SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended December 31, 2002
AMDOCS LIMITED
Suite 5, Tower Hill House Le Bordage
St. Peter Port, Island of Guernsey, GY1 3QT Channel Islands
Amdocs, Inc.
1390 Timberlake Manor Parkway, Chesterfield, Missouri 63017
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F
Form 20-F X FORM 40-F ____
-------
Indicate by check mark whether the registrant by furnishing the information
contained in this form is also thereby furnishing the information to the
Commission pursuant to rule 12g3-2(b) under the Securities Exchange Act of 1934.
YES ___ NO X
------
AMDOCS LIMITED
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
FOR THE QUARTER ENDED DECEMBER 31, 2002
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statement of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Unaudited Consolidated Financial Statements
Item 2. Operating and Financial Review and Prospects
PART II OTHER INFORMATION
Item 1. Exhibits and Reports on Form 6-K
SIGNATURES
EXHIBIT INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
AMDOCS LIMITED
CONSOLIDATED BALANCE SHEETS
(in U.S. dollars, unless otherwise stated)
(in thousands, except per share data)
AS OF
DECEMBER 31, SEPTEMBER 30,
------------ -------------
2002 2002
---- ----
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 572,269 $ 466,655
Short-term interest-bearing investments 555,340 581,164
Accounts receivable, net (*) 257,105 312,732
Deferred income taxes and taxes receivable 50,819 48,154
Prepaid expenses and other current assets (*) 93,879 72,196
----------- -----------
Total current assets 1,529,412 1,480,901
Equipment, vehicles and leasehold improvements, net 152,645 160,902
Deferred income taxes 41,219 37,582
Goodwill and other intangible assets, net 731,032 750,530
Other noncurrent assets (*) 111,656 110,179
----------- -----------
Total assets $ 2,565,964 $ 2,540,094
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 174,233 $ 192,129
Accrued personnel costs 85,739 86,942
Deferred revenue 149,844 149,590
Short-term portion of capital lease obligations 9,379 10,347
Deferred income taxes and taxes payable 108,589 103,315
----------- -----------
Total current liabilities 527,784 542,323
Convertible notes 445,054 445,054
Deferred income taxes 15,656 12,363
Noncurrent liabilities and other 123,001 124,079
----------- -----------
Total liabilities 1,111,495 1,123,819
----------- -----------
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;
223,442 and 223,316 issued and 215,710 and 215,583 outstanding,
respectively 3,574 3,572
Additional paid-in capital 1,818,976 1,818,345
Treasury stock (109,281) (109,281)
Accumulated other comprehensive income (loss) 5,254 (108)
Unearned compensation -- --
Accumulated deficit (264,054) (296,253)
----------- -----------
Total shareholders' equity 1,454,469 1,416,275
----------- -----------
Total liabilities and shareholders' equity $ 2,565,964 $ 2,540,094
=========== ===========
(*) See Note 4.
The accompanying notes are an integral part of these consolidated financial
statements.
2
AMDOCS LIMITED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share data)
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
2002 2001
---- ----
Revenue:
License (*) $ 20,526 $ 42,290
Service (*) 318,860 380,351
------- -------
339,386 422,641
------- -------
Operating expenses:
Cost of license 1,136 1,441
Cost of service (*) 203,986 230,142
Research and development 29,619 28,557
Selling, general and administrative (*) 51,580 53,779
Amortization of goodwill and purchased intangible
assets 5,154 56,782
Restructuring charges and in-process research and
development 9,956 30,711
------- -------
301,431 401,412
------- -------
Operating income 37,955 21,229
Interest income and other, net (*) 4,977 3,327
------- -------
Income before income taxes 42,932 24,556
Income taxes 10,733 20,222
------- -------
Net income $ 32,199 $ 4,334
======= =======
Basic earnings per share $ 0.15 $ 0.02
======= =======
Diluted earnings per share $ 0.15 $ 0.02
======= =======
Basic weighted average number of shares outstanding 215,626 222,696
======= =======
Diluted weighted average number of shares outstanding 217,139 225,090
======= =======
(*) See Note 4.
The accompanying notes are an integral part of these consolidated financial
statements.
3
AMDOCS LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
(in thousands)
Accumulated
Ordinary Shares Additional Other Total
-------------------- Paid-in Treasury Comprehensive Accumulated Shareholders'
Shares Amount Capital Stock Income (Loss) Deficit Equity
------ ------ ------- ----- ------------- ------- ------
BALANCE AS OF SEPTEMBER 30,
2002 215,583 $3,572 $1,818,345 $(109,281) $ (108) $(296,253) $ 1,416,275
Comprehensive income:
Net income -- -- -- -- -- 32,199 32,199
Unrealized income on
foreign currency
hedging contracts, net
of $2,113 tax -- -- -- -- 5,468 -- 5,468
Decrease in unrealized
income on cash
equivalents and
short-term interest-
bearing investments,
net of $(319) tax -- -- -- -- (106) -- (106)
------- ------ ---------- --------- ------- --------- ------------
Comprehensive income 37,561
------- ------ ---------- --------- ------- --------- ------------
Employee stock options
exercised 127 2 605 -- -- -- 607
Tax benefit of stock options
exercised -- -- 8 -- -- -- 8
Expense related to vesting
of stock options -- -- 18 -- -- -- 18
------- ------ ---------- --------- ------- --------- ------------
BALANCE AS OF DECEMBER 31,
2002 215,710 $3,574 $1,818,976 $(109,281) $ 5,254 $(264,054) $ 1,454,469
======= ====== ========== ========= ======= ========= ============
As of December 31, 2002 and September 30, 2002, accumulated other comprehensive
income (loss) is comprised of unrealized gain (loss) on derivatives, net of tax,
of $248 and $(5,220), respectively, and unrealized gain on cash equivalents and
short-term interest-bearing investments, net of tax, of $5,006 and $5,112,
respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
4
AMDOCS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
2002 2001
---- ----
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 32,199 $ 4,334
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization 24,018 77,587
In-process research and development -- 17,400
Loss on sale of equipment 241 88
Deferred income taxes (2,188) (5,267)
Tax benefit of stock options exercised 8 253
Unrealized other comprehensive income 7,156 1,536
Net changes in operating assets and liabilities, net of amounts acquired:
Accounts receivable 55,532 (14,542)
Prepaid expenses and other current assets (22,510) (2,239)
Other noncurrent assets (2,477) (2,925)
Accounts payable and accrued expenses (12,019) 47,763
Deferred revenue 254 (22,271)
Income taxes payable 2,659 310
Noncurrent liabilities and other 949 6,044
--------- ---------
Net cash provided by operating activities 83,822 108,071
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from sale of equipment, vehicles and leasehold
improvements 496 368
Payments for purchase of equipment, vehicles, leasehold
improvements and other (13,251) (13,740)
Proceeds from sale (purchase) of short-term interest-
bearing investments, net 25,824 (289,533)
Investment in noncurrent assets -- (13,543)
Reimbursement of cash in (cash paid for) acquisition 11,111 (210,900)
--------- ---------
Net cash provided by (used in) investing activities 24,180 (527,348)
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from employee stock options exercised 607 2,038
Principal payments on capital lease obligations (2,995) (2,897)
--------- ---------
Net cash used in financing activities (2,388) (859)
--------- ---------
Net increase (decrease) in cash and cash equivalents 105,614 (420,136)
Cash and cash equivalents at beginning of period 466,655 872,998
--------- ---------
Cash and cash equivalents at end of period $ 572,269 $ 452,862
========= =========
SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for:
Income taxes, net of refunds $ 10,195 $ 22,998
Interest 5,044 5,429
NON CASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations of $0 and $493 were incurred during the three months
ended December 31, 2002 and 2001, respectively, when the Company (as defined
below) entered into lease agreements for the purchase of fixed assets.
The accompanying notes are an integral part of these consolidated financial
statements.
5
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
1. BASIS OF PRESENTATION
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 unaudited consolidated financial statements of the Company have been
prepared in accordance with accounting principles generally accepted in the
United States ("GAAP"). In the opinion of the Company's management, all
adjustments considered necessary for a fair presentation of the unaudited
interim consolidated financial statements have been included herein and are of a
normal recurring nature.
The preparation of financial statements during interim periods requires
management to make numerous estimates and assumptions that impact the reported
amounts of assets, liabilities, revenue and expenses. Estimates and assumptions
are reviewed periodically and the effect of revisions is reflected in the
results of operations of the interim periods in which changes are determined to
be necessary.
The results of operations for the interim periods presented herein are not
necessarily indicative of the results to be expected for the full fiscal year.
These statements do not include all information and footnotes necessary for a
complete presentation of financial position, results of operations and cash
flows in conformity with GAAP. These statements should be read in conjunction
with the Company's consolidated financial statements for the fiscal year ended
September 30, 2002 set forth in the Company's Annual Report on Form 20-F filed
March 24, 2003 with the Securities and Exchange Commission.
2. ADOPTION OF NEW ACCOUNTING STANDARDS
Goodwill and Purchased Intangible Assets
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. Goodwill impairment is deemed to exist if the net
book value of a reporting unit exceeds its estimated fair value. Certain
intangible assets will continue to be amortized over their useful lives. Certain
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 adopted SFAS No. 142. Subsequent to
the adoption of the new rules, the Company performed the transitional tests of
goodwill and intangible assets recorded as of October 1, 2002. Thereafter, a
periodic impairment test will be performed at least annually. As discussed in
Note 1 above, the Company and its subsidiaries operate in one operating segment,
and its reporting unit is consistent with that one operating segment. In
calculating the fair value of the reporting unit, the Company used a discounted
cash flow methodology. There was no impairment of goodwill upon adoption of SFAS
142. The Company will perform its annual impairment review during the fourth
quarter of each year, commencing in the fourth quarter of fiscal 2003.
6
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
Prior to fiscal 2003, goodwill was amortized using the straight-line
method over its estimated period of benefit. Net income and earnings per share
for the three months ended December 31, 2001 adjusted to exclude amortization of
goodwill and workforce-in-place expenses, net of tax, is as follows:
THREE MONTHS
ENDED
DECEMBER 31,
------------
2002 2001
---- ----
Reported net income $ 32,199 $ 4,334
Add back: goodwill and
workforce-in-place amortizations -- 51,137
Attributable tax effect -- (679)
---------- --------
Adjusted net income $ 32,199 $ 54,792
========== ========
Adjusted basic earnings per share $ 0.15 $ 0.25
========== ========
Adjusted diluted earnings per share $ 0.15 $ 0.24
========== ========
The following table represents details of amortization expense of
purchased intangible assets as reported in the consolidated statements of
income:
THREE MONTHS
ENDED
DECEMBER 31,
------------
2002 2001
---- ----
Cost of license $ 820 $1,116
Amortization of purchased intangible
assets 5,154 5,645
------ ------
Total $5,974 $6,761
====== ======
The following table presents details of the Company's total purchased
intangible assets:
ACCUMULATED
GROSS AMORTIZATION NET
-------- ------------ -------
DECEMBER 31, 2002
Core technology $ 44,535 $(38,393) $ 6,142
Customer arrangements 36,658 (16,892) 19,766
Intellectual property rights and
purchased computer software 47,223 (34,436) 12,787
-------- -------- -------
Total $128,416 $(89,721) $38,695
======== ======== =======
SEPTEMBER 30, 2002
Core technology $ 44,535 $(36,718) $ 7,817
Customer arrangements 36,658 (13,413) 23,245
Intellectual property rights and
purchased computer software 47,223 (33,616) 13,607
-------- -------- -------
Total $128,416 $(83,747) $44,669
======== ======== =======
7
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
The estimated future amortization expense of purchased intangible assets
as of December 31, 2002 was as follows:
AMOUNT
------
FISCAL YEAR:
2003 (remaining 9 months) $ 16,132
2004 13,384
2005 4,157
2006 2,620
2007 2,402
Guarantor's Accounting and Disclosure Requirements for Guarantees
In November 2002 the FASB issued FASB Interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtness of Others" ("FIN 45"). FIN 45 requires that at the
inception of certain types of guarantees, the guarantor must disclose and
recognize a liability for the fair value of the obligation it assumes under the
guarantee. The initial recognition and measurement of FIN 45 is effective for
guarantees issued or modified after December 31, 2002. The additional disclosure
requirements of FIN 45 are effective for interim and annual periods ending after
December 15, 2002, and are applicable to certain of the Company's guarantees
issued before December 31, 2002.
The Company is a party to an agreement to indemnify one of its customers
for any withholding tax that might be required under the customer's local tax
laws from payments made to the Company. As of December 31, 2002 and September
30, 2002, the maximum potential amount for future exposure of the Company's
guarantee under the scope of FIN 45 issued before December 31, 2002 was $4,717.
The Company does not believe that the outcome of this guarantee will have a
material effect on the Company's results.
The Company generally sells its ClarifyCRM products with a limited
warranty for a period of 90 days. The Company accrues for warranty costs based
on historical trends in product failure. Based on the Company's experience, no
material warranty services have been required and as a result, the company does
not accrue for product warranty liability.
3. RECENT ACCOUNTING PRONOUNCEMENTS
Costs Associated with Exit or Disposal Activities
In June 2002 the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS 146 requires that a liability for costs
associated with an exit or disposal activity, including restructuring
activities, be recognized and measured at fair value when the liability is
incurred, or for certain one-time employee termination costs over a future
service period. Previously, a liability for an exit cost was recognized when a
company committed to an exit plan. As a result, SFAS 146 may affect the timing
of amounts recognized for future restructuring activities. SFAS 146 is effective
for exit or disposal activities that were initiated after December 31, 2002.
Accounting for Stock-Based Compensation
In June 2002 the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement No.
123". SFAS 148 amends SFAS 123 to provide alternative methods of transition for
a voluntary change to the fair value-based method of accounting for
8
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
stock-based employee compensation. In addition, SFAS 148 amends the disclosure
requirements of SFAS 123 to require more prominent disclosures in both annual
and interim financial statements regarding the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The alternative methods of transition of SFAS 148 are effective for
fiscal years ending after December 15, 2002. The disclosure provision of SFAS
148 is effective for interim periods beginning after December 15, 2002. The
Company follows APB 25 in accounting for its employee stock options.
4. RELATED PARTY TRANSACTIONS
The following related party balances are included in the balance sheets:
AS OF
DECEMBER 31, SEPTEMBER 30,
------------ -------------
2002 2002
---- ----
Accounts receivable, including unbilled of $0 and $100,
respectively $35,976 $55,458(1)
Prepaid expenses and other current assets (2) 2,175 1,550
Other noncurrent assets (3) 48,837 48,453
(1) Includes balances with SBC Communications, Inc. ("SBC"). As of December
31, 2002, SBC is no longer a principal shareholder of the Company,
according to SFAS 57, "Related Party Disclosures", and thus is not a
related party. As of December 31, 2002, SBC is not included in the
Company's related party balances.
(2) Consists of accrued interest receivable on convertible debentures issued
to the Company by Certen Inc. ("Certen"), a company formed by Bell Canada
and the Company in January 2001.
(3) Consists of an investment by the Company in equity and convertible
debentures of Certen. 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 currency in which all investments for the
Certen transaction are denominated. The majority of the Company's exposure
to currency fluctuation with respect to the convertible debenture
component of this investment has been hedged.
The Company licenses software and provides computer systems integration
and related services to Certen. The following related party revenue is included
in the statements of operations:
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
2002 2001(*)
---- -------
Revenue:
License $ 2,052 $ 2,930
Service 25,046 95,664
(*) Including license and service revenue to SBC. The transactions above
include SBC as a related party for the three months ended December 31,
2001. For the three months ended December 31, 2002, SBC is not included in
the Company's related party transactions.
The following related party expenses are included in the statements of
operations:
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
2002 2001
-------------- -------------
Operating expenses (1):
Cost of service $-- $ 461
Selling, general and administrative -- 98
Interest income (loss) and other, net(2) 639 (123)
(1) In the three months ended December 31, 2001, consists of lease fees and
miscellaneous support services purchased from SBC's affiliates by the
Company.
(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 $1,009 and $(123) for the
three-month periods ended December 31, 2002 and 2001, respectively.
9
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
5. ACCOUNTS RECEIVABLE
Accounts receivable, net consists of the following:
AS OF
DECEMBER 31, SEPTEMBER 30,
------------ -------------
2002 2002
---- ----
Accounts receivable - billed $ 262,767 $ 314,828
Accounts receivable - unbilled 24,422 24,144
Less - allowances (30,084) (26,240)
--------- ---------
Accounts receivable, net $ 257,105 $ 312,732
========= =========
6. COMPREHENSIVE INCOME
Comprehensive income represents the change in shareholders' equity during
a period from transactions and other events and circumstances from nonowner
sources. It includes all changes in equity except those resulting from
investments by owners and distributions to owners.
The following table sets forth the reconciliation from net income to
comprehensive income for the following periods:
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
2002 2001
---- ----
Comprehensive income:
Net income $ 32,199 $ 4,334
Other comprehensive income:
Unrealized income on derivative instruments, net of tax 5,468 1,135
Unrealized loss on short-term interest-bearing investments,
net of tax (106) (211)
-------- -------
Comprehensive income $ 37,561 $ 5,258
======== =======
7. INCOME TAXES
The provision for income taxes for the following periods consisted of:
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
2002 2001
---- ----
Current $ 12,921 $ 25,489
Deferred (2,188) (5,267)
-------- --------
$ 10,733 $ 20,222
======== ========
The effective income tax rate from continuing operations varied from the
statutory Guernsey tax rate as follows for the following periods:
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
2002 2001
---- ----
Statutory Guernsey tax rate 20% 20%
Guernsey tax-exempt status (20) (20)
Foreign taxes 25 28
-- --
Income tax rate before effect of acquisition-related costs and 25 28
restructuring charges
Effect of amortization of goodwill and purchased intangible assets -- 21
-- --
Income tax rate before in-process research and development and
restructuring charges 25 49
Effect of in-process research and development and restructuring -- 33
charges
-- --
Effective income tax rate 25% 82%
== ==
10
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
As a Guernsey corporation with tax-exempt status, the Company's
overall effective tax rate is attributable solely to foreign taxes and for
fiscal year 2003 is expected to be approximately 25%. Effective October 1,
2002, following the adoption of FASB 142, the Company no longer amortizes
goodwill resulting from acquisitions. See Note 2 above. As a result, the
non tax-deductible goodwill amortization no longer affects the Company's
effective tax rate.
In the three months ended December 31, 2001, the Company incurred
non-cash charges related to the amortization of goodwill and purchased
intangible assets and in-process research and development in connection
with acquisitions and a restructuring charge. Since a significant portion
of such costs and charges is attributable to amortization of goodwill,
much of which is not tax deductible, the effective tax rate in the three
months ended December 31, 2001 was adversely affected. Excluding the
impact of these items, the Company's overall effective tax rate would have
been 28% for the three months ended December 31, 2001.
8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
THREE MONTHS ENDED
DECEMBER 31,
---------------------
2002 2001
-------- --------
Numerator:
Net income $ 32,199 $ 4,334
======== ========
Denominator:
Denominator for basic earnings per share --
weighted average number of shares outstanding (*) 215,626 222,696
Effect of dilutive stock options granted 1,513 2,394
-------- --------
Denominator for dilutive earnings per share -- adjusted
weighted average shares and assumed conversions (*) 217,139 225,090
======== ========
Basic earnings per share $ 0.15 $ 0.02
======== ========
Diluted earnings per share $ 0.15 $ 0.02
======== ========
(*) The weighted average number of shares outstanding includes
exchangeable shares held by shareholders of Amdocs Canada, Inc
(formerly Solect Technology Group Inc. ("Solect")) pursuant to the
Company's acquisition of Solect in April 2000, which are
exchangeable for our Ordinary Shares on a one-for-one basis.
The effect of the 2% Convertible Notes due June 1, 2008 issued by
the Company in May, 2001 (the "Notes") on diluted earnings per share was
anti-dilutive for the three months ended December 31, 2002 and 2001, and
therefore was not included in the calculation above.
9. ACQUISITION
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.
The purchase price was subject to final price adjustments that were
settled in October 2002 and resulted in an $11,111 reduction of the
purchase price in the three months ended December 31, 2002. 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 income, commencing on
November 29, 2001.
11
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
The following is the final allocation of the purchase price and
deferred tax liability:
Net liabilities acquired $ (9,575)
Core technology 13,400
Customer arrangements 34,800
In-process research and development 17,400
Deferred tax liability (2,871)
Goodwill 147,735
---------
$ 200,889
=========
Set forth below is the unaudited pro forma revenue, operating
income, net income and earnings per share as if Clarify had been acquired
as of October 1, 2001, excluding the write-off of purchased in-process
research and development:
THREE MONTHS ENDED
DECEMBER 31,
------------------
2001
------------------
Revenue $442,641
Operating income 27,030
Net income 11,784
Basic earnings per share 0.05
Diluted earnings per share 0.05
10. OPERATIONAL EFFICIENCY AND COST REDUCTION PROGRAM
On November 27, 2002 the Company announced a series of measures
designed to reduce costs and improve productivity. In the first quarter of
fiscal 2003, the Company recorded a charge of $9,956, consisting primarily
of employee separation costs in connection with the termination of the
employment of approximately four hundred positions of software and
information technology specialists and administrative professionals and
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 Company will pay substantially all of the remaining
accrual balance of the cost reduction program in the second quarter of
fiscal 2003. The employee terminations occurred at various locations
around the world. In addition, the Company implemented other cost
reduction measures, including travel cuts and reductions in other
discretionary costs.
In the fourth quarter of fiscal 2002, the Company recorded a charge
of $20,919, consisting primarily of employee separation costs in
connection with the termination of the employment of approximately one
thousand positions of software and information technology specialists and
administrative professionals and 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 Company paid
most of the remaining accrual balance of the cost reduction program in the
first quarter of fiscal 2003.
In the first quarter of fiscal 2002, 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 restructuring 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.
12
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
All of the aforementioned charges are included in " restructuring
charges and in-process research and development".
As of December 31, 2002, the remaining restructuring expense
reserves were $19,131. The remaining employee separation costs are
expected to be paid out through the second 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 December 31, 2002, particularly if actual sublease income is
significantly different from current estimates.
A summary of restructuring activities along with respective
remaining reserves follows:
EMPLOYEE
SEPARATION ASSET
COSTS FACILITIES WRITE-OFFS OTHER TOTAL
---------- ---------- ---------- -------- --------
Balance as of October 1,
2002 $ 3,357 $ 11,087 $ -- $ 440 $ 14,884
Charge in first quarter of
fiscal 2003: 3,837 4,022 1,829 268 9,956
Cash payments (2,679) (1,061) -- (140) (3,880)
Non-cash -- -- (1,829) -- (1,829)
-------- -------- -------- -------- --------
Balance as of December 31,
2002 $ 4,515 $ 14,048 $ -- $ 568 $ 19,131
======== ======== ======== ======== ========
11. 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 recently
appointed a lead plaintiff. The Company disputes the allegations of
wrongdoing in these complaints and intends to defend itself vigorously.
13
ITEM 2. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
FORWARD LOOKING STATEMENTS
This section 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 section that are not statements of historical fact also may be
forward-looking statements. Forward-looking statements are not guarantees of
future performance, and involve risks, uncertainties and assumptions that may
cause our actual results to differ materially from the expectations 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; consolidation within the industries in which our
customers operate; the loss of a significant customer; changes in the
telecommunications regulatory environment; 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; and acts of war or terrorism. For a
discussion of these important factors, please read the information set forth
under the caption "Risk Factors" in the Form 20-F for fiscal 2002 that we have
filed with the United States Securities and Exchange Commission ("SEC").
INTRODUCTION
In this section, we discuss the general financial condition and the
results of operations for Amdocs and its subsidiaries including:
- the factors affect our business,
- our revenue and costs for the three months ended December 31, 2002
and 2001,
- the reasons why such revenue and costs were different from period to
period,
- 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 three months ended December 31, 2002 and
2001, and
- the sources of our cash to pay for future capital expenditures and
possible acquisitions.
In this section, we also analyze and explain the changes in the specific
line items in our consolidated statements of income between the three-month
periods ended December 31, 2002 and 2001. You should read this section in
conjunction with our consolidated financial statements.
14
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, 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 and maintenance services. In addition, we offer 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.
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 significant portion of our revenue being
subject to the percentage of completion accounting method, the size and timing
of customer projects and our progress in completing such projects may
significantly affect our annual and quarterly operating results.
Our business is subject to the effects of general global economic
conditions and, in particular, market conditions in the communications industry.
As a result of the slowdown in the communication industry, the market value,
financial results and prospects, and capital spending levels of communications
companies have declined or degraded.
15
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 financial pressure on
operating expenses and overall reductions in the capital investment budgets of
many communications service providers have led to fewer new contracts, as well
as smaller initial spending commitments and reduced discretionary spending under
our contracts with some of our customers.
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 three months ended December 31,
2002 was $339.4 million, compared to $422.6 million in the three months ended
December 31, 2001.
License and service revenue from the sale of CC&B Systems amounted to
$298.7 million in the three months ended December 31, 2002 compared to $380.5
million in the three months ended December 31, 2001. In the three months ended
December 31, 2002, license and service revenue from the sale of CC&B Systems
represented 88.0% of our total revenue, compared to 90.0% in the three months
ended December 31, 2001.
We believe that we are a leading global provider of CC&B Systems. We
provide a broad set of CC&B Systems, with proven functionality and scalability,
accompanied by a comprehensive range of support services.
We believe that the demand for our CC&B Systems 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,
- 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.
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 for the three months ended
December 31, 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 of January 31, 2003 we expect that total
revenue for the second quarter of fiscal 2003 to be in the range of $333 million
to $340 million. As of January 31, 2003 we had no clear indication for the
second half of fiscal 2003. Accordingly, at this point, we cannot predict
whether revenue levels will continue to deteriorate or if they 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 revenue from the sale of Directory Systems amounted to
$40.7 million in the three months ended December 31, 2002 compared to $42.1
million in the three months ended December 31, 2001.
16
In the three months ended December 31, 2002 license and service revenue from the
sale of Directory Systems represented 12.0% of our total revenue, compared to
10.0% in the three months ended December 31, 2001.
We believe that we are a leading provider of Directory Systems in most of
the markets that we serve. In fiscal 2003, we expect that our revenue from
Directory Systems will be slightly higher than in fiscal 2002.
OPERATIONAL EFFICIENCY AND COST REDUCTION PROGRAM
In November 2002 we announced a series of measures designed to reduce
costs and improve productivity. In the first quarter of fiscal 2003, we recorded
a charge of $10.0 million, consisting primarily of employee separation costs in
connection with the termination of the employment of approximately four hundred
positions of software and information technology specialists and administrative
professionals and 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 will pay substantially all of the remaining
accrual balance of the cost reduction program in the second quarter of fiscal
2003. The employee terminations occurred at various locations around the world.
In addition, we implemented other cost reduction measures, including travel cuts
and reductions in other discretionary costs.
We believe that the implementation of this cost reduction program will
create cost savings of approximately $8 million each quarter on an ongoing basis
compared to the expense level in the first quarter of fiscal 2003. This cost
savings is in addition to the quarterly cost savings already achieved as a
result of cost reduction measures implemented in fiscal 2002. During the first
quarter of fiscal 2003 we notified all affected employees of their termination.
However, these individuals remained on our payroll as our employees through the
end of the first quarter. As a result, the cost savings in the first quarter of
fiscal 2003 were partial.
This cost reduction program is in addition to the measures implemented
during the first and fourth quarters of fiscal 2002. In the fourth quarter of
2002, we recorded a charge of $20.9 million, consisting primarily of employee
separation costs in connection with the termination of the employment of
approximately one thousand positions of software and information technology
specialists and administrative professionals and for the write-off of leasehold
improvements and rent obligations. In the first quarter of fiscal 2002, we
consolidated our Stamford, Connecticut data center into our Champaign, Illinois
facility, and closed the Stamford facility. As a direct result of this closure,
we recorded a restructuring 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.
All of the aforementioned charges are included in "restructuring charges
and in-process research and development".
ADOPTION OF NEW ACCOUNTING STANDARDS
Goodwill and Purchased Intangible Assets
In June 2001, the Financial Accounting Standards Board 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. Goodwill impairment is deemed to exist if the net
book value of a reporting unit exceeds its estimated fair value. Certain
intangible assets will continue to be amortized over their useful lives. Other
intangible assets, such as workforce-in-place, were reclassified to goodwill,
according to SFAS No. 141's new definition of intangible assets.
Effective October 1, 2002 we adopted SFAS No. 142. Subsequent to the
adoption of the new rules, we performed the transitional impairment tests of
goodwill and intangible assets recorded as of October 1, 2002.
17
Thereafter, a periodic impairment test will be performed at least annually. As
discussed in Note 1 to the consolidated financial statements included in this
document, Amdocs and its subsidiaries operate in one operating segment, and our
reporting unit is consistent with that one operating segment. In calculating the
fair value of the reporting unit, we used a discounted cash flow methodology.
There was no impairment of goodwill upon adoption of SFAS 142. We will perform
our annual impairment review during the fourth quarter of each year, commencing
in the fourth quarter of fiscal 2003.
Guarantor's Accounting and Disclosure Requirements for Guarantees
In November 2002 the FASB issued FASB Interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtness of Others" ("FIN 45"). FIN 45 requires that at the
inception of certain types of guarantees, the guarantor must disclose and
recognize a liability for the fair value of the obligation it assumes under the
guarantee. The initial recognition and measurement of FIN 45 is effective for
guarantees issued or modified after December 31, 2002. The additional disclosure
requirements of FIN 45 are effective for interim and annual periods ending after
December 15, 2002, and are applicable to certain of our guarantees issued before
December 31, 2002.
We are a party to an agreement to indemnify one of our customers for any
withholding tax that might be required under the customer's local tax laws from
payments made to us. As of December 31, 2002 and September 30, 2002, the maximum
potential amount for our future exposure guarantee under the scope of FIN 45
issued before December 31, 2002 was $4.7 million. We do not believe the outcome
of this guarantee will have a material effect on our results.
We generally sell our ClarifyCRM products with a limited warranty for a
period of 90 days. We accrue for warranty costs based on historical trends in
product failure. Based on our experience, no material warranty services have
been required and as a result, we do not accrue for product warranty liability.
RECENT ACCOUNTING PRONOUNCEMENTS
Costs Associated with Exit or Disposal Activities
In June 2002 the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS 146 requires that a liability for costs
associated with an exit or disposal activity, including restructuring
activities, be recognized and measured initially at fair value only when the
liability is incurred, or for certain one-time employee termination costs over a
future service period. Previously, a liability for an exit cost was recognized
when a company committed to an exit plan. As a result, SFAS 146 may affect both
the timing and amounts of the recognition of future restructuring costs. SFAS
146 is effective for exit or disposal activities that were initiated after
December 31, 2002.
Accounting for Stock-Based Compensation
In June 2002 the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement No.
123". SFAS 148 amends SFAS 123 to provide alternative methods of transition for
a voluntary change to the fair value-based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require more prominent disclosures in both annual and interim
financial statements regarding the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
alternative methods of transition of SFAS 148 are effective for fiscal years
ending after December 15, 2002. The disclosure provision of SFAS 148 is
effective for interim periods beginning after December 15, 2002. We follow APB
25 in accounting for our employee stock options.
18
ACQUISITION
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. These have included our acquisitions of
International Telecommunications Data Systems, Inc. and Solect Technology Group
Inc., which occurred prior to the periods of the financial statements included
in this report.
On November 28, 2001, we purchased from Nortel Networks Corporation
substantially all of the assets of its Clarify business, a leading provider of
CRM software to communications companies and other enterprise sectors. The
purchase price was subject to final price adjustments that were settled in
October 2002 and resulted in an $11.1 million reduction of the purchase price in
the three months ended December 31, 2002. After making the final purchase price
adjustments, the total purchase price was $200.9 million. The fair market value
of Clarify's assets and liabilities has been included in our balance sheet and
the results of Clarify's operations are included in our consolidated statements
of income, commencing on November 29, 2001.
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 $29.6
million and $28.6 million in the three months ended December 31, 2002 and 2001,
respectively, representing 8.7% and 6.8%, respectively, of our revenue in these
periods. We believe that our research and development efforts are a key element
of our strategy and are essential to our 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. In the
near-term we intend to continue to make substantial investments in our research
and development activities. We believe that this ongoing investment will
position us to capitalize on opportunities that should result from the
anticipated recovery and renewed growth in the communications industry.
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.
19
RESULTS OF OPERATIONS
The following table sets forth for the three months ended December 31,
2002 and 2001 certain items in our consolidated statements of income reflected
as a percentage of total revenue:
THREE MONTHS ENDED DECEMBER 31,
--------------------------------------
2002 2001 2002 2001
---------------- ----------------
PRO FORMA (*) AS REPORTED
---------------- ----------------
Revenue:
License 6.0% 10.0% 6.0% 10.0%
Service 94.0 90.0 94.0 90.0
----- ----- ----- -----
100.0 100.0 100.0 100.0
----- ----- ----- -----
Operating expenses:
Cost of license 0.3 0.3 0.3 0.3
Cost of service 60.2 54.5 60.2 54.5
Research and development 8.7 6.8 8.7 6.8
Selling, general and administrative 15.2 12.7 15.2 12.7
Amortization of goodwill and purchased
intangible assets -- -- 1.5 13.4
Restructuring charges and in-process
research and development -- -- 2.9 7.3
----- ----- ----- -----
84.4 74.3 88.8 95.0
----- ----- ----- -----
Operating income 15.6 25.7 11.2 5.0
Interest income and other, net 1.5 0.8 1.5 0.8
----- ----- ----- -----
Income before income taxes 17.1 26.5 12.7 5.8
Income taxes 4.3 7.4 3.2 4.8
----- ----- ----- -----
Net income 12.8% 19.1% 9.5% 1.0%
===== ===== ===== =====
(*) 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 purchased intangible
assets, (ii) restructuring charges related to cost reduction
programs and the consolidation of data centers (iii) for the three
months ended December 31, 2001 only, amortization of goodwill, (iv)
for the three months ended December 31, 2001 only, purchased
in-process research and development attributable to the acquisition
of Clarify and (v) all related tax effects related to the above in
all respective periods.
THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
REVENUE. Total revenue for the three months ended December 31, 2002 was
$339.4 million, a decrease of $83.3 million, or 19.7%, over the three months
ended December 31, 2001. The decrease in revenue was due to the continued
slowdown in customer buying decisions, stemming from overall reductions in the
capital investment budgets of many communications service providers.
As of January 31, 2003 we believe that past market conditions will result
in softening revenues throughout the first half of fiscal 2003, although the
level of decline is expected to diminish in the second quarter. As a result, we
expect revenue for the second quarter ending March 31, 2003 to be in the range
of $333 million to $340 million.
License revenue decreased from $42.3 million in the three months ended
December 31, 2001 to $20.5 million during the three months ended December 31,
2002, a decrease of 51.5%, and service revenue decreased 16.2% from $380.4
million in the three months ended December 31, 2001 to $318.9 million in the
three months ended December 31, 2002. The decrease in license revenue is
attributable primarily to a reduction in capital investments by our
telecommunications customers, which resulted in our obtaining fewer new
contracts than expected and smaller than expected initial spending commitments
under contracts with some of our customers. The decrease in service revenue is
attributable, in part, to reduced discretionary spending under our contracts
with some of our customers in the first quarter of fiscal 2003.
20
The decline in our overall revenue in the first quarter of fiscal 2003 was
primarily attributable to a decrease in revenue from CC&B Systems. Total CC&B
Systems revenue for the three months ended December 31, 2002 was $298.7 million,
a decrease of $81.8 million, or 21.5%, over the three months ended December 31,
2001. The demand for our CC&B Systems is primarily driven by the need for
communications companies to continue to upgrade their customer care and billing,
CRM software and order management systems. Because many communications companies
are reducing or delaying expenditures on system upgrades as a result of the
current economic slowdown, the demand for our CC&B Systems and our CC&B revenue
were significantly lower during the three months ended December 31, 2002.
Approximately $16.2 million of our CC&B Systems revenue for the three months
ended December 31, 2002 is attributable to customers other than communications
service providers. Although our business is not focused on such
non-communications service provider customers, we believe that revenue from such
customers will remain relatively stable over time.
Revenue from Directory Systems was $40.7 million for the three months
ended December 31, 2002, an increase of $1.4 million, or 3.3%, over the three
months ended December 31, 2001. The increase is attributable primarily to
extensions of agreements with and additional services rendered to existing
customers.
In the three months ended December 31, 2002, revenue from customers in
North America, Europe and the rest of the world accounted for 62.0%, 30.1% and
7.9%, respectively, compared to 61.3%, 28.3% and 10.4%, respectively, for the
three months ended December 31, 2001. The decline in revenue from customers in
the rest of the world was attributable primarily to a reduction in the activity
from existing customers more than in the North American and European activities,
in the first quarter of fiscal 2003.
COST OF LICENSE. Cost of license for the three months ended December 31,
2002 was $1.1 million, compared to $1.4 million cost of license for the three
months ended December 31, 2001. Cost of license mainly includes amortization of
purchased computer software and intellectual property rights.
COST OF SERVICE. Cost of service for the three months ended December 31,
2002 was $204.0 million, a decrease of $26.2 million, or 11.4%, over the cost of
service of $230.2 million for the three months ended December 31, 2001. As a
percentage of revenue, cost of service increased to 60.2% in the three months
ended December 31, 2002 from 54.5% in the three months ended December 31, 2001.
The decrease in cost of service is attributable to the cost reduction programs
that we implemented in fiscal 2002 and in the first quarter of fiscal 2003.
However, although our cost of service decreased in the first quarter of fiscal
2003, our cost reductions were proportionally less than the decrease in our
service revenue, in part because the effects of some of our cost reduction
measures will be realized over time. We took additional steps to decrease our
costs and increase our gross margin. See the discussion above under the caption
"Operational Efficiency and Cost Reduction Program".
RESEARCH AND DEVELOPMENT. Research and development expense was primarily
comprised of compensation expense attributed to research and development
activities, either in conjunction with customer projects or as part of our
internal product development program. In the three months ended December 31,
2002, research and development expense was $29.6 million, or 8.7% of revenue,
compared with $28.6 million, or 6.8% of revenue, in the three months ended
December 31, 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 decreased by 4.1% to
$51.6 million, or 15.2% of revenue, in the three months ended December 31, 2002
from $53.8 million, or 12.7% of revenue, in the three months ended December 31,
2001. The decrease in selling, general and administrative expense is
attributable to the cost reduction programs that we implemented in fiscal 2002
and in the three months ended December 31, 2002. However, although our selling,
general and administrative expense decreased in the first quarter of fiscal
2003, our revenues decreased by a larger percentage than selling, general and
administrative expense, resulting in an increase of our selling, general and
administrative expense as a percentage of revenue in the first quarter of fiscal
2003.
21
AMORTIZATION OF GOODWILL AND PURCHASED INTANGIBLE ASSETS. Effective as of
October 1, 2002, we adopted SFAS No. 142 and goodwill related to our
acquisitions is no longer amortized. Instead, any such goodwill is subject only
to periodic impairment tests. See the discussion above under the caption
"Adoption of New Accounting Standards". Amortization of goodwill for the three
months ended December 31, 2001 was $51.1 million. Amortization of purchased
intangible assets for the three months ended December 31, 2002 and 2001 was $5.2
million and $5.6 million, respectively.
RESTRUCTURING CHARGES AND IN-PROCESS RESEARCH AND DEVELOPMENT.
Restructuring charges and in-process research and development in the three
months ended December 31, 2002 consisted of the additional cost reduction
program we implemented during the first quarter of 2003. See discussion above
under the caption "Operational Efficiency and Cost Reduction Program".
Restructuring charges and in-process research and development in the three
months ended December 31, 2001 consisted of a one-time charge of $17.4 million
related to the Clarify transaction for write-off of purchased in-process
research and development, and a restructuring charge of $13.3 million related to
the consolidation of data centers and the resulting closure of our Stamford,
Connecticut facility.
OPERATING INCOME. Operating income in the three months ended December 31,
2002, was $38.0 million, compared to $21.2 million in the three months ended
December 31, 2001, an increase of 78.8%. The increase is attributable primarily
to our adoption of SFAS No. 142, which resulted in no amortization of goodwill
in the three months ended December 31, 2002, and the in-process research and
development charge related to the Clarify acquisition, which was included only
in the three months ended December 31, 2001. Pro forma operating income for the
three months ended December 31, 2002, excluding acquisition-related charges and
restructuring charges, was $53.1 million, or 15.6% of revenue, compared to
$108.7 million, or 25.7% of revenue, for the three months ended December 31,
2001, a decrease of 51.2%. The decrease in our pro forma operating income was
due to a decrease in our revenue in the three months ended December 31, 2002,
caused by a significant slowdown in our market, which was not offset by a
corresponding decrease in our operating costs.
INTEREST INCOME AND OTHER, NET. In the three months ended December 31,
2002, interest income and other, net, was $5.0 million, an increase of $1.7
million over the three months ended December 31, 2001. The increase in interest
income and other, net, is attributable to an increase in interest income from
our investments, a decrease in interest expenses due to the reduction in capital
lease agreements, changes in exchange rates of currencies other than the dollar
and others. Although we hedge significant exposures in currencies other than the
dollar, the currency fluctuations partially affect our results.
INCOME TAXES. Income taxes in the three months ended December 31, 2002
were $10.7 million on income before income taxes of $42.9 million. Our effective
tax rate in the three months ended December 31, 2002 was 25%. As a result of the
adoption of SFAS No. 142 we no longer amortize goodwill resulting from
acquisitions, thus the non tax-deductible goodwill amortization no longer
affects our effective tax rate. In the three months ended December 31, 2001,
income taxes were $20.2 million on income before taxes of $24.6 million. The pro
forma effective tax rate for the three months ended December 31, 2001, excluding
acquisition-related charges and restructuring charge, was 28%. See discussion
below under the caption "Effective Tax Rate".
NET INCOME. Net income was $32.2 million in the three months ended
December 31, 2002, compared to $4.3 million in the three months ended December
31, 2001. Net income was 9.5% of revenue for the three months ended December 31,
2002, compared to 1.0% for the three months ended December 31, 2001. The
increase in net income is attributable primarily to our adoption of SFAS No.
142, which resulted in no amortization of goodwill in the three months ended
December 31, 2002, and the in-process research and development charge related to
the Clarify acquisition, which was included only in the three months ended
December 31, 2001. Pro forma net income in the three months ended December 31,
2002, excluding the acquisition-related charges and the restructuring charges,
decreased by 46.0% over the three months ended December 31, 2001, to $43.5
million, representing 12.8% of revenue. The decrease in our pro forma net income
was due to a decrease in our revenue in the three months ended December 31,
2002, caused by a significant slowdown in our market, which was not offset by a
corresponding decrease in our operating costs.
22
Prior to fiscal 2003, goodwill was amortized using the straight-line
method over its estimated period of benefit. Net income and earnings per share
for the three months ended December 31, 2001 adjusted to exclude amortization of
goodwill and workforce-in-place expenses, net of tax, is as follows (in
millions, except per share data):
THREE MONTHS ENDED
DECEMBER 31,
------------------
2001
------------------
Reported net income $ 4.3
Add back: goodwill and
workforce-in-place amortizations 51.1
Attributable tax effect (0.7)
------
Adjusted net income $ 54.8
======
Adjusted basic earnings per share $ 0.25
======
Adjusted diluted earnings per share $ 0.24
======
DILUTED EARNINGS PER SHARE. Diluted earnings per share were $0.15 for the
three months ended December 31, 2002, compared to $0.02 in the three months
ended December 31, 2001. Pro forma diluted earnings per share in the three
months ended December 31, 2002, excluding the acquisition-related charges and
the restructuring charges, decreased by 44.4% from the three months ended
December 31, 2001, to $0.20 per diluted share. Excluding acquisition-related
charges, we expect that our pro forma earnings per share in the second quarter
of fiscal 2003 will be in the range of $0.18 to $0.20.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term interest-bearing investments totaled
$1,127.6 million as of December 31, 2002, compared to $1,047.8 million as of
September 30, 2002. The increase is attributable primarily to cash flows from
operations and to the final purchase price adjustment related to the acquisition
of Clarify, which resulted in a reimbursement of $11.1 million. Net cash
provided by operating activities amounted to $83.8 million and $108.1 million
for the three months ended December 31, 2002 and 2001, respectively. The
decrease in cash flows from operations was due to decreased net income before
depreciation, amortization, and a one-time charge for write-off of in-process
research and development. 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 convertible notes.
As of December 31, 2002, we had positive working capital of $1,001.6
million, compared to positive working capital of $938.6 million as of September
30, 2002. The increase is attributable primarily to the increase in cash, cash
equivalents and short-term interest-bearing investments. We believe that current
cash balances, cash generated from operations and our current lines of credit
will provide sufficient resources to meet our liquidity needs for at least the
next fiscal year.
As of December 31, 2002, $445.1 million aggregate principal amount of our
Convertible Notes ("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 three
months ended December 31, 2002, we did not repurchase any of the Notes. We
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 at 100% of their
principal amount plus accrued interest to the redemption date.
As of December 31, 2002, we had available short-term general revolving
lines of credit totaling $40.0 million, none of which were outstanding. In
addition, as of December 31, 2002 we had credit facilities totaling $43.8
million limited for the use of letters of credit and bank guaranties from
various banks. Outstanding letters of credit and bank guarantees as of December
31, 2002 totaled $24.7 million. These were
23
mostly supported by a combination of the credit facilities described above and
compensating cash balances that we maintain with the issuing banks.
As of December 31, 2002, we had outstanding long-term obligations of $22.5
million in connection with leasing arrangements.
Our capital expenditures were approximately $13 million in the three
months ended December 31, 2002. These expenditures consisted primarily of
purchases of computer equipment and, to a lesser degree, leasehold improvements.
We funded our capital expenditures principally from operating cash flows. We do
not anticipate any change to this policy in the foreseeable future.
Our accounts receivable allowance for the three months ended December 31,
2002 was adjusted upward by approximately $6 million, from the allowance as of
September 30, 2002. The increase in our accounts receivable allowance is a
result of allowances for instances where collectibility was not reasonably
assured at the time the transactions were consummated, and no revenue was
recognized.
NET DEFERRED TAX ASSETS
As of December 31, 2002, deferred tax assets of $10.5 million, derived
primarily from carry-forward net operating losses relating to 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.
EFFECTIVE TAX RATE
Our effective tax rate for fiscal year 2003 is expected to be
approximately 25% due to the corporate income tax rates in the various countries
in which we operate and the relative magnitude of our business in those
countries, compared to our pro forma effective tax rate for fiscal year 2002 of
approximately 28%. Effective October 1, 2002, following the adoption of FASB
142, we no longer amortize goodwill resulting from acquisitions. See discussion
above under the caption "Adoption of New Accounting Standards". As a result, the
non tax-deductible goodwill amortization no longer affects our effective tax
rate.
In the three months ended December 31, 2001, we incurred non-cash charges
related to the amortization of goodwill and purchased intangible assets and
in-process research and development in connection with acquisitions and a
restructuring charge. Since a significant portion of such costs and charges was
attributable to amortization of goodwill, much of which is not tax deductible,
the effective tax rate in the three months ended December 31, 2001 was adversely
affected. Our blended effective tax rate for the three months ended December 31,
2001 was 82%. Excluding the impact of these items, our overall effective tax
rate would have been 28% for the three months ended December 31, 2001.
CURRENCY FLUCTUATIONS
Approximately 90% of our revenue is in U.S. dollars or linked to the
dollar and therefore the dollar is our functional currency. Approximately 60% of
our operating expenses (excluding amortization of intangible assets 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 we expand our operations outside of
the United States, our exposure to fluctuations in currency exchange rates
increases. In managing our foreign exchange risk, we enter from time to time
into various foreign exchange contracts. As of December 31, 2002, we had hedged
significant exposures in currencies other than the dollar.
24
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 recently appointed a lead plaintiff. We dispute the allegations of
wrongdoing in these complaints and intend to defend ourself vigorously.
25
PART II - OTHER INFORMATION
ITEM 1. EXHIBITS AND REPORTS ON FORM 6-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
99.1 Amdocs Limited Press Release dated January 22, 2003.
(b) Reports on Form 6-K
The Company filed the following reports on Form 6-K during the three
months ended December 31, 2002:
(1) Form 6-K dated December 27, 2002.
(2) Form 6-K dated December 27, 2002.
(3) Form 6-K dated December 31, 2002.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMDOCS LIMITED
/s/ Thomas G. O'Brien
------------------------------------
Thomas G. O'Brien
Treasurer and Secretary
Authorized U.S. Representative
Date: March 24, 2003
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
99.1 Amdocs Limited Press Release dated January 22, 2003.