 |
|
|
 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
|
4. GOODWILL AND PURCHASED INTANGIBLE ASSETS
As discussed in Note 1, "Goodwill, Purchased Intangible Assets and Other Long-Lived Assets," we adopted SFAS 142 on August 1, 2002. As a result, goodwill is no longer amortized but is subject to annual impairment tests. Most other intangible assets continue to be amortized over their estimated useful lives. If the non-amortization provisions of SFAS 142 had been in effect from the beginning of fiscal 2002, net income from continuing operations would have been $135.8 million and net income would have been $222.3 million in fiscal 2002. Diluted net income from continuing operations would have been $0.62 per share and diluted net income would have been $1.02 per share in that fiscal year.
Changes in the carrying value of goodwill by reportable segment during fiscal 2004 were as follows. Our reportable segments are described in Note 11.
| (In thousands) |
BALANCE
JULY 31, 2003 |
GOODWILL
ACQUIRED/
ADJUSTED |
GOODWILL
IMPAIRMENT
CHARGE |
FOREIGN
CURRENCY
TRANSLATION |
BALANCE
JULY 31, 2004 |
|
QuickBooks-Related |
$ |
6,067 |
|
$ |
98,366 |
|
$ |
- |
|
$ |
- |
|
$ |
104,433 |
|
 |
Intuit-Branded Small Business |
|
473,240 |
|
|
(700 |
) |
|
(18,664 |
) |
|
- |
|
|
453,876 |
|
|
Consumer Tax |
|
11,204 |
|
|
(709 |
) |
|
- |
|
|
- |
|
|
10,495 |
|
|
Professional Tax |
|
90,507 |
|
|
- |
|
|
- |
|
|
- |
|
|
90,507 |
|
|
Other Businesses |
|
10,073 |
|
|
- |
|
|
- |
|
|
646 |
|
|
10,719 |
|
|
|
$ |
591,091 |
|
$ |
96,957 |
|
$ |
(18,664 |
) |
$ |
646 |
|
$ |
670,030 |
|
|
|
|
The increase in goodwill was related primarily to our acquisition of Innovative Merchant Solutions in the first quarter of fiscal 2004. See Note 7. The goodwill impairment charge is described later in this Note 4.
Purchased intangible assets consisted of the following at the dates indicated:
| |
JULY 31, |
|
| (Dollars in thousands) |
LIFE IN YEARS |
2003 |
2004 |
|
| Customer lists |
|
3-7 |
|
$ |
171,237 |
|
$ |
190,953 |
|
|
| Less accumulated amortization |
|
|
|
|
(105,771 |
) |
|
(130,905 |
) |
|
| |
|
|
|
|
65,466 |
|
|
60,048 |
|
|
| Purchased technology |
|
2-7 |
|
|
143,605 |
|
|
147,246 |
|
|
| Less accumulated amortization |
|
|
|
|
(93,694 |
) |
|
(107,189 |
) |
|
| |
|
|
|
|
49,911 |
|
|
40,057 |
|
|
| Trade names and logos |
|
2-7 |
|
|
17,199 |
|
|
17,524 |
|
|
| Less accumulated amortization |
|
|
|
|
(10,293 |
) |
|
(12,711 |
) |
|
| |
|
|
|
|
6,906 |
|
|
4,813 |
|
|
| Covenants not to compete |
|
2-5 |
|
|
9,410 |
|
|
11,384 |
|
|
| Less accumulated amortization |
|
|
|
|
(6,248 |
) |
|
(9,001 |
) |
|
| |
|
|
|
|
3,162 |
|
|
2,383 |
|
|
| Total purchased intangible assets |
|
|
|
|
341,451 |
|
|
367,107 |
|
|
| Total accumulated amortization |
|
|
|
|
(216,006 |
) |
|
(259,806 |
) |
|
| Total net purchased intangible assets |
|
|
|
$ |
125,445 |
|
$ |
107,301 |
|
|
|
|
The increases in customer lists and covenants not to compete were due primarily to our acquisition of Innovative Merchant Solutions in the first quarter of fiscal 2004. See Note 7.
We summarize the following expenses on the acquisition-related charges line of our statement of operations:
| |
FISCAL |
|
| (In thousands) |
2002 |
2003 |
2004 |
|
| Amortization of goodwill |
$ |
122,629 |
|
$ |
- |
|
$ |
- |
|
|
| Amortization of purchased intangible assets |
|
28,112 |
|
|
32,692 |
|
|
23,583 |
|
|
| Amortization of acquisition-related deferred compensation |
|
8,654 |
|
|
1,255 |
|
|
889 |
|
|
| Total acquisition-related charges |
$ |
159,395 |
|
$ |
33,947 |
|
$ |
24,472 |
|
|
|
|
At July 31, 2004, we expected 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. Future acquisitions could cause these amounts to increase. In addition, if impairment events occur they could
accelerate the timing of charges.
| FISCAL YEAR ENDING JULY 31, (dollars in thousands) |
EXPECTED AMORTIZATION EXPENSE |
|
| 2005 |
$ |
38,309 |
|
| 2006 |
|
32,142 |
|
| 2007 |
|
20,178 |
|
| 2008 |
|
9,963 |
|
| 2009 |
|
6,272 |
|
| Thereafter |
|
437 |
|
| Total expected future amortization expense |
$ |
107,301 |
|
|
|
As discussed in Note 1, we regularly perform reviews to determine if the carrying values of our goodwill and purchased intangible assets may be impaired. We look for the existence of facts and circumstances, either internal or external, which indicate that the carrying value of the asset may not be recovered.
Fiscal 2002
During the second quarter of fiscal 2002, events and circumstances indicated impairment of goodwill and intangible assets that we received in connection
with our acquisitions of an Internet-based advertising business from Venture Finance Software Corp. in August 2000 (part of our Other Businesses segment) and the Site Solutions business that we acquired from Boston Light Corp. in August 1999 (part of our Intuit-Branded Small Business segment).
Indicators of impairment for our Internet-based advertising business included a steep decline in demand for online advertising reflecting the industry-wide decline in Internet advertising spending, as well as management's assessment that revenues and profitability would continue to decline in the future based
on analyses and forecasts completed during the second quarter of fiscal 2002. The primary indicator of impairment for our Site Solutions business was management's decision to transition the customer base of Site Solutions and collaborate with a third party to provide the Web site building service. This
collaboration, which began in the second quarter of fiscal 2002, eliminated our use of technology purchased from Boston Light.
In each case, we measured the impairment loss based on the amount by which the carrying amount of the assets exceeded their fair value based on lower projected profits and decreases in cash flow. Our measurement of fair value was based on an analysis of the future discounted cash flows as discussed in Note 1. Based on our analyses, in the second quarter of fiscal 2002 we recorded charges of $22.6 million to reduce the carrying value of the assets associated with our Internet-based advertising business to zero, and a charge of $4.7 million to reduce the carrying value of assets relating to our Site Solutions business to zero.
Fiscal 2004
During the fourth quarter of fiscal 2004, events and circumstances indicated impairment of goodwill that we recorded in connection with our acquisition of Intuit Public Sector Solutions, or IPSS, in May 2002 (part of our Intuit-Branded Small Business segment). The primary indicator of impairment was the fact that actual sales levels did not meet initial projections.
We measured the impairment loss based on the amount by which the carrying amount of goodwill exceeded the fair value based on lower projected
profits and decreases in cash flow. Our measurement of fair value was based on a blend of an analysis of the future discounted cash flows and a
comparison of revenue and operating income multiples for companies of similar industry and/or size as discussed in Note 1. Based on our analysis, in the fourth quarter of fiscal 2004 we recorded a charge of $18.7 million to reduce the carrying value of the goodwill to $10.9 million.
In August 2004 management formally approved a plan to sell IPSS. This subsidiary will be presented as discontinued operations beginning in fiscal 2005.
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