Goodwill, Purchased Intangibles and Other Long-Lived Assets – Impairment Assessments. We make judgments about the recoverability of purchased intangible assets and other long-lived assets whenever events or changes in circumstances indicate that an other-than-temporary impairment in the remaining value of the assets recorded on our balance sheet may exist. We test the impairment of goodwill annually or more frequently if indicators of impairment arise. In order to estimate the fair value of long-lived assets, we typically make various assumptions about the future prospects for the business that the asset relates to, consider market factors specific to that business and estimate future cash flows to be generated by that business. Based on these assumptions and estimates, we determine whether we need to record an impairment charge to reduce the value of the asset on our balance sheet to reflect its estimated fair value. Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, different assumptions and estimates could materially affect our reported financial results. More conservative assumptions of the anticipated future benefits from these businesses could result in greater impairment charges, which would decrease net income and result in lower asset values on our balance sheet. Conversely, less conservative assumptions could result in smaller or no impairment charges, higher net income and higher asset values. At January 31, 2004, we had $690.8 million in goodwill and $124.9 million in intangible assets on our balance sheet.
 
•   Accounting for Stock-Based Incentive Programs. We currently measure compensation expense for our stock-based incentive programs using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Under this method, we do not record compensation expense when stock options are granted to eligible participants as long as the exercise price is not less than the fair market value of the stock when the option is granted. We also do not record compensation expense in connection with our Employee Stock Purchase Plan as long as the purchase price of the stock is not less than 85% of the lower of the fair market value of the stock at the beginning of each offering period or at the end of each purchase period. In accordance with Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” and SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” we disclose our pro forma net income or loss and net income or loss per share as if the fair value-based method had been applied in measuring compensation expense for our stock-based incentive programs. We have elected to follow APB 25 because the fair value accounting provided for under SFAS 123 requires the use of option valuation models that were not developed for use in valuing incentive stock options and employee stock purchase plan shares.
 
    On April 22, 2003, the Financial Accounting Standards Board decided to require all companies to expense the value of incentive stock options. Companies will be required to measure the cost of incentive stock options according to their fair value. The FASB has indicated that it plans to issue an exposure draft of a new accounting standard addressing this matter. This new accounting standard could become effective as early as 2004. Prior to issuance of this exposure draft, the FASB has indicated that it will be addressing several significant technical issues. A method to determine the fair value of incentive stock options must be established. Current accounting standards require the use of an option-pricing model, such as the Black-Scholes model, to determine fair value and provide guidance on adjusting some of the input factors used in the model. This valuation approach has received significant criticism and may be subject to changes that could have a significant impact on the calculated fair value of incentive stock options under the new standard. Among other things, the FASB must also determine the extent to which the new accounting standard will permit adjustments to recognized expense for actual option forfeitures and actual performance outcomes. This determination will affect the timing and amount of compensation expense recognized.

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    We monitor progress at the FASB and other developments with respect to the general issue of stock-based incentive compensation. In the future, should we expense the value of stock-based incentive compensation, either out of choice or due to new requirements issued by the FASB, and/or decide to alter our current employee compensation programs to provide other benefits in place of incentive stock options, we may have to recognize substantially more compensation expense in future periods that could have a material adverse impact on our results of operations
 
•   Income Taxes – Estimates of Effective Tax Rates, Deferred Taxes and Valuation Allowance. When we prepare our consolidated financial statements, we estimate our income taxes based on the various jurisdictions where we conduct business. This requires us to estimate our current tax exposure and to assess temporary differences that result from differing treatments of certain items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which we show on our balance sheet. We must then assess the likelihood that our deferred tax assets will be realized. To the extent we believe that realization is not likely, we establish a valuation allowance. When we establish a valuation allowance or increase this allowance in an accounting period, we record a corresponding tax expense on our statement of operations.
 
    Management must make significant judgments to determine our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance to be recorded against our net deferred tax asset. Our net deferred tax asset as of January 31, 2004 was $217.9 million, net of the valuation allowance of $7.5 million. We recorded the valuation allowance to reflect uncertainties about whether we will be able to utilize some of our deferred tax assets (consisting primarily of certain net operating losses carried forward by our international subsidiaries and certain state capital loss carryforwards) before they expire. The valuation allowance is based on our estimates of taxable income for the jurisdictions in which we operate and the period over which our deferred tax assets will be realizable. While we have considered future taxable income in assessing the need for the valuation allowance, we could be required to increase the valuation allowance to take into account additional deferred tax assets that we may be unable to realize. An increase in the valuation allowance would have an adverse impact, which could be material, on our income tax provision and net income in the period in which we make the increase.

Results of Operations

Total net revenue of $636.3 million increased 14% in the second quarter of fiscal 2004 compared to the second quarter of fiscal 2003. Total net revenue of $878.8 million increased 14% in the first six months of fiscal 2004 compared to the same period of fiscal 2003. Total net revenue was higher in both of the fiscal 2004 periods due primarily to growth in our Small Business Products and Services, Consumer Tax and QuickBooks segments.

Intuit had net income from continuing operations of $149.1 million for the second quarter of fiscal 2004, up 19% from $125.4 million in the second quarter of fiscal 2003. Net income from continuing operations was $95.1 million for the six months ended January 31, 2004, up 47% from $64.9 million for the six months ended January 31, 2003. The growth in net income from continuing operations in excess of the growth in revenue for the quarter and six months ended January 31, 2004 was primarily due to less acquisition-related charges and no purchased research and development expenses in fiscal 2004.

Diluted net income per share from continuing operations was $0.73 for the second quarter of fiscal 2004, up 24% from $0.59 per diluted share in the second quarter of fiscal 2003. Diluted net income per share from continuing operations was $0.47 for the six months ended January 31, 2004, up 52% from $0.31 per diluted share in the six months ended January 31, 2003. The growth in diluted net income per share from continuing operations in excess of the growth in net income from continuing operations for both of the fiscal 2004 periods was primarily due to the net reduction of shares outstanding resulting from our share buyback plan.

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Total Net Revenue

We operate in six business segments. The following represents the net revenue for those six segments for the quarter and six months ended January 31, 2004 and 2003.

                                                                                     
                % Total           % Total                   % Total           % Total        
        Q2   Net   Q2   Net   Q2 %   YTD   Net   YTD   Net   YTD %
    FY03   Revenue   FY04   Revenue   Change   FY03   Revenue   FY04   Revenue   Change
(Dollars in millions)  
 
 
 
 
 
 
 
 
 
QuickBooks
                                                                               
 
Product
  $ 93.2             $ 100.4                     $ 131.0             $ 142.3                  
 
Service
    0.8               0.9                       1.4               1.8                  
 
Other
    —               —                       —               —                  
 
   
             
                     
             
                 
   
Subtotal
    94.0       17 %     101.3       16 %     8 %     132.4       17 %     144.1       16 %     9 %
 
   
             
                     
             
                 
Small Business
                                                                               
Products and
                                                                               
Services
                                                                               
 
Product
    68.7               80.1                       127.1               152.1                  
 
Service
    47.5               59.2                       86.0               104.4                  
 
Other
    4.7               6.0                       9.0               11.9                  
 
   
             
                     
             
                 
   
Subtotal
    120.9       22 %     145.3       23 %     20 %     222.1       29 %     268.4       31 %     21 %
 
   
             
                     
             
                 
Consumer Tax
                                                                               
 
Product
    78.2               102.9                       82.1               105.2                  
 
Service
    16.1               25.8                       18.1               28.5                  
 
Other
    0.9               1.3                       1.1               1.5                  
 
   
             
                     
             
                 
   
Subtotal
    95.2       17 %     130.0       20 %     36 %     101.3       13 %     135.2       15 %     33 %
 
   
             
                     
             
                 
Professional
                                                                               
Accounting
                                                                               
Solutions
                                                                               
 
Product
    146.4               151.5                       152.8               158.4                  
 
Service
    4.0               5.3                       4.1               5.3                  
 
Other
    —               —                       —               —                  
 
   
             
                     
             
                 
   
Subtotal
    150.4       27 %     156.8       25 %     4 %     156.9       20 %     163.7       19 %     4 %
 
   
             
                     
             
                 
Vertical
                                                                               
Business
                                                                               
Management
                                                                               
Solutions
                                                                               
 
Product
    10.0               9.4                       15.6               19.0                  
 
Service
    14.0               16.6                       27.1               32.6                  
 
Other
    0.1               0.1                       0.1               0.8                  
 
   
             
                     
             
                 
   
Subtotal
    24.1       4 %     26.1       4 %     9 %     42.8       6 %     52.4       6 %     22 %
 
   
             
                     
             
                 
Other
                                                                               
Businesses
                                                                               
 
Product
    60.7               64.7                       90.5               92.2                  
 
Service
    0.9               1.8                       2.1               3.2                  
 
Other
    11.9               10.3                       22.8               19.6                  
 
   
             
                     
             
                 
   
Subtotal
    73.5       13 %     76.8       12 %     4 %     115.4       15 %     115.0       13 %     0 %
 
   
             
                     
             
                 
Total net revenue
  $ 558.1       100 %   $ 636.3       100 %     14 %   $ 770.9       100 %   $ 878.8       100 %     14 %
 
   
     
     
     
             
     
     
     
         

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QuickBooks

QuickBooks product revenue is derived primarily from QuickBooks desktop software products. QuickBooks service revenue is derived from QuickBooks Online Edition.

QuickBooks total net revenue of $101.3 million and $144.1 million increased 8% and 9% in the second quarter and first six months of fiscal 2004 compared to the same periods of fiscal 2003. The revenue increases reflected a mix shift to higher-priced industry-specific and enterprise versions of QuickBooks. This was partially offset by lower QuickBooks Pro and Basic unit sales and the increased use of consignment sales to retailers in the second quarter and first six months of fiscal 2004, which delays revenue recognition to the time of the end-user sale. In addition, fewer customers were affected by our elimination of technical support for older products in the quarter and six months ended January 31, 2004 than in the same periods of fiscal 2003. This resulted in a smaller number of customers upgrading to newer versions of QuickBooks in the quarter and six months ended January 31, 2004 than in the same periods of fiscal 2003.

Small Business Products and Services

Small Business Products and Services product revenue is comprised of QuickBooks Do-It-Yourself Payroll, which offers payroll tax tables, forms and electronic tax payment and filing services on a subscription basis to small businesses that prepare their own payrolls; financial supplies such as paper checks, envelopes and invoices; and information technology management software. Services revenue for this segment is derived primarily from outsourced payroll services, QuickBooks support plans and merchant account services. Other revenue for this segment consists primarily of royalties from small business online services and interest earned on customer payroll deposits.

Small Business Products and Services total net revenue of $145.3 million increased 20% in the second quarter of fiscal 2004 compared to the second quarter of fiscal 2003. Growth in this segment was driven primarily by an increase in QuickBooks Do-It-Yourself Payroll, or DIY, revenue and by our October 2003 acquisition of Innovative Merchant Solutions. DIY revenue was higher in the second quarter of fiscal 2004 than in the same quarter of the prior year due to growth in the average customer base and the full impact in fiscal 2004 of a December 2002 price increase.

Small Business Products and Services total net revenue of $268.4 million increased 21% in the first six months of fiscal 2004 compared to the same period of fiscal 2003. Growth in DIY and information technology management software revenue and our acquisition of Innovative Merchant Solutions in October 2003 drove the year to date increase.

Consumer Tax

Consumer Tax product revenue is derived primarily from TurboTax federal and state consumer desktop tax return preparation products. Consumer Tax service revenue is derived primarily from TurboTax for the Web online tax return preparation services and consumer electronic filing services. Paid Web units exclude tax filing units that we donate under the Intuit Tax Freedom Project.

Consumer Tax total net revenue of $130.0 million and $135.2 million increased 36% and 33% in the second quarter and first six months of fiscal 2004 compared to the same periods of fiscal 2003. Desktop revenues were up in the second quarter of fiscal 2004 and desktop net selling prices were higher due primarily to the elimination of rebates for certain products. TurboTax for the Web revenue increased in the second quarter of fiscal 2004 due to unit growth and higher average selling prices. Electronic filing revenue was also up in the second quarter of fiscal 2004 due to unit growth. Due to the highly seasonal nature of our Consumer Tax business, first quarter fiscal 2004 and 2003 revenue was nominal. We will not have complete results for the entire 2003 tax season until late in fiscal 2004.

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Professional Accounting Solutions

Professional Accounting Solutions, or PAS, product revenue is derived primarily from ProSeries and Lacerte professional tax preparation software products. PAS service revenue is derived primarily from electronic filing and training services.

PAS total net revenue of $156.8 million and $163.7 million increased 4% in the second quarter and first six months of fiscal 2004 compared to the same periods of fiscal 2003. The second quarter fiscal 2004 increase was due to the availability of more tax forms in our professional tax products which results in accelerated revenue as additional product is deemed to be delivered and to higher average selling prices related to product enhancements. Due to the highly seasonal nature of our PAS business, first quarter fiscal 2004 and 2003 revenue was nominal. We will not have complete results for the entire 2003 tax season until late in fiscal 2004.

Vertical Business Management Solutions

Vertical Business Management Solutions, or VBMS, revenue is derived from four businesses that we acquired in fiscal 2002 that provide business management solutions for companies in selected industries. Those businesses are Intuit Distribution Management Solutions, whose Intuit Eclipse™ line of products and services offers business management software for the wholesale durable goods industry; MRI Real Estate Solutions, whose Intuit MRI line of products and services provides business management software solutions for commercial and residential property managers; Intuit Construction Business Solutions, whose Intuit MasterBuilder™ line of products and services provides business management solutions for the construction industry; and Intuit Public Sector Solutions, whose Intuit Fundware™ line of products and services offers accounting and business management software solutions for nonprofit organizations, universities and government agencies. VBMS product revenue is derived from business management software for these vertical industries. VBMS service revenue consists primarily of technical support, consulting and training services.

VBMS total net revenue of $26.1 million and $52.4 million increased 9% and 22% in the second quarter and first six months of fiscal 2004 compared to the same periods of fiscal 2003. Growth in this segment was driven primarily by increased service and implementation revenue sold to new and existing customers.

Other Businesses

Other Businesses revenue is derived primarily from Personal Finance products and services and revenue from our Canadian operations. Personal Finance product revenue is derived primarily from Quicken desktop software products. Personal Finance service revenue is nominal while Personal Finance other revenue consists of fees from consumer online transactions and Quicken.com advertising revenue. In Canada, product revenue is derived primarily from localized versions of QuickBooks and Quicken as well as QuickTax and TaxWiz consumer desktop tax return preparation software and ProFile professional tax preparation products. Service revenue in Canada consists primarily of revenue from software maintenance contracts sold with QuickBooks.

Other Businesses total net revenue of $76.8 million and $115.0 million increased 4% in the second quarter and remained flat for the first six months of fiscal 2004 compared to the same periods of fiscal 2003. Lower Quicken revenue, reflecting the continuing lack of growth in the personal finance desktop software category, was offset by higher revenue in Canada. Aggregate average selling prices for Quicken in the fiscal 2004 periods were higher due to a mix shift to our higher-priced Quicken Premier and Home and Business products. However, lower overall Quicken unit sales due to increased use of consignment, which delays revenue recognition to the time of the end-user sale, more than offset the higher average selling prices in the fiscal 2004 periods. Personal Finance other revenue also declined due to the termination of a contract with our largest online advertising customer.

Total net revenue from Canada increased 14% in the second quarter of fiscal 2004 compared to the second quarter of fiscal 2003 due to a more favorable average foreign exchange rate on revenue. The Canadian dollar strengthened compared to the U.S. dollar in the second quarter of fiscal 2004 versus the same period in fiscal 2003 which increased revenues by $5.8 million, or 19%. Total net revenue in Canadian dollars decreased 4% in the second quarter of fiscal 2004 compared to the second quarter of fiscal 2003 primarily due to a reduction in QuickTax net revenue due to lower volume related to a revised channel inventory strategy. Total net revenue from Canada in the first quarter of fiscal 2004 and fiscal 2003 was nominal, reflecting the seasonality of that business.

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Cost of Revenue

                                                                                   
              % of           % of                   % of           % of        
      Q2   Related   Q2   Related   Q2 %   YTD   Related   YTD   Related   YTD %
      FY03   Revenue   FY04   Revenue   Change   FY03   Revenue   FY04   Revenue   Change
(Dollars in millions)  
 
 
 
 
 
 
 
 
 
Cost of revenue:
                                                                               
 
Cost of product revenue
  $ 71.1       16 %   $ 65.9       13 %     (7 %)   $ 99.8       17 %   $ 97.9       15 %     (2 %)
 
Cost of service revenue
    39.6       48 %     42.5       39 %     7 %     76.2       55 %     78.3       45 %     3 %
 
Cost of other revenue
    5.2       30 %     6.9       39 %     33 %     9.8       30 %     13.7       41 %     40 %
 
Amortization of purchased software
    3.5       n/a       3.3       n/a       (6 %)     6.5       n/a       6.6       n/a       2 %
 
   
             
                     
             
                 
Total cost of revenue
  $ 119.4       21 %   $ 118.6       19 %     (1 %)   $ 192.3       25 %   $ 196.5       22 %     2 %
 
   
             
                     
             
                 

There are four components of our cost of revenue: (1) cost of product revenue, which includes the direct cost of manufacturing and shipping our software products; (2) cost of service revenue, which reflects direct costs associated with providing services, including data center costs relating to delivering Internet-based services; (3) cost of other revenue, which includes costs associated with generating advertising and marketing and online transactions revenue; and (4) amortization of purchased software, which represents the cost of depreciating products we obtained through acquisitions over their useful lives.

Cost of service revenue as a percentage of service revenue decreased to 39% and 45% in the second quarter and first six months of fiscal 2004 from 48% and 55% in the same periods of fiscal 2003. These decreases were primarily attributable to growth in service revenue combined with lower service costs for businesses we acquired during fiscal 2003 and 2004, notably Blue Ocean Software, Inc. and Innovative Merchant Solutions LLC. In addition, starting in the third quarter of fiscal 2003 we no longer paid royalties to Wells Fargo Bank for our Premier payroll business. Although we now amortize the $29.2 million purchase price of the right to market to this customer base to cost of services revenue over five years, the amortization expense is less than the royalties that would have been incurred under the old agreement.

Cost of other revenue as a percentage of other revenue increased to 39% and 41% in the second quarter and first six months of fiscal 2004 from 30% in the comparable periods of fiscal 2003. This was primarily due to declining Personal Finance other revenue resulting from the fiscal 2004 termination of a contract with our largest online advertising customer which had little or no cost.

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Operating Expenses

                                                                                   
              % Total           % Total                   % Total           % Total        
      Q2   Net   Q2   Net   Q2 %   YTD   Net   YTD   Net   YTD %
      FY03   Revenue   FY04   Revenue   Change   FY03   Revenue   FY04   Revenue   Change
(Dollars in millions)  
 
 
 
 
 
 
 
 
 
Customer service and technical support
  $ 55.6       10 %   $ 63.2       10 %     14 %   $ 95.2       12 %   $ 104.2       12 %     9 %
Selling and marketing
    97.8       17 %     107.6       17 %     10 %     172.6       23 %     199.6       23 %     16 %
Research and development
    66.1       12 %     73.3       12 %     11 %     130.2       17 %     144.7       17 %     11 %
General and administrative
    38.4       7 %     48.1       7 %     25 %     78.0       10 %     91.8       10 %     18 %
 
   
     
     
     
             
     
     
     
         
 
Subtotal
    257.9       46 %     292.2       46 %     13 %     476.0       62 %     540.3       62 %     14 %
Charge for purchased research and development
    1.1       0 %     —       n/a       n/a       8.9       1 %     —       n/a       n/a  
Acquisition-related charges
    9.2       2 %     6.8       1 %     (26 %)     18.6       2 %     12.8       1 %     (31 %)
 
   
     
     
     
             
     
     
     
         
Total operating expenses
  $ 268.2       48 %   $ 299.0       47 %     11 %   $ 503.5       65 %   $ 553.1       63 %     10 %
 
   
     
     
     
             
     
     
     
         

Overview of Operating Expenses

Total operating expenses increased 11% and 10% in the second quarter and first six months of fiscal 2004 compared to the same periods of fiscal 2003. Core operating expenses (which are subtotaled in the table above) increased 13% and 14% in the same periods. Core operating expenses, individually and in the aggregate, as a percentage of total net revenue of 46% and 62% in the second quarter and first six months of fiscal 2004 remained consistent with the same periods of fiscal 2003. We believe core operating expenses represent the controllable costs of running our business.

Charge for Purchased Research and Development

In the first six months of fiscal 2003, we recorded charges for purchased research and development totaling $8.9 million, primarily in connection with our acquisition of Blue Ocean.

Acquisition-Related Charges

Acquisition-related charges were $6.8 million and $12.8 million in the second quarter and first six months of fiscal 2004 compared to $9.2 million and $18.6 million in the same periods of fiscal 2003. Increases in fiscal 2004 acquisition-related charges due to our acquisition of Innovative Merchant Solutions in the first quarter of fiscal 2004 were more than offset by decreases in those charges as older intangible assets and certain deferred compensation balances related to prior acquisitions became fully amortized.

Non-Operating Income and Expenses

Interest and Other Income

Total interest and other income for the second quarter and first six months of fiscal 2004 was $7.2 million and $14.7 million compared to $7.8 million and $16.6 million in the same periods of fiscal 2003. The interest income that we earn on our cash and short-term investment balances decreased $2.3 million and $6.1 million in the second quarter and first six months of fiscal 2004 compared to the same periods of fiscal 2003 due to our reinvestment of maturing instruments in new instruments that generally yield lower current market interest rates. In the second quarter of fiscal 2004, we also recorded other income of $2.2 million related to receipt of an insurance settlement.

Interest and other income includes net gains and losses resulting from foreign exchange transactions. Due primarily to the effect of the weakening U.S. dollar on intercompany balances with our Canadian subsidiary, we recorded net foreign exchange gains of $0.8 million and $4.1 million in the second quarter and first six months of fiscal 2004 compared to $1.4 million and $2.1 million in the same periods of fiscal 2003.

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Income Taxes

In the second quarter and first six months of fiscal 2004, we recorded income tax provisions of $76.8 million and $49.0 million on pre-tax income from continuing operations of $225.9 million and $144.1 million, resulting in an effective tax rate of approximately 34% for each of those periods. Our effective tax rates for the second quarter and first six months of fiscal 2004 differed from the federal statutory rate primarily due to the net effect of the benefit received from tax-exempt interest income and various tax credits offset by state taxes.

In the second quarter and first six months of fiscal 2003, we recorded income tax provisions of $55.9 million and $29.9 million on pre-tax income from continuing operations of $181.3 million and $94.9 million, resulting in effective tax rates of approximately 31% and 32% for those periods. Our effective tax rate for the second quarter of fiscal 2003 differed from the federal statutory rate primarily due to the net effect of the benefit received from tax-exempt interest income and various tax credits offset by state taxes. Our effective tax rate for the first six months of fiscal 2003 differed from the federal statutory rate primarily due to the net effect of the benefit received from tax-exempt interest income and various tax credits offset by state taxes and acquisition-related charges recorded in the first quarter of fiscal 2003.

Discontinued Operations

In July 2002, we sold our Quicken Loans mortgage business segment and accounted for the sale as discontinued operations. In October 2002, we sold our residual equity interest in the purchasing company and recognized a gain of $5.6 million on the transaction.

In February 2003, we sold our wholly owned Japanese subsidiary, Intuit KK, and accounted for the sale as discontinued operations. In accordance with SFAS 144, we have segregated the operating results of Intuit KK from continuing operations in our statement of operations for all periods prior to the sale.

Liquidity and Capital Resources

At January 31, 2004, our cash and cash equivalents and short-term investments totaled $978.9 million, a $227.9 million decrease from July 31, 2003. The decrease was primarily due to our use of cash for our stock repurchase programs and for an acquisition partially offset by cash provided by continuing operations.

We generated $128.6 million in cash from our operations during the first six months of fiscal 2004. Net income from continuing operations totaled $95.1 million. Adjustments for non-cash expenses included depreciation of $38.6 million and acquisition-related charges, amortization of purchased software and amortization of other purchased intangible assets totaling $22.4 million. Other current liabilities increased $83.8 million due mainly to higher reserves for returns and rebates, income taxes payable increased $26.7 million and deferred revenue increased $24.6 million, each reflecting the seasonality of our business. Cash generated by these and other operating activities was partially offset by an increase of $193.3 million in accounts receivable, again reflecting the seasonality of our business.

We used $25.9 million in cash from investing activities during the first six months of fiscal 2004. We drew net cash of $145.5 million from short-term investments during the period, with proceeds of $1.226 billion from the sale upon maturity of certain short-term investments more than offsetting reinvestments of $1.080 billion. Our primary use of cash for investing activities was for the acquisition of Innovative Merchant Solutions, which totaled $116.7 million. As a result of our continued investment in information systems and infrastructure, we also purchased a total of $47.7 million in property and equipment which included $9.5 million in labor costs capitalized in connection with internal use software projects.

We used $185.1 million in cash for our financing activities in the first six months of fiscal 2004. The primary component of cash used in financing activities was $261.1 million for the repurchase of treasury stock through our stock repurchase programs. See Note 10 of the financial statements. This was partially offset by proceeds of $86.6 million we received from the issuance of common stock under employee stock plans.

In March 2003, Intuit’s Board of Directors initiated Repurchase Plan II and authorized the Company to repurchase up to $500.0 million of common stock from time to time over a three-year period. Shares of stock repurchased

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under this program become treasury shares. During the first six months of fiscal 2004, we repurchased a total of 2.3 million shares of our common stock for an aggregate cost of approximately $109.5 million under this program. Repurchase Plan II was concluded in November 2003 when the authorized purchase amount under the program was reached.

In August 2003, our Board of Directors initiated Repurchase Plan III and authorized the Company to repurchase up to $500.0 million of common stock from time to time over a three-year period. Shares of stock repurchased under this program become treasury shares. During the first six months of fiscal 2004, we repurchased a total of 3.0 million shares of our common stock for an aggregate cost of approximately $151.6 million under this program. Authorized funds of $348.4 million remain available under this program at January 31, 2004.

Outstanding loans to executive officers and other employees totaled $18.2 million at January 31, 2004 and $19.7 million at July 31, 2003. Loans to executive officers are primarily relocation loans that are generally secured by real property and have maturity dates of up to 10 years. As of January 31, 2004, all interest payments were current in accordance with the terms of the loan agreements. Consistent with the requirements of The Sarbanes-Oxley Act of 2002, no loans to executive officers have been made or modified since July 30, 2002 and we do not intend to make or modify loans to executive officers in the future. See Note 12 of the financial statements.

We evaluate, on an ongoing basis, the merits of acquiring technology or businesses, or establishing strategic relationships with and investing in other companies. We may decide to use cash and cash equivalents to fund such activities in the future.

We believe that our cash, cash equivalents and short-term investments will be sufficient to meet anticipated seasonal working capital and capital expenditure requirements for at least the next twelve months.

Contractual Obligations

The following table summarizes our contractual obligations to make future payments at January 31, 2004:

                                           
      Payments Due by Period
     
      Less than 1   1-3   3-5   After 5        
      year   years   years   years   Total
(In millions)  
 
 
 
 
Amounts due employees under deferred compensation plans
  $ —     $ 11.2     $ —     $ —     $ 11.2  
Short-term amounts due CBS Employer Services
    11.9       —       —       —       11.9  
Short-term portion of vacancy reserve
    1.3       —       —       —       1.3  
Long-term obligations
    —       10.2       3.5       5.2       18.9  
Operating leases
    30.3       54.9       36.1       62.1       183.4  
 
   
     
     
     
     
 
 
Total contractual cash obligations
  $ 43.5     $ 76.3     $ 39.6     $ 67.3     $ 226.7  
 
   
     
     
     
     
 

Long-term obligations at January 31, 2004 included the $7.7 million long-term portion of our reserve for vacant Mountain View facilities. Long-term obligations also included $5.6 million for amounts we owe to former stockholders of CBS Employer Services in connection with our acquisition of that company in the fourth quarter of fiscal 2002. See Note 8 of the financial statements.

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Reserves for Returns and Rebates

Activity in our reserves for product returns and for rebates during the first six months of fiscal 2004 and comparative balances at January 31, 2003 were as follows:

                                         
            Additions                        
    Balance   Charged           Balance   Balance
    July 31,   Against   Returns/   January 31,   January 31,
    2003   Revenue   Redemptions   2004   2003
(In thousands)  
 
 
 
 
Reserve for product returns
  $ 34,406     $ 125,168     $ (101,255 )   $ 58,319     $ 69,924  
Reserve for rebates
    10,401       93,052       (66,022 )     37,431       55,463  

Due to the seasonality of our business, the returns and rebate reserve balances at January 31, 2004 should be compared to the reserve balances at January 31, 2003. The returns reserve balance at January 31, 2004 is lower than the balance at January 31, 2003 as we have worked with our retail customers to reduce the amount of inventory they need to serve their customers and improve the timeliness of returns. In addition we are selling more units to major retail customers on a consignment basis. For consignment sales, revenue is not recognized until the retailer sells units to their customers and returns reserves are therefore much lower.

We have reduced our reserve for rebates primarily because some of our major retail customers are participating in a program where they sell our tax products without rebates, we have reduced other rebate programs and we are now selling more units to our retail customers on a consignment basis where the rebates are recognized upon sale to the end user.

Recent Accounting Pronouncements

In November 2002, the EITF reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” Issue 00-21 provides guidance on accounting for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of Issue 00-21 apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. We adopted Issue 00-21 effective August 1, 2003 and the adoption of this standard did not have a material effect on our financial position, results of operations or cash flows.

In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities.” FIN 46 requires us to consolidate a variable interest entity if we are subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. A variable interest entity is a corporation, partnership, trust or any other legal structure used for business purposes that either does not have equity investors with voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property. A variable interest entity may be essentially passive or it may engage in research and development or other activities on behalf of another company. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after December 15, 2003. We anticipate that the adoption of FIN 46 will not have a material impact on our financial position, results of operations or cash flows.

Risks That Could Affect Future Results

The factors discussed below are cautionary statements that identify important risks and trends that could impact our future operating results and could cause actual results to differ materially from those anticipated in the forward-looking statements in this Report. Our fiscal 2003 Form 10-K and other SEC filings contain additional details about these risks, as well as other risks that could affect future results.

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Company-Wide Factors That Could Affect Future Results

We face intense competitive pressures in all of our businesses, which can have a negative impact on our revenue, profitability and market position. We have formidable current and potential competitors. Accordingly, we expect competition to remain intense during fiscal 2004 and beyond. Our competitors in all our businesses may introduce new and improved products and services, reduce prices, gain better access to distribution channels, increase advertising (including advertising targeted at Intuit customers), and release new products and services before we do. Any of these competitive actions – particularly any prolonged price competition – could diminish our net revenue and profitability. They could also affect our ability to keep existing customers and acquire new customers.

We are implementing new information systems that are important for our ability to execute on our growth strategy, and problems with the design or implementation of these systems could interfere with our business and operations. We are in the process of implementing new information systems to replace our existing systems. As a part of this effort, we began implementing in fiscal 2003, and will continue to implement in fiscal 2004, new software applications to manage our business and finance operations. We may not successfully implement these new systems and transition data, and even if we do succeed, the implementation may be much more costly than we anticipated. Any disruptions relating to these systems enhancements could adversely impact our ability to do the following in a timely and accurate manner: take customer orders, ship products, provide services and support to our customers, bill and track our customers, fulfill contractual obligations and otherwise run our business. In addition, many of our newer businesses depend on a different operational infrastructure than our desktop software businesses, and we expect to encounter difficulties as we develop, expand and modify our internal systems and procedures – including call center, customer management, order management, billing and other systems – to support these businesses. If we are unable to successfully implement new information systems, our financial position, results of operations, cash flows and stock price could be adversely affected.

If we do not continue to develop new products and services in a timely and efficient manner, our future financial results will suffer. We must continually develop new products and services and improve existing products and services so that we can remain competitive in the markets we serve and in the markets we seek to enter. In executing our customer-focused product strategies, we have introduced a number of products and services that are specially designed for specific businesses and consumer needs. Many of our offerings have posed new product development challenges for us because they require that our products and services integrate with one another and with both our web sites and our internal information systems. In addition, our customers expect – and our business model contemplates – increased functionality and greater inter-operability among our products and services. Moreover, our development and enhancement processes involve several risks, including challenges in hiring and retaining highly qualified employees, the risk of delays in product and service launches, the risk of defects that hinder performance and the risk that consumers will not buy new or modified offerings. Failure to timely and successfully develop new products and services would harm our competitive position and result in declines in our revenue and earnings.

Expanding our product and service offerings creates risks due to the increasing complexity and decreasing predictability of our revenue streams. Our expanding range of products and services generates more varied revenue streams than our traditional desktop software businesses. The accounting policies that apply to these revenue streams are more complex than those that apply to our traditional products and services. We expect this trend to continue as we acquire additional companies. For example, as we begin to offer additional features and options as part of multiple-element sales arrangements, we could be required to defer a higher percentage of our product revenue at the time of sale than we do for traditional products. This would decrease revenue at the time products are shipped, but result in increased revenue in fiscal periods after shipment. In addition, our Vertical Business Management Solutions businesses offer products and services with significantly higher prices than we have traditionally offered. Revenue from these offerings tends to be less predictable than revenue from our traditional desktop products, due to longer sales and implementation cycles. These businesses also tend to rely on a relatively small number of large orders for a substantial portion of their revenue in a particular quarter, which could cause our quarterly revenue from these businesses to fluctuate.

Any significant failure in our technology systems or other interruption to our business could harm our operations and our financial performance. We rely on a variety of technology systems to take and fulfill customer orders, handle customer service requests, host our Web-based activities, support internal operations, store customer and company data and perform other functions. Our technology systems could be damaged or interrupted, lose customer data or otherwise fail to perform at levels necessary to support our business operations. In addition, our business operations are concentrated in San Diego, California and Mountain View, California and are vulnerable to interruption by fire, earthquake, power loss, terrorist acts and other events beyond our control. Any significant failure

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in our technology systems or business operations could prevent us from accepting and fulfilling customer orders and adversely impact our revenues. To reduce the likelihood of interruptions, we must continually upgrade our systems and processes to ensure that we have adequate recoverability and redundancy, which is costly and time consuming. While we have backup systems for certain aspects of our operations, our systems are not fully redundant and our disaster recovery planning may not be sufficient for all eventualities. In addition, we may have inadequate insurance coverage or insurance limits to compensate us for losses from a major interruption. If our technology systems were to fail or if our business operations were interrupted, it could harm our financial performance, damage our reputation and be expensive to remedy.

Business integration of acquired companies presents several challenges and we may not fully realize the intended benefits of our acquisitions if we do not successfully integrate them with our operations. During the past few years, we have completed numerous acquisitions (one in fiscal 2004, two in fiscal 2003 and five in fiscal 2002), and we expect to continue to pursue acquisitions as part of our business strategy. These acquisitions expand our product and service offerings, personnel and geographic locations and require us to integrate different company cultures, management teams and business infrastructures. The integration process can strain our resources and be expensive and time consuming, particularly if we are integrating multiple companies at the same time. Promptly and efficiently integrating acquired businesses creates challenges for our operational, financial and management information systems, as well as for our product development processes. Depending on the size and complexity of an acquisition, and the number of acquisitions we are concurrently integrating, our successful integration of the entity depends on a variety of factors, including:

•   Retaining key employees
 
•   Managing facilities and employees in different geographic areas
 
•   Retaining key customers, and
 
•   Integrating or coordinating research and development, product manufacturing, and sales and marketing programs.

Despite our efforts to adequately staff and equip our customer service and technical support operations, we cannot always respond promptly to customer requests for assistance. We occasionally experience customer service and technical support problems, including longer than expected waiting times for customers when our staffing and systems are inadequate to handle a higher-than-anticipated volume of requests. When we experience these problems, they can adversely affect customer relationships and our financial results (due to lost revenue because of our inability to accept orders for our products or increased costs). We also risk losing service at any one of our customer contact centers and our redundancy systems could prove inadequate to provide backup support. In addition, our customer-focused business strategy presents additional technical support challenges as we increase the number and complexity of the products we offer, particularly for our QuickBooks, Consumer Tax and Vertical Business Management Solutions segments. To improve our performance in this area, we must eliminate underlying causes of customer requests for service and support through product improvements, better order fulfillment processes, more robust self-help tools, and better forecasting of demand for support services. Implementing any of these improvements can be expensive, time consuming and ultimately prove unsuccessful.

Given the nature of the products and services that we offer, our revenue and earnings are highly seasonal. Several of our businesses are highly seasonal – particularly our tax businesses, but also our small business software and service offerings to a lesser extent. This causes significant quarterly fluctuations in our financial results. Revenue and operating results are usually strongest during the second and third fiscal quarters, which end January 31 and April 30. We experience lower revenues, and we often experience significant operating losses, in the first and fourth quarters, which end October 31 and July 31. Our financial results can also fluctuate from quarter to quarter and year to year due to a variety of factors, including changes in product sales mix that affect average selling prices, product release dates, the timing of sales of our higher-priced Vertical Business Management Solutions offerings, our methods for distributing our products, including the shift to a consignment model for our consumer tax products that we sell through retail distribution channels, and the timing of acquisitions, dispositions, and goodwill and purchased intangible asset impairment charges.

Acquisition-related costs can cause significant fluctuation in our net income. Our recent acquisitions have resulted in significant expenses, including amortization of purchased software (which is reflected in cost of revenue), as well as charges for in-process research and development, and amortization and impairment of goodwill, purchased intangible assets and deferred compensation (which are reflected in operating expenses). Total acquisition-related costs in the categories identified above were $196.0 million in fiscal 2002, $56.6 million in fiscal 2003 and $19.4 million in the first six months of fiscal 2004. Fiscal 2003 and 2004 acquisition-related costs have declined primarily

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because of a change in the accounting treatment of goodwill. However, we may incur less frequent, but larger, impairment charges related to the goodwill already recorded and to goodwill arising out of future acquisitions. As of January 31, 2004, we had an unamortized goodwill balance of approximately $690.8 million, which could be subject to impairment charges in the future. Additional acquisitions, and any impairment of the value of purchased assets, could have a significant negative impact on our future operating results.

Specific Factors Affecting Our QuickBooks, Small Business Products and Services and Vertical Business Management Solutions Segments

In our QuickBooks and our Small Business Products and Services businesses, we face a wide range of competitive risks that could impact our financial results. Our QuickBooks business faces current competition from competitors’ desktop and Web-based software offerings. Many competitors and potential competitors have begun providing, or have expressed significant interest in providing, accounting and business management products and services to small businesses. As we expand the depth and breadth of our small business offerings, we face additional competition from others who are already offering industry-specific small business solutions and business management tools and services for larger small businesses. Microsoft has several small business offerings that compete with our small business offerings, including Microsoft Business Solutions Small Business Manager, Microsoft Business Solutions CRM and Business Contact Manager for Microsoft Office Outlook® 2003. We expect that Microsoft small business offerings will continue to compete with our small business offerings, perhaps even more directly in the future. In addition, we face direct competition in our Intuit Payroll Services Complete Payroll business from traditional payroll services offered by a number of companies, including ADP and Paychex. Our financial supplies business faces ongoing pricing pressures from many of our competitors. As we implement our Right for My Business strategy we face increased competitive threats from larger companies in bigger markets than we have historically faced.

We face competitive pressures in our Vertical Business Management Solutions segment. All of our Vertical Business Management Solutions businesses operate in highly competitive and fragmented environments where no competitor has a significant share of the market segment. We may experience pricing pressure in these market segments because we compete with many small companies, who have fewer resources than larger companies and are therefore more likely to focus on near-term sales. In each of these market segments, the possibility exists that through either consolidation within the market segment or the entry into the market segment of new companies a significant competitor will emerge.

It is too soon to provide assurance that we will be able to generate substantial and sustained revenue growth from new products and services in our QuickBooks, Small Business Products and Services and Vertical Business Management Solutions segments. To meet our growth goals, we must generate revenue from a wider range of market and customer segments, as well as from new products and services. There are many risks associated with our growth strategy, including:

•   We may have difficulty identifying potential targets for acquisition.
 
•   Our Right for My Business strategy is resulting in a dramatic increase in the number and complexity of the products and services that we offer. This places greater demands on our research and development, and marketing and sales resources, as we must develop, market and sell both the new products and services and periodic enhancements to an expanding portfolio of products and services. This will also require us to continually develop, expand and modify our internal business operations systems and procedures to gain better integration so we can support our new businesses, including our customer service and technical support contact centers, and our customer management, order management, billing and other systems.
 
•   Many of the new products and services we offer, and will be offering, are much more complex than our traditional core desktop software products and are priced accordingly. They will therefore require a more consultative sales process and a higher level of post-sales support, both of which could result in higher selling and marketing expenses. If we are not able to adapt our marketing, sales, distribution and customer support functions to accommodate these changes, we will not succeed in generating significant or sustained revenue or net income from these new businesses.

Our acquisition strategy entails a number of challenges that could limit our successful implementation of the strategy. A key component of our Right for My Business strategy is to continue to expand our product and service offerings, and we expect to derive a portion of this expansion from acquisitions. We could face the following risks relating to our strategy and future acquisitions, in addition to the integration challenges noted above:

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•   Competition for acquisition opportunities could inhibit our ability to complete suitable acquisitions, and could also increase the price we would have to pay to complete acquisitions.
 
•   If we are unable to complete acquisitions successfully, we may not be able to develop and market products for new industries or applications with which we may not be familiar.
 
•   Acquired businesses may bring with them unanticipated liabilities, business or legal risks or operating costs that could harm our results of operations or business, reduce or eliminate any benefits of the acquisition or require unanticipated expenses.
 
•   Future acquisitions may require us to issue shares of our stock and stock options to owners of the acquired businesses, which would result in dilution to the equity interests of our stockholders.
 
•   If we fail to retain the services of key employees of acquired companies for significant time periods after we acquire their companies, we may experience difficulty in managing the acquired company’s business and not realize the anticipated benefits of the acquisition.

Revenue growth for our Vertical Business Management Solutions segment may be hindered by a variety of factors, which could have a negative impact on overall company revenue growth. Revenue growth for our Vertical Business Management Solutions business is subject to many risks. Among these are the negative impact of the current economic environment on customer purchases of the relatively high-priced software solutions offered by these businesses, strong pricing pressure in these markets because we compete with many small companies, who have fewer resources than larger companies and are therefore more likely to focus on near-term sales, our ability to successfully acquire other companies and the potential disruption to the businesses of the acquired companies during the acquisition integration process. In addition, revenue growth in any particular period may be difficult to predict because of the complex revenue streams generated by these businesses, and the corresponding complexity in the accounting policies that apply to them.

Our payroll businesses face a number of risks that could have a negative impact on revenue and profitability. For our payroll businesses, we must process customer data accurately, reliably and timely in order to attract and retain customers and avoid the costs associated with errors. We must also accurately and timely develop new and upgraded payroll products to enable our customers to meet the various regulatory deadlines associated with employer-related payroll activities. If we failed to timely deliver any of our payroll products, it could cause our current and prospective customers to choose a competitor’s product for that year’s payroll and not to purchase Intuit products in the future. Since our payroll businesses involve processing large amounts of payroll funds and remitting large amounts of income taxes, there is a potential for errors in processing the payments or misappropriation of payroll funds by either our customers’ employees or our own employees. Any such error or misappropriation could subject Intuit to liabilities that could be substantial. In addition, we are authorized by our customers to transfer money from their bank accounts to fund amounts owed to their employees and taxing authorities. It is possible that we could be held liable for such amounts in the event the client has insufficient funds to cover them. Moreover, our payroll businesses, other than our Do-It-Yourself product, include as part of their revenue interest on customer deposits not yet remitted to taxing authorities or to customers’ employees. If interest rates decline, or regulatory changes occur that either decrease the amount of taxes withheld or allow less time to remit taxes to taxing authorities, it would result in less interest revenue for those businesses. If any of the above eventualities came to pass, it could have a negative impact on the revenue, profitability and future growth of our payroll businesses.

Specific Factors Affecting Our Consumer Tax and Professional Accounting Solutions Segments

We face intense competitive pressures from both the private and public sectors in our Consumer Tax and Professional Tax businesses that could have a negative impact on revenue, profitability and market position. There are formidable current and potential competitors in the private sector for both our consumer and professional tax products, and we expect competition to remain intense in the future. Our major domestic competitor for both desktop and Web-based consumer tax software continues to be H&R Block, and our largest professional tax competitors are CCH Incorporated; Kleinrock Publishing; and the Thomson Corporation. In addition, we face current and potential competition from a number of publicly funded state and federal government entities that are offering individual taxpayers electronic tax preparation and/or filing services, at no cost to individual taxpayers. If governmental agencies are able to develop consumer tax preparation and filing services and to gain consumer acceptance of those services, it could have a negative impact on our financial results in future years. The federal government signed a three-year Free File Alliance agreement in October 2002 under which a number of private sector companies, rather than the federal government, are providing Web-based federal tax preparation and filing services at no cost through voluntary public services initiatives such as our Intuit Tax Freedom Project. However,

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future administrative, regulatory or legislative activity in this area could have a strong adverse impact the financial performance of our Consumer Tax and Professional Tax businesses.

The product activation technology that we introduced into certain TurboTax desktop products last year could have an adverse impact on this year’s results for our Consumer Tax business. During tax year 2002, federal versions of TurboTax desktop products for Windows included product activation technology that helped to prevent unlicensed users from using pass-along and/or counterfeit copies of TurboTax to print or electronically file a tax return. The introduction of product activation generated negative commentary in the media and in online forums and also resulted in a modest increase in the volume of customers contacting our customer service and technical support centers. While we have publicly announced that we will not include product activation in retail versions of TurboTax for Windows for the upcoming tax season, there is uncertainty about whether the negative publicity and customer reactions to, and experiences with, this technology last year will impact our Consumer Tax business this year. Any significant negative repercussions relating to product activation could adversely impact our fiscal 2004 results for our Consumer Tax business, in particular, and our financial performance as a whole.

Significant problems or delays in developing our Consumer Tax and Professional Tax products would result in lost revenue and customers. Developing tax preparation software presents unique challenges because of the demanding annual development cycle required to incorporate unpredictable tax law and tax form changes each year and because our customers expect high levels of accuracy and a timely launch of these products. Our tax preparation software business, which represents a substantial portion of our annual revenue, is highly seasonal since the customers in that market generally prepare and file their taxes by April 15. A significantly late product launch could cause our current and prospective customers to choose a competitor’s product for that year’s tax season or to choose not to purchase tax preparation software at all, which would result in lost revenue in the current tax year and would make it more difficult for us to sell our products to customers in future tax seasons. Moreover, the rigid development timetable increases the risk of bugs or errors in our products. Any major defects could lead to negative publicity, customer dissatisfaction, lost revenue and increased operating expenses, including expenses resulting from correcting defects or errors in our products, expenses resulting from increased activity at our customer contact centers and, expenses resulting from our commitment to reimburse penalties and interest paid by consumer customers due solely to calculation errors in our products.

If we fail to maintain reliable and responsive service levels for our electronic tax offerings, we could lose revenue and customers. Our Web-based tax preparation and electronic filing services must effectively handle extremely heavy customer demand during the peak tax season and the exact level of demand for these offerings is difficult to predict. We face significant risks and challenges in maintaining these services and maintaining adequate service levels, particularly during peak volume service times. For example, we experienced a relatively brief unscheduled interruption in our electronic filing service on April 15, 2003 during which certain users of our professional tax products were unable to receive confirmation from us that their electronic filing had been accepted, and we reached maximum capacity for a short period on April 15, 2002. We also face risks related to the performance of our redundancy and data recoverability systems in these businesses. If our redundancy and data recoverability systems are inadequate, then we could lose the ability to provide these services – or provide these services at inadequate levels – to our customers. If we experience any prolonged difficulties with our Web-based tax preparation or electronic filing service at any time during the tax season, we could lose current and future customers, receive negative publicity and incur increased operating costs, any of which could have a significant negative impact on the financial and market success of these businesses and have a negative impact on our near-term and long-term financial results.

If we are unable to significantly increase accountant-facilitated sales, it could have a negative impact on revenue growth. We are currently focused on developing relationships with accounting professionals in order to expand our opportunities to sell small business products and services to their clients under our “Right for My Firm, Right for My Clients” strategy. We view this strategy as an important driver for our Professional Accounting Solutions segment, as well as our QuickBooks and Small Business Products and Services businesses. However, since this is a new model for us, we face several risks associated with it, including the risk that we will not be able to effectively execute this strategy and the risk that we will not derive the anticipated benefits (including financial benefits) from this strategy. Moreover, we face intense competition in this effort, as there are an increasing number of alliances between accountants and other professional tax preparers and providers of small business software and services that aim to capitalize on accountant-facilitated sales of small business products and services to their clients.

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ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Short-Term Investment Portfolio

We do not hold derivative financial instruments in our short-term investment portfolio. Our short-term investments consist of instruments that meet quality standards consistent with our investment policy. This policy specifies that, except for direct obligations of the United States government, securities issued by agencies of the United States government, and money market or cash management funds, we diversify our holdings and limit our short-term investments with any individual issuer to a maximum of $5.0 million in each of our three managed portfolios.

Interest Rate Risk

Our cash equivalents and short-term investment portfolio are subject to market risk due to changes in interest rates. Interest rate movements affect the interest income we earn on cash equivalents and short-term investments and the value of those investments. Should interest rates increase by 100 basis points from the levels of January 31, 2004, the value of our short-term investments would decline by approximately $5.4 million.

Over the past few years, we have experienced significant reductions in our interest income due to declines in interest rates. These declines have led to interest rates that are low by historical standards and we do not believe that further decreases in interest rates will have a material impact on the interest income earned on our cash equivalents and short-term investments held at January 31, 2004.

Impact of Foreign Currency Rate Changes

The functional currency of all our international subsidiaries is the local currency. Assets and liabilities of our foreign subsidiaries are translated at the exchange rate on the balance sheet date. Revenue, costs and expenses are translated at average rates of exchange in effect during the period. We report translation gains and losses as a separate component of stockholders’ equity. We include net gains and losses resulting from foreign exchange transactions on our statement of operations.

Since we translate foreign currencies (primarily Canadian dollars and British pounds) into U.S dollars for financial reporting purposes, currency fluctuations can have an impact on our financial results. The historical impact of currency fluctuations has generally been immaterial. We believe that our exposure to currency exchange fluctuation risk is not significant primarily because our international subsidiaries invoice customers and satisfy their financial obligations almost exclusively in their local currencies. Due primarily to the effect of the weakening U.S. dollar on intercompany balances with our Canadian subsidiary, we recorded foreign currency exchange gains of $5.4 million in fiscal 2003 and $4.1 million in the first six months of fiscal 2004. Although the impact of currency fluctuations on our financial results has generally been immaterial in the past and we believe that for the reasons cited above currency fluctuations will not be significant in the future, there can be no guarantee that the impact of currency fluctuations will not be material in the future. As of January 31, 2004, we did not engage in foreign currency hedging activities.

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ITEM 4
CONTROLS AND PROCEDURES

(a)   Evaluation of Disclosure Controls and Procedures
 
    Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer) of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as required by Rules 13a-15 and 15d-15 under the Exchange Act, as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that such disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
 
(b)   Changes in Internal Control Over Financial Reporting
 
    There was no change in our system of internal control over financial reporting during our second fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II

ITEM 1
LEGAL PROCEEDINGS

Leonard Knable et al. v. Intuit Inc. was filed in Los Angeles County Superior Court on February 24, 2003. The original complaint alleged various claims for unfair practices and deceptive and misleading advertising, fraud and deceit and product liability, on behalf of a purported class. The allegations were based on allegedly defective design and operation of the product activation feature in Intuit’s TurboTax 2002 for Windows desktop software and Intuit’s representations and disclosures about product activation. The complaint sought disgorgement of revenue from the sale of the product, compensatory and punitive damages, injunctive relief and attorneys’ fees and costs. On Intuit’s motion, the court dismissed the complaint on September 29, 2003, but granted plaintiffs leave to amend. Plaintiffs filed an amended complaint on October 30, 2003, adding causes of action for trespass to chattels, breach of contract, breach of the covenant of good faith and fair dealing, and negligent misrepresentation. Intuit filed a motion to dismiss the amended complaint on December 4, 2003. The court granted the motion and dismissed the action in its entirety without leave to amend on January 30, 2004.

On September 17, 2003, Muriel Siebert & Co., Inc. v. Intuit Inc. was filed in the Supreme Court of the State of New York, County of New York. The lawsuit alleges various claims for breach of contract, breach of express and implied covenants of good faith and fair dealing, breach of fiduciary duty, misrepresentation and/or fraud, and promissory estoppel. The allegations relate to Quicken Brokerage powered by Siebert, a strategic alliance between the two companies. The complaint seeks compensatory, punitive, and other damages. On September 22, 2003, Intuit filed an arbitration demand against Siebert & Co., Inc. in San Jose, CA seeking arbitration of all claims asserted by both parties. The New York court is currently determining whether the matter will proceed in New York state court or in arbitration. Intuit believes this lawsuit is without merit and intends to defend the litigation vigorously.

Intuit is subject to certain routine legal proceedings, as well as demands, claims and threatened litigation, that arise in the normal course of our business. We currently believe that the ultimate amount of liability, if any, for any pending claims of any type (either alone or combined) will not materially affect our financial position, results of operations or liquidity. However, the ultimate outcome of any litigation is uncertain, and either unfavorable or favorable outcomes could have a material negative impact. Regardless of outcome, litigation can have an adverse impact on Intuit because of defense costs, diversion of management resources and other factors.

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ITEM 5
OTHER MATTERS

CHANGES IN EXECUTIVE OFFICERS

Effective January 12, 2004, Thomas Weigman terminated his employment as Senior Vice President and Chief Marketing Officer.

Raymond Stern, Senior Vice President of Corporate Strategy and Development, has added chief marketing officer responsibilities to his duties.

Effective January 29, 2004, Nicholas Spaeth resigned as Senior Vice President, General Counsel and Corporate Secretary.

Effective February 2, 2004, Thomas Allanson terminated his employment as Senior Vice President, Consumer Tax Group.

Effective February 13, 2004, Daniel Manack terminated his employment as Senior Vice President, Professional Accounting Solutions.

ANNUAL MEETING DATE

Intuit’s next Annual Meeting of Stockholders is scheduled for December 9, 2004. This date is more than 30 days after the date of the annual meeting in 2003. Any Intuit stockholder who intends to present a proposal at the annual meeting must submit the proposal, in writing, so that Intuit receives it at our principal executive offices by July 9, 2004 in order for the proposal to be included in our proxy statement and proxy for the meeting. Any Intuit stockholder who wishes to submit a proposal for the annual meeting, but does not seek to include it in our proxy materials, must provide written notice of the proposal to Intuit’s Secretary, at our principal executive offices, between July 17, 2004 and August 16, 2004. In addition, our stockholders must comply with the procedural requirements in our bylaws. Stockholders can obtain a copy of our bylaws from us upon request. The bylaws are also on file with the SEC. We reserve the right to reject, rule out of order or take other appropriate action with respect to any proposal that does not comply with these and other applicable requirements.

RELATED PARTY TRANSACTIONS

In December 2003 the Intuit Foundation contributed $2.5 million to a foundation directed by a member of our board of directors. The Intuit Foundation may contribute an additional $2.5 million to this foundation through November 2006.

The Intuit Foundation was established by Intuit as an independent charitable foundation in accordance with IRS code 501(c)(3). Intuit’s initial contribution to the Intuit Foundation was $3.0 million in April 2002, and Intuit expects to make additional contributions to the Intuit Foundation over time. The Intuit Foundation was created to foster economic empowerment both nationally and in communities where Intuit has a significant number of employees.

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ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K

We have filed the following exhibits as part of this report:

     
Exhibit    
No.   Exhibit Description

 
10.01#   Fifth Addendum to the Supply Agreement for the addition of Shipping Label Products, dated as of June 11, 2003, between Intuit Inc. and the John H. Harland Company
     
10.02#   Sixth Addendum to the Supply Agreement for the addition of Manual Checks Products, dated as of August 1, 2003, between Intuit Inc. and the John H. Harland Company
     
10.03#   Amendment No. 1, dated as of November 12, 2003, to the Supply Agreement between Intuit Inc. and the John H. Harland Company
     
10.04#   Amendment No. 2, dated as of December 15, 2003, to the Supply Agreement between Intuit Inc. and the John H. Harland Company
     
10.05+   Lorrie Norrington Long Term Compensation Program dated December 18, 2003
     
10.06+   Amended and Restated Offer Letter dated November 12, 2003 from Intuit Inc. to Nicholas J. Spaeth
     
10.07+   Terms of Separation Letter dated January 30, 2004 between Nicholas J. Spaeth and Intuit Inc.
     
10.08+   Letter to Nicholas J. Spaeth regarding relocation benefits dated January 30, 2004.
     
10.09+   Separation Terms and Release Agreement dated January 8, 2004 between Thomas E. Weigman and Intuit Inc.
     
10.10+   Separation Terms and release Agreement dated January 20, 2004 between Dan Manack and Intuit Inc.
     
10.11+   Separation Terms and Release Agreement dated January 22, 2004 between Thomas A. Allanson and Intuit Inc.
     
31.01   Rule 13a-14(a) Certification (Chief Executive Officer)*
     
31.02   Rule 13a-14(a) Certification (Chief Financial Officer)*
     
32.01   Section 1350 Certification (Chief Executive Officer)
     
32.02   Section 1350 Certification (Chief Financial Officer)

*   This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that Intuit specifically incorporates it by reference.
 
#   We have requested confidential treatment for certain portions of this document pursuant to an application for confidential treatment sent to the Securities and Exchange Commission. We omitted such portions from this filing and filed them separately with the SEC.
 
+   Indicates a management contract or compensatory plan or arrangement

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Reports on Form 8-K filed during the second quarter of fiscal 2004:

1.   On November 19, 2003, Intuit furnished a report on Form 8-K to report under Item 12 its financial results for the quarter ended October 31, 2003, and to list under Item 7 a press release furnished with the filing. Intuit’s statement of operations and balance sheet for the quarter ended October 31, 2003 were included with the press release that is an exhibit to the report.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

             
        INTUIT INC.
(Registrant)
             
Date:   March 9, 2004   By:   /s/ ROBERT B. HENSKE
           
            Robert B. (“Brad”) Henske
            Senior Vice President and Chief Financial Officer
            (Authorized Officer and Principal Financial Officer)

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EXHIBIT INDEX

     
Exhibit    
No.   Exhibit Description

 
10.01#   Fifth Addendum to the Supply Agreement for the addition of Shipping Label Products, dated as of June 11, 2003, between Intuit Inc. and the John H. Harland Company
     
10.02#   Sixth Addendum to the Supply Agreement for the addition of Manual Checks Products, dated as of August 1, 2003, between Intuit Inc. and the John H. Harland Company
     
10.03#   Amendment No. 1, dated as of November 12, 2003, to the Supply Agreement between Intuit Inc. and the John H. Harland Company
     
10.04#   Amendment No. 2, dated as of December 15, 2003, to the Supply Agreement between Intuit Inc. and the John H. Harland Company
     
10.05+   Lorrie Norrington Long Term Compensation Program dated December 18, 2003
     
10.06+   Amended and Restated Offer Letter dated November 12, 2003 from Intuit Inc. to Nicholas J. Spaeth
     
10.07+   Terms of Separation Letter dated January 30, 2004 between Nicholas J. Spaeth and Intuit Inc.
     
10.08+   Letter to Nicholas J. Spaeth regarding relocation benefits dated January 30, 2004.
     
10.09+   Separation Terms and Release Agreement dated January 8, 2004 between Thomas E. Weigman and Intuit Inc.
     
10.10+   Separation Terms and Release Agreement dated January 20, 2004 between Dan Manack and Intuit Inc.
     
10.11+   Separation Terms and Release Agreement dated January 22, 2004 between Thomas A. Allanson and Intuit Inc.
     
31.01   Rule 13a-14(a) Certification (Chief Executive Officer)*
     
31.02   Rule 13a-14(a) Certification (Chief Financial Officer)*
     
32.01   Section 1350 Certification (Chief Executive Officer)
     
32.02   Section 1350 Certification (Chief Financial Officer)

*   This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that Intuit specifically incorporates it by reference.
 
#   We have requested confidential treatment for certain portions of this document pursuant to an application for confidential treatment sent to the Securities and Exchange Commission. We omitted such portions from this filing and filed them separately with the SEC.
 
+   Indicates a management contract or compensatory plan or arrangement

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