SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 UNDER
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED SEPTEMBER 30, 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 YEAR ENDED SEPTEMBER 30, 2002
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Report of Independent Auditors
Consolidated Balance Sheets as of September 30, 2002 and 2001
Consolidated Statements of Operations for the years
ended September 30, 2002, 2001 and 2000
Consolidated Statements of Changes in Shareholders' Equity for the
years ended September 30, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the years
ended September 30, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
Item 2. Financial Statement Schedule
Item 3. Operating and Financial Review and Prospects
PART II OTHER INFORMATION
Item 1. Exhibits
SIGNATURES
EXHIBIT INDEX
The information presented herein shall be deemed filed by us for purposes
of Section 18 of the Securities Exchange Act of 1934, as amended, and
incorporation by reference.
FORWARD LOOKING STATEMENTS
This document contains forward-looking statements (within the meaning of
the United States federal securities laws) that involve substantial risks and
uncertainties. You can identify these forward-looking statements by words such
as "expect", "anticipate", "believe", "seek", "estimate", "project", "forecast",
"continue", "potential", "should", "would", "could" and "may", and other words
that convey uncertainty of future events or outcome. Statements that we make in
this document 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 that 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, except where applicable law may otherwise require us to do so.
Important factors that may affect these projections or expectations
include, but are not limited to: changes in the overall economy; changes in
competition in markets in which we operate; changes in the demand for our
products and services; the loss of a significant customer; changes in the
regulatory environment in which our customers operate; changes in technology
that impact both the markets we serve and the types of products and services we
offer; financial difficulties of our customers; losses of key personnel;
difficulties in completing or integrating acquisitions; acts of war or
terrorism; and consolidation within the industries in which our customers
operate. For a discussion of these important factors, please read the
information set forth under the caption "Risk Factors" in the Form 20-F that we
have most recently filed with the United States Securities and Exchange
Commission ("SEC").
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Amdocs Limited
We have audited the accompanying consolidated balance sheets of Amdocs
Limited as of September 30, 2002 and 2001, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
each of the three years in the period ended September 30, 2002. Our audits also
included the financial statement schedule listed in the index at Item 2 of Part
I. These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and the financial statement schedule based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Amdocs Limited
as of September 30, 2002 and 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
September 30, 2002, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth herein.
/s/ ERNST & YOUNG LLP
New York, New York
October 31, 2002
AMDOCS LIMITED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
AS OF SEPTEMBER 30,
----------------------------
2002 2001
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 466,655 $ 872,998
Short-term interest-bearing investments 581,164 237,069
Accounts receivable, net (*) 312,732 384,851
Deferred income taxes and taxes receivable 48,154 38,916
Prepaid expenses and other current assets (*) 72,196 38,045
----------- -----------
Total current assets 1,480,901 1,571,879
Equipment, vehicles and leasehold improvements, net 160,902 173,695
Deferred income taxes 37,582 19,722
Goodwill and other intangible assets, net 750,530 788,187
Other noncurrent assets (*) 110,179 70,953
----------- -----------
Total assets $ 2,540,094 $ 2,624,436
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 192,129 $ 166,527
Accrued personnel costs 86,942 103,990
Deferred revenue 149,590 140,033
Short-term portion of capital lease obligations 10,347 10,400
Deferred income taxes and taxes payable 103,315 91,026
----------- -----------
Total current liabilities 542,323 511,976
Convertible notes 445,054 500,000
Deferred income taxes 12,363 7,410
Noncurrent liabilities and other 124,079 92,959
----------- -----------
Total liabilities 1,123,819 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; 223,316
and 222,628 issued and 215,583 and 222,628 outstanding, in 2002 and
2001, respectively 3,572 3,560
Additional paid-in capital 1,818,345 1,806,290
Treasury stock (109,281) --
Accumulated other comprehensive loss (108) (6,382)
Unearned compensation -- (185)
Accumulated deficit (296,253) (291,192)
----------- -----------
Total shareholders' equity 1,416,275 1,512,091
----------- -----------
Total liabilities and shareholders' equity $ 2,540,094 $ 2,624,436
=========== ===========
(*) See Note 4
The accompanying notes are an integral part of these
consolidated financial statements.
AMDOCS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
2002 2001 2000
----------- ----------- -----------
Revenue:
License (*) $ 153,664 $ 171,430 $ 124,822
Service (*) 1,459,901 1,362,480 993,498
----------- ----------- -----------
1,613,565 1,533,910 1,118,320
----------- ----------- -----------
Operating expenses:
Cost of license 5,054 5,651 5,624
Cost of service (*) 928,283 847,591 639,900
Research and development 124,082 105,807 74,852
Selling, general and administrative (*) 223,551 195,592 137,004
Amortization of goodwill and purchased intangible assets 231,804 219,988 111,199
Restructuring charges, in-process research and
development and other indirect acquisition-related
costs 51,630 -- 75,617
----------- ----------- -----------
1,564,404 1,374,629 1,044,196
----------- ----------- -----------
Operating income 49,161 159,281 74,124
Interest income and other, net (*) 19,298 22,286 10,734
----------- ----------- -----------
Income before income taxes 68,459 181,567 84,858
Income taxes 73,520 115,181 78,880
----------- ----------- -----------
Net (loss) income $ (5,061) $ 66,386 $ 5,978
=========== =========== ===========
Basic (loss) earnings per share $ (0.02) $ 0.30 $ 0.03
=========== =========== ===========
Diluted (loss) earnings per share $ (0.02) $ 0.29 $ 0.03
=========== =========== ===========
Basic weighted average number of shares outstanding 220,361 222,002 212,005
=========== =========== ===========
Diluted weighted average number of shares outstanding 220,361 226,832 216,935
=========== =========== ===========
(*) See Note 4.
The accompanying notes are an integral part of these
consolidated financial statements.
AMDOCS LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
Accumulated
Ordinary Shares Additional Other Total
--------------- Paid-in Treasury Comprehensive Unearned Accumulated Shareholders'
Shares Amount Capital Stock Income Compensation Deficit Equity
(Loss)
------- ------ ---------- --------- ------------- ------------ ----------- -------------
BALANCE AS OF OCTOBER 1,
1999 198,800 $3,181 $ 489,099 $ -- $ (1,157) $ (3,830) $ (363,556) $ 123,737
Comprehensive income:
Net income -- -- -- -- -- -- 5,978 5,978
Decrease in unrealized
loss on derivative
instruments, net of
$1,000 tax -- -- -- -- 2,333 -- -- 2,333
Increase in unrealized
loss on cash
equivalents income,
net of $(7) tax -- -- -- -- (17) -- -- (17)
-------------
Comprehensive income 8,294
-------------
Employee stock options
exercised 2,058 33 21,327 -- -- -- -- 21,360
Tax benefit of stock
options exercised -- -- 10,825 -- -- -- -- 10,825
Issuance of Ordinary
Shares related to
acquisitions, net 20,307 325 1,263,330 -- -- -- -- 1,263,655
Stock options granted -- -- 235 -- -- -- -- 235
Amortization of unearned
compensation -- -- -- -- -- 2,666 -- 2,666
------- ------ ---------- --------- ------------- ------------ ----------- -------------
BALANCE AS OF SEPTEMBER
30, 2000 221,165 3,539 1,784,816 -- 1,159 (1,164) (357,578) 1,430,772
Comprehensive income:
Net income -- -- -- -- -- -- 66,386 66,386
Decrease in unrealized
gain on derivatives,
net of $(3,891) tax -- -- -- -- (9,078) -- -- (9,078)
Increase in unrealized
gain on cash
equivalents and
short-term interest-
bearing investments,
net of $659 tax -- -- -- -- 1,537 -- -- 1,537
-------------
Comprehensive income 58,845
-------------
Employee stock options
exercised 1,463 21 13,946 -- -- -- -- 13,967
Tax benefit of stock
options exercised -- -- 7,345 -- -- -- -- 7,345
Stock options granted -- -- 183 -- -- -- -- 183
Amortization of unearned
compensation -- -- -- -- -- 979 -- 979
------- ------ ---------- --------- ------------- ------------ ----------- -------------
BALANCE AS OF SEPTEMBER
30, 2001 222,628 3,560 1,806,290 -- (6,382) (185) (291,192) 1,512,091
Comprehensive income:
Net loss -- -- -- -- -- -- (5,061) (5,061)
Decrease in unrealized
loss on foreign
currency hedging
contracts, net of
$1,357 tax -- -- -- -- 2,682 -- -- 2,682
Decrease in unrealized
loss on cash
equivalents and
short-term interest-
bearing investments,
net of $1,336 tax -- -- -- -- 3,592 -- -- 3,592
-------------
Comprehensive income 1,213
-------------
Employee stock options
exercised 687 12 5,149 -- -- -- -- 5,161
Tax benefit of stock
options exercised -- -- 6,808 -- -- -- -- 6,808
Expense related to vesting
of stock options -- -- 98 -- -- -- -- 98
Repurchase of shares (7,732) -- -- (109,281) -- -- -- (109,281)
Amortization of unearned
compensation -- -- -- -- -- 185 -- 185
------- ------ ---------- --------- ------------- ------------ ----------- -------------
BALANCE AS OF SEPTEMBER
30, 2002 215,583 $3,572 $1,818,345 $(109,281) $ (108) $ -- $ (296,253) $ 1,416,275
======= ====== ========== ========= ============= ============ =========== =============
As of September 30, 2002, 2001 and 2000, accumulated other comprehensive income
(loss) is comprised of unrealized gain (loss) on derivatives, net of tax, of
$(5,220), $(7,902) and $1,176 and unrealized gain (loss) on cash equivalents and
short-term interest-bearing investments, net of tax, of $5,112, $1,520 and
$(17), as of September 30, 2002, 2001 and 2000, respectively.
The accompanying notes are an integral part of these
consolidated financial statements.
AMDOCS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED SEPTEMBER 30,
---------------------------------------
2002 2001 2000
--------- --------- ---------
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) income $ (5,061) $ 66,386 $ 5,978
Reconciliation of net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 309,821 282,625 155,359
Adjustment to the basis of investments 5,500 6,750 --
In-process research and development expenses 17,400 -- 70,319
Loss on sale of equipment 549 593 148
Gain on repurchase of convertible notes (6,012) -- --
Deferred income taxes (1,665) 5,018 (1,196)
Tax benefit of stock options exercised 6,808 7,345 10,825
Unrealized other comprehensive income (loss) 8,967 (10,773) 3,309
Net changes in operating assets and liabilities,
net of amounts acquired:
Accounts receivable 97,055 (121,751) (29,763)
Prepaid expenses and other current assets (22,992) (3,718) (12,408)
Other noncurrent assets (9,875) (7,826) (10,861)
Accounts payable and accrued expenses (2,461) 71,772 38,852
Deferred revenue (21,253) 6,487 24,313
Income taxes payable (4,798) 20,703 16,071
Noncurrent liabilities and other 40,293 14,376 16,642
--------- --------- ---------
Net cash provided by operating activities 412,276 337,987 287,588
--------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment, vehicles and
leasehold improvements 1,795 2,062 1,280
Payments for purchase of equipment, vehicles,
leasehold improvements and other (58,562) (91,891) (62,740)
Purchase of short-term interest-bearing
investments, net (344,095) (237,069) --
Investment in noncurrent assets (39,584) (12,291) (9,000)
Net cash (paid for) acquired in acquisitions (213,180) -- 67,791
--------- --------- ---------
Net cash used in investing activities (653,626) (339,189) (2,669)
--------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from employee stock options exercised 5,161 13,967 21,360
Repurchase of shares (109,281) -- --
Repurchase of convertible notes (48,934) -- --
Payments under short-term finance arrangements -- (20,000) (284,464)
Borrowings under short-term finance arrangements -- -- 301,933
Net proceeds from issue of long-term convertible
notes -- 488,000 --
Principal payments on capital lease obligations (11,939) (10,067) (6,622)
--------- --------- ---------
Net cash (used in) provided by financing activities (164,993) 471,900 32,207
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (406,343) 470,698 317,126
Cash and cash equivalents at beginning of year 872,998 402,300 85,174
--------- --------- ---------
Cash and cash equivalents at end of year $ 466,655 $ 872,998 $ 402,300
========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
AMDOCS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(IN THOUSANDS)
YEAR ENDED SEPTEMBER 30,
------------------------------------------------
2002 2001 2000
----------- ----------- -----------
SUPPLEMENTARY CASH FLOW INFORMATION
Interest and Income Taxes Paid
Cash paid for:
Income taxes, net of refunds $ 75,371 $ 77,429 $ 49,262
Interest 11,221 2,901 2,614
NON-CASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations of $2,245, $13,116 and $15,732 were incurred
during the years ended September 30, 2002, 2001 and 2000, respectively, when the
Company (as defined below) entered into lease agreements for vehicles.
In fiscal 2000, the Company issued 6,461 Ordinary Shares and options to
acquire 1,103 Ordinary Shares in connection with the acquisition of ITDS (as
defined below). The Company issued 13,846 exchangeable shares and options to
acquire 1,654 Ordinary Shares in connection with the acquisition of Solect (as
defined below). See Note 3.
The accompanying notes are an integral part of these consolidated
financial statements.
AMDOCS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - NATURE OF ENTITY
Amdocs Limited (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, providing business support systems
and related services primarily for the communications industry. The Company
designs, develops, markets, supports, operates and provides outsourcing of
information system solutions primarily to leading communications companies
throughout the world.
The Company is a Guernsey corporation, which directly or indirectly
holds several wholly owned subsidiaries in the Asia-Pacific region, Europe,
Israel, Latin America and North America. The majority of the Company's customers
are in North America, Europe, Latin America and the Asia-Pacific region. The
Company's main production and operating facilities are located in Israel, the
United States (U.S.), Cyprus, Canada and Ireland.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States.
CONSOLIDATION
The financial statements include the accounts of the Company and its
wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
FUNCTIONAL CURRENCY
As the U.S. dollar is the predominant currency by which the Company's
revenue and expenses are denominated, the U.S. dollar is the functional currency
for the Company and its subsidiaries.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and interest-bearing
investments with insignificant interest rate risk and original maturities of 90
days or less.
INVESTMENTS
When excess funds are available, the Company invests in short-term
interest-bearing investments. The Company classifies all of its short-term
interest-bearing investments as available-for-sale securities. Such short-term
interest-bearing investments consist primarily of treasury notes, federal agency
securities, corporate bonds and money market funds, which are stated at market
value. Unrealized gains and losses are comprised of the difference between
market value and amortized costs of such securities
AMDOCS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
and are reflected, net of tax, as "other comprehensive income (loss)" in
shareholders' equity. Realized gains and losses on short-term interest-bearing
investments are included in earnings and are derived using the specific
identification method for determining the cost of securities.
From time to time the Company also has made certain investments in
non-publicly traded companies. These investments are included in other
noncurrent assets in the Company's balance sheet and are generally carried at
cost. The Company monitors these investments for impairment and makes
appropriate reductions in carrying values if necessary.
EQUIPMENT, VEHICLES AND LEASEHOLD IMPROVEMENTS
Equipment, vehicles and leasehold improvements are stated at cost.
Assets under capital leases are recorded at the present value of the future
minimum lease payments at the date of acquisition. Depreciation is computed
using the straight-line method over the estimated useful life of the asset,
which ranges from 2 to 10 years and includes the amortization of assets under
capitalized leases. Leasehold improvements are amortized over the shorter of the
estimated useful lives or the term of the related lease. Management reviews
property and equipment and other long-lived assets on a periodic basis to
determine whether events or changes in circumstances indicate that the carrying
amount of such assets may not be recoverable.
GOODWILL AND OTHER INTANGIBLE ASSETS
The total purchase price of product line or business acquisitions
accounted for using the purchase method is allocated first to identifiable
assets and liabilities based on estimated fair values. The excess of the
purchase price over the fair value of net assets of purchased businesses is
recorded as goodwill. Goodwill associated with acquisitions completed prior to
July 1, 2001 was amortized on a straight-line basis over its estimated useful
life. For future goodwill amortization, see the discussion below under the
caption "Adoption of New Accounting Standards".
Other intangible assets consist primarily of purchased computer
software, intellectual property rights, core technology and customer
arrangements.
Purchased computer software is reported at the lower of amortized cost
or net realizable value, and is amortized over its estimated useful life based
on the pro-rata amount of the future revenue expected to be realized from the
software. This accounting policy results in accelerated amortization of
purchased computer software as compared to the straight-line method.
Intellectual property rights, core technology, workforce-in-place and
customer arrangements acquired by the Company are amortized over their estimated
useful lives on a straight-line basis.
AMDOCS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Through the end of fiscal 2002, the Company considered whether there
are indicators of impairment that would require the comparison of the estimated
net realizable value of goodwill and other intangible assets to their carrying
value under Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of". Any impairment would be recognized when the expected future
operating cash flows derived from such intangible assets is less than their
carrying value.
COMPREHENSIVE INCOME
The Company accounts for comprehensive income under the provisions of
SFAS No. 130, "Reporting Comprehensive Income", which established standards for
the reporting and display of comprehensive income and its components.
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.
CONVERTIBLE NOTES
The Company presents the outstanding principal amount of the
convertible notes as part of noncurrent liabilities. Accrued interest on the
convertible notes is included in "accounts payable and accrued expenses". The
Company amortizes the issuance cost related to the convertible notes on a
straight-line basis over the term of the convertible notes. Gain or loss on
repurchase of convertible notes represents the difference between the principal
amount and the purchase price. Such gain, aggregating $6,012, is included in
"interest income and other, net". The unamortized issuance cost calculated on a
pro-rata basis, related to the repurchased convertible notes, is included in
"interest income and other, net".
TREASURY STOCK
The Company repurchases its Ordinary Shares from time to time on the
open market and holds such shares as treasury stock. The Company presents the
cost to repurchase treasury stock as a reduction of shareholders' equity.
INCOME TAXES
The Company records deferred income taxes to reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting and tax purposes. Deferred taxes are
computed based on tax rates anticipated to be in effect (under applicable laws
at the time the financial statements are prepared) when the deferred taxes are
expected to be paid or realized. A valuation allowance is provided for deferred
tax assets if it is more likely than not these items will either expire before
the Company is able to realize their benefit, or that future deductibility is
uncertain. In the event that a valuation allowance relating to a business
acquisition is subsequently reduced, the adjustment will reduce the original
amount allocated to goodwill.
AMDOCS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Deferred tax liabilities and assets are classified as current or
noncurrent based on the classification of the related asset or liability for
financial reporting, or according to the expected reversal dates of the specific
temporary differences, if not related to an asset or liability for financial
reporting, and also include anticipated withholding taxes due on subsidiaries'
earnings when paid as dividends to the Company.
REVENUE RECOGNITION
The Company usually sells its software as part of an overall solution
offered to a customer, in which significant customization and modification to
the Company's software is required. As a result, revenue generally is recognized
over the course of these long-term projects in conformity with Accounting
Research Bulletin ("ARB") No. 45 "Long Term Construction-Type Contracts",
Statement of Position ("SOP") 81-1 "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts" and SOP 97-2 "Software
Revenue Recognition". Losses are recognized on contracts in the period in which
the loss is identified in accordance with SOP 81-1. Initial license fee for
software revenue is recognized as work is performed, under 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 recognized as work is performed, under the
percentage of completion method of accounting. Revenue from software solutions
that does not require significant customization and modification, is recognized
upon delivery, in accordance with the principles emphasized in Staff Accounting
Bulletin ("SAB") 101 "Revenue Recognition in Financial Statements" and SOP 97-2.
In outsourcing contracts, revenue from 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, and recorded at gross or net amount according to the criteria
established in Emerging Issues Task Force ("EITF") 99-19 "Recording Revenue
Gross as a Principal versus Net as an Agent" and SAB 101. Maintenance revenue is
recognized ratably over the term of the maintenance agreement, which in most
cases is one year or less. As a result of a substantial portion of the Company's
revenue being subject to the percentage of completion accounting method, the
Company's annual and quarterly operating results may be significantly affected
by the size and timing of customer projects and the Company's progress in
completing such projects.
Many of the Company's agreements include multiple obligations. For
these multiple elements arrangements, the fair value of each component is
determined based on specific objective evidence for that element and revenue is
allocated to each component based upon its fair value. The revenue associated
with each element is recognized using the respective methodology discussed
above.
AMDOCS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Deferred revenue represents billings to customers for licenses,
services and third-party products for which revenue has not been recognized.
Unbilled accounts receivable include all amounts that had not been billed as of
the balance sheet date due to contractual or other arrangements with customers.
Allowances that are netted against accounts receivable, represent amounts
provided for accounts which their collectibility is not reasonably assured.
Included in service revenue are sales of third-party products. Revenue
from sales of such products includes third-party computer hardware and computer
software products and was less than 10 percent of total revenue in each of
fiscal 2002, 2001 and 2000.
COST OF LICENSE AND COST OF SERVICE
Cost of license and service consists of all costs associated with
providing services to customers, including identified losses on contracts and
warranty expense. Estimated losses on contracts are recognized in the period in
which the loss is identified in accordance with SOP 81-1. Estimated costs
related to warranty obligations are initially provided at the time the product
is delivered and are revised to reflect subsequent changes in circumstances and
estimates. Cost of license includes royalty payments to software suppliers,
amortization of purchased computer software and intellectual property rights.
Included in cost of service are costs of third-party products
associated with reselling third-party computer hardware and software products to
customers, when revenue from third-party products is recorded at the gross
amount. Customers purchasing third-party products from the Company generally do
so in conjunction with the purchase of services.
RESEARCH AND DEVELOPMENT
Research and development expenditures consist of costs incurred in the
development of new software modules and product offerings, either in conjunction
with customer projects or as part of the Company's internal product development
programs. Research and development costs, which are incurred in conjunction with
a customer project, are expensed as incurred.
Based on the Company's product development process, technological
feasibility, as defined in SFAS No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed", is established upon
completion of a detailed program design or, in the absence thereof, completion
of a working model. Costs incurred by the Company after achieving technological
feasibility and before the product is ready for customer release have been
insignificant.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to
AMDOCS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Employees". Pursuant to this accounting standard, the Company records deferred
compensation for share options granted to employees at the date of grant based
on the difference between the exercise price of the options and the market value
of the underlying shares at that date. Deferred compensation is amortized to
compensation expense over the vesting period of the underlying options. No
compensation expense is recorded for stock options that are granted to employees
and directors at an exercise price equal to the fair market value of the
Ordinary Shares at the time of the grant. See Note 18 for pro forma disclosures
required in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation". Compensation expenses that are deductible in a tax return in a
period different from the one in which they are reported as expenses in
measuring net income are temporary differences that result in deferred taxes. To
the extent that compensation is not recorded for stock-based compensation, the
benefit of the related tax deduction is recorded as an increase to additional
paid-in capital in the period of the tax reduction.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of the Company consist mainly of cash and
cash equivalents, short-term interest-bearing investments, accounts receivable,
short-term financing arrangements, forward exchange contracts, lease obligations
and convertible notes. In view of their nature, the fair value of the financial
instruments, excluding the convertible notes (for which the fair value at
September 30, 2002 is approximately $400,000), included in the accounts of the
Company does not significantly vary from their carrying amount. The fair values
of the Company's foreign currency exchange contracts are estimated based on
quoted market prices of comparable contracts.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of trade receivables. The
Company invests its excess cash primarily in highly liquid U.S.
dollar-denominated securities with major U.S. institutions. The Company does not
expect any credit losses with respect to these items. The Company's revenue is
generated primarily in North America and Europe. To a lesser extent, revenue is
generated in the Asia-Pacific region and Latin America. Most customers are among
the largest communications and directory publishing companies in the world (or
are owned by them). The Company's business is subject to the effects of general
global economic conditions and, in particular, market conditions in the
communications industry. The Company performs ongoing credit analyses of its
customer base and generally does not require collateral.
EARNINGS PER SHARE
The Company accounts for earnings per share based on SFAS No. 128
"Earnings per Share". SFAS No. 128 requires companies to compute earnings per
share under two different methods, basic and diluted earnings per share, and to
disclose the methodology used for the calculations. Basic earnings per share are
calculated using the weighted
AMDOCS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
average number of shares outstanding during the period. Diluted earnings per
share is computed on the basis of the weighted average number of shares
outstanding and the effect of dilutive outstanding stock options using the
treasury stock method and the effect of dilutive outstanding convertible notes
using the if-converted method.
DERIVATIVES AND HEDGING
The Company accounts for derivatives and hedging based on SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
requires the Company to recognize all derivatives on the balance sheet at fair
value. If a derivative meets the definition of a hedge and is so designated,
depending on the nature of the hedge, changes in the fair value of the
derivative will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value is recognized in
earnings.
RECLASSIFICATIONS
Certain amounts in prior years' financial statements have been
reclassified to conform to the current year's presentation.
ADOPTION OF NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other
Intangible Assets".
SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001.
SFAS No. 142 is effective for fiscal years beginning after December 15,
2001. Under SFAS No. 142, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to periodic
impairment tests in accordance with the Statement. Other intangible assets will
continue to be amortized over their useful lives.
Other intangible assets, such as workforce-in-place, will be
reclassified to goodwill, according to SFAS No. 141's new definition of
intangible assets.
Effective October 1, 2002 the Company will adopt SFAS No. 142.
Subsequent to the adoption of the new rules, the Company will perform the first
of the required periodic impairment tests of goodwill and intangible assets
recorded as of October 1, 2002. Thereafter, a periodic impairment test will be
performed at least annually. The Company has not yet determined what the effect
of these tests will be on its earnings and financial position. The Company
recorded $204,561, $204,566 and $104,268, of goodwill and
AMDOCS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
workforce-in-place amortization during the years ended September 30, 2002, 2001
and 2000, respectively.
Set forth below is the effect of non-amortization of goodwill and
workforce-in-place:
YEAR ENDED SEPTEMBER 30,
---------------------------------------------
2002 2001 2000
--------- --------- ---------
Reported net (loss) income $ (5,061) $ 66,386 $ 5,978
Add back: goodwill and workforce-in-place
amortizations 204,561 204,566 104,268
Attributable tax effect (2,717) (2,717) (2,088)
--------- --------- ---------
Adjusted net income $ 196,783 $ 268,235 $ 108,158
========= ========= =========
Adjusted basic earnings per share $ 0.89 $ 1.21 $ 0.51
========= ========= =========
Adjusted diluted earnings per share $ 0.88 $ 1.18 $ 0.50
========= ========= =========
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". SFAS No. 145 eliminates previous requirements to classify gains
and losses from extinguishment of debt as extraordinary items in earnings. Gains
or losses from extinguishment of debt for fiscal years beginning after May 15,
2002 shall not be classified as extraordinary items unless certain provisions
are met. Early adoption was encouraged. The Company adopted SFAS No. 145 in the
fourth quarter of fiscal 2002 in connection with the gain related to the
repurchase of its convertible notes. See Note 12.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 3 - ACQUISITIONS
ITDS
On November 30, 1999, the Company acquired International
Telecommunication Data Systems, Inc. ("ITDS"), a leading provider of solutions
to communications companies for outsourcing of billing operations. The total
purchase price of $189,034, based on a per share price of $28.25 for the
Company's Ordinary Shares, consisted of the issuance of 6,461 Ordinary Shares,
the grant of options to purchase 1,103 Ordinary Shares and transaction costs.
The acquisition was accounted for using the purchase method of accounting. The
fair market value of ITDS' assets and liabilities has been included in the
Company's balance sheet and the results of ITDS' operations are included
AMDOCS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
in the Company's consolidated statement of income, commencing on December 1,
1999. The value of acquired technology, which was independently determined,
included both existing technology and in-process research and development. The
valuation of these technologies was made by applying the income forecast method,
which considered the present value of cash flows by product lines. The fair
value of core technology was valued at $12,342 and was fully amortized over
approximately two years commencing on December 1, 1999. Purchased in-process
research and development, valued at $19,876, was charged as an expense
immediately following the completion 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" ("FIN 4"), since this
technology had not reached technological feasibility and had no alternative use.
This technology required additional development, coding and testing efforts
before technological feasibility could be determined. The fair value of customer
base was valued at $647 and the fair value of workforce-in-place was valued at
$5,407, each of which is being amortized over five years commencing on December
1, 1999. The excess of the purchase price over the fair value of the net assets
acquired, or goodwill, of $70,895 is being amortized over 15 years commencing on
December 1, 1999. Effective October 1, 2002, SFAS No. 142 will be adopted by the
Company. Under SFAS No. 142, amortization of goodwill will cease for
acquisitions completed prior to July 1, 2001. As a result, commencing fiscal
2003, goodwill related to the ITDS acquisition will no longer be amortized, but
will be subject to periodic impairment tests. Other intangible assets, such as
workforce-in-place, will be reclassified to goodwill, according to SFAS No.
141's new definition of intangible assets.
SOLECT
On April 5, 2000, the Company acquired Solect Technology Group Inc.
("Solect"), a leading provider of customer care and billing software to IP
service providers. Under the terms of the combination agreement, all then
outstanding Solect common shares were exchanged for shares of a newly issued
class of exchangeable shares of Solect. The Solect exchangeable shares entitle
holders to dividends and other rights economically equivalent to the Company's
Ordinary Shares, including the right, through a voting trust, to vote at the
Company's shareholder meetings, and are exchangeable at the option of holders
into the Company's Ordinary Shares on a one-for-one basis. The total purchase
price of $1,087,711, based on a per share price of $69.875 for the Company's
Ordinary Shares, included the issuance of 13,846 exchangeable shares, the grant
of options to purchase 1,654 Ordinary Shares, as well as transaction costs. The
acquisition was accounted for using the purchase method of accounting. The fair
market value of Solect's assets and liabilities has been included in the
Company's balance sheet and the results of Solect's operations are included in
the Company's consolidated statement of income, commencing on April 6, 2000. The
value of acquired technology, which was independently determined, included both
existing technology and in-process research and development. The valuation of
these items was made by applying the income forecast method, which considered
the present value of cash flows by product
AMDOCS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
lines. The fair value of core technology was valued at $18,259 and was fully
amortized over two years commencing on April 6, 2000. Purchased in-process
research and development, valued at $50,443, was charged as an expense
immediately following the completion of the acquisition in accordance with FIN
4, since this technology had not reached technological feasibility and had no
alternative use. This technology required varying additional development, coding
and testing efforts before technological feasibility could be determined. The
fair value of customer base was valued at $1,211 and the fair value of
workforce-in-place was valued at $3,259, each of which is being amortized over
three years commencing on April 6, 2000. The excess of the purchase price over
the fair value of net assets acquired, or goodwill, of $985,271 is being
amortized over five years commencing on April 6, 2000. As a result of the
adoption of SFAS No. 142, commencing fiscal 2003, goodwill related to the Solect
acquisition will no longer be amortized, but will be subject to periodic
impairment tests. Other intangible assets, such as workforce-in-place, will be
reclassified as goodwill, according to SFAS No. 141's new definition of
intangible assets.
Set forth below is the unaudited pro forma revenue, operating income,
net loss and loss per share figures for the year ended September 30, 2000, as if
ITDS and Solect had been acquired as of October 1, 1998, excluding the write-off
of purchased in-process research and development and other indirect
acquisition-related costs:
YEAR ENDED
SEPTEMBER 30, 2000
------------------
Revenue $1,152,783
Operating income 41,516
Net loss (25,516)
Basic loss per share (0.12)
Diluted loss per share (0.12)
CLARIFY
On November 28, 2001, the Company purchased from Nortel Networks
Corporation 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
positioned the Company as a leading provider of CRM software to the
communications industry and, through the addition of Clarify's CRM software to
the Company's Business Support Systems offerings, reinforced the Company's
leadership in delivering a comprehensive portfolio of business software
applications. Following the acquisition, the Company has continued to sell
Clarify's CRM software to customers other than communications service providers,
although this is not the focus of the Company's business and, as a result, it
believes that revenue from such customers will slightly increase over time. The
aggregate initial purchase price for Clarify as of September 30, 2002 was
$212,000 in cash, including transaction costs of $8,250. The purchase price was
subject to final price adjustments that
AMDOCS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
were settled in October 2002 and resulted in an $11,265 reduction of the
purchase price to $200,735 in the first quarter of fiscal 2003. The acquisition
was accounted for as a business combination using the purchase method of
accounting, as required by SFAS No. 141. The fair market value of Clarify's
assets and liabilities has been included in the Company's balance sheet and the
results of Clarify's operations are included in the Company's consolidated
statements of operations, commencing on November 29, 2001. The Company obtained
a valuation of the intangible assets acquired in the Clarify transaction. The
value of acquired technology included both existing technology and in-process
research and development. The valuation of these items was made by applying the
income forecast method, which considered 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 FIN 4. The fair
value assigned to core technology was $13,400 and is being amortized over two
years commencing on November 29, 2001. The fair value assigned to customer
arrangements was $34,800 and is being amortized over three years commencing on
November 29, 2001.The excess of the purchase price over the fair value of the
net assets acquired, or goodwill, as of September 30, 2002, was $161,258, of
which $156,478 is tax deductible. The amount assigned to goodwill was subject to
possible purchase price adjustments and other contingencies, which were settled
in October 2002, as discussed above. The goodwill is accounted for under SFAS
No. 142. In accordance with SFAS No. 142, goodwill from acquisitions after June
30, 2001 is no longer amortized, but is subject to periodic impairment tests.
Under the transition provisions of SFAS No. 142, goodwill for acquisitions prior
to July 1, 2001 will continue to be amortized only through September 30, 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 through the end of fiscal 2002.
The following is the preliminary allocation of the purchase price and
deferred tax liability:
Net liabilities acquired $ (11,987)
Core technology 13,400
Customer arrangements 34,800
In-process research and development 17,400
Deferred tax liability (2,871)
Goodwill 161,258
----------
$ 212,000
==========
As discussed above, the purchase price was subject to final price
adjustments that were settled in October 2002. The purchase price allocation
above is not final and will be affected by these adjustments.
AMDOCS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Set forth below is the unaudited pro forma revenue, operating income,
net income (loss) and per share figures for the years ended September 30, 2002
and 2001, as if Clarify had been acquired as of October 1, 2000, excluding the
write-off of purchased in-process research and development:
YEAR ENDED SEPTEMBER 30,
-----------------------------------
2002 2001
------------- ------------
Revenue $ 1,633,565 $ 1,776,063
Operating income 54,962 27,218
Net income (loss) 2,753 (33,521)
Basic earnings (loss) per share 0.01 (0.15)
Diluted earnings (loss) per share 0.01 (0.15)
As a result of SFAS No. 142, goodwill associated with acquisitions
completed after June 30, 2001 is not amortized and, accordingly, the pro forma
information above reflects no amortization of goodwill related to the Clarify
acquisition.
NOTE 4 - RELATED PARTY TRANSACTIONS
The following related party balances are included in the balance
sheets:
AS OF SEPTEMBER 30,
-------------------------------
2002 2001
------------ -------------
Accounts receivable, including unbilled of $100 and $4,479
in 2002 and 2001, respectively $ 55,458 $ 104,096
Prepaid expenses and other current assets (1) 1,550 -
Other noncurrent assets (2) 48,453 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 convertible
debentures. The investment in Certen is accounted for under
the cost method, based on the Company's 10% ownership of
Certen. As part of its original commitment, the total
additional financial investment the Company will be making in
Certen is approximately $5,000, translated from Canadian
dollars, which is the functional currency for the Certen
transaction. The Company's exposure to currency fluctuation
with respect to the convertible debenture component of this
investment has been substantially hedged.
AMDOCS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company licenses software and provides computer systems integration
and related services to affiliates of SBC Communications, Inc., including
Certen. The following related party revenue is included in the statements of
operations:
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
2002 2001 2000
------------- ------------ -------------
Revenue:
License $ 30,551 $ 37,356 $ 15,888
Service 314,341 264,278 144,859
The following related party expenses are included in the statements of
operations:
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
2002 2001 2000
----------- ----------- ---------
Operating expenses (1):
Cost of service $ 2,642 $ 3,232 $ 2,814
Selling, general and administrative 336 663 700
Interest income and other, net (2) 1,886 89 -
--------------------
(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, net of
hedging, on the convertible debentures issued in connection
with the Certen transaction. Absent hedging, these amounts
would be $1,402, $89 and $0 for the years ended September 30,
2002, 2001 and 2000, respectively.
NOTE 5 - SHORT-TERM INTEREST-BEARING INVESTMENTS
Short-term interest-bearing investments consisted of the following:
AMORTIZED COST MARKET VALUE
AS OF SEPTEMBER 30, AS OF SEPTEMBER 30,
---------------------------- ---------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Federal agencies $ 110,743 $ 192,095 $ 112,092 $ 193,537
U.S. government treasuries 77,279 - 79,276 -
Corporate bonds 100,544 29,692 102,646 30,468
Mortgages (including government and
corporate) 254,593 - 256,027 -
Municipal bonds 13,543 - 13,543 -
Other 17,355 13,053 17,580 13,064
---------- ---------- ---------- ----------
574,057 234,840 581,164 237,069
Allowance for unrealized gain 7,107 2,229 - -
---------- ---------- ---------- ----------
Total $ 581,164 $ 237,069 $ 581,164 $ 237,069
========== ========== ========== ==========
AMDOCS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
As of September 30, 2002, short-term interest-bearing investments had
the following expected maturity dates:
MARKET VALUE
------------
2003 $280,204
2004 155,887
2005 90,386
2006 44,841
2007 9,846
--------
Total $581,164
========
NOTE 6 - ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consists of the following:
AS OF SEPTEMBER 30,
----------------------------------
2002 2001
------------- -------------
Accounts receivable - billed $ 314,828 $ 365,697
Accounts receivable - unbilled 24,144 23,272
Less - allowances (26,240) (4,118)
------------- -------------
Accounts receivable, net $ 312,732 $ 384,851
============= =============
NOTE 7 - EQUIPMENT, VEHICLES AND LEASEHOLD IMPROVEMENTS, NET
Components of equipment, vehicles and leasehold improvements, net are:
AS OF SEPTEMBER 30,
------------------------
2002 2001
-------- --------
Computer equipment $211,010 $171,155
Vehicles furnished to employees 53,696 54,140
Leasehold improvements 54,319 49,137
Furniture and fixtures 38,672 31,434
-------- --------
357,697 305,866
Less accumulated depreciation 196,795 132,171
-------- --------
$160,902 $173,695
======== ========
The Company has entered into various arrangements for the leasing of
vehicles for periods of five years, carrying interest rates of LIBOR plus an
interest rate ranging 0.5% to 0.9% (between 2.29% to 2.69% as of September 30,
2002). The Company has accounted for these as capital leases and amortization
costs have been included in depreciation expense. Vehicles under capital lease
arrangements had cost of $49,582 and
AMDOCS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
$52,165 with related accumulated depreciation of $21,520 and $15,351 as of
September 30, 2002 and 2001, respectively.
Capital lease payments, excluding interest, due over the next five
years are as follows:
FOR THE YEARS ENDED SEPTEMBER 30,
---------------------------------
2003 $ 10,347
2004 6,639
2005 6,304
2006 2,079
2007 118
NOTE 8 - GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill and other intangible assets, net are:
ESTIMATED AS OF SEPTEMBER 30,
USEFUL LIFE -------------------------------
(IN YEARS) 2002 2001
---------- ---- ----
Goodwill (1)(2) 5-15 $1,208,469 $1,057,314
Intellectual property rights and purchased
computer software 2-10 91,758 77,358
Other intangible assets 3-5 47,378 12,403
---------- ----------
1,347,605 1,147,075
Less accumulated amortization 597,075 358,888
---------- ----------
$ 750,530 $ 788,187
========== ==========
--------------------
(1) In accordance with SFAS No. 142, goodwill from acquisitions
completed after June 30, 2001 is not amortized, but is subject to
periodic impairment tests. Under SFAS No. 142, amortization of
goodwill will cease, for acquisitions completed prior to July 1,
2001, on October 1, 2002.
(2) In September 2002, the Company recorded an offsetting reduction of
the goodwill related to Solect acquisition due to a release of tax
valuation allowance. See Note 10.
AMDOCS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 9 - OTHER NONCURRENT ASSETS
Other noncurrent assets consist of the following:
AS OF SEPTEMBER 30,
----------------------
2002 2001
-------- --------
Funded employee benefit costs (1) $ 40,495 $ 33,624
Noncurrent investments, at cost (2)(3) 7,596 6,964
Noncurrent investment in convertible debentures (2) 40,857 7,827
Convertible notes issuance cost, net 5,934 10,667
Restricted cash and cash equivalents (4) 5,072 4,818
Other 10,225 7,053
-------- --------
$110,179 $ 70,953
======== ========
--------------------
(1) See Note 16.
(2) Consists of certain investments in non-publicly traded companies
under the cost method, including investment in Certen. In January
2001 the Company and Bell Canada formed Certen to provide customer
care and billing solutions to Bell Canada and some of its affiliated
companies. Certen is owned 90% by Bell Canada and 10% by the
Company. Commencing on the 30-month anniversary of the transaction,
convertible debentures issued by Certen to the Company will be
convertible into an additional 35% ownership interest in Certen. The
relative ownership interests of the Company might further be
modified through the exercise of a series of contractual rights,
commencing on the 30-month anniversary of the transaction. The
Company provides the customer care and billing software required by
Certen, including customization, installation, maintenance and other
services. The Company accounts for the investment in Certen under
the cost method. See Note 4.
(3) In fiscal 2002, the Company recorded pretax charges of $5,500 to
adjust the carrying value of two investments, accounted for by the
Company under the cost method. In fiscal 2001, the Company recorded
pretax charges of $6,750 to adjust the carrying value of four
investments, accounted for by the Company under the cost method.
Following these adjustments, as of September 30, 2002, the Company
had one remaining investment, the investment in Certen, accounted
for under the cost method. The Company continues to monitor the
economic and financial aspects of its remaining interests in this
investment.
(4) The Company was required to maintain restricted cash and cash
equivalents balances relating to letters of credit and bank
guarantees.
AMDOCS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 10 - INCOME TAXES
The provision for income taxes consists of the following:
YEAR ENDED SEPTEMBER 30,
-----------------------------------------
2002 2001 2000
--------- --------- ---------
Current $ 75,185 $ 110,163 $ 80,076
Deferred (1,665) 5,018 (1,196)
--------- --------- ---------
$ 73,520 $ 115,181 $ 78,880
========= ========= =========
All income taxes are from continuing operations reported by the Company
in the applicable taxing jurisdiction. Income taxes also include anticipated
withholding taxes due on subsidiaries' earnings when paid as dividends to the
Company.
Deferred income taxes are comprised of the following components:
AS OF SEPTEMBER 30,
---------------------
2002 2001
-------- --------
Deferred tax assets:
Deferred revenue $ 23,303 $ 18,033
Accrued employee costs 19,367 20,589
Intangible assets, computer software and intellectual property 14,790 6,553
Net operating loss carry forwards 22,657 30,358
Other 11,899 10,275
Valuation allowances (10,704) (27,907)
-------- --------
Total deferred tax assets 81,312 57,901
-------- --------
Deferred tax liabilities:
Anticipated withholdings on subsidiaries' earnings (42,149) (32,730)
Intangible assets, computer software and intellectual property (10,007) (7,410)
Other (8,522) (2,185)
-------- --------
Total deferred tax liabilities (60,678) (42,325)
-------- --------
Net deferred tax assets $ 20,634 $ 15,576
======== ========
AMDOCS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The effective income tax rate varied from the statutory Guernsey tax
rate as follows:
YEAR ENDED SEPTEMBER 30,
----------------------------
2002 2001 2000
---- ---- ----
Statutory Guernsey tax rate 20% 20% 20%
Guernsey tax-exempt status (20) (20) (20)
Foreign taxes 28 30 30
---- ---- ----
Income tax rate before effect of
acquisitions-related costs and restructuring
charges 28 30 30
Effect of acquisition-related costs 48 33 19
---- ---- ----
Income tax rate before restructuring charges,
in-process research and development and gain from
the repurchase of Notes 76 63 49
Restructuring charges and in-process research
development and gain from the repurchase of Notes 31 -- 44
---- ---- ----
Effective income tax rate 107% 63% 93%
==== ==== ====
These high effective tax rates were primarily attributable to
amortization of goodwill related to the Company's acquisitions, much of which is
not tax deductible. In the year ended September 30, 2002 the Company's effective
tax rate was also adversely affected by the fixed non-deductible expenditures
representing a larger component of the Company's pretax income.
As of September 30, 2002, the Company had deferred tax assets of
$22,657 derived primarily from Canadian net operating loss carry-forwards. The
net operating loss carry-forwards will expire within eight to ten years. Until
fiscal 2002 the realization of these assets through future taxable earnings was
uncertain, and as a result a valuation allowance was recorded. As of September
30, 2002, the Company estimated that operating losses acquired in the Solect
transaction would be realized through future taxable earnings. As a result,
related valuation allowance of $8,957 was released as an offsetting reduction of
the goodwill recorded in the Solect transaction. The remainder of the valuation
allowance of $10,704 is related to Canadian operating losses other than those
acquired in the Solect transaction.
AMDOCS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 11 - SHORT-TERM FINANCING ARRANGEMENTS
The Company's financing transactions are described below:
As of September 30, 2002, the Company had available short-term general
revolving lines of credit totaling $40,000. During fiscal 2002 and as of
September 30, 2002, there was no outstanding balance under any of these credit
lines.
In addition, as of September 30, 2002, the Company had credit
facilities totaling $43,840, limited for the use of letters of credit and bank
guarantees from various banks. Outstanding letters of credit and bank guarantees
as of September 30, 2002 totaled $24,460. These were mostly supported by a
combination of the credit facilities described above and restricted cash
balances that the Company maintains with the issuing banks. See Note 9.
NOTE 12 - CONVERTIBLE NOTES
In May 2001 the Company issued $500,000 aggregate principal amount of
2% Convertible Notes due June 1, 2008 (the "Notes"). The Company is obligated to
pay interest on the Notes semi-annually on June 1 and December 1 of each year.
The Notes are senior unsecured obligations of the Company and rank equal in
right of payment with all of existing and future senior unsecured indebtedness
of the Company. The Notes are convertible, at the option of the holders at any
time before the maturity date, into Ordinary Shares of the Company at a
conversion rate of 10.8587 shares per one thousand dollars principal amount,
representing a conversion price of approximately $92.09 per share. The Notes are
subject to redemption at any time on or after June 1, 2006, in whole or in part,
at the option of the Company, at a redemption price of 100% of the principal
amount plus accrued and unpaid interest. The Notes are subject to repurchase, at
the holders' option, on June 1, 2004 and June 1, 2006, at a repurchase price
equal to 100% of the principal amount plus accrued and unpaid interest, if any,
on such repurchase date. The Company may choose to pay the repurchase price in
cash, Ordinary Shares or a combination of cash and Ordinary Shares.
On July 23, 2002, the board of directors authorized the Company to
repurchase the Notes, in such amounts, at such prices and at such times
considered appropriate. Such repurchases may be made on the open market, in
privately negotiated transactions or otherwise, in accordance with any
applicable laws and the terms of the Notes. During the fourth quarter of fiscal
2002, the Company had repurchased $54,946 aggregate principal amount of the
Notes at an average price of $890 per $1,000 principal amount, resulting in a
gain of $6,012. See Note 14. The Company funded these repurchases, and intends
to fund any future repurchases, with available funds. As of September 30, 2002,
$445,054 aggregate principal amount of the Notes was outstanding.
AMDOCS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 13 - NONCURRENT LIABILITIES AND OTHER
Noncurrent liabilities and other consist of the following:
AS OF SEPTEMBER 30,
--------------------
2002 2001
-------- --------
Accrued employees costs $ 66,850 $ 62,663
Noncurrent customer advances 24,146 --
Long-term portion of capital lease obligations 15,138 24,779
Noncurrent forward exchange obligations -- 2,265
Accrued lease obligations 14,031 2,166
Other 3,914 1,086
-------- --------
$124,079 $ 92,959
======== ========
NOTE 14 - INTEREST INCOME AND OTHER, NET
Interest income and other, net consists of the following:
YEAR ENDED SEPTEMBER 30,
---------------------------------------
2002 2001 2000
-------- -------- --------
Interest income $ 31,856 $ 32,156 $ 14,254
Interest expense (16,004) (8,678) (2,528)
Gain from repurchase of Notes(*) 6,012 -- --
Other, net (2,566) (1,192) (992)
-------- -------- --------
$ 19,298 $ 22,286 $ 10,734
======== ======== ========
--------------------
(*) See Note 12.
NOTE 15 - CONTINGENCIES
Commitments
The Company leases office space under non-cancelable operating leases
in various countries in which it does business. Future minimum non-cancelable
lease payments required after October 1, 2002 are as follows:
FOR THE YEARS ENDED SEPTEMBER 30,
---------------------------------
2003 $ 43,794
2004 40,681
2005 36,540
2006 32,945
2007 23,805
Thereafter 26,416
-----------
$ 204,181
===========
AMDOCS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Future minimum non-cancelable lease payments, as stated above, do not
reflect committed future sublease income of $2,634, $2,681, $1,794, $1,444, $914
and $1,746 for the years ended September 30, 2003, 2004, 2005, 2006, 2007 and
thereafter, respectively. Of the $192,968 net operating leases, net of $11,213
of sublease income, $11,087 has been included in accrued restructuring charges
as of September 30, 2002.
Rent expense, including accruals for future lease losses, was
approximately $39,141, $40,506 and $20,400 for fiscal 2002, 2001 and 2000,
respectively.
Litigation
Beginning on June 24, 2002, a number of complaints were filed by
holders of the Company's Ordinary Shares against the Company and four of its
officers and directors, in the United States District Courts for the Eastern
District of Missouri and the Southern District of New York. The complaints
allege violations of the Securities Exchange Act of 1934, as amended, and Rule
10b-5 promulgated thereunder. Each plaintiff seeks to represent a putative class
of all purchasers of the Company's Ordinary Shares between July 18, 2000 (or, in
some of the complaints, July 24, 2001) and June 20, 2002. The complaints
generally allege that, during that period, the Company and the individual
defendants made false or misleading statements, in press releases and Securities
and Exchange Commission filings, regarding among other things the Company's
future prospects, backlog, revenue, gross margin, acquisitions and accounting
practices. Each plaintiff seeks unspecified monetary damages and other relief
against all defendants. The parties in the New York cases have stipulated to
transfer them to the Eastern District of Missouri. The court has not yet
appointed a lead plaintiff. The Company disputes the allegations of wrongdoing
in these complaints and intends to defend itself vigorously.
NOTE 16 - EMPLOYEE BENEFITS
The Company accrues severance pay for the employees of its Israeli
operations in accordance with Israeli law and certain employment procedures on
the basis of the latest monthly salary paid to these employees and the length of
time that they have worked for the Israeli operations. The severance pay
liability, which is included in noncurrent liabilities and other, is partially
funded by amounts on deposit with insurance companies, which are included in
other noncurrent assets. Severance expenses were approximately $9,953, $17,242
and $17,614 for fiscal 2002, 2001 and 2000, respectively.
The Company sponsors defined contribution plans covering certain
employees in the U.S., U.K. and Canada. The plans provide for Company matching
contributions based upon a percentage of the employees' voluntary contributions.
The Company's fiscal 2002, 2001 and 2000 plan contributions were not
significant.
AMDOCS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 17 - CAPITAL TRANSACTIONS
The following are details of the Ordinary Shares issued and
outstanding:
AS OF SEPTEMBER 30,
----------------------
2002 2001
------- -------
Voting Ordinary Shares 220,780 211,849
Non-Voting Ordinary Shares 2,535 10,779
------- -------
Ordinary Shares issued 223,315 222,628
Less - treasury stock (7,732) --
------- -------
Ordinary Shares outstanding 215,583 222,628
======= =======
All the Non-Voting Ordinary Shares are held by a single shareholder.
Under the Company's Articles of Association, upon the transfer or sale of such
shares to another party, the shares automatically convert to Voting Ordinary
Shares.
The Company's capital transactions are described below:
On November 30, 1999 the Company issued 6,461 Ordinary Shares in
connection with the acquisition of ITDS. On April 5, 2000 the Company issued
13,846 exchangeable shares in connection with the acquisition of Solect. See
Note 3.
Total proceeds from the exercise of employee stock options amounted to
$5,161, $13,967 and $21,360 in fiscal 2002, 2001 and 2000, respectively.
On November 6, 2001, the Company announced that its board of directors
had approved a twelve-month 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. On April 23, 2002, the Company
announced that its board of directors had 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. Under the program, from time to time
through November 2002, the Company was authorized to repurchase shares on the
open market, in privately negotiated transactions or otherwise, in accordance
with any applicable laws, and at times and prices considered appropriate by the
Company. During fiscal 2002 the Company repurchased 7,732 Ordinary Shares, at an
average price of $14.13 per share. The Company funded these repurchases, and
intends to fund any future repurchases, with available funds.
NOTE 18 - STOCK OPTION AND INCENTIVE PLAN
In January 1998, the Company first adopted, and in each of January
1999, January 2000 and January 2001 the Company has amended, the Amdocs Limited
1998 Stock Option and Incentive Plan (the "Plan"). Under the provisions of the
Plan, 32,300
AMDOCS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Ordinary Shares are available to be granted to officers, directors, employees
and consultants. Such options fully vest over one to nine years and have a term
of ten years.
On November 30, 1999, the Company issued additional options to purchase
1,103 Ordinary Shares in connection with the acquisition of ITDS to replace
issued ITDS options. On April 5, 2000, the Company issued additional options to
purchase 1,654 Ordinary Shares in connection with the acquisition of Solect to
replace issued Solect options. See Note 3.
The following table summarizes information about share options, as well
as changes during the years ended September 30, 2002, 2001 and 2000:
NUMBER OF WEIGHTED
SHARE AVERAGE
OPTIONS EXERCISE PRICE
--------- --------------
Outstanding as of October 1, 1999 6,236.9 $ 11.75
Granted 4,948.7 52.82
Options exchanged in acquisitions 2,756.7 18.24
Exercised (2,057.5) 10.38
Forfeited (656.7) 30.11
---------
Outstanding as of September 30, 2000 11,228.1 30.62
Granted 5,745.2 50.15
Exercised (1,462.8) 9.73
Forfeited (1,359.3) 49.59
---------
Outstanding as of September 30, 2001 14,151.2 38.89
Granted 16,648.5 23.88
Exercised (688.9) 7.49
Forfeited (2,418.8) 44.02
---------
Outstanding as of September 30, 2002 27,692.0 30.30
=========
AMDOCS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table summarizes information about share options
outstanding as of September 30, 2002:
OUTSTANDING AS OF EXERCISABLE AS OF
SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
---------------------------------------------------------------------------- --------------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED
CONTRACTUAL AVERAGE WEIGHTED
NUMBER LIFE EXERCISE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING (IN YEARS) PRICE EXERCISABLE EXERCISE PRICE
-------------- ----------- ----------- -------- ----------- --------------
$ 0-3.01 993.9 5.70 $ 2.02 857.3 $ 1.95
6.40-18.60 6,163.5 9.23 8.70 766.1 11.93
20.85-28.60 4,238.3 8.41 26.36 418.7 23.91
30.94-31.90 6,257.0 9.20 31.01 4.6 30.94
33.07-47.25 5,732.8 8.51 37.63 1,256.6 38.29
47.90-65.01 3,528.4 7.98 58.58 1,240.1 58.34
66.25-78.31 778.1 7.81 71.04 358.5 71.03
The weighted average grant-date fair value of the 16,648.5, 5,745.2 and
4,948.7 options granted in fiscal 2002, 2001 and 2000, respectively, amounted to
$10.93, $23.07 and $35.71, respectively, per option. The Company utilized the
Black-Scholes option-pricing model to estimate fair value, utilizing the
following assumptions for the year (all in weighted averages):
YEAR ENDED SEPTEMBER 30,
------------------------------
2002 2001 2000
----- ----- -----
Risk-free interest rate 2.85% 5.15% 5.75%
Expected life of options 2.89 3.26 3.23
Expected annual volatility 0.756 0.660 1.086
Expected dividend yield None None None
Had compensation cost for the Company's options been determined based
on fair value at the grant dates for awards made in fiscal 2002, 2001 and 2000
in accordance with SFAS No. 123, the Company's pro forma net loss and loss per
share would have been as follows:
YEAR ENDED SEPTEMBER 30,
---------------------------------------------
2002 2001 2000
----------- ----------- -----------
Pro forma net loss $ (115,224) $ (3,502) $ (23,022)
Pro forma diluted loss per share (0.52) (0.02) (0.11)
AMDOCS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 19 - (LOSS) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
(loss) earnings per share:
YEAR ENDED SEPTEMBER 30,
----------------------------------------
2002 2001 2000
--------- --------- ---------
Numerator:
Net (loss) income $ (5,061) $ 66,386 $ 5,978
========= ========= =========
Denominator:
Denominator for basic (loss) earnings per share -
weighted average number of shares outstanding (1) 220,361 222,002 212,005
Effect of dilutive stock options granted (2) -- 4,830 4,930
--------- --------- ---------
Denominator for dilutive (loss) earnings per share -
adjusted weighted average shares and assumed
conversions (1) 220,361 226,832 216,935
========= ========= =========
Basic (loss) earnings per share $ (0.02) $ 0.30 $ 0.03
========= ========= =========
Diluted (loss) earnings per share $ (0.02) $ 0.29 $ 0.03
========= ========= =========
--------------------
(1) The weighted average number of shares outstanding includes
exchangeable shares issued to shareholders of Amdocs Canada, Inc.
(formerly 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.
(2) Due to net loss, 2,201 anti-dilutive securities are excluded from
the computation of diluted average number of shares outstanding.
The effect of the Notes on diluted (loss) earnings per share was
anti-dilutive for the years ended September 30, 2002 and 2001, and therefore was
not included in the calculation above. The weighted average effect of the
repurchase of Ordinary Shares by the Company has been included in the
calculation of basic (loss) earnings per share. See Note 17.
AMDOCS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 20 - SEGMENT INFORMATION AND SALES TO SIGNIFICANT CUSTOMERS
The Company and its subsidiaries operate in one business segment,
providing business support systems and related services primarily for the
communications industry.
GEOGRAPHIC INFORMATION
The following is a summary of revenue and long-lived assets by
geographic area. Revenue is attributed to geographic region based on the
location of the customers.
YEAR ENDED SEPTEMBER 30,
------------------------------------------
2002 2001 2000
---------- ---------- ----------
REVENUE
North America $ 999,037 $ 825,309 $ 510,129
Europe 466,098 549,106 474,300
Rest of the world 148,430 159,495 133,891
---------- ---------- ----------
Total $1,613,565 $1,533,910 $1,118,320
========== ========== ==========
LONG-LIVED ASSETS
North America (1) $ 842,782 $ 866,846 $1,041,383
Israel (2) 77,988 88,794 85,518
Rest of the world 60,346 43,571 33,466
---------- ---------- ----------
Total $ 981,116 $ 999,211 $1,160,367
========== ========== ==========
--------------------
(1) Primarily goodwill, computer software and intellectual property
rights.
(2) Primarily computers and vehicles.
REVENUE AND CUSTOMER INFORMATION
Customer care and billing, customer relationship management or CRM, and
order management systems (collectively, "CC&B") include systems for wireline,
wireless, voice, data, broadband, content, electronic and mobile commerce and IP
services. Directory includes directory sales and publishing systems for
publishers of both traditional printed yellow pages and white pages directories
and electronic Internet directories.
YEAR ENDED SEPTEMBER 30,
------------------------------------------
2002 2001 2000
---------- ---------- ----------
CC&B $1,439,980 $1,379,654 $ 986,553
Directory 173,585 154,256 131,767
---------- ---------- ----------
Total $1,613,565 $1,533,910 $1,118,320
========== ========== ==========
AMDOCS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SALES TO SIGNIFICANT CUSTOMERS
The following table summarizes the percentage of sales to significant
customers groups (when they exceed 10 percent of total revenue for the year).
YEAR ENDED SEPTEMBER 30,
------------------------
2002 2001 2000
---- ---- ----
Nextel Communications group 12% 10% (*)%
SBC Communications Inc. group, a related party 11 13 13
Vodafone group 10 11 14
--------------------
(*) Less than 10 percent of total revenue
NOTE 21 - OPERATIONAL EFFICIENCY AND COST REDUCTION PROGRAM
In October 2001, 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 closed the Stamford facility. As a direct result of this closure,
the Company recorded 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 employee separation costs. In addition, as
part of a general effort to reduce costs, the Company has decreased its overall
commitments for employee compensation, through a lesser reliance on fixed
compensation programs and a greater reliance on discretionary arrangements.
On June 20, 2002, the Company announced its intention to implement a
cost reduction program to reduce costs by approximately 10% in response to a
decline of the Company's forecasted revenue for the third and fourth quarters of
fiscal 2002. The decline resulted from, among other factors, slowdowns in
customer buying decisions in the third quarter of fiscal 2002, stemming from
overall reductions in the capital investment budgets of many communications
service providers, leading to fewer new contracts for the Company than it had
expected, as well as smaller than expected initial spending commitments and
reduced discretionary spending under the Company's contracts with some of its
customers.
The Company recorded a charge of $20,919 in the fourth quarter of
fiscal 2002, consisting primarily of employee separation costs in connection
with the elimination of approximately one thousand positions of software and
information technology specialists and administrative professionals that have
been eliminated by the Company, with the remainder for the write-off of
leasehold improvements and rent obligations. Except for certain lease
termination costs that will be paid over the respective lease terms, the
AMDOCS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Company expects to pay substantially all of the remaining accrual balance of the
cost reduction program in the first quarter of fiscal 2003.
These charges are included in "restructuring charges, in-process
research and development and other indirect acquisition-related costs" for the
year ended September 30, 2002.
As of September 30, 2002, the remaining restructuring expense reserves
were $14,884. The remaining employee separation costs are expected to be paid
out through the first quarter of fiscal 2003. Facility related costs are
expected to be paid out through April 2012. Actual future cash requirements may
differ materially from the accrual as of September 30, 2002, particularly if
actual sublease income is significantly different from current estimates.
A summary of restructuring activities along with respective remaining
reserves follows:
Balance as of
Restructuring Charges Cash Non-cash September 30, 2002
--------------------- ---- -------- ------------------
Plan 1(*) Plan 2(*)
--------- ---------
Employee separation
costs $ 2,530 $ 11,353 $(10,525) $ -- $ 3,357
Facilities 6,255 7,880 (3,048) -- 11,087
Asset write-offs 4,126 1,584 -- (5,710) --
Other 400 102 (62) -- 440
-------- -------- -------- -------- --------
$ 13,311 $ 20,919 $(13,635) $ (5,710) $ 14,884
======== ======== ======== ======== ========
--------------------
(*) Plan 1 refers to the closure of the Stamford facility in the first
quarter of fiscal 2002. Plan 2 refers to the cost reduction program
implemented in the fourth quarter of fiscal 2002.
For additional cost reduction measures, see Note 24.
AMDOCS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 22 - FINANCIAL INSTRUMENTS
The Company enters into forward contracts to sell foreign currency in
order to hedge its exposure associated with some firm commitments from customers
in non-U.S. dollar-based currencies and treats these for accounting purposes as
fair value hedges. The Company also enters into forward contracts in foreign
currency to reduce the exposure associated with estimated receipts from
customers and with anticipated costs (primarily personnel costs), in non-U.S.
dollar-based currencies and treats these as cash flow hedges. The derivative
financial instruments are afforded hedge accounting because they are effective
in managing foreign exchange risks and are appropriately assigned to the
underlying exposures. The Company does not engage in currency speculation.
Generally, the Company measures the differential between forward rates and spot
rates on forward exchange contracts as the inherent ineffectiveness of a hedging
arrangement. Accordingly, changes in the fair value of forward exchange
contracts, which are classified as fair value hedges, offset the change in the
fair value of the hedged item to the extent of the arrangement's effectiveness.
The effective portion of the change in the fair value of forward exchange
contracts, which are classified as cash flow hedges, is recorded as
comprehensive income until the underlying transaction is recognized in earnings.
Forward contracts, which are not designated as hedging instruments under SFAS
No. 133, are used to hedge the impact of the variability in exchange rates on
certain accounts receivables and investment in Certen convertible debentures
denominated in foreign currencies.
The fair values of the forward derivatives were $(7,125) and $(11,298)
on September 30, 2002 and 2001, respectively. The Company currently enters into
forward exchange contracts exclusively with major financial institutions.
During fiscal 2002 and 2001, there were no significant gains or losses
recognized in earnings for hedge ineffectiveness, and the Company did not
recognize in earnings any significant gains or losses resulting from a hedged
firm commitment that no longer qualified as a fair value hedge. During fiscal
2002, the Company recognized in earnings $25 loss resulting from hedged
forecasted cash flows that no longer qualified as cash flow hedges.
Derivatives gains and losses, that are included in other comprehensive
income, are reclassified into earnings at the time the forecasted revenue or
operation expenses are recognized. The Company estimates that a $4,874
derivative net loss included in other comprehensive income will be reclassified
into earnings within the next twelve months.
AMDOCS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 23 - SELECTED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following are details of the unaudited quarterly results of
operations for the three months ended:
SEPTEMBER
30, JUNE 30, MARCH 31, DECEMBER 31,
--------- --------- --------- ------------
2002 (*)
Revenue $ 355,520 $ 380,135 $ 455,269 $ 422,641
Operating (loss) income (25,385) 2,503 50,813 21,229
Net (loss) income (8,986) (26,851) 26,441 4,334
Basic and diluted (loss) earnings per
share (0.04) (0.12) 0.12 0.02
2001
Revenue $ 415,447 $ 404,007 $ 372,289 $ 342,167
Operating income 49,529 44,864 37,356 27,532
Net income 19,905 18,492 15,413 12,576
Basic and diluted earnings per share 0.09 0.08 0.07 0.06
--------------------
(*) In fiscal 2002, the fiscal quarters ended December 31, 2001 and
September 30, 2002 included restructuring charges, purchased
in-process research and development expense and gain from the
repurchase of Notes of $30,711, $20,919 and $6,012, respectively.
NOTE 24 - SUBSEQUENT EVENT
On November 27, 2002 the Company announced a series of measures
designed to reduce costs and improve productivity. As part of this plan, the
Company will reduce its workforce by approximately 400 positions out of a total
workforce of 9,000 employees. The reductions will be from different centers
around the world. In addition, the Company will implement other cost reduction
measures, including travel cuts and reductions in other discretionary costs.
Item 2. Financial Statement Schedule
VALUATION AND QUALIFYING ACCOUNTS
Additions
------------------------------------------------------------------------------------------------------------
Description Balance at Charged to Charged to other Deductions Balance at
beginning of costs and accounts end of period
period expenses
------------------------------------------------------------------------------------------------------------
Accounts receivable 4,118 -- 22,859(*) (737) 26,240
allowances
Valuation allowances 27,907 -- -- (17,203) 10,704
(*) Includes accounts receivable allowance of $13,777 acquired as part of the
acquisition of Clarify.
Item 3. Operating and Financial Review and Prospects
AMDOCS LIMITED
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
INTRODUCTION
In this section, we discuss the general financial condition and the
results of operations for Amdocs and its subsidiaries including:
- the factors that affect our business,
- our revenue and costs for the fiscal years ended September 30,
2002, 2001 and 2000,
- the reasons why such revenue and costs were different from
year to year,
- the sources of our revenue,
- the impact of changes we have made to our organizational
structure,
- how all of this affects our overall financial condition,
- our expenditures for the fiscal years ended September 30,
2002, 2001 and 2000, and
- the sources of our cash to pay for future capital expenditures
and possible acquisitions.
In this section, we also analyze and explain the annual changes in the
specific line items in our consolidated statements of operations. You should
read this section in conjunction with our consolidated financial statements,
which follow.
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 industry. The products and
services that we provide are known as business support systems, which we refer
to as "BSS". Our BSS products consist primarily of customer care and billing,
customer relationship management and order management systems. We refer to
these, collectively, as "CC&B Systems". We refer to our customer relationship
management products as "CRM" products. Our products also include a full range of
directory sales and publishing systems, which we refer to as "Directory
Systems", for publishers of both traditional printed yellow page and white page
directories and electronic Internet directories.
Our CC&B Systems and our Directory Systems are designed to meet the
mission-critical needs of leading communications service providers. We support a
wide range of communications services, including wireline, wireless, voice,
data, broadband, content,
AMDOCS LIMITED
OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (CONTINUED)
electronic and mobile commerce and Internet Protocol ("IP") based services. We
also support companies that offer multiple service packages, commonly referred
to as convergent services. Because of 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, such as the operation of data centers and
the provision of communications facility management services, in all cases on
either or a combination of a fixed or unit charge basis to our customers.
As part of our strategy, we may pursue acquisitions and other
initiatives in order to offer new products or services or otherwise enhance our
market position or strategic strengths. See the discussion below under the
caption "Acquisitions".
We derive our revenue principally from:
- the sale of licenses for our products, including initial
license fees and incremental license fees resulting from
increases in a customer's business volume,
- the sale of services related to our products, including
customization, implementation and integration services,
- recurring revenue from ongoing support and maintenance
provided to our customers, and
- providing outsourcing and other related services for our
customers.
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, we generally recognize revenue over the
course of these long-term projects. Initial license fee revenue is recognized as
work is performed, using the percentage of completion method of accounting.
Subsequent license fee revenue is recognized upon completion of specified
conditions in each contract. Service revenue that involves significant ongoing
obligations, including fees for software customization, implementation and
modification, also is 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, we recognize revenue from the operation and
maintenance of customers' billing systems 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
AMDOCS LIMITED
OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (CONTINUED)
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.
As a result of the slowdown in the communications industry, the market value,
financial results and prospects, and capital spending levels of communications
companies have declined or degraded.
The persistence and worsening of the downturn in the communications
industry have significantly impacted our business. Over the past year, further
slowdowns in customer buying decisions stemming from overall reductions in the
capital investment budgets of many communications service providers have led to
fewer new contracts than we had expected, as well as smaller than expected
initial spending commitments and reduced discretionary spending under our
contracts with some of our customers. These factors, combined with the
continuing general economic slowdown, resulted in our achieving lower revenue
levels than expected during the second half of fiscal 2002.
Due to our heavy dependence on the communications industry, we can be
adversely affected by bankruptcies or other business failures in that industry.
Failures in the communications industry could harm our business and might have a
material adverse effect on our operating results and financial condition.
Total license and service revenue for the fiscal year ended September
30, 2002 was $1,613.6 million, compared to $1,533.9 million in fiscal 2001 and
$1,118.3 million in fiscal 2000.
License and service fees from the sale of CC&B Systems amounted to
$1,440.0 million in the year ended September 30, 2002, compared to $1,379.7
million in fiscal 2001 and $986.5 million in fiscal 2000. In fiscal 2002,
license and service fees from the sale of CC&B Systems represented 89.2% of our
total revenue, compared to 89.9% in fiscal 2001 and 88.2% in fiscal 2000.
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 demand for our CC&B Systems is driven by, among other
key factors:
- the global penetration of communications service providers,
- the emergence of new communications products and services,
especially IP, data and content services,
AMDOCS LIMITED
OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (CONTINUED)
- technological changes, such as the introduction of wireless
Internet services via GPRS (General Packet Radio Services) and
UMTS (Universal Mobile Telecommunications System) technology,
- the business needs of communications service providers to
reduce costs and retain customers, and
- a shift from in-house management to vendor solutions.
We also believe that additional drivers of demand are 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), and the ability of our CC&B Systems to improve productivity and
reduce costs of communications providers.
Another key to demand for our CC&B Systems is the practice by certain
communications service providers to outsource entirely their customer care and
billing functions.
Although we are unable at this time to forecast demand for our CC&B
Systems, we could experience additional revenue softness in the future as a
result of the downturn in the communications industry. This industry-wide
downturn had a direct negative impact on our results in fiscal 2002, reducing
both the number of new contracts we have been able to obtain, and the initial
spending commitments and discretionary spending levels of some of our customers.
As a result, we expect that revenue attributable to our CC&B Systems will
decrease in the first quarter of fiscal 2003. As of November 30, 2002 we have no
clear indication for the second quarter of fiscal 2003 or subsequent periods.
Accordingly, at this point, we cannot predict whether revenue levels will
continue to deteriorate or have stabilized. However, we expect that revenue
attributable to our CC&B Systems in fiscal 2003 will be lower than in fiscal
2002.
License and service fees from the sale of Directory Systems amounted to
$173.6 million in the year ended September 30, 2002, compared to $154.2 million
in fiscal 2001 and $131.8 million in fiscal 2000. In fiscal 2002, license and
service fees from the sale of Directory Systems represented 10.8% of our total
revenue, compared to 10.1% in fiscal 2001 and 11.8% in fiscal 2000.
We believe that we are a leading provider of Directory Systems in most
of the markets that we serve. We are unable at this time to forecast demand for
our Directory Systems and related outsourcing projects for fiscal 2003 because
our results are highly dependent on our ability to secure certain new contracts.
SENIOR MANAGEMENT TRANSITION AND NEW ORGANIZATIONAL STRUCTURE
In March 2002, we announced a senior management transition. Effective
July 1, 2002, Dov Baharav, who previously had served as Chief Financial Officer
of Amdocs
AMDOCS LIMITED
OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (CONTINUED)
Management Limited, assumed the role of President and Chief Executive Officer.
Ron Moskovitz, who previously had served as Vice President of Finance for Amdocs
Management Limited, took over the role of Chief Financial Officer. Mr. Baharav
replaced Avinoam Naor in the positions of President and Chief Executive Officer
of Amdocs Management Limited. Mr. Naor became the Vice Chairman of our board of
directors.
Under the leadership of our new management team and in response to
changing market conditions, we implemented a new organizational structure during
the fourth quarter of fiscal 2002. Our operations are now centered around two
main groups, the Offering Group and the Delivery Group. The Offering Group is
responsible for developing and marketing our BSS products, while the Delivery
Group is responsible for project and service delivery to our customers.
OPERATIONAL EFFICIENCY AND COST REDUCTION PROGRAM
In October 2001, 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
closed the Stamford facility. As a direct result of this closure, we recorded 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 employee separation costs.
In addition, in the first quarter of fiscal 2002, as part of a general
effort 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.
On June 20, 2002, we announced our intention to implement a cost
reduction program to reduce costs by approximately 10% in response to a decline
of our forecasted revenue for the third and fourth quarters of fiscal 2002. The
decline resulted from, among other factors, slowdowns in customer buying
decisions in the third quarter of fiscal 2002, stemming from overall reductions
in the capital investment budgets of many communications service providers,
leading to fewer new contracts than we had expected, as well as smaller than
expected initial spending commitments and reduced discretionary spending under
our contracts with some of our customers.
We recorded a charge of $20.9 million in the fourth quarter of fiscal
2002, consisting primarily of employee separation costs in connection with the
elimination of approximately 1,000 positions, with the remainder for the
write-off of leasehold improvements and rent obligations. Except for certain
lease termination costs that will be paid over the respective lease terms, we
expect to pay substantially all of the remaining accrual balance of the cost
reduction program in the first quarter of fiscal 2003.
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OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (CONTINUED)
These charges are included in "restructuring charges, in-process research
and development and other indirect acquisition-related costs" for the year ended
September 30, 2002.
Implementation of our cost reduction program permitted us to achieve cost
savings of approximately $18 million in the fourth quarter of fiscal 2002. We
believe that the cost reduction program will create additional quarterly cost
savings of approximately $12 million, which will achieve an overall savings of
$30 million each quarter on an ongoing basis compared to the expense level in
the third quarter of fiscal 2002. During the fourth quarter of fiscal 2002 we
notified all affected employees of their termination. However, some of these
individuals remained on our payroll as our employees through the end of the
fourth quarter. As a result, the cost savings achieved in the fourth quarter
were partial.
For additional cost reduction measures, see the discussion below under the
caption "Subsequent Event".
ADOPTION OF NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" ("SFAS No. 141"), and No. 142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142").
SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001.
SFAS No. 142 is effective for fiscal years beginning after December 15,
2001. Under SFAS No. 142, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but, instead, will be subject to
periodic impairment tests in accordance with the Statement. Other intangible
assets will continue to be amortized over their useful lives.
Other intangible assets, such as workforce-in-place, will be reclassified
to goodwill, according to SFAS No. 141's new definition of intangible assets.
Effective October 1, 2002 we will adopt SFAS No. 142. Subsequent to the
adoption of the new rules, we will perform the first of the required periodic
impairment tests of goodwill and intangible assets recorded as of October 1,
2002. Thereafter, a periodic impairment test will be performed at least
annually. We have not yet determined what the effect of these tests will be on
our earnings and financial position. We recorded goodwill and workforce-in-place
amortization of $204.6 million in fiscal 2002, $204.6 million in fiscal 2001 and
$104.3 million in fiscal 2000. See the discussion below under the caption
"Acquisitions".
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements
AMDOCS LIMITED
OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (CONTINUED)
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS No. 145"). SFAS No. 145 eliminates previous requirements to
classify gains and losses from extinguishment of debt as extraordinary items in
earnings. Gains or losses from extinguishment of debt for fiscal years beginning
after May 15, 2002 shall not be classified as extraordinary items unless certain
provisions are met. Early adoption was encouraged. We adopted SFAS No. 145 in
the fourth quarter of fiscal 2002 in connection with the gain related to the
repurchase of our convertible notes. See the discussion below under the caption
"Convertible Notes".
ACQUISITIONS
As part of our strategy, we may pursue acquisitions in order to offer new
products or services or otherwise enhance our market position or strategic
strengths.
In November 1999, we acquired International Telecommunication Data
Systems, Inc. ("ITDS") in a stock-for-stock acquisition. The acquisition of
ITDS, a leading provider of solutions to communications companies for
outsourcing of billing operations, expanded the scope of our CC&B Systems
offerings. We believe that this acquisition further established our leadership
in providing total solutions to the communications industry. The total purchase
price of $189.0 million consisted of the issuance of 6,461,376 ordinary shares,
the grant of options to purchase 1,102,955 ordinary shares and transaction
costs. We have since renamed ITDS, Amdocs Stamford, Inc.
In April 2000, we acquired Solect Technology Group Inc. ("Solect") in a
stock-for-stock acquisition. The acquisition of Solect, a leading provider of
billing and customer care software to IP service providers, including wireless
and application service providers, or ASPs, expanded our IP service provider
customer base for CC&B Systems. In the acquisition, all then outstanding common
shares of Solect were exchanged for shares of a newly issued class of
exchangeable shares of Solect. The exchangeable shares entitle holders to
dividends and other rights economically equivalent to our ordinary shares,
including the right, through a voting trust, to vote at our shareholder
meetings. The exchangeable shares are exchangeable at the option of the holders
into our ordinary shares on a one-for-one basis. The total purchase price of
$1,087.7 million consisted of the issuance of 13,846,302 exchangeable shares,
the grant of options to purchase 1,653,662 ordinary shares and transaction
costs. We have since renamed Solect, Amdocs Canada, Inc.
On November 28, 2001, we purchased from Nortel Networks Corporation
substantially all of the assets of its Clarify business ("Clarify"), a leading
provider of CRM software to communications companies and other enterprise
sectors. This acquisition positioned us as a leading provider of CRM software to
the communications industry and, through our addition of Clarify's CRM software
to our CC&B Systems offerings, reinforced our leadership in delivering a
comprehensive portfolio of business software applications. Following the
acquisition, we have continued to sell Clarify's CRM software to customers other
than communication service providers. Although these
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OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (CONTINUED)
customers are not the primary focus of our business, we believe that revenue
from such customers will slightly increase over time. The total purchase price
for Clarify, as of September 30, 2002, was $212.0 million in cash, including
transaction costs of $8.3 million. The purchase price was subject to final price
adjustments that were settled in October 2002 and resulted in an $11.3 million
reduction of the purchase price to $200.7 million in the first quarter of fiscal
2003.
We accounted for the ITDS, Solect and Clarify acquisitions using the
purchase method of accounting. We have included the fair market value of the
assets and liabilities acquired in these transactions in our balance sheet and
the results of operations for the acquired entities in our consolidated
statements of operations as of the closing date of each acquisition. In each
case, we obtained a valuation of the intangible assets acquired. The value of
the acquired technology included both existing technology and in-process
research and development. The valuation of these items was estimated by applying
the income forecast method, which considered the present value of cash flows by
product lines. We amortized the fair value of existing technology products over
two years, commencing as of the closing date of the applicable acquisition. We
charged as an expense in-process research and development immediately following
the completion of each acquisition in accordance with FASB Interpretation No. 4,
"Applicability of FASB Statement No. 2 to Business Combinations Accounted for by
the Purchase Method", because in each case such technology had not reached
technological feasibility and had no alternative use. We are amortizing the fair
value of customer arrangements and workforce-in-place over five years in the
case of ITDS and three years in the case of Solect and Clarify. These
amortizations commenced on the closing date of the applicable acquisition.
The excess of the purchase price over the fair value of the net assets
acquired constitutes goodwill. We began amortizing goodwill from the ITDS
acquisition over a 15-year period and from the Solect acquisition over a
five-year period, in each case commencing on the closing date of the applicable
acquisition. According to the transition provisions of SFAS No. 142, goodwill
for acquisitions completed subsequent to June 30, 2001 is not amortized and
goodwill for acquisitions completed prior to June 30, 2001 is amortized only
through September 30, 2002. See the discussion above under the caption "Adoption
of New Accounting Standards". In accordance with these provisions, the goodwill
relating to the Clarify acquisition has been not amortized. Commencing October
1, 2002, as a result of our adoption of SFAS No. 142, we will cease amortizing
goodwill related to the ITDS and Solect acquisitions and all goodwill will be
subject to periodic impairment tests. Also effective October 1, 2002, we adopted
SFAS No. 141 for acquisitions prior to July 1, 2001, which requires us to
reclassify to goodwill certain other intangible assets, such as
workforce-in-place. The amount assigned to Clarify goodwill was subject to
possible purchase price adjustments and other contingencies, which were settled
in October 2002, as discussed above.
No further investments were made in the projects written-off in our
acquisitions.
AMDOCS LIMITED
OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (CONTINUED)
For more information on our acquisitions, see Note 3 to the consolidated
financial statements included in this document.
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 markets and to provide new and enhanced functionality to
our existing product offerings. Research and development expenditures were
$124.1 million, $105.8 million and $74.9 million in the fiscal years ended
September 30, 2002, 2001 and 2000, respectively, representing 7.7%, 6.9% and
6.7%, respectively, of our revenue in these fiscal years. We believe that our
research and development efforts are a key element of our strategy and are
essential to our success. Although we intend to continue to devote resources to
research and development as required to maintain and further strengthen our
market position, our research and development budget, like all of our costs, is
sensitive to our overall financial condition. A decrease in our total revenue
could, in certain circumstances, lead to reductions in the levels of our
research and development expenditures.
We regard significant portions of our software products and systems as
proprietary. We 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, subcontractors, customers and potential customers and
limit access to, and distribution of, our proprietary information. We believe
that the 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.
CONVERTIBLE NOTES
In May 2001 we issued $500.0 million aggregate principal amount of 2%
Convertible Notes due June 1, 2008 (the "Notes"). We are obligated to pay
interest on the Notes semi-annually on June 1 and December 1 of each year. The
Notes are our senior unsecured obligations and rank equal in right of payment
with all of our existing and future senior unsecured indebtedness. The Notes are
convertible, at the option of the holders at any time before the maturity date,
into our ordinary shares at a conversion rate of 10.8587 shares per $1,000
principal amount of Notes, representing a conversion price of approximately
$92.09 per share. The Notes are subject to redemption at any time on or after
June 1, 2006, in whole or in part, at our option, at a redemption price of 100%
of the principal amount plus accrued and unpaid interest. The Notes are subject
to repurchase, at the holder's option, on June 1, 2004 and June 1, 2006, at a
repurchase price equal to
AMDOCS LIMITED
OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (CONTINUED)
100% of the principal amount plus accrued and unpaid interest, if any, on such
repurchase date. We may choose to pay the repurchase price in cash, ordinary
shares or a combination of cash and ordinary shares.
On July 23, 2002, our board of directors authorized us to repurchase
Notes, in such amounts, at such prices and at such times considered appropriate.
Such repurchases may be made on the open market, in privately negotiated
transactions or otherwise, in accordance with any applicable laws and the terms
of the Notes. As of September 30, 2002, we had repurchased $54.9 million
aggregate principal amount of the Notes, at an average price of $890 per $1,000
principal amount. We funded these repurchases, and intend to fund any future
repurchases, with available funds. As of September 30, 2002, $445.1 million
aggregate principal amount of the Notes was outstanding.
SHARE REPURCHASE PROGRAM
In November 2001, our board of directors approved a twelve-month share
repurchase program, authorizing the repurchase of up to 11 million of our
ordinary shares, or approximately 5% of our outstanding ordinary shares as of
that date. In April 2002, our board of directors expanded the stock repurchase
plan to authorize the purchase of up to 20 million shares, or approximately 9%
of our then outstanding ordinary shares. Under the program, from time to time
through November 2002, we were authorized to repurchase shares on the open
market, in privately negotiated transactions or otherwise, in accordance with
any applicable laws, and at times and prices as we deemed appropriate. During
2002 we repurchased 7.7 million of our ordinary shares at a weighted average
price of $14.13 per share. We funded these repurchases, and intend to fund any
future repurchases, with available funds.
INVESTMENT
In January 2001 we formed Certen Inc. ("Certen") with Bell Canada to
provide customer care and billing solutions to Bell Canada and some of its
affiliated companies. Certen is owned 90% by Bell Canada and 10% by us.
Commencing on the 30-month anniversary of the transaction, convertible
debentures issued by Certen to us will be convertible into an additional 35%
ownership interest in Certen. Our relative ownership interests might be modified
further through the exercise of a series of contractual rights, commencing on
the 30-month anniversary of the transaction. We are providing the customer care
and billing software required by Certen, including customization, installation,
maintenance and other services. We account for our investment in Certen under
the cost method.
ADJUSTMENT TO THE BASIS OF INVESTMENTS
In fiscal 2002, we recorded pretax charges of $5.5 million to adjust the
carrying value of two investments, accounted for by us under the cost method. In
fiscal 2001, we recorded pretax charges of $6.8 million to adjust the carrying
value of four investments, accounted for by us under the cost method. We
periodically monitor the economic and
AMDOCS LIMITED
OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (CONTINUED)
financial aspects of our interests in all of our investments. Following these
adjustments, as of September 30, 2002, our only remaining investment accounted
for under the cost method was Certen.
AMDOCS LIMITED
OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (CONTINUED)
OPERATING RESULTS
The following table sets forth for the fiscal years ended September 30,
2002, 2001 and 2000 certain items in our consolidated statements of operations
reflected as a percentage of total revenue:
YEAR ENDED SEPTEMBER 30,
------------------------
2002 2001 2000
---- ---- ----
PRO PRO PRO
FORMA(*) AS REPORTED FORMA(*) AS REPORTED FORMA (*) AS REPORTED
-------- ----------- -------- ----------- --------- -----------
Revenue:
License........................ 9.5% 9.5% 11.2% 11.2% 11.2% 11.2%
Service........................ 90.5 90.5 88.8 88.8 88.8 88.8
-------- ----------- -------- ----------- --------- -----------
100.0 100.0 100.0 100.0 100.0 100.0
-------- ----------- -------- ----------- --------- -----------
Operating expenses:
Cost of license................ 0.3 0.3 0.4 0.4 0.5 0.5
Cost of service................ 57.5 57.5 55.3 55.3 57.2 57.2
Research and development....... 7.7 7.7 6.9 6.9 6.7 6.7
Selling, general and
administrative............... 13.9 13.9 12.7 12.7 12.3 12.3
Amortization of goodwill and
purchased intangible assets..
-- 14.4 -- 14.3 -- 9.9
Restructuring charges,
in-process research and
development and other
indirect acquisition-related
costs........................ -- 3.2 -- -- -- 6.8
-------- ----------- -------- ----------- --------- -----------
79.4 97.0 75.3 89.6 76.7 93.4
-------- ----------- -------- ----------- --------- -----------
Operating income 20.6 3.0 24.7 10.4 23.3 6.6
Interest income and other, net
0.8 1.2 1.4 1.4 1.0 1.0
-------- ----------- -------- ----------- --------- -----------
Income before income taxes 21.4 4.2 26.1 11.8 24.3 7.6
Income taxes 6.0 4.6 7.8 7.5 7.3 7.1
-------- ----------- -------- ----------- --------- -----------
Net (loss) income 15.4% (0.3)% 18.3% 4.3% 17.0% 0.5%
======== =========== ======== =========== ========= ===========
---------------
(*) The above pro forma financial information regarding our operating results
is provided as a complement to results reported in accordance with
accounting principles generally accepted in the United States. We use this
pro forma financial information in our internal analysis because it
enables us to consistently analyze the critical components and results of
operations and to have a meaningful comparison to prior years. This pro
forma financial information excludes (i) amortization of goodwill and
purchased intangible assets, (ii) for fiscal 2002 and 2000 only, $17.4
million and $75.6 million, respectively, for purchased in-process research
and development and other indirect acquisition-related costs, attributable
to our acquisitions, (iii) for fiscal 2002 only, $13.3 million for a
nonrecurring charge related to the consolidation of data centers and the
resulting closure of our Stamford, Connecticut facility, $20.9 million for
restructuring charge related to the cost reduction program, (iv) for
fiscal 2002 only, $6.0 million gain attributable to the repurchase of
Notes and (v) all related tax effects attributable to the above of $23.3
million, $5.3 million and $2.6 million for fiscal 2002, 2001 and 2000,
respectively. We refer to the items in clauses (i) and (ii) collectively,
as the "acquisition-related charges".
AMDOCS LIMITED
OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (CONTINUED)
FISCAL YEARS ENDED SEPTEMBER 30, 2002 AND 2001
Revenue. Total revenue for the year ended September 30, 2002 was $1,613.6
million, an increase of $79.7 million, or 5.2%, over fiscal 2001. This growth
rate was significantly less than the 37.2% revenue increase we had been able to
achieve between fiscal 2000 and 2001, primarily as a result of the pronounced
decrease in our CC&B Systems revenue in the second half of fiscal 2002,
partially offset by revenue attributable to our acquisition of Clarify. While
CC&B Systems revenue levels in the first six months of fiscal 2002 were 23.8%
higher than revenue levels for CC&B Systems in the comparable period of fiscal
2001, and 6.3% higher sequentially based on a comparison of our second to our
first fiscal quarters of 2002, CC&B Systems revenue declined significantly in
the second six months of fiscal 2002. The Company experienced a $130.6 million,
or 16.6%, decline in revenue from our CC&B Systems between the first half and
second half of fiscal 2002 and sequential declines of $65.9 million or 16.3% and
$23.0 million or 6.8%, between the second and third fiscal quarters and third
and fourth fiscal quarters of 2002, respectively.
The recent quarterly trends in our total revenue are summarized below (in
millions):
Q1 Q2 Q3 Q4
-- -- -- --
Fiscal 2002 $ 422.6 $ 455.3 $ 380.1 $ 355.5
Fiscal 2001 $ 342.2 $ 372.3 $ 404.0 $ 415.4
As of November 30, 2002 we expect that total revenue for the first quarter
of fiscal 2003 will be in the range of $333 million to $338 million. We are
unable at this time to forecast beyond the first quarter of fiscal 2003. We
could experience stabilization of revenue levels or additional revenue softness
in future quarters. However, we expect that our revenue in fiscal 2003 will be
lower than in fiscal 2002.
License revenue decreased from $171.4 million in the year ended September
30, 2001 to $153.7 million in the year ended September 30, 2002, a decrease of
10.4%, while service revenue increased 7.2% to $1,459.9 million in the year
ended September 30, 2002 from $1,362.5 million in the year ended September 30,
2001. The decrease in license revenue and the smaller than expected growth in
service revenue are attributable primarily to the slowdown in customer buying
decisions in the second half of fiscal 2002, stemming from overall reductions in
the capital investment budgets of many communications service providers. This
reduction in investment by our customers has resulted in our obtaining fewer new
contracts than expected and smaller than expected initial spending commitments
under contracts with some of our customers. The smaller than anticipated
increase in service revenue is also attributable, in part, to reduced
AMDOCS LIMITED
OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (CONTINUED)
discretionary spending under our contracts with some of our customers in the
second half of fiscal 2002.
Total CC&B Systems revenue for the year ended September 30, 2002 was
$1,440.0 million, an increase of $60.3 million, or 4.4%, over fiscal 2001.
During fiscal 2002, the demand for our CC&B Systems was primarily driven by the
need for communications companies to continue to upgrade their customer care and
billing, CRM software and order management systems in response to competition in
the subscriber markets, the need to offer new data services and the need to
improve productivity and operational efficiency. In addition, demand for our
CC&B Systems was enhanced by our acquisition of Clarify, which added Clarify's
CRM software to our CC&B Systems offerings. As a result of the Clarify
acquisition, we derived a portion of our CC&B Systems revenue in fiscal 2002
from customers other than communications service providers. For the year ended
September 30, 2002, $59.9 million of our CC&B Systems revenue was attributable
to such customers. Although our business is not focused on such
non-communications service provider customers, we believe that revenue from such
customers will slightly increase over time.
Revenue from Directory Systems was $173.6 million for the year ended
September 30, 2002, an increase of $19.3 million, or 12.5%, over fiscal 2001.
The increase is attributable primarily to extensions of agreements with and
additional services rendered to existing customers.
In the year ended September 30, 2002, revenue from customers in North
America, Europe and the rest of the world accounted for 61.9%, 28.9% and 9.2%,
respectively, compared to 53.8%, 35.8% and 10.4%, respectively, for fiscal 2001.
The growth in North American revenue in the year ended September 30, 2002, was
attributable primarily to increased activity from existing customers.
Cost of License. Cost of license for the year ended September 30, 2002 was
$5.1 million, a decrease of $0.6 million, or 10.6%, over the cost of license for
fiscal 2001. Cost of license includes amortization of purchased computer
software and intellectual property rights, and is decreasing as a result of our
amortizing on a faster than straight-line basis.
Cost of Service. Cost of service for the year ended September 30, 2002 was
$928.3 million, an increase of $80.7 million, or 9.5%, over the cost of service
of $847.6 million for fiscal 2001. As a percentage of revenue, cost of service
increased to 57.5% in fiscal 2002 from 55.3% in fiscal 2001. The increase in
cost of service as a percentage of revenue is attributable to the decrease in
license revenue and the slight decrease in the gross margin of our service
revenue in the second half of fiscal 2002. As a result of general economic and
other factors negatively impacting our markets, we took steps to decrease our
costs. See the discussion above under the caption "Operational Efficiency and
Cost Reduction Program".
AMDOCS LIMITED
OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (CONTINUED)
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. For the year ended September 30, 2002,
research and development expense was $124.1 million, or 7.7% of revenue,
compared with $105.8 million, or 6.9% of revenue, in fiscal 2001. The increase
in expense reflects ongoing expenditures primarily for CC&B Systems. Our
research and development budget, like all of our costs, is sensitive to our
overall financial condition. A decrease in our total revenue could, in certain
circumstances, lead to reductions in the levels of our research and development
expenditures. See the discussion above under the caption "Research and
Development, Patents and Licenses".
Selling, General and Administrative. Selling, general and administrative
expense was primarily comprised of compensation expense and increased by 14.3%
to $223.6 million, or 13.9% of revenue, in the year ended September 30, 2002
from $195.6 million, or 12.7% of revenue, in fiscal 2001. The increase in
selling, general and administrative expense as a percentage of revenue is
attributable primarily to the increase in our selling and marketing efforts in
fiscal 2002 and, to a lesser degree, to the reduction in our revenue growth,
which was not offset by a corresponding decrease in our selling, general and
administrative expense.
Amortization of Goodwill and Purchased Intangible Assets. Amortization of
goodwill and purchased intangible assets for the year ended September 30, 2002
was $231.8 million, compared to $220.0 million in fiscal 2001. The increase in
amortization expense in fiscal 2002 is due to non-goodwill related amortization
resulting from the Clarify acquisition. In accordance with SFAS No. 142,
goodwill related to Clarify, an acquisition completed after July 1, 2001, is not
amortized, but is subject to periodic impairment tests. For acquisitions
completed prior to July 1, 2001, under SFAS No. 142 amortization of goodwill and
certain other intangibles, such as workforce-in-place, will cease on October 1,
2002. In fiscal 2002 and 2001, total amortization related to such goodwill and
workforce-in-place was $204.6 million. Effective as of October 1, 2002, we
adopted SFAS No. 142 and goodwill related to our acquisitions will no longer be
amortized. Instead, any such goodwill will be subject only to the same periodic
impairment tests now applicable to Clarify-related goodwill. See the discussion
above under the caption "Acquisitions".
Restructuring Charges, In-Process Research and Development and Other
Indirect Acquisition-Related Costs. Restructuring charges, in-process research
and development and other indirect acquisition-related costs in fiscal 2002
consisted of a one-time charge of $17.4 million for write-off of purchased
in-process research and development resulting from the Clarify transaction, a
nonrecurring charge of $13.3 million related to the consolidation of data
centers and the resulting closure of our Stamford, Connecticut facility and a
restructuring charge of $20.9 million related to the cost reduction program we
implemented in the fourth quarter of fiscal 2002. See the discussion above under
the caption "Operational Efficiency and Cost Reduction Program".
AMDOCS LIMITED
OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (CONTINUED)
Operating Income. Operating income for the year ended September 30, 2002,
was $49.2 million, compared to $159.3 million for fiscal 2001, a decrease of
69.1%. The decrease resulted primarily from the reduction in our revenue growth
in fiscal 2002, which was not offset by a corresponding decrease in our costs,
as well as from the Clarify acquisition-related charges and the restructuring
charges resulting from the Stamford facility closing and the implementation of
our cost reduction program. Pro forma operating income for the year ended
September 30, 2002, excluding acquisition-related charges and the restructuring
charges, was $332.6 million, or 20.6% of revenue, compared to $379.3 million, or
24.7% of revenue, for fiscal 2001, a decrease of 12.3%.
Interest Income and Other, Net. For the year ended September 30, 2002,
interest income and other, net, was $19.3 million, a decrease of $3.0 million
from fiscal 2001. The decrease in interest income and other, net, is primarily
attributable to the full-year interest expense and amortization of debt issuance
costs related to our Notes, compared to four months of these costs in fiscal
2001. The decrease in interest income and other, net, was partially offset by
gain of $6.0 million from the repurchase of our Notes. See the discussion above
under the caption "Convertible Notes".
Income Taxes. Income taxes for the year ended September 30, 2002 were
$73.5 million on pretax income of $68.5 million. Our blended effective tax rate
for fiscal 2002 was 107%, resulting from the non-cash amortization of goodwill
related to acquisitions, much of which is not tax deductible. See the discussion
below under the caption "Effective Tax Rate". The pro forma effective tax rate
for the year ended September 30, 2002, excluding the acquisition-related
charges, the restructuring charges resulting from the Stamford facility closing,
the implementation of our cost reduction program and the gain from the
repurchase of our Notes, was 28%. For the year ended September 30, 2001, income
taxes were $115.2 million on income before income taxes of $181.6 million. The
blended effective tax rate for fiscal 2001 was 63% (due to non-cash amortization
of goodwill related to acquisitions, much of which is not tax deductible) and
the pro forma effective tax rate for such period, excluding acquisition-related
charges, was 30%.
Net (Loss) Income. We incurred a net loss of $5.1 million in the year
ended September 30, 2002, compared to net income of $66.4 million in fiscal
2001. The net loss in fiscal 2002 resulted primarily from a decrease in our
license revenue and the reduction in our revenue growth in fiscal 2002, which
was not offset by a corresponding decrease in our costs, as well as from the
Clarify acquisition-related charges and the restructuring charges resulting from
the Stamford facility closing and the implementation of the cost reduction
program. We expect that our adoption of SFAS No. 142 as of October 1, 2002 will
have a positive impact on our results of operations in fiscal 2003. As a result
of the adoption, we will no longer be required to amortize the goodwill from any
of our acquisitions made prior to July 1, 2001. Instead, any such goodwill will
be subject only to periodic impairment tests, as is the case currently for the
goodwill from the Clarify acquisition. See the discussion above under the
caption "Acquisitions". Pro forma net income for the year ended September 30,
2002, excluding the acquisition-related charges, the restructuring charges
resulting from the Stamford facility closing and the
AMDOCS LIMITED
OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (CONTINUED)
implementation of our cost reduction program, the gain from the repurchase of
our Notes and tax effects related to these items, decreased by 11.4% from fiscal
2001, to $249.0 million, representing 15.4% of revenue. The decrease in our pro
forma net income was due to a decrease in our revenue growth in the year ended
September 30, 2002, caused by a significant slowdown in our market in the second
half of fiscal 2002, which was not offset by a corresponding decrease in the
growth of our costs.
Set forth below is the effect of non-amortization of goodwill and
workforce-in-place (in millions, except per share data):
FOR THE YEAR ENDED
SEPTEMBER 30,
-------------
2002 2001
---- ----
Reported net (loss) income $ (5.1) $ 66.4
Add back: goodwill and workforce-in-place
amortizations 204.6 204.6
Attributable tax effect (2.7) (2.7)
-------- --------
Adjusted net income $ 196.8 $ 268.3
======== ========
Adjusted basic earnings per share $ 0.89 $ 1.21
======== ========
Adjusted diluted earnings per share $ 0.88 $ 1.18
======== ========
Diluted (Loss) Earnings Per Share. Diluted loss per share was $0.02 for
the year ended September 30, 2002, compared to diluted earnings per share of
$0.29 in fiscal 2001. Pro forma diluted earnings per share for the year ended
September 30, 2002, excluding the acquisition-related charges, the restructuring
charges resulting from the Stamford facility closing and the implementation of
the cost reduction program and the gain from the repurchase of our Notes and tax
effects related to these items, decreased by 9.7% from fiscal 2001, to $1.12 per
diluted share. Excluding acquisition-related charges, we expect that our pro
forma earnings per share in the first quarter of fiscal 2003 will be in the
range of $0.18 to $0.20. See the discussion above under the caption "Operational
Efficiency and Cost Reduction Program".
FISCAL YEARS ENDED SEPTEMBER 30, 2001 AND 2000
Revenue. Total revenue for the year ended September 30, 2001 was $1,533.9
million, an increase of $415.6 million, or 37.2%, over fiscal 2000. The increase
in revenue was due to continued growth in the demand for our CC&B Systems
solutions in our traditional target markets of high-end and mid-tier
communications companies. License revenue increased from $124.8 million in the
year ended September 30, 2000 to $171.4 million during fiscal 2001, an increase
of 37.3%, and service revenue increased 37.1% from $993.5 million in the year
ended September 30, 2000 to $1,362.5 million in fiscal 2001.
Total CC&B Systems revenue for the year ended September 30, 2001 was
$1,379.7 million, an increase of $393.1 million, or 39.8%, over fiscal 2000. In
the year
AMDOCS LIMITED
OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (CONTINUED)
ended September 30, 2001, 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 $154.2 million for the year ended
September 30, 2001, an increase of $22.5 million, or 17.1%, over fiscal 2000.
The increase was attributable primarily to extensions of agreements with and
additional services rendered to existing customers.
In the year ended September 30, 2001, revenue from customers in North
America, Europe and the rest of the world accounted for 53.8%, 35.8% and 10.4%,
respectively, compared to 45.6%, 42.4% and 12.0%, respectively, in fiscal 2000.
The growth in North America was attributable primarily to revenue we had gained
from forming or expanding relationships with new or existing customers in fiscal
2001.
Cost of License. Cost of license for fiscal 2001 was $5.7 million, which
was approximately equal to the cost of license in the prior fiscal year. Cost of
license included amortization of purchased computer software and intellectual
property rights.
Cost of Service. Cost of service for fiscal 2001 was $847.6 million, an
increase of $207.7 million, or 32.5%, over the cost of service of $639.9 million
for the year ended September 30, 2000. As a percentage of revenue, cost of
service decreased to 55.3% in the year ended September 30, 2001 from 57.2% in
fiscal 2000. The decrease in cost of service as a percentage of revenue was
primarily due to increases in our operational efficiency in the year ended
September 30, 2001. In the second half of fiscal 2001, we adopted a plan to
increase the efficiency of our operations and lower costs by reducing
discretionary expenses. As a result of this plan, we were able to reduce the
growth rate of our costs and achieve greater operational efficiency in fiscal
2001.
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 programs. In the year ended September 30, 2001,
research and development expense was $105.8 million, or 6.9% of revenue,
compared with $74.9 million, or 6.7% of revenue, in the previous fiscal year.
The increase represented 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 42.8%
to $195.6 million, or 12.7% of revenue, in the year ended September 30, 2001,
from $137.0 million, or 12.3% of revenue, in fiscal 2000. The increase was
attributable primarily to increases in our selling and marketing efforts in the
year ended September 30, 2001.
AMDOCS LIMITED
OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (CONTINUED)
Amortization of Goodwill and Purchased Intangible Assets. Amortization of
goodwill and purchased intangible assets for the year ended September 30, 2001
was $220.0 million, compared to $111.2 million in fiscal 2000. Amortization of
goodwill and purchased intangible assets relates to the acquisitions of ITDS and
Solect. The increase in amortization of goodwill and purchased intangible assets
in fiscal 2001 was due to the full-year amortization period applied in fiscal
2001 compared to a shorter amortization period in fiscal 2000.
In-process Research and Development and Other Indirect Acquisition-Related
Costs. No in-process research and development and other indirect
acquisition-related costs were incurred in fiscal 2001. In fiscal 2000 such
costs consisted of a nonrecurring charge of $75.6 million related to the
acquisitions of ITDS and Solect.
Operating Income. Operating income in the year ended September 30, 2001
was $159.3 million, compared to $74.1 million in fiscal 2000, an increase of
115%, primarily due to the effect of a nonrecurring charge for write-off of
purchased in-process research and development related to the acquisitions of
ITDS and Solect in fiscal 2000. Pro forma operating income for the year ended
September 30, 2001, excluding ITDS and Solect acquisition-related charges, was
$379.3 million, or 24.7% of revenue, compared to $260.9 million, or 23.3% of
revenue, for fiscal 2000, an increase of 45.4%.
Interest Income and Other, Net. In the year ended September 30, 2001,
interest income and other, net, was $22.3 million, an increase of $11.6 million
over fiscal 2000. The increase in interest income and other, net, was primarily
attributable to the increase in our cash equivalents and short-term
interest-bearing investments partially offset by overall interest rate declines.
Income Taxes. Income taxes in the year ended September 30, 2001 were
$115.2 million on income before income taxes of $181.6 million. Our effective
tax rate in the year ended September 30, 2001 was 63%, resulting from the
non-cash amortization of goodwill related to the ITDS and Solect acquisitions,
much of which is not tax deductible. In the year ended September 30, 2000,
income taxes were $78.9 million on income before income taxes of $84.9 million.
In the year ended September 30, 2000, the effective tax rate (based on the ratio
between income taxes and income before income taxes, excluding nonrecurring
charges for write-offs of purchased in-process research and development and
other indirect acquisition-related costs) was 49%. The pro forma effective tax
rate for fiscal 2001 and 2000, excluding ITDS and Solect acquisition-related
charges, was 30%. See the discussion below under the caption "Effective Tax
Rate".
Net Income. Net income was $66.4 million in the year ended September 30,
2001, compared to net income of $6.0 million in the previous fiscal year. Pro
forma net income in fiscal 2001, excluding ITDS and Solect acquisition-related
charges, increased by 47.8% over fiscal 2000, reaching $281.1 million,
representing 18.3% of revenue.
Diluted Earnings per Share. Diluted earnings per share were $0.29 for the
year ended September 30, 2001, compared to $0.03 in fiscal 2000. Pro forma
diluted earnings
AMDOCS LIMITED
OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (CONTINUED)
per share in the year ended September 30, 2001, excluding ITDS and Solect
acquisition-related charges, increased by 40.9% from the year ended September
30, 2000, reaching $1.24 per diluted share.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term interest-bearing investments totaled
$1,047.8 million as of September 30, 2002, compared to $1,110.1 million as of
September 30, 2001. The decrease is attributable primarily to the use of $371.4
million in cash to acquire Clarify and to repurchase our shares and Notes, which
was partially offset by positive cash flows from operations. Net cash provided
by operating activities amounted to $412.3 million for fiscal 2002 and $338.0
million for fiscal 2001. The increase in cash flows from operations was
primarily due to a decrease in working capital. We currently intend to retain
our future operating cash flows to support the further expansion of our business
including new outsourcing deals and acquisitions, although we may also use a
portion of our cash for future repurchases of our outstanding securities. See
the discussions above under the captions "Share Repurchase Program" and
"Convertible Notes".
As of September 30, 2002, we had positive working capital of $938.6
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 and the implementation of our share and Notes repurchase
programs. We believe that our current cash balances, cash generated from
operations and our current lines of credit will provide sufficient resources to
meet our liquidity needs for the next fiscal year.
As of September 30, 2002, $445.1 million aggregate principal amount of the
Notes was outstanding. In July 2002, our board of directors authorized us to
repurchase outstanding Notes, in such amounts, at such prices and at such times
considered appropriate by us. During the fourth quarter of fiscal 2002 we
repurchased $54.9 million aggregate principal amount of the Notes. We funded
these repurchases, and intend to fund any future repurchases, with available
funds. On June 1, 2004, the holders of our Notes may require us to redeem their
Notes. See the discussion above under the caption "Convertible Notes".
As of September 30, 2002, we had available short-term general revolving
lines of credit totaling $40.0 million, none of which were outstanding. In
addition, as of September 30, 2002 we had credit facilities totaling $43.8
million, limited for the use of letters of credit and bank guarantees from
various banks. Outstanding letters of credit and bank guarantees as of September
30, 2002 totaled $24.5 million. These were mostly supported by a combination of
the credit facilities described above and compensating cash balances that we
maintain with the issuing banks.
As of September 30, 2002, we had outstanding long-term obligations of
$25.5 million in connection with leasing arrangements.
AMDOCS LIMITED
OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (CONTINUED)
The following table summarizes our contractual obligations as of September
30, 2002 and the effect such obligations are expected to have on our liquidity
and cash flows in future periods, (in millions):
Cash Payments Due by Period
---------------------------
Less than Over 5
Contractual Obligations Total 1 year 1-3 years 4-5 years years
----------------------- ----- ------ --------- --------- -----
Convertible notes (*) $ 445.1 $ -- $ 445.1 $ -- $ --
Capital lease obligations 25.5 10.3 13.0 2.2 --
Non-cancelable operating leases 204.2 43.8 77.2 56.8 26.4
-------- -------- -------- -------- --------
$ 674.8 $ 54.1 $ 535.3 $ 59.0 $ 26.4
======== ======== ======== ======== ========
----------
(*) June 1, 2004 is the earliest date that the holders of our Notes may
require us to redeem their Notes. See the discussion above under the
caption "Convertible Notes".
Our capital expenditures were approximately $59 million in fiscal 2002.
These expenditures consisted primarily of purchases of computer equipment and,
to a lesser degree, vehicles and leasehold improvements. We funded our capital
expenditures principally from operating cash flows and capital leasing
arrangements. We do not anticipate any changes to this policy in the foreseeable
future.
Our accounts receivable allowance for fiscal 2002 was adjusted upward by
approximately $22.1 million, from the allowance as of September 30, 2001. The
increase in our accounts receivable allowance is primarily a result of our
purchase accounting treatment of the Clarify acquisition as well as allowances
for instances where collectibility was not reasonably assured.
NET DEFERRED TAX ASSETS
As of September 30, 2002, deferred tax assets of $10.7 million derived
primarily from carry-forward net operating losses derived by our Canadian
subsidiary 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. In September 2002 we have released valuation
allowances of deferred tax assets derived from carry-forward operating losses
relating to losses incurred by Solect prior to our acquisition of that company
in April 2000, resulting in an offsetting reduction of the goodwill recorded in
the Solect acquisition of approximately $9.0 million. The release of these
valuation allowances was made based on our estimation that we will be able to
realize the tax benefits associated with those net operating losses.
AMDOCS LIMITED
OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (CONTINUED)
EFFECTIVE TAX RATE
Our blended effective tax rate was 107% for the year ended September 30,
2002, compared to 63% for fiscal 2001. These high effective tax rates were
primarily attributable to amortization of goodwill related to our acquisitions,
much of which is not tax deductible. In the year ended September 30, 2002 our
effective tax rate was also adversely affected by the fixed non-deductible
expenditures representing a larger component of our pretax income. Our overall
pro forma effective tax rate for fiscal year 2002 was 28% compared to our
historical pro forma effective tax rate of 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.
We expect a reduction in our pro forma effective tax rate in fiscal 2003
from 28% to 25%. The reduction is due to our continued expansion into countries
with lower effective tax rates.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates, assumptions and judgments that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of contingent
liabilities. On a regular basis, we evaluate and may revise our estimates. We
base our estimates on historical experience and various other assumptions that
we believe to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities, that are not readily apparent. Actual results could differ
materially from the estimates under different assumptions or conditions.
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. These policies require that we make estimates in the preparation of
our financial statements as of a given date.
Our critical accounting policies are as follows:
- Revenue recognition and contract accounting
- Doubtful accounts
- Tax accounting
- Derivative and hedge accounting
AMDOCS LIMITED
OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (CONTINUED)
- Realizability of long-lived assets
Below, we discuss these policies further, as well as the estimates and
judgments involved. We also have other key accounting policies. We believe that,
compared to the critical accounting policies listed above, the other policies
either do not generally require us to make estimates and judgments that are as
difficult or as subjective, or it is less likely that they would have a material
impact on our reported results of operations for a given period.
REVENUE RECOGNITION AND CONTRACT ACCOUNTING
Our revenue recognition policy is significant because our revenue is a key
component of our results of operations. We follow very specific and detailed
guidelines, several of which are discussed above, in measuring revenue; however,
certain judgments affect the application of our revenue recognition policy.
A significant portion of our revenue is recognized over the course of
long-term projects, under the percentage of completion method of accounting. The
percentage of completion method requires significant judgment, such as
estimations of progress-to-completion, contract revenue and contract costs.
Our revenue recognition policy takes into consideration the
creditworthiness and past transaction history of each customer in determining
the probability of collection as a criterion of revenue recognition. This
determination requires the exercise of judgment, which affects our revenue
recognition. If we determine that collection of a fee is not reasonably assured,
we defer the revenue recognition until the time collection becomes reasonably
assured, which is generally upon receipt of cash.
For arrangements with multiple obligations, we allocate revenue to each
component based upon its fair value, which is determined in reliance on the
specific objective evidence for that element. Such determination is judgmental
and is typically based on normal pricing and discounting practices for those
elements in similar arrangements.
Revenue from third-party hardware and software sales is recorded at a
gross or net amount according to certain indicators. The application of these
indicators for gross and net reporting of revenue depends on the relative facts
and circumstances and requires significant judgment.
DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is for estimated losses resulting from
the inability of our customers to make required payments. We evaluate accounts
receivable to determine if they will ultimately be collected. In performing this
evaluation, significant judgments and estimates are involved, such as past
experience, credit quality of the customer, age of the receivable balance and
current economic conditions that may affect a
AMDOCS LIMITED
OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (CONTINUED)
customer's ability to pay. If collection is not reasonably assured at the time
the transaction is consummated, we do not recognize revenue until collection
becomes reasonably assured. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. The allowance for doubtful accounts is
established through a charge to selling, general and administrative expenses.
TAX ACCOUNTING
As part of the process of preparing our consolidated financial statements
we are required to estimate our income tax expense in each of the jurisdictions
in which we operate. In the ordinary course of a global business, there are many
transactions and calculations where the ultimate tax outcome is uncertain. Some
of these uncertainties arise as a consequence of revenue sharing and
reimbursement arrangements among related entities, the process of identifying
items of revenue and expenses that qualify for preferential tax treatment and
segregation of foreign and domestic income and expense to avoid double taxation.
This process involves us estimating our actual current tax exposure together
with assessing temporary differences resulting from differing treatment of
items, such as deferred revenue, for tax and accounting differences. These
differences result in deferred tax assets and liabilities, which are included
within our consolidated balance sheet. We record a valuation allowance to reduce
our deferred tax assets to the amount of future tax benefit that is more likely
than not to be realized.
Although we believe that our estimates are reasonable and that we have
considered future taxable income and ongoing prudent and feasible tax strategies
in estimating our tax outcome and in assessing the need for the valuation
allowance, there is no assurance that the final tax outcome and the valuation
allowance will not be different than those which are reflected in our historical
income tax provisions and accruals. Such differences could have a material
effect on our income tax provision, net income and cash balances in the period
in which such determination is made.
DERIVATIVE AND HEDGE ACCOUNTING
Approximately 10% of our revenue and 35% of our operating expenses
(excluding acquisition-related charges and restructuring charges) are not
denominated in U.S. dollars or linked to the U.S. dollar. We enter into foreign
exchange forward contracts to hedge a significant portion of our foreign
currency exposure to minimize fluctuations in revenue and expenses. The majority
of our hedging arrangements are classified as cash flow hedges. Accordingly,
changes in the fair value of these forward exchange contracts are recorded in
other comprehensive Income. We estimate the fair value of such derivative
contracts by reference to forward and spot rates quoted in active markets.
Establishing and accounting for foreign exchange contracts involve
judgments, such as determining the nature of the exposure, assessing its amount
and timing, and evaluating the effectiveness of the hedging arrangement.
AMDOCS LIMITED
OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (CONTINUED)
Although we believe that our estimates are accurate and meet the
requirement of hedge accounting, actual results differ from these estimates, and
such difference could cause fluctuation of our recorded revenue and expenses.
REALIZABILITY OF LONG-LIVED ASSETS
We are required to assess the impairment of long-lived assets, tangible
and intangible, on an annual basis, and potentially more frequently if events or
changes in circumstances indicate that the carrying value may not be
recoverable. We assess the impairment based on number of factors, including
significant changes in the manner of our use of the acquired assets or the
strategy of our overall business, significant negative industry or economic
trends and significant decline in our share price for a sustained period.
Upon determination that the carrying value of a long-lived asset may not
be recoverable based upon a comparison of fair value to the carrying amount of
the asset, an impairment charge is made. We measure fair value based on a
projected future cash flow using a discount rate determined by our management to
be commensurate with the risk inherent in our current business model.
Within the context of these critical accounting policies, we are not
currently aware of any reasonably likely events or circumstances, which would
result in materially different amounts being reported.
CURRENCY FLUCTUATIONS
Approximately 90% of our revenue is in U.S. dollars or linked to the U.S.
dollar. Therefore, the dollar is our functional currency. Approximately 65% of
our operating expenses (excluding acquisition-related charges and restructuring
charges) 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 euro (ECU) and Israeli shekels. Historically, the
effect of fluctuations in currency exchange rates has had a minimal impact on
our operations. As more of our customers seek contracts that are denominated in
currencies such as the ECU and not the U.S. dollar, 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
September 30, 2002, we had substantially hedged our significant exposures in
currencies other than the U.S. dollar.
FOREIGN CURRENCY RISK
We enter into foreign exchange forward contracts to hedge most of our
foreign currency exposure. We use such contracts to hedge exposure to changes in
foreign currency exchange rates associated with revenue denominated in a foreign
currency, primarily British pounds and the ECU, and anticipated costs to be
incurred in a foreign currency, primarily Australian dollars, Canadian dollars
and Israeli shekels. We also use
AMDOCS LIMITED
OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (CONTINUED)
forward contracts to hedge the impact of the variability in exchange rates on
certain accounts receivables, denominated in British pounds and the ECU, and on
the investment in Certen convertible debentures denominated in Canadian dollars.
We seek to minimize the risk that the anticipated cash flow from sales of our
products and services and cash flow required for our expenses denominated in a
currency other than our functional currency will be affected by changes in
exchange rates. See Note 22 to our Consolidated Financial Statements included
elsewhere in this report. The following table summarizes our foreign currency
forward exchange agreements as of September 30, 2002. All the forward contracts
are expected to mature during fiscal 2003. The table below (all dollar amounts
in millions) presents the notional amounts, and fair value of the total
derivative instruments as of September 30, 2002. Notional values are calculated
based on forward rates as of September 30, 2002, U.S. dollar translated.
AS OF SEPTEMBER 30, 2002
------------------------
NOTIONAL AMOUNT
TRANSLATED TO U.S. FAIR VALUE OF
DOLLAR (*) DERIVATIVES
---------- -----------
Revenue $ 8.9 $ (0.9)
Costs (145.8) (6.7)
Balance sheet items 41.2 0.5
-------- --------
$ (95.7) $ (7.1)
======== ========
----------
(*) Positive notional amounts represent forward contracts to sell foreign
currency. Negative notional amounts represent forward contracts to buy
foreign currency.
INTEREST RATE RISK
Our interest expenses and income are sensitive to changes in interest
rates, as all of our cash reserves and borrowings, other than the Notes, are
subject to interest rate changes. Excess liquidity is invested in short-term
interest-bearing investments. Such short-term interest-bearing investments
consist primarily of treasury notes, federal agency securities, corporate bonds
and money market funds and currently bear minimal interest rate risk. As of
September 30, 2002, we had nothing outstanding on either our revolving lines of
credit or our short-term credit facilities, and $25.5 million recorded as
long-term lease obligations, which in the aggregate bear minimal interest rate
risk.
SUBSEQUENT EVENT
On November 27, 2002 we announced a series of measures designed to reduce
costs and improve productivity. As part of this plan, we will reduce our
workforce by approximately 400 positions out of a total workforce of 9,000
employees. The reductions
AMDOCS LIMITED
OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (CONTINUED)
will be from different centers around the world. In addition, we will implement
other cost reduction measures, including travel cuts and reductions in other
discretionary costs.
LITIGATION
Beginning on June 24, 2002, a number of complaints were filed by
holders of our ordinary shares against us and four of our officers and
directors, in the United States District Courts for the Eastern District of
Missouri and the Southern District of New York. The complaints allege violations
of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated
thereunder. Each plaintiff seeks to represent a putative class of all purchasers
of our ordinary shares between July 18, 2000 (or, in some of the complaints,
July 24, 2001) and June 20, 2002. The complaints generally allege that, during
that period, we and the individual defendants made false or misleading
statements, in press releases and Securities and Exchange Commission filings,
regarding among other things our future prospects, backlog, revenue, gross
margin, acquisitions and accounting practices. Each plaintiff seeks unspecified
monetary damages and other relief against all defendants. The parties in the New
York cases have stipulated to transfer them to the Eastern District of Missouri.
The court has not yet appointed a lead plaintiff. We dispute the allegations of
wrongdoing in these complaints and intend to defend ourself vigorously.
PART II - OTHER INFORMATION
Item 1. Exhibits
Exhibit No. Description
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23 Consent of Ernst & Young LLP
99.1 Amdocs Limited Press Release dated
November 6, 2002
SIGNATURE
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: December 26, 2002
EXHIBIT INDEX
Exhibit No. Description
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23 Consent of Ernst & Young LLP
99.1 Amdocs Limited Press Release dated November 6, 2002