SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2003
AMDOCS LIMITED
Suite 5, Tower Hill House Le Bordage
St. Peter Port, Island of Guernsey, GY1 3QT Channel Islands
Amdocs, Inc.
1390 Timberlake Manor Parkway, Chesterfield, Missouri 63017
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F
Form 20-F [X] FORM 40-F [ ]
Indicate by check mark whether the registrant by furnishing the information
contained in this form is also thereby furnishing the information to the
Commission pursuant to rule 12g3-2(b) under the Securities Exchange Act of 1934.
YES [ ] NO [X]
AMDOCS LIMITED
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
FOR THE QUARTER ENDED MARCH 31, 2003
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
1
AMDOCS LIMITED
CONSOLIDATED BALANCE SHEETS
(in U.S. dollars, unless otherwise stated)
(in thousands, except per share data)
AS OF
------------------------------------
MARCH 31, SEPTEMBER 30,
-------------- --------------
2003 2002
-------------- --------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 642,058 $ 466,655
Short-term interest-bearing investments 579,244 581,164
Accounts receivable, net (*) 238,514 312,732
Deferred income taxes and taxes receivable 50,212 48,154
Prepaid expenses and other current assets (*) 88,137 72,196
-------------- --------------
Total current assets 1,598,165 1,480,901
Equipment, vehicles and leasehold improvements, net 144,072 160,902
Deferred income taxes 40,241 37,582
Goodwill and other intangible assets, net 730,357 750,530
Other noncurrent assets (*) 114,717 110,179
-------------- --------------
Total assets $ 2,627,552 $ 2,540,094
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 145,800 $ 192,129
Accrued personnel costs 96,479 86,942
Deferred revenue 178,520 149,590
Short-term portion of capital lease obligations 8,384 10,347
Deferred income taxes and taxes payable 115,777 103,315
-------------- --------------
Total current liabilities 544,960 542,323
Convertible notes 445,054 445,054
Deferred income taxes 16,522 12,363
Noncurrent liabilities and other 117,902 124,079
-------------- --------------
Total liabilities 1,124,438 1,123,819
-------------- --------------
Shareholders' equity:
Preferred Shares - Authorized 25,000 shares;(pound)0.01 par value;0
shares issued and outstanding - -
Ordinary Shares - Authorized 550,000 shares;(pound)0.01 par value;
223,622 and 223,316 issued and 215,889 and 215,583 outstanding,
respectively 3,577 3,572
Additional paid-in capital 1,819,520 1,818,345
Treasury stock (109,281) (109,281)
Accumulated other comprehensive income (loss) 7,977 (108)
Accumulated deficit (218,679) (296,253)
-------------- --------------
Total shareholders' equity 1,503,114 1,416,275
-------------- --------------
Total liabilities and shareholders' equity $ 2,627,552 $ 2,540,094
============== ==============
(*) See Note 5.
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 SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------ ------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenue:
License (*) $ 19,159 $ 45,528 $ 39,685 $ 87,818
Service (*) 335,855 409,741 654,715 790,092
------------ ------------ ------------ ------------
355,014 455,269 694,400 877,910
------------ ------------ ------------ ------------
Operating expenses:
Cost of license 1,546 1,627 2,682 3,068
Cost of service (*) 212,080 249,010 416,066 479,152
Research and development 29,328 30,902 58,947 59,459
Selling, general and administrative (*) 51,121 61,023 102,701 114,802
Amortization of goodwill and
purchased intangible assets 4,625 61,894 9,779 118,676
Restructuring charges and in-process
research and development -- -- 9,956 30,711
------------ ------------ ------------ ------------
298,700 404,456 600,131 805,868
------------ ------------ ------------ ------------
Operating income 56,314 50,813 94,269 72,042
Interest income and other, net (*) 4,186 2,383 9,163 5,710
------------ ------------ ------------ ------------
Income before income taxes 60,500 53,196 103,432 77,752
Income taxes 15,125 26,755 25,858 46,977
------------ ------------ ------------ ------------
Net income $ 45,375 $ 26,441 $ 77,574 $ 30,775
============ ============ ============ ============
Basic earnings per share $ 0.21 $ 0.12 $ 0.36 $ 0.14
============ ============ ============ ============
Diluted earnings per share $ 0.21 $ 0.12 $ 0.36 $ 0.14
============ ============ ============ ============
Basic weighted average number of shares
outstanding 215,797 222,995 215,711 222,844
============ ============ ============ ============
Diluted weighted average number of
shares outstanding 219,109 225,488 218,179 225,275
============ ============ ============ ============
(*) See Note 5.
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
Additional Other Total
Ordinary Shares Paid-in Treasury Comprehensive Accumulated Shareholders'
--------------------
Shares Amount Capital Stock Income (Loss) Deficit Equity
------- ------- ---------- --------- ------------ --------- -----------
BALANCE AS OF SEPTEMBER 215,583 $ 3,572 $1,818,345 $(109,281) $ (108) $(296,253) $ 1,416,275
30, 2002
Comprehensive income:
Net income - - - - - 77,574 77,574
Unrealized income on
foreign currency
hedging contracts, net
of $3,335 tax - - - - 9,134 - 9,134
Unrealized loss on cash
equivalents and
short-term interest-
bearing investments,
net of $(634) tax - - - - (1,049) - (1,049)
-----------
Comprehensive income 85,659
-----------
Employee stock options 306 5 1,104 - - - 1,109
exercised
Tax benefit of stock options
exercised - - 46 - - - 46
Expense related to vesting
of stock options - - 25 - - - 25
------- ------- ---------- --------- ------------ --------- -----------
BALANCE AS OF MARCH 31, 215,889 $ 3,577 $1,819,520 $(109,281) $ 7,977 $(218,679) $ 1,503,114
2003 ======= ======= ========== ========= ============ ========= ===========
As of March 31, 2003 and September 30, 2002, accumulated other comprehensive
income (loss) is comprised of unrealized gain (loss) on derivatives, net of tax,
of $3,914 and $(5,220), respectively, and unrealized gain on cash equivalents
and short-term interest-bearing investments, net of tax, of $4,063 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)
SIX MONTHS ENDED MARCH 31,
----------------------------------------
2003 2002
---------------- ----------------
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 77,574 $ 30,775
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization 46,444 158,302
In-process research and development -- 17,400
Loss on sale of equipment 509 195
Deferred income taxes 5,314 1,161
Tax benefit of stock options exercised 46 389
Unrealized income (loss) on other comprehensive loss 10,786 (9,648)
Net changes in operating assets and liabilities, net of
amounts acquired:
Accounts receivable 74,122 5,518
Prepaid expenses and other current assets (16,768) (5,714)
Other noncurrent assets (6,318) (4,254)
Accounts payable and accrued expenses (29,412) 51,060
Deferred revenue 28,930 (34,703)
Income taxes payable 3,890 (7,195)
Other noncurrent liabilities (2,190) 4,758
---------------- ----------------
Net cash provided by operating activities 192,927 208,044
---------------- ----------------
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from sale of equipment, vehicles and leasehold
improvements 1,283 861
Payments for purchase of equipment, vehicles, leasehold
improvements and other (26,998) (26,581)
Purchase of short-term interest-bearing investments, net 1,920 (322,890)
Investment in noncurrent assets -- (24,006)
Reimbursement of cash in (cash paid for) acquisition 11,111 (210,900)
---------------- ----------------
Net cash used in investing activities (12,684) (583,516)
---------------- ----------------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from employee stock options exercised 1,109 4,629
Repurchase of shares -- (15,408)
Principal payments on capital lease obligations (5,949) (5,766)
---------------- ----------------
Net cash used in financing activities (4,840) (16,545)
---------------- ----------------
Net increase (decrease) in cash and cash equivalents 175,403 (392,017)
Cash and cash equivalents at beginning of period 466,655 872,998
---------------- ----------------
Cash and cash equivalents at end of period $ 642,058 $ 480,981
================ ================
SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for:
Income taxes, net of refunds $ 15,982 $ 53,428
Interest 4,801 5,707
NON CASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations of $0 and $2,224 were incurred during the six months
ended March 31, 2003 and 2002, respectively, as a result of the Company (as
defined below) entering 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 operating 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. SIGNIFICANT ACCOUNTING POLICY
Accounting for Stock-Based Compensation
In December 2002 the Financial Accounting Standards Board ("FASB")
issued Statements of Financial Accounting Standards ("SFAS") 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
Amendment of FASB Statement No. 123". SFAS 148 amends SFAS 123, "Accounting
for Stock-Based Compensation", 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. The Company follows Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" in
accounting for its employee stock options. The transition and annual
disclosure requirements of SFAS 148 were effective for the Company
commencing January 1, 2003. The Company has adopted the interim disclosure
for the quarter ended March 31, 2003, which is provided in Note 12.
3. ADOPTION OF NEW ACCOUNTING STANDARDS
Goodwill and Purchased Intangible Assets
In June 2001, the 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
6
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
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. Other intangible
assets will continue to be amortized over their useful lives. Certain
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 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.
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 and six months ended March 31, 2002 adjusted to
exclude amortization of goodwill and workforce-in-place expenses, net of
tax, are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- -----------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Reported net income $ 45,375 $ 26,441 $ 77,574 $ 30,775
Add back: goodwill and
workforce-in-place amortizations -- 51,135 -- 102,272
Attributable tax effect -- (679) -- (1,358)
----------- ----------- ----------- -----------
Adjusted net income $ 45,375 $ 76,897 $ 77,574 $ 131,689
=========== =========== =========== ===========
Adjusted basic earnings per share $ 0.21 $ 0.34 $ 0.36 $ 0.59
=========== =========== =========== ===========
Adjusted diluted earnings per share $ 0.21 $ 0.34 $ 0.36 $ 0.58
=========== =========== =========== ===========
The following table presents details of amortization expense of
purchased intangible assets as reported in the consolidated statements of
income:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- -----------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Cost of license $ 820 $ 849 $ 1,640 $ 1,965
Amortization of purchased intangible
assets 4,625 10,759 9,779 16,404
----------- ----------- ----------- -----------
Total $ 5,445 $ 11,608 $ 11,419 $ 18,369
=========== =========== =========== ===========
7
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
The following table presents details of the Company's total purchased
intangible assets:
ACCUMULATED
GROSS AMORTIZATION NET
----------- ------------- ----------
MARCH 31, 2003
Core technology $ 44,535 $ (40,068) $ 4,467
Customer arrangements 36,658 (19,842) 16,816
Intellectual property rights and
purchased computer software 51,993 (35,256) 16,737
----------- ------------- ----------
Total $ 133,186 $ (95,166) $ 38,020
=========== ============= ==========
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
=========== ============= ==========
The estimated future amortization expense of purchased intangible
assets as of March 31, 2003 is as follows:
AMOUNT
-----------
FISCAL YEAR:
2003 (remaining 6 months) $ 11,482
2004 14,974
2005 5,747
2006 3,415
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 requirements of FIN 45 are 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 that includes an indemnification
of one of its customers for any withholding tax that might be required
under the customer's local tax laws from certain payments made to the
Company under this agreement. The indemnification under this agreement
expires in December 2005. As of March 31, 2003 and September 30, 2002, the
maximum potential amount of the Company's future exposure under guarantees
covered by 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's policy is to accrue for
warranty costs, if needed, 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 have any accrued amounts for
product warranty liability as of March 31, 2003.
8
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
4. 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.
5. RELATED PARTY TRANSACTIONS
The following related party balances are included in the balance sheets:
AS OF
-----------------------------------
MARCH 31, SEPTEMBER 30,
----------- --------------
2003 2002
----------- --------------
Accounts receivable, including unbilled of $0 and $100, $ 32,410 $ 55,458(1)
respectively
Prepaid expenses and other current assets (2) 654 1,550
Other noncurrent assets (3) 51,776 48,453
(1) Includes balances with SBC Communications, Inc. ("SBC"). Since the end
of the fiscal quarter ended December 31, 2002, SBC has ceased to be a
principal shareholder of the Company, according to SFAS 57, "Related
Party Disclosures", and thus is not a related party. SBC is not
included in the Company's related party balances as of March 31, 2003.
(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 SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------- ------------------------
2003 2002(1) 2003 2002(1)
------------ --------- ---------- ----------
Revenue:
License $ 1,191 $ 7,744 $ 3,243 $ 10,674
Service 26,702 77,458 51,748 173,122
(1) Including license and service revenue to SBC. The transactions
above include SBC as a related party for the three months and six
months ended March 31, 2002. For the three months and six months ended
March 31, 2003, SBC is not included in the Company's related party
transactions.
9
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
The following related party expenses are included in the statements of
income:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------- -----------------------------
2003 2002 2003 2002
------------ -------------- ------------ -----------
Operating expenses (1):
Cost of service $ -- $ 751 $ -- $ 1,212
Selling, general and administrative -- 73 -- 171
Interest income and other, net (2) 458 420 1,098 296
(1) In the three months and six months ended March 31, 2002, consists of lease
fees and miscellaneous support services purchased by the Company from
affiliates of SBC.
(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 $3,601 and $4,611 for the three and
six months ended March 31, 2003, respectively, and $368 and $244 for the
three months and six months ended March 31,2002, respectively.
6. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consists of the following:
AS OF
----------------------------------
MARCH 31, SEPTEMBER 30,
----------------- -------------
2003 2002
----------------- -------------
Accounts receivable - billed $ 254,314 $ 314,828
Accounts receivable - unbilled 13,619 24,144
Less - allowances (29,419) (26,240)
----------------- -------------
Accounts receivable, net $ 238,514 $ 312,732
================= =============
7. COMPREHENSIVE INCOME
Comprehensive income represents the change in shareholders' equity
during a period from transactions and other events and circumstances from
nonowner sources. It includes all changes in equity except those resulting
from investments by owners and distributions to owners.
The following table sets forth the reconciliation from net income to
comprehensive income for the following periods:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income $ 45,375 $ 26,441 $ 77,574 $ 30,775
Other comprehensive income (loss):
Unrealized income (loss) on
foreign currency hedging
contracts, net of tax 3,666 (5,467) 9,134 (4,332)
Unrealized loss on
short-term interest-bearing
investments, net of tax (943) (2,586) (1,049) (2,797)
------------ ------------ ------------ ------------
Comprehensive income $ 48,098 $ 18,388 $ 85,659 $ 23,646
============ ============ ============ ============
10
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
8. INCOME TAXES
The provision for income taxes for the following periods consisted of:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- ------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Current $ 7,623 $ 20,327 $ 20,544 $ 45,816
Deferred 7,502 6,428 5,314 1,161
------------ ------------ ------------ ------------
$ 15,125 $ 26,755 $ 25,858 $ 46,977
============ ============ ============ ============
The effective income tax rate from continuing operations varied from
the statutory Guernsey tax rate as follows for the following periods:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- ---------------------------
2003 2002 2003 2002
------------ ---------- ---------- ---------
Statutory Guernsey tax rate 20% 20% 20% 20%
Guernsey tax-exempt status (20) (20) (20) (20)
Foreign taxes 25 28 25 28
------------ ---------- ---------- ---------
Income tax rate before effect of 25 28 25 28
acquisitions-related costs and
restructuring charges
Effect of amortization of goodwill
and purchased intangible assets,
in-process research and development
and restructuring charges - 22 - 32
------------ ---------- ---------- ---------
Effective income tax rate 25% 50% 25% 60%
============ ========== ========== =========
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 3 above. As a result, the non
tax-deductible goodwill amortization no longer affects the Company's
effective tax rate.
In the three months and six months ended March 31, 2002, 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 and six months ended March 31, 2002 was adversely affected.
Excluding the impact of these items, the Company's overall effective tax
rate would have been 28% for the three months and six months ended March 31,
2002.
11
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------ --------------------------
2003 2002 2002 2002
----------- ---------- ---------- -----------
Numerator:
Net income $ 45,375 $ 26,441 $ 77,574 $ 30,775
=========== ========== ========== ===========
Denominator:
Denominator for basic earnings per
share-
weighted average number of shares
outstanding (1) 215,797 222,995 215,711 222,844
Effect of dilutive stock options
granted 3,312 2,493 2,468 2,431
----------- ---------- -- ---------- -----------
Denominator for diluted earnings per
share -
adjusted weighted average shares and
assumed conversions (1) 219,109 225,488 218,179 225,275
=========== ========== ========== ===========
Basic earnings per share $ 0.21 $ 0.12 $ 0.36 $ 0.14
=========== ========== ========== ===========
Diluted earnings per share $ 0.21 $ 0.12 $ 0.36 $ 0.14
=========== ========== ========== ===========
(1) The weighted average number of shares outstanding includes
exchangeable shares held by shareholders of Amdocs Canada, Inc
(formerly Solect Technology Group Inc. ("Solect")) pursuant to the
Company's acquisition of Solect in April 2000, which are exchangeable
for the Company's Ordinary Shares on a one-for-one basis.
The effect of the 2% Convertible Notes due June 1, 2008 issued by the
Company in May, 2001 (the "Notes") on diluted earnings per share was
anti-dilutive for the three months and six months ended March 31, 2003 and
2002, and, therefore, was not included in the above calculation.
10. 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 first quarter of fiscal 2003. The fair market value of Clarify's assets
and liabilities has been included in the Company's balance sheets and the
results of Clarify's operations have been included in the Company's
consolidated statements of income, commencing on November 29, 2001.
12
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:
SIX MONTHS
ENDED
MARCH 31,
----------
2002
----------
Revenue $ 897,910
Operating income 77,843
Net income 38,116
Basic earnings per share 0.17
Diluted earnings per share 0.17
11. 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 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 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
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.
13
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 March 31, 2003, the remaining accrual balances were $12,880.
Facility-related costs are expected to be paid through April 2012. Actual
future cash requirements may differ materially from the accrual as of March
31, 2003, 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, $ 3,357 $ 11,087 $ - $ 440 $ 14,884
2002
Charge in first quarter of
fiscal 2003 4,011 4,022 1,829 94 9,956
Cash payments (2,679) (1,061) - (140) (3,880)
Non-cash - - (1,829) - (1,829)
---------- ---------- ---------- ---------- --------
Balance as of December 31, 4,689 14,048 - 394 19,131
2002
Cash payments (4,205) (1,886) - (100) (6,191)
Adjustments (1) (60) - - - (60)
---------- ---------- ---------- ---------- --------
Balance as of March 31, 2003 $ 424 $ 12,162 $ - $ 294 $ 12,880
========== ========== ========== ========== ========
(1) Reflects differences in foreign exchange rates from balances paid
in currencies other than the U.S. dollar, which were charged to "interest
income and other, net".
12. STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with
APB 25. 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 employee stock-based compensation cost is reflected in net
income for the three months and six months ended March 31, 2003 and 2002, as
all options granted were at an exercise price equal to the market value of
the underlying shares at the grant date.
The Company determined pro forma net income and earnings per share
information as if the fair value method described in SFAS No. 123, as
amended by SFAS No. 148, had been applied to its employee stock-based
compensation. The Company utilized the Black-Scholes option-pricing model to
estimate fair value, which is one of several methods that can be used under
SFAS 123. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. Option valuation models require the
input of highly subjective assumptions, including the expected share price
volatility. The Company's options have characteristics significantly
different from those of traded options, and changes in the subjective input
assumptions can materially affect the fair value estimates.
14
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
The fair value of options granted was estimated at the date of grant
using the Black-Scholes pricing model with the following assumptions for the
presented periods (all in weighted averages):
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------- ---------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Risk-free interest rate 2.72% 2.85% 2.72% 2.85%
Expected life of options 2.92 4.51 2.93 2.83
Expected annual volatility 0.83 0.68 0.84 0.70
Expected dividend yield None None None None
Fair value $ 6.62 $ 16.02 $ 5.11 $ 13.69
The pro forma effect on net income and earnings per share is as follows
for the three months and six months ended March 31, 2003 and 2002:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- ------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income, as reported $ 45,375 $ 26,441 $ 77,574 $ 30,775
Less: Total stock-based employee
compensation expense
determined under fair value
method for all awards, net of
related tax effects 1,254 29,758 14,299 52,616
------------ ------------ ------------ ------------
Pro forma net income (loss) $ 44,121 $ (3,317) $ 63,275 $ (21,841)
============ ============ ============ ============
Basic earnings per share:
As reported $ 0.21 $ 0.12 $ 0.36 $ 0.14
============ ============ ============ ============
Pro forma $ 0.20 $ (0.01) $ 0.29 $ (0.10)
============ ============ ============ ============
Diluted earnings per share:
As reported $ 0.21 $ 0.12 $ 0.36 $ 0.14
============ ============ ============ ============
Pro forma $ 0.20 $ (0.01) $ 0.29 $ (0.10)
============ ============ ============ ============
13. LITIGATION
Beginning on June 24, 2002, a number of complaints were filed by
holders of the Company's Ordinary Shares against the Company and certain 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
cases were transferred to and consolidated in the Eastern District of
Missouri. The Court has appointed lead plaintiffs, who filed a consolidated
amended complaint on March 24, 2003. The lead plaintiffs seek to represent a
putative class of persons who purchased the Company's Ordinary Shares
between July 18, 2000 and June 20, 2002. The amended complaint alleges that
the Company and the individual defendants made false or misleading
statements about the Company's business and future prospects during the
putative class period in violation of Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The lead
plaintiffs seek unspecified monetary damages. The Company will move to
dismiss the amended complaint. The Company disputes all allegations of
wrongdoing and intends to defend itself vigorously.
15
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 that affect our business,
- our revenue and costs for the six months and three months ended March
31, 2003 and 2002,
- 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 six months and three months ended March 31,
2003 and 2002, 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 six-month and
three-month periods ended March 31, 2003 and 2002. You should read this section
in conjunction with our consolidated financial statements.
16
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 based on a
periodic fee, which reflects the scope of services rendered and the size of the
customer's business handled under the outsourcing agreement. 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.
17
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. Our revenue for the three months ended
March 31, 2003 decreased by 22% from the same period in fiscal 2002. From the
first to second quarter of fiscal 2003, revenue increased by 4.6%. Given
continued uncertain conditions in the communications industry, we do not know if
we will be able to sustain sequential growth in subsequent quarters, and if so,
at what rate.
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 six months and three months ended
March 31, 2003 was $694.4 million and $355.0 million, respectively, compared to
$877.9 million and $455.3 million in the six months and three months ended March
31, 2002.
License and service revenue from the sale of CC&B Systems was $604.5 million
and $785.3 million in the six months ended March 31, 2003 and 2002,
respectively, representing 87.1% and 89.4%, respectively, of our total revenue
for such periods. License and service revenue from the sale of CC&B Systems was
$305.8 million and $404.7 million in the three months ended March 31, 2003 and
2002, respectively, representing 86.1% and 88.9%, respectively, of our total
revenue for such periods.
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.
We are unable at this time to forecast demand for our CC&B Systems. The
industry-wide downturn in the communications industry has had a significant
negative impact on our results for the three months and six months ended March
31, 2003, 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.
18
License and service revenue from the sale of Directory Systems was $89.9
million and $92.6 million in the six months ended March 31, 2003 and 2002,
respectively, accounting for 12.9% and 10.6%, respectively, of our total revenue
for such periods. License and service revenue from the sale of Directory Systems
totaled $49.2 million and $50.5 million in the three months ended March 31, 2003
and 2002, respectively, accounting for 13.9% and 11.1%, respectively, of our
total revenue for such periods.
We believe that we are a leading provider of Directory Systems in most of
the markets that we serve. In fiscal 2003, as a result of new agreements
recently announced, we expect that our revenue from Directory Systems will be
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
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 paid most 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.
The implementation of this cost reduction program created cost savings in
the second quarter of fiscal 2003 compared to the first quarter of fiscal 2003.
These cost savings are not apparent in our operating results due to the increase
in our revenue in this quarter and the corresponding increase in the related
operating expenses.
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 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".
SIGNIFICANT ACCOUNTING POLICY
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. The transition and annual
disclosure requirements of SFAS 148 are effective for us commencing January 1,
2003. We have
19
adopted the interim disclosure in the quarter ended March 31, 2003, which is
provided in Note 12 to the consolidated financial statements included in this
document.
ADOPTION OF NEW ACCOUNTING STANDARDS
Goodwill and Purchased Intangible Assets
In June 2001, the 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. 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. 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 requirements of FIN 45 are
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 that includes an indemnification of one of
our customers for any withholding tax that might be required under the
customer's local tax laws from certain payments made to us under this agreement.
The indemnification under this agreement expires in December 2005. As of March
31, 2003 and September 30, 2002, the maximum potential amount of our future
exposure under guarantees covered by 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. Our policy is to accrue for warranty costs, if needed, 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 have any
accrued amounts for product warranty liability as of March 31, 2003.
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
20
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.
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. Such acquisitions have included 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 first quarter of fiscal 2003. 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 sheets and
the results of Clarify's operations have been 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 amounted
to $58.9 million and $59.5 million in the six months ended March 31, 2003 and
2002, respectively, representing 8.5% and 6.8%, respectively, of our revenue in
these periods. Research and development expenditures amounted to $29.3 million
and $30.9 million in the three months ended March 31, 2003 and 2002,
respectively, representing 8.3% 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.
21
RESULTS OF OPERATIONS
The following table sets forth for the six months and three months ended
March 31, 2003 and 2002 certain items in our consolidated statements of income
reflected as a percentage of total revenue:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenue:
License ........................ 5.4% 10.0% 5.7% 10.0%
Service ........................ 94.6 90.0 94.3 90.0
------------ ------------ ------------ ------------
100.0 100.0 100.0 100.0
------------ ------------ ------------ ------------
Operating expenses:
Cost of license ................ 0.4 0.4 0.4 0.4
Cost of service ................ 59.7 54.6 59.9 54.6
Research and development ....... 8.3 6.8 8.5 6.8
Selling, general and
administrative ............... 14.4 13.4 14.8 13.0
Amortization of goodwill and
purchased intangible assets... 1.3 13.6 1.4 13.5
Restructuring charges and
in-process research and
development .................. -- -- 1.4 3.5
------------ ------------ ------------ ------------
84.1 88.8 86.4 91.8
------------ ------------ ------------ ------------
Operating income ................. 15.9 11.2 13.6 8.2
Interest income and other, net.... 1.2 0.5 1.3 0.7
------------ ------------ ------------ ------------
Income before income taxes ....... 17.1 11.7 14.9 8.9
Income taxes ..................... 4.3 5.9 3.7 5.4
------------ ------------ ------------ ------------
Net income ....................... 12.8% 5.8% 11.2% 3.5%
============ ============ ============ ============
SIX MONTHS ENDED MARCH 31, 2003 AND 2002
REVENUE. Total revenue for the six months ended March 31, 2003 was $694.4
million, a decrease of $183.5 million, or 20.9%, over the six months ended March
31, 2002. 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.
License revenue decreased from $87.8 million in the six months ended March
31, 2002 to $39.7 million during the six months ended March 31, 2003, a decrease
of 54.8%, and service revenue decreased by 17.1% from $790.1 million in the six
months ended March 31, 2002 to $654.7 million in the six months ended March 31,
2003. The decrease in license revenue is attributable primarily to the reduction
in capital investments by our telecommunications customers, which resulted in
our obtaining fewer new contracts than in the six months ended March 31, 2002
and smaller expected initial spending commitments under contracts with some of
our customers. Most of the new contracts that we did obtain were for outsourcing
arrangements, which contain only a small license revenue component. In addition,
the current communications market environment has resulted in pricing pressure
in that market, particularly with respect to license fees. 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 that was partially offset by a sequential increase in service revenue in
the second quarter of fiscal 2003.
The decline in our overall revenue in the first half of fiscal 2003 was
primarily attributable to a decrease in revenue from CC&B Systems. Total CC&B
Systems revenue for the six months ended March 31, 2003 was $604.5 million, a
decrease of $180.7 million, or 23.0%, over the six months ended March 31, 2002.
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
software, CRM software and order management systems. Because many communications
companies are reducing or delaying expenditures on system upgrades as a result
of the
22
continued economic slowdown, the demand for our CC&B Systems and our CC&B
Systems revenue were significantly lower during the six months ended March 31,
2003. Approximately $30.7 million of our CC&B Systems revenue for the six months
ended March 31, 2003 was derived from customers other than communications
service providers.
Revenue from Directory Systems was $89.9 million for the six months ended
March 31, 2003, a decrease of $2.8 million, or 3.0%, over the six months ended
March 31, 2002. The decrease is attributable primarily to the completion of some
major implementation projects, which was partially offset by extensions of
agreements with and additional services rendered to existing customers and
contracts with new customers.
In the six months ended March 31, 2003, revenue from customers in North
America, Europe and the rest of the world accounted for 60.0%, 31.0% and 9.0%,
respectively, compared to 61.2%, 28.3% and 10.5%, respectively, for the six
months ended March 31, 2002. The increase in revenue from customers in Europe
and the decline in revenue from customers in the rest of the world, as a
percentage of revenue, was attributable primarily to a relatively greater
reduction in activity from customers outside of Europe than in Europe, in the
first half of fiscal 2003.
COST OF LICENSE. Cost of license for the six months ended March 31, 2003
was $2.7 million, compared to $3.1 million cost of license for the six months
ended March 31, 2002. Cost of license mainly includes amortization of purchased
computer software and intellectual property rights.
COST OF SERVICE. Cost of service for the six months ended March 31, 2003
was $416.1 million, a decrease of $63.1 million, or 13.2%, over the cost of
service of $479.2 million for the six months ended March 31, 2002. As a
percentage of revenue, cost of service increased to 59.9% in the six months
ended March 31, 2003 from 54.6% in the six months ended March 31, 2002. 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. Although
our cost of service decreased in the first half of fiscal 2003, our cost
reductions were proportionally less than the decrease in our service revenue,
resulting in a decrease in our gross margin. We have taken 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 six months ended March 31, 2003,
research and development expense was $58.9 million, or 8.5% of revenue, compared
with $59.5 million, or 6.8% of revenue, in the six months ended March 31, 2002.
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 10.5%
to $102.7 million, or 14.8% of revenue, in the six months ended March 31, 2003
from $114.8 million, or 13.0% of revenue, in the six months ended March 31,
2002. The decrease in selling, general and administrative expense is
attributable to the cost reduction programs that we implemented in fiscal 2002
and in the first quarter of fiscal 2003.Although our selling, general and
administrative expense decreased in the first half of fiscal 2003, our revenues
decreased by a larger percentage, resulting in an increase of our selling,
general and administrative expense as a percentage of revenue in the first half
of fiscal 2003.
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 six
months ended March 31, 2002 was $102.3 million. Amortization of purchased
intangible assets for the six months ended March 31, 2003 and 2002 was $9.8
million and $16.4 million, respectively. Amortization of purchased intangible
assets in the six months ended March 31, 2002 includes amortization of purchased
intangible assets that were fully amortized by March 31, 2002.
23
RESTRUCTURING CHARGES AND IN-PROCESS RESEARCH AND DEVELOPMENT.
Restructuring charges and in-process research and development in the six months
ended March 31, 2003 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 six months ended March
31, 2002 consisted of a one-time charge of $17.4 million related to the Clarify
transaction for write-off of purchased in-process research and development, and
a restructuring charge of $13.3 million related to the consolidation of data
centers and the resulting closure of our Stamford, Connecticut facility in the
first quarter of fiscal 2002.
OPERATING INCOME. Operating income in the six months ended March 31, 2003,
was $94.3 million, or 13.6% of revenue, compared to $72.0 million, or 8.2% of
revenue, in the six months ended March 31, 2002, an increase of 30.9%. The
increase is attributable primarily to our adoption of SFAS No. 142, which
resulted in no amortization of goodwill in the six months ended March 31, 2003,
and the in-process research and development charge related to the Clarify
acquisition, which was included only in the six months ended March 31, 2002.
Operating income for the six months ended March 31, 2002 included
amortization of goodwill of $102.3 million, amortization of purchased intangible
assets of $16.4 million, restructuring charges of $13.3 million and the
write-off of in-process research and development of $17.4 million. Excluding
amortization of goodwill and purchased intangible assets and the write-off of
in-process research and development, operating income for the six months ended
March 31, 2002 was $208.1 million, or 23.7% of revenue. Operating income for the
six months ended March 31, 2003 included amortization of purchased intangible
assets of $9.8 million and restructuring charges of $10.0 million. Excluding
amortization of purchased intangible assets, operating income for the six months
ended March 31, 2003, was $104.0 million, or 15.0% of revenue, a decrease of
50.0% from the prior year. The decrease in our operating income, excluding
amortization of purchased intangible assets and goodwill and the write-off of
in-process research and development, was due to a decrease in our revenue in the
six months ended March 31, 2003, caused by the continued slowdown in our market,
which was not offset by a corresponding decrease in our operating costs.
INTEREST INCOME AND OTHER, NET. In the six months ended March 31, 2003,
interest income and other, net, was $9.2 million, an increase of $3.5 million
over the six months ended March 31, 2002. The increase in interest income and
other, net, is primarily attributable to a decrease in interest expenses due to
the reduction in our outstanding convertible notes following our repurchase of a
portion of the convertible notes, the reduction in our capital lease agreements
and changes in exchange rates of currencies other than the dollar. Although we
hedge significant exposures in currencies other than the dollar, currency
fluctuations partially affect our results.
INCOME TAXES. Income taxes in the six months ended March 31, 2003 were
$25.9 million on income before income taxes of $103.4 million. Our effective tax
rate in the six months ended March 31, 2003 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 six months ended March 31, 2002, income taxes were $47.0 million on
income before taxes of $77.8 million, or 60% of income before income taxes. The
effective tax rate for the six months ended March 31, 2002, excluding
amortization of purchased intangible assets and goodwill, was 28%. See
discussion below under the caption "Effective Tax Rate".
NET INCOME. Net income was $77.6 million in the six months ended March 31,
2003, compared to $30.8 million in the six months ended March 31, 2002. Net
income was 11.2% of revenue for the six months ended March 31, 2003, compared to
3.5% for the six months ended March 31, 2002. The increase in net income is
attributable primarily to our adoption of SFAS No. 142, which resulted in no
amortization of goodwill in the six months ended March 31, 2003, and the
in-process research and development charge related to the Clarify acquisition,
which was included only in the six months ended March 31, 2002.
Net income for the six months ended March 31, 2002 included amortization of
goodwill and purchased intangible assets, restructuring charges and the
write-off of in-process research and development. Excluding amortization of
goodwill and purchased intangible assets and the write-off of in-process
research and development, net income for the six months ended March 31, 2002 was
$154.0 million, or 17.5% of revenue. Net income for the six months ended March
31, 2003 included amortization of purchased intangible assets
24
and restructuring charges. Excluding amortization of purchased intangible
assets, net income was $84.9 million, representing 12.2% of revenue, a decrease
of 44.8% from the prior year. The decrease in our net income, excluding
amortization of purchased intangible assets and goodwill, was due to a decrease
in our revenue in the six months ended March 31, 2003, caused by the continued
slowdown in our market, which was not offset by a corresponding decrease in our
operating costs.
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
six months ended March 31, 2002 adjusted to exclude amortization of goodwill and
workforce-in-place expenses, net of tax, is as follows (in millions, except per
share data):
SIX MONTHS
ENDED
MARCH 31,
----------
2002
----------
Reported net income $ 30.8
Add back: goodwill and workforce-
in-place amortizations 102.3
Attributable tax effect (1.4)
----------
Adjusted net income $ 131.7
==========
Adjusted basic earnings per share $ 0.59
==========
Adjusted diluted earnings per share $ 0.58
==========
DILUTED EARNINGS PER SHARE. Diluted earnings per share were $0.36 for the
six months ended March 31, 2003, compared to $0.14 in the six months ended March
31, 2002. Diluted earnings per share, in the six months ended March 31, 2003,
excluding amortization of purchased intangible assets and goodwill and the
write-off of in-process research and development, decreased by 42.6% from $0.68
in the six months ended March 31, 2002, to $0.39 per diluted share.
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
REVENUE. Total revenue for the three months ended March 31, 2003 was $355.0
million, a decrease of $100.3 million, or 22.0%, over the three months ended
March 31, 2002, although a sequential increase of $15.6 million, or 4.6%, over
the first quarter of fiscal 2003. The year-over-year 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. The sequential increase in revenue is due to the sale of some
significant projects with respect to Directory Systems. We do not know if we
will be able to sustain sequential growth in subsequent quarters, and if so, at
what rate.
The following table sets forth our total revenue for each of the last four
fiscal quarters:
TOTAL REVENUE
QUARTER ENDED (IN MILLIONS)
------------- -------------
June 30, 2002 $ 380.1
September 30, 2002 355.5
December 31, 2002 339.4
March 31, 2003 355.0
License revenue decreased from $45.5 million in the three months ended
March 31, 2002 to $19.2 million during the three months ended March 31, 2003, a
decrease of 57.9%, and service revenue decreased 18.0% from $409.7 million in
the three months ended March 31, 2002 to $335.9 million in the three months
ended March 31, 2003. The decrease in license revenue is attributable primarily
to the reduction in capital investments by our telecommunications customers,
which resulted in our obtaining fewer new contracts than in the three months
ended March 31, 2002 and smaller initial spending commitments under contracts
with some of our customers. Most of the new contracts that we did obtain were
for outsourcing arrangements, which contain only a small license revenue
component. In addition, the current communications market
25
environment has resulted in pricing pressure in that market, particularly with
respect to license fees. The decrease in service revenue is attributable, in
part, to reduced discretionary spending under our contracts with some of our
customers.
The decline in our overall revenue in the second 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 March 31, 2003 was $305.8 million, a
decrease of $98.9 million, or 24.4%, over the three months ended March 31, 2002.
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
software, CRM software and order management systems. Because many communications
companies are reducing or delaying expenditures on system upgrades as a result
of the continued economic slowdown, the demand for our CC&B Systems and our CC&B
Systems revenue were significantly lower during the three months ended March 31,
2003, although our CC&B Systems revenue increased sequentially from the first
quarter of fiscal 2003 by $7.1 million. Approximately $14.4 million of our CC&B
Systems revenue for the three months ended March 31, 2003 is attributable to
customers other than communications service providers.
Revenue from Directory Systems was $49.2 million for the three months ended
March 31, 2003, a decrease of $1.3 million, or 2.7%, over the three months ended
March 31, 2002. The decrease is attributable primarily to the completion of some
major implementation projects, which was partially offset by extensions of
agreements with and additional services rendered to existing customers and
contracts with new customers.
In the three months ended March 31, 2003, revenue from customers in North
America, Europe and the rest of the world accounted for 58.0%, 33.0% and 9.0%,
respectively, compared to 61.1%, 28.3% and 10.6%, respectively, for the three
months ended March 31, 2002. The increase in revenue from customers in Europe,
as a percentage of revenue, was attributable primarily to a relatively greater
reduction in activity from customers outside of Europe than in Europe, in the
second quarter of fiscal 2003.
COST OF LICENSE. Cost of license for the three months ended March 31, 2003
was $1.5 million, compared to $1.6 million cost of license for the three months
ended March 31, 2002. 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 March 31, 2003
was $212.1 million, a decrease of $36.9 million, or 14.8%, over the cost of
service of $249.0 million for the three months ended March 31, 2002. As a
percentage of revenue, cost of service increased to 59.7% in the three months
ended March 31, 2003 from 54.6% in the three months ended March 31, 2002. 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. Although
our cost of service decreased in the second quarter of fiscal 2003, our cost
reductions were proportionally less than the decrease in our service revenue,
resulting in a decrease in our gross margin. We have taken 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 March 31, 2003,
research and development expense was $29.3 million, or 8.3% of revenue, compared
with $30.9 million, or 6.8% of revenue, in the three months ended March 31,
2002. 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 16.2%
to $51.1 million, or 14.4% of revenue, in the three months ended March 31, 2003
from $61.0 million, or 13.4% of revenue, in the three months ended March 31,
2002. The decrease in selling, general and administrative expense is
attributable to the cost reduction programs that we implemented in fiscal 2002
and in the first quarter of fiscal 2003. Although our selling, general and
administrative expense decreased in the second quarter of fiscal 2003, our
revenues decreased by a larger percentage, resulting in an increase of our
selling, general and administrative expense as a percentage of revenue in the
second quarter of fiscal 2003.
26
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 March 31, 2002 was $51.1 million. Amortization of purchased
intangible assets for the three months ended March 31, 2003 and 2002 was $4.6
million and $10.8 million, respectively. Amortization of purchased intangible
assets in the three months ended March 31, 2002 includes amortization of
purchased intangible assets that were fully amortized by March 31, 2002.
OPERATING INCOME. Operating income in the three months ended March 31,
2003, was $56.3 million, or 15.9% of revenue, compared to $50.8 million, or
11.2% of revenue, in the three months ended March 31, 2002, an increase of
10.8%. The increase is attributable primarily to our adoption of SFAS No. 142,
which resulted in no amortization of goodwill in the three months ended March
31, 2003.
Operating income for the three months ended March 31, 2002 included
amortization of goodwill of $51.1 million and amortization of purchased
intangible assets of $10.8 million. Excluding amortization of goodwill and
purchased intangible assets, operating income for the three months ended March
31, 2002 was $112.7 million, or 24.8% of revenue. Operating income for the three
months ended March 31, 2003 included amortization of purchased intangible assets
of $4.6 million. Excluding this charge, operating income in the three months
ended March 31, 2003 was $60.9 million, or 17.2% of revenue, a decrease of 45.9%
from prior year. The decrease in our operating income, excluding amortization of
purchased intangible assets and goodwill, was due to a decrease in our revenue
in the three months ended March 31, 2003, caused by a continued 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 March 31, 2003,
interest income and other, net, was $4.2 million, an increase of $1.8 million
over the three months ended March 31, 2002. The increase in interest income and
other, net, is primarily attributable to a decrease in interest expenses due to
the reduction in our outstanding convertible notes following our repurchase of a
portion of the convertible notes, the reduction in our capital lease agreements
and changes in exchange rates of currencies other than the dollar. Although we
hedge significant exposures in currencies other than the dollar, currency
fluctuations partially affect our results.
INCOME TAXES. Income taxes in the three months ended March 31, 2003 were
$15.1 million on income before income taxes of $60.5 million. Our effective tax
rate in the three months ended March 31, 2003 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 March 31, 2002, income
taxes were $26.8 million on income before taxes of $53.2 million, or 50% of
income before income taxes. The effective tax rate for the three months ended
March 31, 2002, excluding amortization of purchased intangible assets and
goodwill, was 28%. See discussion below under the caption "Effective Tax Rate".
NET INCOME. Net income was $45.4 million in the three months ended March
31, 2003, compared to $26.4 million in the three months ended March 31, 2002.
Net income was 12.8% of revenue for the three months ended March 31, 2003,
compared to 5.8% for the three months ended March 31, 2002. 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 March 31, 2003.
Net income for the three months ended March 31, 2002 included amortization
of goodwill and purchased intangible assets. Excluding these charges, net income
for the three months ended March 31, 2002 was $82.9 million, or 18.2% of
revenue. Net income in the three months ended March 31, 2003 included
amortization of purchased intangible assets. Excluding this charge, net income
was $48.8 million, representing 13.8% of revenue, a decrease of 41.1% from the
prior year. The decrease in our net income, excluding amortization of purchased
intangible assets and goodwill, was due to a decrease in our revenue in the
three months ended March 31, 2003, caused by the continued slowdown in our
market, which was not offset by a corresponding decrease in our operating costs.
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 March 31, 2002 adjusted to exclude
27
amortization of goodwill and workforce-in-place expenses, net of tax, is as
follows (in millions, except per share data):
THREE MONTHS
ENDED
MARCH 31,
------------
2002
------------
Reported net income $ 26.4
Add back: goodwill and workforce-
in-place amortizations 51.1
Attributable tax effect (0.7)
------------
Adjusted net income $ 76.8
============
Adjusted basic earnings per share $ 0.34
============
Adjusted diluted earnings per share $ 0.34
============
DILUTED EARNINGS PER SHARE. Diluted earnings per share were $0.21 for the
three months ended March 31, 2003, compared to $0.12 in the three months ended
March 31, 2002. Diluted earnings per share, excluding amortization of purchased
intangible assets and goodwill, in the three months ended March 31, 2003,
decreased by 40.5% from $0.37 in the three months ended March 31, 2002, to $0.22
per diluted share.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term interest-bearing investments totaled
$1,221.3 million as of March 31, 2003, 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 $192.9 million and $208.0 million
for the six months ended March 31, 2003 and 2002, 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, which was partially offset by a decrease in working capital
excluding cash. 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 March 31, 2003, we had working capital of $1,053.2 million, compared
to $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 March 31, 2003, $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 six
months ended March 31, 2003, we did not repurchase any of the Notes. 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 March 31, 2003, we had no outstanding borrowings under our short-term
general revolving line of credit of $30.0 million. In addition, as of March 31,
2003 we had credit facilities totaling $38.9 million limited for the use of
letters of credit and bank guaranties from various banks. Outstanding letters of
credit and bank guarantees as of March 31, 2003 totaled $22.0 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 March 31, 2003, we had outstanding long-term obligations of $19.5
million in connection with leasing arrangements.
28
Our capital expenditures were approximately $27.0 million in the six months
ended March 31, 2003. These expenditures consisted primarily of purchases of
computer equipment, computer software and related intangible assets 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.
NET DEFERRED TAX ASSETS
As of March 31, 2003, deferred tax assets of $11.1 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. Effective
October 1, 2002, following the adoption of SFAS No. 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 six months ended March 31, 2002, 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. Since a
significant portion of such costs and charges was attributable to amortization
of goodwill, much of which was not tax deductible, the effective tax rate in the
six months ended March 31, 2002 was adversely affected. Our blended effective
tax rate for the six months ended March 31, 2002 was 60%. Excluding the impact
of these items, our overall effective tax rate would have been 28% for the six
months ended March 31, 2002.
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 March 31, 2003, we had hedged
significant exposures in currencies other than the dollar.
LITIGATION
Beginning on June 24, 2002, a number of complaints were filed by holders of
our ordinary shares against us and certain 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 cases were transferred to and consolidated in
the Eastern District of Missouri. The Court has appointed lead plaintiffs, who
filed a consolidated amended complaint on March 24, 2003. The lead plaintiffs
seek to represent a putative class of persons who purchased our ordinary shares
between July 18, 2000 and June 20, 2002. The amended complaint alleges that we
and the individual defendants made false or misleading statements about our
business and future prospects during the putative class period in violation of
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder. The lead plaintiffs seek unspecified monetary damages. We will move
to dismiss the amended complaint. We dispute all allegations of wrongdoing and
intend to defend ourselves vigorously.
29
PART II - OTHER INFORMATION
ITEM 1. EXHIBITS AND REPORTS ON FORM 6-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
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99.1 Amdocs Limited Press Release dated April 15, 2003.
(b) Reports on Form 6-K
The Company filed the following reports on Form 6-K during the three
months ended March 31, 2003:
(1) Form 6-K dated March 24, 2003.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMDOCS LIMITED
/s/ Thomas G. O'Brien
---------------------------------
Thomas G. O'Brien
Treasurer and Secretary
Authorized U.S. Representative
Date: May 15, 2003
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
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99.1 Amdocs Limited Press Release dated April 15, 2003.