SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2002
AMDOCS LIMITED
Suite 5, Tower Hill House Le Bordage
St. Peter Port, Island of Guernsey, GY1 3QT Channel Islands
Amdocs, Inc.
1390 Timberlake Manor Parkway, Chesterfield, Missouri 63017
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F
Form 20-F X FORM 40-F ____
Indicate by check mark whether the registrant by furnishing the information
contained in this form is also thereby furnishing the information to the
Commission pursuant to rule 12g3-2(b) under the Securities Exchange Act of 1934.
YES ___ NO X
AMDOCS LIMITED
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
FOR THE QUARTER ENDED MARCH 31, 2002
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statement of Changes in Shareholders'
Equity
Consolidated Statements of Cash Flows
Notes to Unaudited Consolidated Financial Statements
Item 2. Operating and Financial Review and Prospects
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 6-K
SIGNATURES
EXHIBIT INDEX
1
AMDOCS LIMITED
CONSOLIDATED BALANCE SHEETS
(in U.S. dollars, unless otherwise stated)
(in thousands, except per share data)
AS OF
-----------------------------
MARCH 31, SEPTEMBER 30,
-----------------------------
2002 2001
----------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 480,981 $ 872,998
Short-term interest-bearing investments 559,959 237,069
Accounts receivable, including unbilled of $26,762 and $23,272, less
allowances of $14,248 and $3,219, respectively (*) 406,588 384,851
Deferred income taxes and taxes receivable 54,868 38,916
Prepaid expenses and other current assets (*) 54,968 38,045
----------- -----------
Total current assets 1,557,364 1,571,879
Equipment, vehicles and leasehold improvements, net 171,496 173,695
Deferred income taxes 25,603 19,722
Goodwill and other intangible assets, net 874,200 788,187
Other noncurrent assets 97,213 70,953
----------- -----------
Total assets $ 2,725,876 $ 2,624,436
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 254,726 $ 166,527
Accrued personnel costs 86,162 103,990
Deferred revenue 136,140 140,033
Short-term portion of capital lease obligations 10,286 10,400
Deferred income taxes and taxes payable 104,635 91,026
----------- -----------
Total current liabilities 591,949 511,976
Convertible notes and long-term portion of capital lease obligations 521,351 524,779
Deferred income taxes 9,377 7,410
Other noncurrent liabilities 77,605 68,180
----------- -----------
Total liabilities 1,200,282 1,112,345
----------- -----------
Shareholders' equity:
Preferred Shares - Authorized 25,000 shares; L0.01 par value; 0 shares issued
and outstanding
Ordinary Shares - Authorized 550,000 shares; L0.01 par value; 223,130 and 222,628 issued and
222,530 and 222,628 outstanding, respectively 3,569 3,560
Additional paid-in capital 1,811,361 1,806,290
Treasury stock (15,408) --
Accumulated other comprehensive loss (13,511) (6,382)
Unearned compensation -- (185)
Accumulated deficit (260,417) (291,192)
----------- -----------
Total shareholders' equity 1,525,594 1,512,091
----------- -----------
Total liabilities and shareholders' equity $ 2,725,876 $ 2,624,436
=========== ===========
(*) See Note 2.
See accompanying notes
2
AMDOCS LIMITED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
Revenue:
License (*) $ 45,528 $ 43,290 $ 87,818 $ 81,366
Service (*) 409,741 328,999 790,092 633,090
-------- -------- -------- --------
455,269 372,289 877,910 714,456
-------- -------- -------- --------
Operating expenses:
Cost of license 1,433 1,295 2,413 2,953
Cost of service (*) 249,204 206,154 479,807 397,942
Research and development 30,902 25,152 59,459 48,731
Selling, general and administrative (*) 61,023 48,168 114,802 91,618
Amortization of goodwill and purchased intangible
assets 61,894 54,164 118,676 108,324
In-process research and development and
nonrecurring charge -- -- 30,711 --
-------- -------- -------- --------
404,456 334,933 805,868 649,568
-------- -------- -------- --------
Operating income 50,813 37,356 72,042 64,888
Interest income and other, net (*) 2,383 5,096 5,710 10,658
-------- -------- -------- --------
Income before income taxes 53,196 42,452 77,752 75,546
Income taxes 26,755 27,039 46,977 47,557
-------- -------- -------- --------
Net income $ 26,441 $ 15,413 $ 30,775 $ 27,989
======== ======== ======== ========
Basic earnings per share $ 0.12 $ 0.07 $ 0.14 $ 0.13
======== ======== ======== ========
Diluted earnings per share $ 0.12 $ 0.07 $ 0.14 $ 0.12
======== ======== ======== ========
Basic weighted average number of shares outstanding 222,995 221,884 222,844 221,546
======== ======== ======== ========
Diluted weighted average number of shares outstanding 225,488 227,213 225,275 226,994
======== ======== ======== ========
(*) See Note 2.
See accompanying notes
3
AMDOCS LIMITED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
(in thousands)
Accumulated
Ordinary Shares Additional Other
----------------- Paid-in Treasury Comprehensive Unearned Accumulated
Shares Amount Capital Stock Loss Compensation Deficit
-------- ------ ---------- -------- ------------- ------------ ------------
BALANCE AS OF SEPTEMBER 30, 2001 222,628 $3,560 $1,806,290 $ -- $ (6,382) $(185) $(291,192)
Comprehensive income:
Net income -- -- -- -- -- -- 30,775
Increase in unrealized loss on
foreign currency hedging
contracts, net of $1,371 tax
benefit -- -- -- -- (4,332) -- --
Increase in unrealized loss on
cash equivalents and
short-term interest-bearing
investments, net of $1,148
tax benefit -- -- -- -- (2,797) -- --
Comprehensive income
Employee stock options exercised 502 9 4,620 -- -- -- --
Tax benefit of stock options
exercised -- -- 389 -- -- -- --
Expense related to vesting of
stock options -- -- 62 -- -- -- --
Repurchase of shares (600) -- -- (15,408) -- -- --
Amortization of unearned
compensation -- -- -- -- -- 185 --
-------- ------ ---------- -------- -------- ----- ---------
BALANCE AS OF MARCH 31, 2002 222,530 $3,569 $1,811,361 $(15,408) $(13,511) $-- $(260,417)
======== ====== ========== ======== ======== ===== =========
Total
Shareholders'
Equity
-------------
BALANCE AS OF SEPTEMBER 30, 2001 $ 1,512,091
Comprehensive income:
Net income 30,775
Increase in unrealized loss on
foreign currency hedging
contracts, net of $1,371 tax
benefit (4,332)
Increase in unrealized loss on
cash equivalents and
short-term interest-bearing
investments, net of $1,148
tax benefit (2,797)
-----------
Comprehensive income 23,646
-----------
Employee stock options exercised 4,629
Tax benefit of stock options
exercised 389
Expense related to vesting of
stock options 62
Repurchase of shares (15,408)
Amortization of unearned
compensation 185
-----------
BALANCE AS OF MARCH 31, 2002 $ 1,525,594
===========
As of March 31, 2002 and September 30, 2001, accumulated other comprehensive
loss is comprised of unrealized loss on foreign currency hedging contracts, net
of tax, of $12,234 and $7,902, respectively, and unrealized loss (gain) on cash
equivalents and short-term interest-bearing investments, net of tax, of $1,277
and $(1,520), respectively.
See accompanying notes
4
AMDOCS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
SIX MONTHS ENDED MARCH 31,
--------------------------
2002 2001
--------- ---------
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 30,775 $ 27,989
Reconciliation of net income to net cash provided by operating activities:
Depreciation and amortization 158,302 137,844
In-process research and development 17,400 --
Loss on sale of equipment 195 112
Deferred income taxes 1,161 (2,577)
Tax benefit of stock options exercised 389 5,297
Unrealized loss on other comprehensive loss (9,648) (8,820)
Net changes in operating assets and liabilities, net of amounts
acquired:
Accounts receivable 5,518 (49,799)
Prepaid expenses and other current assets (5,714) (10,166)
Other noncurrent assets (4,254) (1,832)
Accounts payable and accrued expenses 51,060 1,418
Deferred revenue (34,703) 13,267
Income taxes payable (7,195) 7,753
Other noncurrent liabilities 4,758 4,426
--------- ---------
Net cash provided by operating activities 208,044 124,912
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from sale of equipment, vehicles and leasehold improvements 861 1,674
Payments for purchase of equipment, vehicles, leasehold improvements and
other (26,581) (42,216)
Purchase of short-term interest-bearing investments, net (322,890) (120,220)
Investment in noncurrent assets (24,006) (3,725)
Cash paid for acquisition (210,900) --
--------- ---------
Net cash used in investing activities (583,516) (164,487)
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from employee stock options exercised 4,629 10,380
Repurchase of shares (15,408) --
Payments under short-term finance arrangements -- (20,000)
Principal payments on capital lease obligations (5,766) (5,270)
--------- ---------
Net cash used in financing activities (16,545) (14,890)
--------- ---------
Net decrease in cash and cash equivalents (392,017) (54,465)
Cash and cash equivalents at beginning of period 872,998 402,300
--------- ---------
Cash and cash equivalents at end of period $ 480,981 $ 347,835
========= =========
SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for:
Income taxes, net of refunds $ 53,428 $ 35,209
Interest 5,707 1,458
NON CASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations of $2,224 and $6,730 were incurred during the six
months ended March 31, 2002 and 2001, respectively, as a result of the Company
(as defined below) entering into lease agreements for the purchase of fixed
assets.
See accompanying notes
5
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
1. BASIS OF PRESENTATION
Amdocs Limited ("Amdocs" or the "Company") is a leading
provider of software products and services to the communications
industry. The Company and its subsidiaries operate in one business
segment, the provision of business support systems and related
services. Focused on the communications industry, the Company designs,
develops, markets, supports and operates information system solutions
primarily to leading communications companies throughout the world.
The unaudited consolidated financial statements of the Company
have been prepared in accordance with accounting principles generally
accepted in the United States ("GAAP"). In the opinion of management,
all adjustments considered necessary for a fair presentation of the
unaudited interim consolidated financial statements have been included
herein and are of a normal recurring nature.
The preparation of financial statements during interim periods
requires management to make numerous estimates and assumptions that
impact the reported amounts of assets, liabilities, revenue and
expenses. Estimates and assumptions are reviewed periodically and the
effect of revisions is reflected in the results of operations of the
interim periods in which changes are determined to be necessary.
The results of operations for the interim periods presented
herein are not necessarily indicative of the results to be expected for
the full year. These statements do not include all information and
footnotes necessary for a complete presentation of financial position,
results of operations and cash flows in conformity with GAAP. These
statements should be read in conjunction with the Company's
consolidated financial statements for the fiscal year ended September
30, 2001 set forth in the Company's Annual Report on Form 20-F filed
with the Securities and Exchange Commission.
2. RELATED PARTY TRANSACTIONS
The following related party balances are included in the
balance sheets:
AS OF
------------------------
MARCH 31, SEPTEMBER 30,
--------- -------------
2002 2001
--------- -------------
Accounts receivable, including unbilled of $823 and $4,479, respectively
$ 74,213 $104,096
Prepaid expenses and other current assets (1) 380 --
Other noncurrent assets (2) 34,097 10,091
(1) Consists of interest receivable accrued on convertible debentures
issued to the Company by Certen Inc. ("Certen"), a company formed
by Bell Canada and the Company in January 2001.
(2) Consists of an investment in Certen in equity and the convertible
debentures. The investment in Certen is accounted for under the
cost method, based on the Company's 10% ownership of Certen. The
total financial commitment of the Company to Certen is
approximately $50,000 in aggregate equity and convertible
debentures.
6
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
The Company licenses software and provides computer systems
integration and related services to several affiliates of a significant
shareholder of the Company, including Certen. The following related
party revenue is included in the statements of income for the following
periods:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------- ---------------------
2002 2001 2002 2001
------- ------- -------- --------
Revenue:
License $ 7,744 $ 9,728 $ 10,674 $ 13,311
Service 77,458 67,111 173,122 109,778
The following related party expenses are included in the
statements of income for the following periods:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------ -------------------
2002 2001 2002 2001
---- ---- ------ ------
Operating expenses (1):
Cost of service $751 $695 $1,212 $1,289
Selling, general and administrative 73 260 171 431
Interest income and other, net (2): 368 -- 244 --
(1) The Company leases office space on a month-to-month basis and
purchases other miscellaneous support services from affiliates
of a certain shareholder.
(2) Represents interest and exchange rate differences on the
convertible debentures.
3. COMPREHENSIVE INCOME
Comprehensive income represents the change in shareholders'
equity during a period from transactions and other events and
circumstances from nonowner sources. It includes all changes in equity
except those resulting from investments by owners and distributions to
owners.
The following table sets forth the reconciliation from net
income to comprehensive income for the following periods:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- -------
Net income $ 26,441 $ 15,413 $ 30,775 $27,989
Other comprehensive income (loss):
Unrealized loss on foreign currency hedging
contracts, net of tax (5,467) (6,727) (4,332) (6, 686)
Unrealized income (loss) on short-term
interest-bearing investments, net of tax (2,586) 355 (2,797) 515
-------- -------- -------- -------
Comprehensive income $ 18,388 $ 9,041 $ 23,646 $21,818
======== ======== ======== =======
7
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
4. INCOME TAXES
The provision for income taxes for the following periods
consisted of:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------- --------------------
2002 2001 2002 2001
------- ------- ------- --------
Current $20,327 $22,604 $45,816 $ 50,134
Deferred 6,428 4,435 1,161 (2,577)
------- ------- ------- --------
$26,755 $27,039 $46,977 $ 47,557
======= ======= ======= ========
The effective income tax rate from continuing operations
varied from the statutory Guernsey tax rate as follows for the
following periods:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ----------------
2002 2001 2002 2001
---- ---- ---- ----
Statutory Guernsey tax rate 20% 20% 20% 20%
Guernsey tax-exempt status (20) (20) (20) (20)
Foreign taxes 28 30 28 30
--- --- --- ---
Income tax rate before effect of acquisitions-related
costs and nonrecurring charge 28 30 28 30
Effect of acquisitions-related costs 22 34 22 33
--- --- --- ---
Income tax rate before in-process research and
development and nonrecurring charge 50 64 50 63
In-process research and development and nonrecurring
charge -- -- 10 --
--- --- --- ---
Effective income tax rate 50% 64% 60% 63%
=== === === ===
As a Guernsey corporation with tax-exempt status, the
Company's overall effective tax rate is attributable solely to foreign
taxes. In connection with acquisitions, the Company incurred non-cash
charges related to the amortization of purchased intangible assets,
in-process research and development and a nonrecurring charge resulting
from the closing of one of the Company's facilities. See Note 7 below.
Since a significant portion of such costs and charges are not
deductible for tax purposes, the effective tax rate is adversely
affected during periods in which such charges are recorded. For the
three months ended March 31, 2002, the Company's blended effective tax
rate from operations was 50%, and for the three months ended March 31,
2001 it was 64%. For the six months ended March 31, 2002, the Company's
blended effective tax rate was 60%, and for the six months ended March
31, 2001 it was 63%. For the six months ended March 31, 2002 the
Company's blended effective tax rate from operations, calculated based
on income before income taxes, excluding the impact of one-time charges
for in-process research and development and the nonrecurring charge,
was 50%. Excluding the impact of these items and acquisitions-related
costs, the Company's overall effective tax rate was approximately 28%
and 30% for the three months and six months ended March 31, 2002 and
2001, respectively.
8
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
5. EARNINGS PER SHARE
The following table sets forth the computation of basic and
diluted earnings per share:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
Numerator:
Net income $ 26,441 $ 15,413 $ 30,775 $ 27,989
-------- -------- -------- --------
Denominator:
Denominator for basic earnings per share -
weighted average number of shares
outstanding (*) 222,995 221,884 222,844 221,546
-------- -------- -------- --------
Effect of dilutive stock options granted 2,493 5,329 2,431 5,448
Denominator for dilutive earnings per share -
adjusted weighted average shares and
assumed conversions (*) 225,488 227,213 225,275 226,994
======== ======== ======== ========
Basic earnings per share $ 0.12 $ 0.07 $ 0.14 $ 0.13
======== ======== ======== ========
Diluted earnings per share $ 0.12 $ 0.07 $ 0.14 $ 0.12
======== ======== ======== ========
(*) The weighted average number of shares outstanding includes
exchangeable shares held by shareholders of Amdocs Canada,
Inc. (formerly Solect Technology Group Inc. ("Solect"))
pursuant to the Company's acquisition of Solect in April 2000,
which are exchangeable for the Company's Ordinary Shares on a
one-for-one basis.
The effect of the 2% Convertible Notes due June 1, 2008 issued
by the Company in May, 2001 (the "Notes") on diluted earnings per share
was anti-dilutive for the three months and six months ended March 31,
2002, and therefore was not included in the calculation above. The
weighted average effect of the repurchase of Ordinary Shares by the
Company is included in the calculation of basic earnings per share. See
Note 8 below.
6. ACQUISITION
On November 28, 2001, the Company completed its acquisition
from Nortel Networks Corporation of substantially all of the assets of
its Clarify business ("Clarify"), a leading provider of Customer
Relationship Management ("CRM") software to communications companies
and other enterprise sectors. This acquisition positions the Company as
a leading provider of CRM to the communications industry and reinforces
its leadership in delivering a comprehensive portfolio of business
software applications.
The aggregate purchase price for Clarify was $203,750 in cash.
The purchase price is subject to final price adjustments that may
result in a reduction. In addition, transaction costs were $7,150. The
acquisition was accounted for as a business combination using the
purchase method of accounting, as required by Statements of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations" ("SFAS
141"). The fair market value of Clarify's assets and liabilities is
included in the Company's balance sheet and the results of Clarify's
operations are included in the Company's consolidated statements of
income, as of the closing date of the acquisition.
9
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
The Company obtained a valuation of the intangible assets
acquired in the Clarify transaction. The value of acquired technology
includes both existing technology and in-process research and
development. The valuation of these technologies was made by applying
the income forecast method, which considers the present value of cash
flows by product lines. Of the $65,600 of acquired identifiable
intangible assets, $17,400 was assigned to in-process research and
development and was written off as of the closing date of the
acquisition, in accordance with FASB Interpretation No. 4,
"Applicability of FASB Statement No. 2 to Business Combinations
Accounted for by the Purchase Method". This write-off is included in
"in-process research and development and nonrecurring charge". The fair
value assigned to core technology is $13,400 and is being amortized
over two years commencing on November 28, 2001. The fair value assigned
to customer arrangements is $34,800 and is being amortized over three
years commencing on November 28, 2001.
The excess of the purchase price over the fair value of the
net assets acquired, or goodwill, is $161,242. The amount assigned to
goodwill is subject to certain price adjustments and contingencies. The
goodwill is accounted for under SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). In accordance with SFAS 142, goodwill
from acquisitions after July 1, 2001 is no longer amortized and is
subject to impairment tests. Under the transition provisions of SFAS
142, goodwill for acquisitions prior to July 1, 2001 will continue to
be amortized only through final l adoption of the standard, which will
occur on October 1, 2002. As a result, goodwill associated with the
acquisition of Clarify is not amortized while goodwill associated with
other acquisitions by the Company will be amortized only for the
remainder of this fiscal year.
Set forth below is the unaudited pro forma revenue, operating
income, net income (loss) and earnings (loss) per share as if Clarify
had been acquired as of the beginning of the respective periods,
excluding the write-off of purchased in-process research and
development:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ----------------------
2002 2001 2002 2001
-------- --------- -------- ---------
Revenue $455,269 $ 429,489 $897,910 $ 854,074
Operating income 50,813 4,569 77,843 15,641
Net income (loss) 26,441 (10,464) 38,116 (14,599)
Basic earnings (loss) per share 0.12 (0.05) 0.17 (0.07)
Diluted earnings (loss) per share 0.12 (0.05) 0.17 (0.07)
As a result of SFAS 142, goodwill associated with acquisitions
completed after July 1, 2001 is not amortized and, accordingly, the pro
forma information above reflects no amortization of goodwill related to
Clarify.
7. OPERATIONAL EFFICIENCY
As part of a plan to achieve increased operational efficiency and to
more closely monitor and reduce costs, the Company consolidated its
Stamford, Connecticut data center into its Champaign, Illinois facility,
and is closing the Stamford facility. As a direct result of this closure,
the Company incurred a nonrecurring charge of $13,311 in the first quarter
of fiscal 2002, primarily for the write-off of leasehold improvements and
rent obligations, with the remainder for severance payments. This
nonrecurring charge is included in "in-process research and development
and nonrecurring charge". In addition, as part of its ongoing efforts to
reduce costs, the Company has decreased its overall commitments for
employee compensation.
8. SHARE REPURCHASE PROGRAM
10
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
On November 6, 2001, the Company announced that its board of
directors had approved a share repurchase program authorizing the
repurchase of up to 11,000 Ordinary Shares, or approximately 5% of the
Company's outstanding Ordinary Shares as of that date. Under the
program, from time to time over the twelve-month period commencing
November 6, 2001, shares may be repurchased on the open market, in
privately negotiated transactions or otherwise, in accordance with any
applicable laws, and at prices per share as the Company deems
appropriate. During the six and three month periods ended March 31,
2002, the Company repurchased 600 Ordinary Shares at an average market
price of $25.63 per share. The Company funded these and intends to fund
any future repurchases with available funds. See Note 9 below.
9. SUBSEQUENT EVENT
On April 23, 2002, the Company announced that its board of
directors has expanded the existing stock repurchase plan to authorize
the purchase of up to 20,000 shares, or approximately 9% of the
Company's outstanding Ordinary Shares. This represents an increase from
the 11,000 shares originally authorized when the plan was instituted in
November 2001. These purchases may be made on the open market, or in
privately negotiated transactions, at times and prices considered
appropriate by the Company, which intends to fund the repurchases with
available funds. From April 1, 2002 and through the period ended May 9,
2002, the Company repurchased an additional 3,132.5 Ordinary Shares at
an average market price of $20.13 per share.
11
ITEM 2. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
FORWARD LOOKING STATEMENTS
Some of the information in this section contains forward looking
statements (within the meaning of the Private Securities Litigation Reform Act
of 1995) that involve substantial risks and uncertainties. You can identify
these statements by forward looking words such as "expect", "anticipate",
"believe", "seek", "estimate", "project", "forecast", "continue", "potential"
and similar words. Statements that we make in this section that are not
statements of historical fact also may be forward looking statements. Forward
looking statements are not guarantees of future performance, and involve risks,
uncertainties and assumptions that may cause our actual results to differ
materially from the expectations we describe in our forward looking statements.
There may be events in the future that we are not accurately able to predict, or
over which we have no control. You should not place undue reliance on forward
looking statements. We do not promise to notify you if we learn that our
assumptions or projections are wrong for any reason. We disclaim any obligation
to update our forward looking statements.
INTRODUCTION
In this section, we discuss the general financial condition and the
results of operations for Amdocs and its subsidiaries including:
- what factors affect our business,
- what our revenue and costs were in the six months and three months
ended March 31, 2002 and 2001,
- why those revenue and costs were different from period to period,
- the sources of our revenue,
- how all of this affects our overall financial condition,
- what our expenditures were in the six months and three months ended
March 31, 2002 and 2001, and
- the sources of our cash to pay for future capital expenditures and
possible acquisitions.
In this section, we also analyze and explain for the relevant periods
the changes in the specific line items in our consolidated statements of income.
This section should be read in conjunction with our consolidated financial
statements.
OVERVIEW OF BUSINESS AND TREND INFORMATION
Our market focus is the communications industry and we are a leading
provider of software products and services to that sector. Our Business Support
Systems ("BSS") consist primarily of Customer Care and Billing, CRM and Order
Management Systems (collectively, "CC&B Systems"). Our products are designed to
meet the mission-critical needs of leading communications service providers,
supporting a wide range of communications services, including wireline,
wireless, broadband, electronic and mobile commerce and Internet Protocol ("IP")
services. We also support companies that offer multiple service packages,
commonly referred to as convergent services. In addition, we provide a full
range of Directory Sales and Publishing Systems ("Directory Systems") to
publishers of both traditional printed yellow page and white page directories
and electronic Internet directories. Due to the complexity of BSS projects and
the expertise required for system support, we also provide extensive
customization, implementation, system integration, ongoing support, system
enhancement, maintenance and outsourcing services.
12
As part of our strategy, we may pursue additional acquisitions and
other initiatives in order to offer new products or services or otherwise
enhance our market position or strategic strengths. See discussion below -
"Acquisition".
We derive our revenue principally from:
- the initial sale of our products and related services, including
license fees and customization, implementation and integration
services, and
- recurring revenue from ongoing support, maintenance, outsourcing and
other related services provided to our customers and, to a lesser
degree, from incremental license fees resulting from increases in the
number of a customer's subscribers.
We usually sell our software as part of an overall solution offered to
a customer, in which significant customization and modification to our software
generally is required. As a result, revenue generally is recognized over the
course of these long-term projects. Initial license revenue is recognized as
work is performed, using the percentage of completion method of accounting.
Subsequent license fee revenue is recognized upon completion of the specified
conditions in each contract. Service revenue that involves significant ongoing
obligations, including fees for customization, implementation and modification,
is also recognized as work is performed, under the percentage of completion
method of accounting. Revenue from software solutions that do not require
significant customization and modification is recognized upon delivery. In
outsourcing contracts, revenue from the operation and maintenance of customers'
billing systems is recognized in the period in which the bills are produced.
Revenue from ongoing support services is recognized as work is performed.
Revenue from third-party hardware and software sales is recognized upon
delivery. Maintenance revenue is recognized ratably over the term of the
maintenance agreement. As a result of a substantial portion of our revenue being
subject to the percentage of completion accounting method, the size and timing
of customer projects and our progress in completing such projects may
significantly affect our annual and quarterly operating results.
Our business is subject to the effects of general global economic
conditions and, in particular, market conditions in the communications industry.
These conditions have reduced the high growth that the communications industry
had experienced over the past several years. As a result, the market value,
financial results and prospects, and capital spending levels of many
communications companies have declined or degraded.
Our sales cycle is significantly longer than in earlier periods of high
growth in the communications industry. It currently ranges from between six and
twelve months for the majority of our new sales. We believe that current market
conditions, including our lengthened sales cycle and the persistence of the
downturn in the communications industry, will inhibit our growth. Although we
currently anticipate that revenue for the two remaining quarters of fiscal 2002
will be greater than revenue levels achieved in the corresponding quarters in
fiscal 2001, we expect revenue levels in both of the remaining quarters of
fiscal 2002 to be less than the level achieved in the second quarter of this
fiscal year.
License and service fees from the sale of CC&B Systems amounted to
$785.3 million and $634.5 million in the six months ended March 31, 2002 and
2001, respectively, representing 89.4% and 88.8%, respectively, of our revenue
for such periods. License and service fees from the sale of CC&B Systems
amounted to $404.7 million and $327.9 million in the three months ended March
31, 2002 and 2001, respectively, representing 88.9% and 88.1%, respectively, of
our revenue for such periods.
13
We believe that we are a leading global provider of CC&B Systems. We
provide a broad set of CC&B Systems, with proven functionality and scalability,
accompanied by a comprehensive range of support services.
We believe that the demand for our CC&B Systems will increase in the
long term due to, among other key factors:
- the growth and deregulation of the communications market,
- the global penetration and expansion of communications services,
- the proliferation of new communications products and services,
especially IP and data services,
- rapid technological changes, such as the introduction of wireless
Internet services via GPRS (General Packet Radio Services) and UMTS
(Universal Mobile Telecommunications System) technology,
- intensifying competition among communications carriers, and
- a shift from in-house management to vendor solutions and outsourcing.
We also believe that a key driver of demand is the continuing trend for
communications service providers to offer to their subscribers multiple service
packages, commonly referred to as convergent services (combinations of voice,
broadband, electronic and mobile commerce and IP services). In addition, we
believe that another driver of demand is the ability of our CC&B solutions to
improve productivity and reduce costs of communications providers.
License and service fee revenue from the sale of Directory Systems
totaled $92.6 million and $79.9 million in the six months ended March 31, 2002
and 2001, respectively, accounting for 10.6% and 11.2%, respectively, of our
revenue for such periods. License and service fee revenue from the sale of
Directory Systems totaled $50.5 million and $44.4 million in the three months
ended March 31, 2002 and 2001, respectively, accounting for 11.1% and 11.9%,
respectively, of our revenue for such periods.
We believe that we are a leading provider of Directory Systems in most
of the markets that we serve and we expect that the demand for our Directory
Systems will remain relatively stable in future periods.
RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES
Our research and development activities involve the development of new
software modules and product offerings in response to an identified market
demand, either in conjunction with a customer project or as part of our internal
product development programs. We also expend additional amounts on applied
research and software development activities to keep abreast of new technologies
in the communications and IP markets. Research and development expenditures
amounted to $59.5 million and $48.7 million in the six months ended March 31,
2002 and 2001, respectively, representing 6.8% of our revenue in these periods.
Research and development expenditures amounted to $30.9 million and $25.2
million in the three months ended March 31, 2002 and 2001, respectively,
representing 6.8% of our revenue in these periods. We believe that our research
and development efforts are a key element of our strategy and are essential to
our BSS offerings. We intend to continue devoting resources to research and
development as required to maintain and further strengthen our market position.
We regard significant portions of our software products and systems as
proprietary and rely on a combination of statutory and common law copyright,
trademark and trade secret laws, customer licensing agreements, employee and
third-party nondisclosure agreements and other methods to protect our
proprietary rights. We generally enter into confidentiality agreements with our
employees, consultants, customers and potential customers and limit access to,
and distribution of, our proprietary information. We believe that the
14
sophistication and complexity of our BSS offerings make it very difficult to
copy such information or to subject such information to unauthorized use. We
maintain sole ownership of our software products.
ACQUISITION
On November 28, 2001, we completed our acquisition from Nortel Networks
Corporation of substantially all of the assets of Clarify, a leading provider of
CRM software to communications companies and other enterprise sectors. This
acquisition positions us as a leading provider of CRM to the communications
industry and reinforces our leadership in delivering a comprehensive portfolio
of business software applications.
The aggregate purchase price for Clarify was $203.8 million in cash.
The purchase price is subject to final price adjustments that may result in a
reduction. In addition, transaction costs were $7.2 million. The acquisition was
accounted for as a business combination using the purchase method of accounting,
as required by SFAS 141. The fair market value of Clarify's assets and
liabilities is included in our balance sheet and the results of Clarify's
operations are included in our consolidated statements of income, as of the
closing date of the acquisition.
We obtained a valuation of the intangible assets acquired in the
Clarify transaction. The value of acquired technology includes both existing
technology and in-process research and development. The valuation of these
technologies was made by applying the income forecast method, which considers
the present value of cash flows by product lines. Of the $65.6 million of
acquired identifiable intangible assets, $17.4 million was assigned to
in-process research and development and was written off as of the closing date
of the acquisition, in accordance with FASB Interpretation No. 4, "Applicability
of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase
Method". This write-off is included in "in-process research and development and
nonrecurring charge". The fair value assigned to core technology is $13.4
million and is being amortized over two years commencing on November 28, 2001.
The fair value assigned to customer arrangements is $34.8 million and is being
amortized over three years commencing on November 28, 2001.
The excess of the purchase price over the fair value of the net assets
acquired, or goodwill, is $161.2 million. The amount assigned to goodwill is
subject to certain price adjustments and contingencies. The goodwill is
accounted for under SFAS 142. In accordance with SFAS 142, goodwill from
acquisitions after July 1, 2001 is no longer amortized and is subject to
impairment tests. Under the transition provisions of SFAS 142, goodwill for
acquisitions prior to July 1, 2001 will continue to be amortized only through
final adoption of the standard, which will occur on October 1, 2002. As a
result, goodwill associated with the acquisition of Clarify is not amortized
while goodwill associated with other acquisitions will be amortized only for the
remainder of this fiscal year.
OPERATIONAL EFFICIENCY
As part of a plan to achieve increased operational efficiency and to
more closely monitor and reduce costs, we consolidated our Stamford, Connecticut
data center into our Champaign, Illinois facility, and we are closing the
Stamford facility. As a direct result of this closure, we incurred a
nonrecurring charge of $13.3 million in the first quarter of fiscal 2002,
primarily for the write-off of leasehold improvements and rent obligations, with
the remainder for severance payments. This nonrecurring charge is included in
"in-process research and development and nonrecurring charge". In addition, as
part of our ongoing efforts to reduce costs, we have decreased our overall
commitments for employee compensation, through a lesser reliance on fixed
compensation programs and a greater reliance on discretionary arrangements.
15
SHARE REPURCHASE PROGRAM
On November 6, 2001, we announced that our board of directors had
approved a share repurchase program authorizing the repurchase of up to 11.0
million of our Ordinary Shares, or approximately 5% of our outstanding Ordinary
Shares as of that date. Under the program, from time to time over the
twelve-month period commencing November 6, 2001, shares may be repurchased on
the open market, in privately negotiated transactions or otherwise, in
accordance with any applicable laws, and at prices per share as we deem
appropriate. During the six and three months ended March 31, 2002 we repurchased
0.6 million of our Ordinary Shares at an average market price of $25.63 per
share. We funded these and intend to fund any future repurchases with available
funds. See discussion below - "Subsequent Event".
SUBSEQUENT EVENT
On April 23, 2002, we announced that our board of directors has
expanded the existing stock repurchase plan to authorize the purchase of up to
20.0 million shares, or approximately 9% of our outstanding Ordinary Shares.
This represents an increase from the 11.0 million shares originally authorized
when the plan was instituted in November 2001. These purchases may be made on
the open market, or in privately negotiated transactions, at times and prices
considered appropriate by us, which we intend to fund the repurchases with
available funds. From April 1, 2002 and through the period ended May 9, 2002, we
repurchased an additional 3.1 million Ordinary Shares at an average market price
of $20.13 per share.
RESULTS OF OPERATIONS
The following tables set forth for the six months and three months
ended March 31, 2002 and 2001 certain items in our consolidated statements of
income reflected as a percentage of total revenue:
SIX MONTHS ENDED MARCH 31,
---------------------------------------
2002 2001 2002 2001
------ ------ ------ ------
PRO FORMA (*) AS REPORTED
----------------- -----------------
Revenue:
License 10.0% 11.4% 10.0% 11.4%
Service 90.0 88.6 90.0 88.6
----- ----- ----- -----
100.0 100.0 100.0 100.0
----- ----- ----- -----
Operating expenses:
Cost of license 0.3 0.4 0.3 0.4
Cost of service 54.7 55.7 54.7 55.7
Research and development 6.8 6.8 6.8 6.8
Selling, general and
administrative 13.0 12.8 13.0 12.8
Amortization of goodwill and
purchased intangible assets -- -- 13.5 15.2
In-process research and development and
nonrecurring charge
-- -- 3.5 --
----- ----- ----- -----
74.8 75.7 91.8 90.9
----- ----- ----- -----
Operating income 25.2 24.3 8.2 9.1
Interest income and other, net 0.7 1.5 0.7 1.5
----- ----- ----- -----
Income before income taxes 25.9 25.8 8.9 10.6
Income taxes 7.3 7.8 5.4 6.7
----- ----- ----- -----
Net income 18.6% 18.0% 3.5% 3.9%
===== ===== ===== =====
(*) The pro forma financial information regarding our operating
results is provided as a complement to results reported in
accordance with GAAP. The pro forma financial information
excludes (i) $118.7 million for amortization of goodwill and
purchased intangible assets and all related tax effects
attributable to acquisitions and (ii) for the six months ended
March 31, 2002 only, $17.4 million for purchased in-process
research and
16
development attributable to the acquisition of Clarify and
$13.3 million for a nonrecurring charge related to the
consolidation of data centers and the resulting closure of our
Stamford, Connecticut facility, and all related tax effects.
THREE MONTHS ENDED MARCH 31,
---------------------------------------
2002 2001 2002 2001
------ ------ ------ ------
PRO FORMA (*) AS REPORTED
----------------- -----------------
Revenue:
License 10.0% 11.6% 10.0% 11.6%
Service 90.0 88.4 90.0 88.4
----- ----- ----- -----
100.0 100.0 100.0 100.0
----- ----- ----- -----
Operating expenses:
Cost of license 0.3 0.3 0.3 0.3
Cost of service 54.7 55.4 54.7 55.4
Research and development 6.8 6.8 6.8 6.8
Selling, general and
administrative 13.4 12.9 13.4 12.9
Amortization of goodwill and
purchased intangible assets -- -- 13.6 14.6
----- ----- ----- -----
75.2 75.4 88.8 90.0
----- ----- ----- -----
Operating income 24.8 24.6 11.2 10.0
Interest income and other, net 0.5 1.4 0.5 1.4
----- ----- ----- -----
Income before income taxes 25.3 26.0 11.7 11.4
Income taxes 7.1 7.8 5.9 7.3
----- ----- ----- -----
Net income 18.2% 18.2% 5.8% 4.1%
===== ===== ===== =====
(*) The pro forma financial information regarding our operating
results is provided as a complement to results reported in
accordance with GAAP. The pro forma financial information
excludes amortization of goodwill and purchased intangible
assets and all related tax effects attributable to
acquisitions.
SIX MONTHS ENDED MARCH 31, 2002 AND 2001
REVENUE. Revenue for the six months ended March 31, 2002 was $877.9
million, an increase of $163.5 million, or 22.9%, over the six months ended
March 31, 2001. The increase in revenue was due to the continued growth in the
demand for our CC&B Systems solutions in our traditional target markets of
high-end and mid-tier communications companies and to a lesser degree from the
acquisition of Clarify. License revenue increased from $81.4 million in the six
months ended March 31, 2001 to $87.8 million during the six months ended March
31, 2002, an increase of 7.9%, and service revenue increased 24.8% from $633.1
million in the six months ended March 31, 2001 to $790.1 million in the six
months ended March 31, 2002. The reduced growth in license revenues reflects the
lengthened sales cycles that we are experiencing and the resulting decrease in
the number of new deals.
Total CC&B Systems revenue for the six months ended March 31, 2002 was
$785.3 million, an increase of $150.8 million, or 23.8%, over the six months
ended March 31, 2001. During the first half of fiscal 2002, the demand for our
CC&B Systems was primarily driven by the need for communications companies to
upgrade their customer care and billing, CRM and order management systems in
response to competition in the subscriber markets, the need to offer convergent
and IP services, and the need to improve productivity and operational
efficiency.
Revenue from Directory Systems was $92.6 million for the six months
ended March 31, 2002, an increase of $12.7 million, or 15.9%, over the six
months ended March 31, 2001. The increase is attributable primarily to
extensions of agreements with and additional services rendered to existing
customers.
In the six months ended March 31, 2002, revenue from customers in North
America, Europe and the rest of the world accounted for 61.2%, 28.3% and 10.5%,
respectively, compared to 53.4%, 36.1% and 10.5%, respectively, for the six
months ended March 31, 2001. The growth in North America in the six months
17
ended March 31, 2002, was attributable primarily to revenue we gained from
increased activity for existing customers and, to a lesser degree, relationships
formed with new customers.
COST OF LICENSE. Cost of license for the six months ended March 31,
2002 was $2.4 million, a decrease of $0.5 million, or 18.3%, over the cost of
license for the six months ended March 31, 2001. Cost of license includes
amortization of purchased computer software and intellectual property rights.
COST OF SERVICE. Cost of service for the six months ended March 31,
2002 was $479.8 million, an increase of $81.9 million, or 20.6%, over the cost
of service of $397.9 million for the six months ended March 31, 2001. As a
percentage of revenue, cost of service decreased to 54.7% in the six months
ended March 31, 2002 from 55.7% in the six months ended March 31, 2001. The
decrease in cost of service as a percentage of revenue is primarily due to our
efforts to trim costs within our business, as part of our strategy to more
closely monitor and reduce costs. See discussion above - "Operational
Efficiency".
RESEARCH AND DEVELOPMENT. Research and development expense was
primarily comprised of compensation expense attributable to research and
development activities, either in conjunction with customer projects or as part
of our internal product development program. In the six months ended March 31,
2002, research and development expense was $59.5 million, or 6.8% of revenue,
compared with $48.7 million, or 6.8% of revenue, in the six months ended March
31, 2001. The increase in expense reflects ongoing expenditures primarily for
CC&B Systems.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expense was primarily comprised of compensation expense and
increased by 25.3% to $114.8 million, or 13.0% of revenue, in the six months
ended March 31, 2002 from $91.6 million, or 12.8% of revenue, in the six months
ended March 31, 2001. The increase is attributable to the increase in our
selling and marketing efforts in the six months ended March 31, 2002.
AMORTIZATION OF GOODWILL AND PURCHASED INTANGIBLE ASSETS. Amortization
of goodwill and purchased intangible assets for the six months ended March 31,
2002 was $118.7 million, compared to $108.3 million in the six months ended
March 31, 2001. The increase in amortization expense in the six months ended
March 31, 2002 is due to non-goodwill related amortization resulting from the
Clarify acquisition. As a result of SFAS 142, goodwill related to Clarify, an
acquisition made by us after July 1, 2001, is not amortized, and is subject to
impairment tests. For acquisitions we made prior to July 1, 2001, which includes
all of our acquisitions other than Clarify, SFAS 142 requires us to amortize the
goodwill resulting from such acquisitions only through its final adoption in our
fiscal 2003. In the six months ended March 31, 2002, total amortization related
to such goodwill is $101.0 million. Effective as of October 1, 2002, SFAS 142
will be adopted by us and goodwill related to our acquisitions will no longer be
amortized on a periodic basis. Instead, any such goodwill will be subject only
to the same impairment tests now applicable to Clarify's goodwill. See
discussion above - "Acquisition".
IN-PROCESS RESEARCH AND DEVELOPMENT AND NONRECURRING CHARGE. In-process
research and development and nonrecurring charge in the six months ended March
31, 2002 consisted of a one-time charge of $17.4 million related to the Clarify
transaction for write-off of purchased in-process research and development, and
a nonrecurring charge of $13.3 million related to the consolidation of data
centers and the resulting closure of our Stamford, Connecticut facility.
OPERATING INCOME. Operating income in the six months ended March 31,
2002, was $72.0 million, compared to $64.9 million in the six months ended March
31, 2001, an increase of 11.0%, due to the increase in revenue and operational
efficiency partly offset by the Clarify acquisition-related charges and the
nonrecurring charge resulting from the Stamford facility closing. Pro forma
operating income for the six months ended March 31, 2002, excluding
acquisition-related charges and the nonrecurring charge, was $221.4 million, or
25.2% of revenue, compared to $173.2 million, or 24.3% of revenue, for the six
months ended March 31, 2001, an increase of 27.8%.
18
INTEREST INCOME AND OTHER, NET. In the six months ended March 31, 2002,
interest income and other, net, was $5.7 million, a decrease of $5.0 million
from the six months ended March 31, 2001. The decrease in interest income and
other, net, is primarily attributable to the overall interest rate declines
partially offset by increase in our cash equivalents and short-term
interest-bearing investments, net of our interest obligations on convertible
notes.
INCOME TAXES. Income taxes in the six months ended March 31, 2002 were
$47.0 million on income before income taxes of $77.8 million. Our blended
effective tax rate for the six months ended March 31, 2002 was 60%. Our
effective tax rate from operations (calculated based on the income taxes on
income before income taxes, excluding a one-time charge for write-off of
purchased in-process research and development and the nonrecurring charge
resulting from the Stamford facility closing) in the six months ended March 31,
2002 was 50%, resulting from the non-cash amortization of goodwill related to
acquisitions, much of which is not tax deductible. The pro forma effective tax
rate for the six months ended March 31, 2002, excluding the acquisition-related
charges, was 28%. In the six months ended March 31, 2001, income taxes were
$47.6 million on income before taxes of $75.5 million. The pro forma effective
tax rate for the six months ended March 31, 2001, excluding acquisition-related
charges, was 30%. See discussion below - "Effective Tax Rate".
NET INCOME. Net income was $30.8 million in the six months ended March
31, 2002, compared to $28.0 million in the six months ended March 31, 2001. Net
income was 3.5% of revenue for the six months ended March 31, 2002, compared to
3.9% for the six months ended March 31, 2001. We expect our net income to be
impacted positively in fiscal 2003 by our adoption of SFAS 142 as of October 1,
2002. As a result of the adoption, we will no longer be required to amortize the
goodwill from any of our acquisitions made prior to Clarify. Instead, any such
goodwill will be subject only to impairment tests, as is the case currently for
the goodwill from the Clarify acquisition. See discussion above - "Acquisition".
Pro forma net income in the six months ended March 31, 2002, excluding the
acquisition-related charges and the nonrecurring charge resulting from the
Stamford facility closing, increased by 27.1% over the six months ended March
31, 2001, reaching $163.5 million, representing 18.6% of revenue.
DILUTED EARNINGS PER SHARE. Diluted earnings per share were $0.14 for
the six months ended March 31, 2002, compared to $0.12 in the six months ended
March 31, 2001. Pro forma diluted earnings per share in the six months ended
March 31, 2002, excluding the acquisition-related charges and the nonrecurring
charge resulting from the Stamford facility closing, increased by 28.1% from the
six months ended March 31, 2001, reaching $0.73 per diluted share.
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
REVENUE. Revenue for the three months ended March 31, 2002 was $455.3
million, an increase of $83.0 million, or 22.3%, over the three months ended
March 31, 2001. The increase in revenue was due to the continued growth in the
demand for our CC&B Systems solutions in our traditional target markets of
high-end and mid-tier communications companies and to a lesser degree from the
acquisition of Clarify. License revenue increased from $43.3 million in the
three months ended March 31, 2001 to $45.5 million during the three months ended
March 31, 2002, an increase of 5.2%, and service revenue increased 24.5% from
$329.0 million in the three months ended March 31, 2001 to $409.7 million in the
three months ended March 31, 2002. The reduced growth in license revenues
reflected the lengthened sales cycles that we are experiencing and the resulting
decrease in the number of new deals.
Total CC&B Systems revenue for the three months ended March 31, 2002
was $404.7 million, an increase of $76.8 million, or 23.4%, over the three
months ended March 31, 2001. In the three months ended March 31, 2002, the
demand for our CC&B Systems was primarily driven by the need for communications
companies to upgrade their customer care and billing, CRM and order management
systems in response to competition in the subscriber markets, the need to offer
convergent and IP services, and the need to improve productivity and operational
efficiency.
19
Revenue from Directory Systems was $50.5 million for the three months
ended March 31, 2002, an increase of $6.1 million, or 13.7%, over the three
months ended March 31, 2001. The increase was attributable primarily to
extensions of agreements with and additional services rendered to existing
customers.
In the three months ended March 31, 2002, revenue from customers in
North America, Europe and the rest of the world accounted for 61.1%, 28.3% and
10.6%, respectively, compared to 52.8%, 35.7% and 11.5%, respectively, for the
three months ended March 31, 2001. The growth in North America was attributable
primarily to revenue we gained from increased activity for existing customers
and, to a lesser degree, relationships formed with new customers.
COST OF LICENSE. Cost of license for the three months ended March 31,
2002 was $1.4 million, an increase of $0.1 million, or 10.7%, over the cost of
license for the three months ended March 31, 2001. Cost of license included
amortization of purchased computer software and intellectual property rights.
COST OF SERVICE. Cost of service for the three months ended March 31,
2002 was $249.2 million, an increase of $43.0 million, or 20.9%, over the cost
of service of $206.2 million for the three months ended March 31, 2001. As a
percentage of revenue, cost of service decreased to 54.7% in the three months
ended March 31, 2002 from 55.4% in the three months ended March 31, 2001. The
decrease in cost of service as a percentage of revenue was primarily due to our
efforts to trim costs within our business, as part of our strategy to more
closely monitor and reduce costs. See discussion above - "Operational
Efficiency".
RESEARCH AND DEVELOPMENT. Research and development expense was
primarily comprised of compensation expense attributed to research and
development activities, either in conjunction with customer projects or as part
of our internal product development program. In the three months ended March 31,
2002, research and development expense was $30.9 million, or 6.8% of revenue,
compared with $25.2 million, or 6.8% of revenue, in the three months ended March
31, 2001. The increase reflected ongoing expenditures primarily for CC&B
Systems.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expense was primarily comprised of compensation expense and
increased by 26.6% to $61.0 million, or 13.4% of revenue, in the three months
ended March 31, 2002 from $48.2 million, or 12.9% of revenue, in the three
months ended March 31, 2001. The increase was attributable to the increase in
our selling and marketing efforts in the three months ended March 31, 2002.
AMORTIZATION OF GOODWILL AND PURCHASED INTANGIBLE ASSETS. Amortization
of goodwill and purchased intangible assets for the three months ended March 31,
2002 was $61.9 million, compared to $54.2 million in the three months ended
March 31, 2001. The increase in amortization expense in the three months ended
March 31, 2002 was due to the non-goodwill related amortization resulting from
the Clarify acquisition. As a result of SFAS 142, goodwill related to Clarify,
an acquisition made by us after July 1, 2001, is not amortized, and is subject
to impairment tests. For acquisitions we made prior to July 1, 2001, which
includes all of our acquisitions other than Clarify, SFAS 142 requires us to
amortize the goodwill resulting from such acquisitions only through its final
adoption in our fiscal 2003. In the three months ended March 31, 2002, total
amortization related to such goodwill was $50.5 million. Effective as of October
1, 2002, SFAS 142 will be adopted by us and goodwill related to our acquisitions
will no longer be amortized on a periodic basis. Instead, any such goodwill will
be subject only to the same impairment tests now applicable to Clarify's
goodwill. See discussion above - "Acquisition".
OPERATING INCOME. Operating income in the three months ended March 31,
2002, was $50.8 million, compared to $37.4 million in the three months ended
March 31, 2001, an increase of 36.0%, due to the increase in revenue and
operational efficiency partly offset by the Clarify acquisition-related charges.
Pro forma operating income for the three months ended March 31, 2002, excluding
acquisition-related charges, was $112.7 million, or 24.8% of revenue, compared
to $91.5 million, or 24.6% of revenue, for the three months ended March 31,
2001, an increase of 23.2%.
20
INTEREST INCOME AND OTHER, NET. In the three months ended March 31,
2002, interest income and other, net, was $2.4 million, a decrease of $2.7
million over the three months ended March 31, 2001. The decrease in interest
income and other, net, was primarily attributable to the overall interest rate
declines partially offset by increase in our cash equivalents and short-term
interest-bearing investments, net of convertible notes.
INCOME TAXES. Income taxes in the three months ended March 31, 2002
were $26.8 million on income before income taxes of $53.2 million. Our effective
tax rate from operations in the three months ended March 31, 2002 was 50%,
resulting from the non-cash amortization of goodwill related to acquisitions,
much of which is not tax deductible. The pro forma effective tax rate for the
three months ended March 31, 2002, excluding the acquisition-related charges,
was 28%. In the three months ended March 31, 2001, income taxes were $27.0
million on income before taxes of $42.5 million. The pro forma effective tax
rate for the three months ended March 31, 2001, excluding acquisition-related
charges, was 30%. See discussion below - "Effective Tax Rate".
NET INCOME. Net income was $26.4 million in the three months ended
March 31, 2002, compared to $15.4 million in the three months ended March 31,
2001. Net income was 5.8% of revenue for the three months ended March 31, 2002,
compared to 4.1% for the three months ended March 31, 2001. We expect our net
income to be impacted positively in fiscal 2003 by our adoption of SFAS 142 as
of October 1, 2002. As a result of the adoption, we will no longer be required
to amortize the goodwill from any of our acquisitions made prior to Clarify.
Instead, any such goodwill will be subject only to impairment tests, as is the
case currently for the goodwill from the Clarify acquisition. See discussion
above - "Acquisition". Pro forma net income in the three months ended March 31,
2002, excluding the acquisition-related charges, increased by 22.5% over the
three months ended March 31, 2001, reaching $82.9 million, representing 18.2% of
revenue.
DILUTED EARNINGS PER SHARE. Diluted earnings per share were $0.12 for
the three months ended March 31, 2002, compared to $0.07 in the three months
ended March 31, 2001. Pro forma diluted earnings per share in the three months
ended March 31, 2002, excluding the acquisition-related charges, increased by
23.3% from the three months ended March 31, 2001, reaching $0.37 per diluted
share.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term interest-bearing investments
totaled $1,040.9 million as of March 31, 2002, compared to $1,110.1 million as
of September 30, 2001. The decrease is attributable primarily to the acquisition
of Clarify and is partially offset by cash flows from operations. Net cash
provided by operating activities amounted to $208.0 million and $124.9 million
for the six months ended March 31, 2002 and 2001, respectively. The increase in
cash flows from operations was due to increased net income before depreciation,
amortization, and a one-time charge for write-off of in-process research and
development, and a decrease in working capital. We currently intend to retain
our future operating cash flows to support the further expansion of our
business.
As of March 31, 2002, we had positive working capital of $965.4
million, compared to positive working capital of $1,059.9 million as of
September 30, 2001. The decrease is attributable primarily to cash paid for the
acquisition of Clarify. We believe that current cash balances, cash generated
from operations and our current lines of credit will provide sufficient
resources to meet our needs in the near future.
All of the 2% Convertible Notes due June 1, 2008 issued by us in May,
2001 were outstanding as of March 31, 2002, representing an aggregate principal
amount of $500.0 million plus accumulated interest.
As of March 31, 2002, we had short-term general revolving lines of
credit totaling $40.0 million, none of which were outstanding. In addition, as
of March 31, 2002 we had credit facilities totaling $42.8 million limited for
the use of letters of credit and bank guaranties from various banks. Outstanding
letters of credit and bank guarantees as of March 31, 2002 totaled $20.8
million. These were supported by a combination of the credit facilities
described above and compensating cash balances that we maintain.
21
We had outstanding long-term obligations of $31.6 million in connection
with leasing arrangements as of March 31, 2002.
Currently, our capital expenditures consist primarily of computer
equipment and vehicles and are funded principally by operating cash flows and
capital leasing arrangements. We do not anticipate any changes to this policy in
the foreseeable future.
NET DEFERRED TAX ASSETS
As of March 31, 2002, deferred tax assets of $24.3 million, derived
primarily from carry-forward net operating losses relating to losses incurred by
Solect prior to our acquisition of the company in April 2000, were offset by
valuation allowances due to the uncertainty of realizing any tax benefit for
such losses. When realization of the tax benefits associated with such net
operating losses is deemed probable, the valuation allowance will be released,
resulting primarily in an offsetting reduction of the goodwill recorded in the
Solect acquisition.
EFFECTIVE TAX RATE
Our blended effective tax rate was 60% for the six months ended March
31, 2002. Our consolidated effective tax rate from operations (based on the
ratio between income taxes and income before income taxes, excluding one-time
charges for write-offs of purchased in-process research and development and the
nonrecurring charge resulting from the Stamford facility closing) for the six
months ended March 31, 2002 was 50%, compared to 63% in the six months ended
March 31, 2001. These high effective tax rates were attributable to amortization
of goodwill related to our acquisitions, much of which is not tax deductible.
Our overall pro forma effective tax rate for fiscal year 2002 is expected to be
approximately 28% compared to our historical pro forma effective tax rate of
approximately 30%, due to the corporate income tax rates in the various
countries in which we operate and changes in the relative magnitude of our
business in those countries.
CURRENCY FLUCTUATIONS
Approximately 90% of our revenue is in U.S. dollars or linked to the
dollar and therefore the dollar is our functional currency. Approximately 60% of
our operating expenses (excluding amortization for goodwill and intangible
assets, in-process research and development and nonrecurring charge) are paid in
dollars or linked to dollars. Other significant currencies in which we receive
revenue or pay expenses are Australian dollars, British pounds, Canadian
dollars, the European Monetary Union currency ("euro") and Israeli shekels.
Historically, the effect of fluctuations in currency exchange rates has had a
minimal impact on our operations. As we expand our operations outside of the
United States, our exposure to fluctuations in currency exchange rates could
increase. In managing our foreign exchange risk, we enter from time to time into
various foreign exchange contracts. As of March 31, 2002, we had hedged
significant exposures in currencies other than the dollar.
22
ITEM 6. EXHIBITS AND REPORTS ON FORM 6-K.
(a) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
99.1 Amdocs Limited Press Release dated April 23, 2002.
(b) Reports on Form 6-K
The Company filed the following reports on Form 6-K during the three
months ended March 31, 2002:
(1) Form 6-K dated January 30, 2002.
(2) Form 6-K/A dated February 11, 2002.
(3) Form 6-K dated March 19, 2002.
23
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.
AMDOCS LIMITED
s/ Thomas G. O'Brien
Thomas G. O'Brien
Treasurer and Secretary
Authorized U.S. Representative
Date: May 13, 2002
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
99.1 Amdocs Limited Press Release dated April 23, 2002.