================================================================================
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 June 30, 2002
AMDOCS LIMITED
Suite 5, Tower Hill House Le Bordage
St. Peter Port, Island of Guernsey, GY1 3QT Channel Islands
Amdocs, Inc.
1390 Timberlake Manor Parkway, Chesterfield, Missouri 63017
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F
Form 20-F X FORM 40-F
----- -----
Indicate by check mark whether the registrant by furnishing the information
contained in this form is also thereby furnishing the information to the
Commission pursuant to rule 12g3-2(b) under the Securities Exchange Act of 1934.
YES NO X
----- -----
================================================================================
AMDOCS LIMITED
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
FOR THE QUARTER ENDED JUNE 30, 2002
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statement of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Unaudited Consolidated Financial Statements
Item 2. Operating and Financial Review and Prospects
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 6-K
SIGNATURES
EXHIBIT INDEX
1
AMDOCS LIMITED
CONSOLIDATED BALANCE SHEETS
(in U.S. dollars, unless otherwise stated)
(in thousands, except per share data)
AS OF
-------------------------------
JUNE 30, SEPTEMBER 30,
----------- -------------
2002 2001
----------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 423,415 $ 872,998
Short-term interest-bearing investments 589,941 237,069
Accounts receivable, including unbilled of $24,377 and $23,272, less
allowances of $15,609 and $3,219, respectively(*) 358,416 384,851
Deferred income taxes and taxes receivable 49,912 38,916
Prepaid expenses and other current assets (*) 65,634 38,045
---------- ----------
Total current assets 1,487,318 1,571,879
Equipment, vehicles and leasehold improvements, net 170,657 173,695
Deferred income taxes 24,909 19,722
Goodwill and other intangible assets, net 822,276 788,187
Other noncurrent assets (*) 113,751 70,953
---------- ----------
Total assets $2,618,911 $2,624,436
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $240,331 $166,527
Accrued personnel costs 88,489 103,990
Deferred revenue 134,260 140,033
Short-term portion of capital lease obligations 10,237 10,400
Deferred income taxes and taxes payable 114,126 91,026
---------- ----------
Total current liabilities 587,443 511,976
Convertible notes and long-term portion of capital lease obligations 518,682 524,779
Deferred income taxes 9,601 7,410
Other noncurrent liabilities 83,493 68,180
---------- ----------
Total liabilities 1,199,219 1,112,345
---------- ----------
Shareholders' equity:
Preferred Shares - Authorized 25,000 shares; Pound Sterling 0.01 par
value; 0 shares issued and outstanding -- --
Ordinary Shares - Authorized 550,000 shares; Pound Sterling 0.01 par
value; 223,253 and 222,628 issued and 215,521 and 222,628 outstanding,
respectively 3,571 3,560
Additional paid-in capital 1,817,590 1,806,290
Treasury stock (109,281) --
Accumulated other comprehensive loss (4,921) (6,382)
Unearned compensation -- (185)
Accumulated deficit (287,267) (291,192)
---------- ----------
Total shareholders' equity 1,419,692 1,512,091
---------- ----------
Total liabilities and shareholders' equity $2,618,911 $2,624,436
========== ==========
(*) See Note 2.
See accompanying notes
2
AMDOCS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ----------------------------
2002 2001 2002 2001
-------- -------- ---------- ----------
Revenue:
License (*) $ 36,778 $ 48,504 $ 124,596 $ 129,870
Service (*) 343,357 355,503 1,133,449 988,593
-------- -------- ---------- ----------
380,135 404,007 1,258,045 1,118,463
-------- -------- ---------- ----------
Operating expenses:
Cost of license 1,189 1,772 3,602 4,725
Cost of service (*) 231,648 220,834 711,454 618,776
Research and development 32,822 28,003 92,281 76,734
Selling, general and administrative (*) 55,411 52,727 170,213 144,344
Amortization of goodwill and
purchased intangible assets 56,562 55,807 175,238 164,131
In-process research and development
and nonrecurring charge -- -- 30,711 --
-------- -------- ---------- ----------
377,632 359,143 1,183,499 1,008,710
-------- -------- ---------- ----------
Operating income 2,503 44,864 74,546 109,753
Interest income and other, net (*) 3,080 5,228 8,790 15,885
-------- -------- ---------- ----------
Income before income taxes 5,583 50,092 83,336 125,638
Income taxes 32,434 31,600 79,411 79,157
-------- -------- ---------- ----------
Net income (loss) $(26,851) $ 18,492 $ 3,925 $ 46,481
======== ======== ========== ==========
Basic earnings (loss) per share $ (0.12) $ 0.08 $ 0.02 $ 0.21
======== ======== ========== ==========
Diluted earnings (loss) per share $ (0.12) $ 0.08 $ 0.02 $ 0.20
======== ======== ========== ==========
Basic weighted average number of shares
outstanding 220,245 222,349 221,979 221,814
======== ======== ========== ==========
Diluted weighted average number of
shares outstanding 220,245 226,942 223,968 226,961
======== ======== ========== ==========
(*) See Note 2.
See accompanying notes
3
AMDOCS LIMITED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
(in thousands)
Accumulated
Ordinary Shares Additional Other
-------------------- Paid-in Treasury Comprehensive
Shares Amount Capital Stock Loss
------- ------ ---------- -------- -------------
BALANCE AS OF
SEPTEMBER 30, 2001 222,628 $3,560 $1,806,290 $-- $(6,382)
Comprehensive income:
Net income -- -- -- -- --
Decrease in unrealized
loss on foreign
currency hedging
contracts, net of $733
tax -- -- -- -- 1,079
Increase in unrealized
gain on cash equivalents
and short-term interest-
bearing investments, net
of $88 tax -- -- -- -- 382
Comprehensive income
Employee stock options
exercised 625 11 5,017 -- --
Tax benefit of stock
options exercised -- -- 6,203 -- --
Expense related to
vesting of stock options -- -- 80 -- --
Repurchase of shares (7,732) -- -- (109,281) --
Amortization of
unearned compensation -- -- -- -- --
------- ------ ---------- --------- -------
BALANCE AS OF JUNE 30,
2002 215,521 $3,571 $1,817,590 $(109,281) $(4,921)
======= ====== ========== ========= =======
Total
Unearned Accumulated Shareholders'
Compensation Deficit Equity
------------ ----------- -------------
BALANCE AS OF
SEPTEMBER 30, 2001 $(185) $(291,192) $1,512,091
Comprehensive income:
Net income -- 3,925 3,925
Decrease in unrealized
loss on foreign
currency hedging
contracts, net of $733
tax -- -- 1,079
Increase in unrealized
gain on cash equivalents
and short-term interest-
bearing investments, net
of $88 tax -- -- 382
---------
Comprehensive income 5,386
---------
Employee stock options
exercised -- -- 5,028
Tax benefit of stock
options exercised -- -- 6,203
Expense related to
vesting of stock options -- -- 80
Repurchase of shares -- -- (109,281)
Amortization of
unearned compensation 185 -- 185
----- --------- ----------
BALANCE AS OF JUNE 30,
2002 $ -- $(287,267) $1,419,692
===== ========= ==========
As of June 30, 2002 and September 30, 2001, accumulated other comprehensive loss
is comprised of unrealized loss on foreign currency hedging contracts, net of
tax, of $(6,823) and $(7,902), respectively, and unrealized gain on cash
equivalents and short-term interest-bearing investments, net of tax, of $1,902
and $1,520, respectively.
See accompanying notes
4
AMDOCS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
NINE MONTHS ENDED JUNE 30,
--------------------------------
2002 2001
--------- ---------
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 3,925 $ 46,481
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization 233,068 209,472
Adjustment to the basis of investments 5,500 6,750
In-process research and development 17,400 --
Loss on sale of equipment 335 217
Deferred income taxes 6,607 2,894
Tax benefit of stock options exercised 6,203 5,841
Unrealized other comprehensive income (loss) 2,282 (5,277)
Net changes in operating assets and liabilities, net
of amounts acquired:
Accounts receivable 50,845 (66,233)
Prepaid expenses and other current assets (16,430) (4,964)
Other noncurrent assets (10,272) (6,274)
Accounts payable and accrued expenses 38,491 28,177
Deferred revenue (36,583) 13,483
Income taxes payable (616) (751)
Other noncurrent liabilities 10,647 13,070
--------- ---------
Net cash provided by operating activities 311,402 242,886
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from sale of equipment, vehicles and leasehold
improvements 1,267 2,157
Payments for purchase of equipment, vehicles, leasehold (42,417)
improvements and other (71,701)
Purchase of short-term interest-bearing investments, net (352,872) (214,767)
Investment in noncurrent assets (41,026) (4,669)
Cash paid for acquisitions (213,180) --
--------- ---------
Net cash used in investing activities (648,228) (288,890)
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from employee stock options exercised 5,028 12,818
Repurchase of shares (109,281) --
Net proceeds from issue of long term convertible notes -- 488,000
Payments under short-term finance arrangements -- (20,000)
Principal payments on capital lease obligations (8,504) (7,611)
--------- ---------
Net cash (used) provided in financing activities (112,757) 473,207
--------- ---------
Net (decrease) increase in cash and cash equivalents (449,583) 427,113
Cash and cash equivalents at beginning of period 872,998 402,300
--------- ---------
Cash and cash equivalents at end of period $ 423,415 $ 829,413
========= =========
SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for:
Income taxes, net of refunds $ 68,800 $ 65,741
Interest 10,949 2,149
NON CASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations of $2,245 and $8,185 were incurred during the
nine months ended June 30, 2002 and 2001, respectively, as a result of the
Company (as defined below) entering into lease agreements for the purchase of
fixed assets.
See accompanying notes
5
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
1. BASIS OF PRESENTATION
Amdocs Limited and its subsidiaries ("Amdocs" or the "Company") is a
leading provider of software products and services to the communications
industry. The Company operates in one business segment, the provision of
business support systems and related services. Focused on 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 management, all adjustments considered
necessary for a fair presentation of the unaudited interim consolidated
financial statements have been included herein and are of a normal recurring
nature.
The preparation of financial statements during interim periods requires
management to make numerous estimates and assumptions that impact the reported
amounts of assets, liabilities, revenue and expenses. Estimates and assumptions
are reviewed periodically and the effect of revisions is reflected in the
results of operations of the interim periods in which changes are determined to
be necessary.
The results of operations for the interim periods presented herein are not
necessarily indicative of the results to be expected for the full year. These
statements do not include all information and footnotes necessary for a complete
presentation of financial position, results of operations and cash flows in
conformity with GAAP. These statements should be read in conjunction with the
Company's consolidated financial statements for the fiscal year ended September
30, 2001 set forth in the Company's Annual Report on Form 20-F filed with the
Securities and Exchange Commission.
2. RELATED PARTY TRANSACTIONS
The following related party balances are included in the balance sheets:
AS OF
------------------------------
JUNE 30, SEPTEMBER 30,
--------- -------------
2002 2001
--------- -------------
Accounts receivable, including unbilled of $314 and $54,000 $104,096
$4,479, respectively
Prepaid expenses and other current assets(1) 975 --
Other noncurrent assets(2) 50,318 10,091
(1) Consists of interest receivable accrued on convertible debentures issued to
the Company by Certen Inc. ("Certen"), a company formed by Bell Canada and
the Company in January 2001.
(2) Consists of an investment in Certen in equity and convertible debentures.
The investment in Certen is accounted for under the cost method, based on
the Company's 10% ownership of Certen. As part of its original commitment,
the total additional financial investment the Company will be making in
Certen is approximately $5,000, translated from Canadian dollars, which is
the functional currency for the Certen transaction. The Company's exposure
to currency fluctuation with respect to the convertible debenture component
of this investment has been substantially hedged.
6
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
The Company licenses software and provides computer systems integration and
related services to several affiliates of a significant shareholder of the
Company, including Certen. The following related party revenue is included in
the statements of operations for the following periods:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2002 2001 2002 2001
------- ------- -------- --------
Revenue:
License $ 9,607 $ 9,256 $ 20,281 $ 22,567
Service 71,545 61,159 244,667 170,937
The majority of the related party revenue is attributable to affiliates
(other than Certen) of a significant shareholder of the Company, with the
balance attributable to Certen.
The following related party expenses and income are included in the
statements of operations for the following periods:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2002 2001 2002 2001
----- ------ ------ ------
Operating expenses (1):
Cost of service $750 $1,187 $1,962 $2,476
Selling, general and administrative 96 144 267 575
Interest income and other, net (2): 1,038 -- 1,334 --
(1) The Company leases office space on a month-to-month basis and purchases
other miscellaneous support services from affiliates of a certain
shareholder.
(2) Represents interest and exchange rate differences, net of hedging, on the
convertible debentures issued in connection with the Certen transaction.
Absent hedging, these amounts would be $2,448 and $2,692 for the three and
nine months ended June 30, 2002, respectively
3. COMPREHENSIVE INCOME
Comprehensive income represents the change in shareholders' equity during a
period from transactions and other events and circumstances from nonowner
sources. It includes all changes in equity except those resulting from
investments by owners and distributions to owners.
The following table sets forth the reconciliation from net income (loss) to
comprehensive income (loss) for the following periods:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ------------------------
2002 2001 2002 2001
--------- ------- ------ -------
Net income (loss) $(26,851) $18,492 $3,925 $46,481
Other comprehensive income (loss):
Unrealized income (loss) on foreign
currency hedging contracts, net of tax 5,411 2,821 1,079 (3,865)
Unrealized income (loss) on short-term
interest-bearing investments, net of tax 3,179 (344) 382 171
-------- ------- ------ -------
Comprehensive income (loss) $(18,261) $20,969 $5,386 $42,787
======== ======= ====== =======
7
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
4. INCOME TAXES
The provision for income taxes for the following periods consisted of:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ------------------------
2002 2001 2002 2001
------- ------- ------- -------
Current $26,988 $26,129 $72,804 $76,263
Deferred 5,446 5,471 6,607 2,894
------- ------- ------- -------
$32,434 $31,600 $79,411 $79,157
======= ======= ======= =======
The Company's effective income tax rate varied from the statutory Guernsey
tax rate as follows for the following periods:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2002 2001 2002 2001
----- ----- ----- -----
Statutory Guernsey tax rate 20% 20% 20% 20%
Guernsey tax-exempt status (20) (20) (20) (20)
Foreign taxes 28 30 28 30
----- ----- ----- -----
Income tax rate before effect of 28 30 28 30
acquisitions-related costs and nonrecurring
charge
Effect of acquisitions-related costs 553 33 47 33
----- ----- ----- -----
Income tax rate before in-process
research and development and
nonrecurring charge 581 63 75 63
In-process research and development and
nonrecurring charge -- -- 20 --
----- ---- ----- -----
Effective income tax rate 581% 63% 95% 63%
===== ==== ===== =====
These effective tax rates are substantially higher than the weighted
average of the tax rates applicable to the Company generally in those
jurisdictions where it operated during the time periods given. The high
effective rates result from the substantial amount of the Company's
non-deductible non-cash goodwill amortization related to acquisitions, relative
to the Company's level of pretax income. This effect was exaggerated in the
third quarter of fiscal 2002 because, in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" ("SFAS
109"), the Company's effective tax rates are estimated in advance of each fiscal
year, based on a forecast by the Company of its pretax income for the coming
fiscal year, and the Company's current pretax income estimate is substantially
less than the pretax income level originally forecast for the full fiscal year.
Excluding the impact of acquisitions-related costs and certain other items, the
Company's overall effective tax rate was approximately 28% and 30% for the three
months and nine months ended June 30, 2002 and 2001, respectively.
8
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
5. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- -------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Numerator:
Net income (loss) $(26,851) $ 18,492 $ 3,925 $ 46,481
======== ======== ======== ========
Denominator:
Denominator for basic earnings (loss)
per share - weighted average number of
shares outstanding(1) 220,245 222,349 221,979 221,814
Effect of dilutive stock options granted(2) -- 4,593 1,989 5,147
-------- -------- -------- --------
Denominator for dilutive earnings (loss)
per share - adjusted weighted average
shares and assumed conversions(1) 220,245 226,942 223,968 226,961
======== ======== ======== ========
Basic earnings (loss) per share $ (0.12) $ 0.08 $ 0.02 $ 0.21
======== ======== ======== ========
Diluted earnings (loss) per share $ (0.12) $ 0.08 $ 0.02 $ 0.20
======== ======== ======== ========
(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.
(2) Due to net loss, potentially issuable shares are excluded from the
computation of diluted average number of shares outstanding.
The effect of the 2% Convertible Notes due June 1, 2008 issued by the
Company in May 2001 (the "Notes") on diluted earnings (loss) per share was
anti-dilutive for the three months and nine months ended June 30, 2002 and 2001,
and therefore has not been included in the calculation above. The weighted
average effect of the repurchase of Ordinary Shares by the Company has been
included in the calculation of basic earnings (loss) per share. See Note 9
below.
6. ACQUISITION
On November 28, 2001, the Company completed its acquisition from Nortel
Networks Corporation of substantially all of the assets of its Clarify business
("Clarify"), a leading provider of Customer Relationship Management ("CRM")
software to communications companies and other enterprise sectors. This
acquisition positioned the Company as a leading provider of CRM software to the
communications industry and, through the addition of Clarify's CRM software to
the Company's Business Support Systems offerings, reinforced the Company's
leadership in delivering a comprehensive portfolio of business software
applications. Following the acquisition, the Company has continued to sell
Clarify's CRM software to customers other than communications service providers,
although this is not the focus of the Company's business and, as a result, it
believes that revenue from such customers will remain relatively stable over
time.
9
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
The aggregate purchase price for Clarify was $203,750 in cash. The purchase
price is subject to final price adjustments that may result in a reduction.
Transaction costs were $8,250. The acquisition was accounted for as a business
combination using the purchase method of accounting, as required by SFAS No.
141, "Business Combinations" ("SFAS 141"). The fair market value of Clarify's
assets and liabilities is included in the Company's balance sheet and the
results of Clarify's operations are included in the Company's consolidated
statements of operations, in each case as of the closing date of the
acquisition.
The Company obtained a valuation of the intangible assets acquired in the
Clarify transaction. The value of acquired technology included both existing
technology and in-process research and development. The valuation of these
technologies was made by applying the income forecast method, which considered
the present value of cash flows by product lines. Of the $65,600 of acquired
identifiable intangible assets, $17,400 was assigned to in-process research and
development and was written off as of the closing date of the acquisition, in
accordance with FASB Interpretation No. 4, "Applicability of FASB Statement No.
2 to Business Combinations Accounted for by the Purchase Method". This write-off
is included in "in-process research and development and nonrecurring charge" for
the nine months ended June 30, 2002. The fair value assigned to core technology
was $13,400 and is being amortized over two years commencing on November 28,
2001. The fair value assigned to customer arrangements was $34,800 and is being
amortized over three years commencing on November 28, 2001.
The excess of the purchase price over the fair value of the net assets
acquired, or goodwill, was $165,404. The amount assigned to goodwill is subject
to the possible purchase price adjustment and other contingencies. The goodwill
is accounted for under SFAS No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"). In accordance with SFAS 142, goodwill from acquisitions after July
1, 2001 is no longer amortized, but is subject to impairment tests. Under the
transition provisions of SFAS 142, goodwill for acquisitions prior to July 1,
2001 will continue to be amortized only through September 30, 2002. As a result,
goodwill associated with the acquisition of Clarify is not amortized, while
goodwill associated with other acquisitions by the Company will be amortized
only for the remainder of this fiscal year.
Set forth below is the unaudited pro forma revenue, operating income, net
income (loss) and earnings (loss) per share as if Clarify had been acquired as
of the beginning of the respective periods, excluding the write-off of purchased
in-process research and development:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, 2001 JUNE 30,
------------------ ----------------------------
2002 2001
---------- -----------
Revenue $459,007 $1,278,045 $1,313,081
Operating income 15,478 80,346 31,119
Net income (loss) (4,244) 11,261 (18,843)
Basic earnings (loss) per share (0.02) 0.05 (0.08)
Diluted earnings (loss) per share (0.02) 0.05 (0.08)
As a result of SFAS 142, goodwill associated with acquisitions completed
after July 1, 2001 is not amortized and, accordingly, the pro forma information
above reflects no amortization of goodwill related to the Clarify acquisition.
7. ADJUSTMENT TO THE BASIS OF INVESTMENTS
In the third quarter of fiscal 2002, the Company recorded pretax charges of
$5,500 to adjust the carrying value of two investments, accounted for by the
Company under the cost method. In the third
10
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share date)
quarter of fiscal 2001, the Company recorded pretax charges of $6,750 to adjust
the carrying value of four investments, accounted for by the Company under the
cost method. The Company monitors the economic and financial aspects of its
interests in all of its investments.
8. OPERATIONAL EFFICIENCY AND COST REDUCTION PROGRAM
As part of a plan to achieve increased operational efficiency and to more
closely monitor and reduce costs, in October 2001 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
incurred a nonrecurring charge of $13,311 in the first quarter of fiscal 2002,
primarily for the write-off of leasehold improvements and rent obligations, with
the remainder for severance payments. This nonrecurring charge is included in
"in-process research and development and nonrecurring charge" for the nine
months ended June 30, 2002. In addition, as part of a general effort to reduce
costs, the Company has decreased its overall commitments for employee
compensation, through a lesser reliance on fixed compensation programs and a
greater reliance on discretionary arrangements.
On June 20, 2002, the Company announced its intention to implement a cost
reduction program to reduce costs by approximately 10% in response to a decline
of the Company's forecasted revenue for the third and fourth quarters of fiscal
2002. The decline resulted from, among other factors, slowdowns in customer
buying decisions in the third quarter of fiscal 2002, stemming from overall
reductions in the capital investment budgets of many communications service
providers, leading to fewer new contracts for the Company than it had expected,
as well as smaller than expected initial spending commitments and reduced
discretionary spending under the Company's contracts with some of its customers.
These cost reductions, implementation of which will take place during the fourth
quarter of fiscal 2002, include workforce reductions of approximately 10% that
occurred in July 2002, and general overhead expense reduction measures, such as
the closure of excess facilities.
The Company expects to record a charge of $20,000 to $25,000 in the fourth
quarter of fiscal 2002, consisting primarily of severance payments for the
approximately one thousand positions that have been eliminated by the Company,
and facility closing costs. Except for certain lease termination costs that will
be paid over the respective lease terms, the Company expects to pay
substantially all of the remaining costs of the cost reduction program
throughout the first quarter of fiscal 2003.
9. SECURITIES REPURCHASE PROGRAMS
On November 6, 2001, the Company announced that its board of directors had
approved a share repurchase program authorizing the repurchase of up to 11,000
Ordinary Shares, or approximately 5% of the Company's outstanding Ordinary
Shares as of that date. On April 23, 2002, the Company announced that its board
of directors had expanded the existing stock repurchase plan to authorize the
purchase of up to 20,000 shares, or approximately 9% of the Company's
outstanding Ordinary Shares. Under the program, from time to time through
November 2002, shares may be repurchased on the open market, in privately
negotiated transactions or otherwise, in accordance with any applicable laws,
and at times and prices considered appropriate by the Company. During the three
and nine month periods ended June 30, 2002, the Company repurchased 7,132.5 and
7,732.5 Ordinary Shares, respectively, at an average price of $13.16 and $14.13
per share, respectively. The Company funded these repurchases, and intends to
fund any future repurchases, with available funds.
11
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share date)
On July 23, 2002, the Company's board of directors authorized the Company
to repurchase outstanding Notes, in such amounts, at such prices and at such
times considered appropriate by the Company. Such repurchases may be made by the
Company on the open market, in privately negotiated transactions or otherwise,
in accordance with any applicable laws and the terms of the Notes. No
repurchases by the Company have been made to date.
10. LITIGATION
Beginning on June 24, 2002, a number of complaints were filed by holders of
the Company's Ordinary Shares against the Company and four of its officers and
directors, in the United States District Courts for the Eastern District of
Missouri and the Southern District of New York. The complaints allege violations
of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated
thereunder. Each plaintiff seeks to represent a putative class of all purchasers
of the Company's Ordinary Shares between July 18, 2000 (or, in some of the
complaints, July 24, 2001) and June 20, 2002. The complaints generally allege
that, during that period, the Company and the individual defendants made false
or misleading statements, in press releases and Securities and Exchange
Commission filings, regarding among other things the Company's future prospects,
backlog, revenue, gross margin, acquisitions and accounting practices. Each
plaintiff seeks unspecified monetary damages and other relief against all
defendants. The Company disputes the allegations of wrongdoing in these
complaints and intends to defend itself vigorously.
12
ITEM 2. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
FORWARD LOOKING STATEMENTS
Some of the information in this section contains forward looking statements
(within the meaning of the Private Securities Litigation Reform Act of 1995)
that involve substantial risks and uncertainties. You can identify these
statements by forward looking words such as "expect", "anticipate", "believe",
"seek", "estimate", "project", "forecast", "continue", "potential" and similar
words. Statements that we make in this section that are not statements of
historical fact also may be forward looking statements. Forward looking
statements are not guarantees of future performance, and involve risks,
uncertainties and assumptions that may cause our actual results to differ
materially from the expectations we describe in our forward looking statements.
There may be events in the future that we are not accurately able to predict, or
over which we have no control. You should not place undue reliance on forward
looking statements. We do not promise to notify you if we learn that our
assumptions or projections are wrong for any reason. We disclaim any obligation
to update our forward looking statements.
Important factors that may affect these projections or expectations
include, but are not limited to: the loss of a significant client; changes in
the overall economy; changes in competition in markets in which we operate;
changes in the regulatory environment in which our customers operate; changes in
the demand for our products and services; changes in technology that impact both
the markets we serve and the types of products and services we offer; financial
difficulties of our customers; losses of key personnel; difficulties in
completing or integrating acquisitions; acts of war or terrorism; and
consolidation within the industries in which our customers operate.
INTRODUCTION
In this section, we discuss the general financial condition and the results
of operations for Amdocs and its subsidiaries including:
- what factors affect our business,
- what our revenue and costs were in the nine months and three months
ended June 30, 2002 and 2001,
- why those revenue and costs were different from period to period,
- the sources of our revenue,
- the impact of certain special charges we have made,
- how all of this affects our overall financial condition,
- what our expenditures were in the nine months and three months ended
June 30, 2002 and 2001, and
- the sources of our cash to pay for future capital expenditures and
possible acquisitions.
In this section, we also analyze and explain for the relevant periods the
changes in the specific line items in our consolidated statements of operations.
This section should be read in conjunction with our consolidated financial
statements.
OVERVIEW OF BUSINESS AND TREND INFORMATION
Our market focus is the communications industry, and we are a leading
provider of software products and services to that sector. Our Business Support
Systems ("BSS") consist primarily of Customer Care and Billing, Customer
Relationship Management (or "CRM") and Order Management Systems (collectively,
13
"CC&B Systems"). Our products are designed to meet the mission-critical needs of
leading communications service providers, supporting a wide range of
communications services, including wireline, wireless, broadband, electronic and
mobile commerce and Internet Protocol ("IP") services. We also support companies
that offer multiple service packages, commonly referred to as convergent
services. In addition, we provide a full range of Directory Sales and Publishing
Systems ("Directory Systems") to publishers of both traditional printed yellow
page and white page directories and electronic Internet directories. Due to the
complexity of BSS projects and the expertise required for system support, we
also provide extensive customization, implementation, system integration,
ongoing support, system enhancement, maintenance and outsourcing services, such
as the operation of data centers and the provision of communications facility
management services, in all cases on either or a combination of a fixed or unit
charge basis to our customers.
As part of our strategy, we may pursue acquisitions and other initiatives
in order to offer new products or services or otherwise enhance our market
position or strategic strengths. See discussion below - "Acquisition".
We derive our revenue principally from:
- the initial sale of our products and related services, including
license fees and customization, implementation and integration
services,
- recurring revenue from ongoing support and maintenance provided to our
customers and, to a lesser degree, from incremental license fees
resulting from increases in the number of a customer's subscribers,
and
- 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, revenue generally is recognized 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, revenue from the operation and maintenance of
customers' billing systems is recognized in the period in which the bills are
produced. Revenue from ongoing support services is recognized as work is
performed. Revenue from third-party hardware and software sales is recognized
upon delivery. Maintenance revenue is recognized ratably over the term of the
maintenance agreement. As a result of a substantial portion of our revenue being
subject to the percentage of completion accounting method, the size and timing
of customer projects and our progress in completing such projects may
significantly affect our annual and quarterly operating results.
Our business is subject to the effects of general global economic
conditions and, in particular, market conditions in the communications industry.
As a result of the slowdown in the communications industry, the market value,
financial results and prospects, and capital spending levels of most
communications companies have declined or degraded.
The persistence and worsening of the downturn in the communications
industry has significantly impacted our business. Recent further slowdowns in
customer buying decisions stemming from overall reductions in the capital
investment budgets of many communications service providers have led to fewer
new contracts than we had expected, as well as smaller than expected initial
spending commitments and reduced discretionary spending under our contracts with
some of our customers. These factors, combined with the continuing general
economic slowdown, resulted in our achieving lower revenue levels during the
third quarter of fiscal 2002 than we had
14
originally expected. We believe that the downturn in our market will continue to
impact our business in the next quarter, and will result in further reductions
in revenue. We currently expect that revenue for the fourth quarter ending
September 30, 2002 will be in the range of $350 million to $360 million, and
that we will have a loss per share for the fourth quarter. Excluding the effects
of acquisition-related charges and a non-recurring charge to be made in the
fourth quarter of fiscal 2002 related to a cost reduction program commenced in
July 2002, we expect that our pro forma earnings per share in the fourth quarter
of fiscal 2002 will be in the range of $0.17 to $0.20 per share. See discussions
below - "Acquisition" and "Operational Efficiency and Cost Reduction Program".
Although we are unable at this time to forecast beyond the fourth quarter
of fiscal 2002, we could experience additional revenue softness in the future.
As a result of the decrease in our revenue, we moved decisively to reduce costs.
See discussion below - "Operational Efficiency and Cost Reduction Program".
Due to our heavy dependence on the communications industry, we can be
adversely effected 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.
License and service fees from the sale of CC&B Systems amounted to $1,124.1
million and $1,001.8 million in the nine months ended June 30, 2002 and 2001,
respectively, representing 89.4% and 89.6%, respectively, of our revenue for
such periods. License and service fees from the sale of CC&B Systems amounted to
$338.9 million and $364.1 million in the three months ended June 30, 2002 and
2001, respectively, representing 89.1% and 90.1%, respectively, of our revenue
for such periods.
15
We believe that we are a leading global provider of CC&B Systems. We
provide a broad set of CC&B Systems, with proven functionality and scalability,
accompanied by a comprehensive range of support services.
We believe that demand for our CC&B Systems is driven by, among other key
factors:
- the global penetration of communications service providers,
- the emergence of new communications products and services, especially
IP and data services,
- technological changes, such as the introduction of wireless Internet
services via GPRS (General Packet Radio Services) and UMTS (Universal
Mobile Telecommunications System) technology, and
- a shift from in-house management to vendor solutions.
We also believe two key drivers of demand are the continuing trend for
communications service providers to offer to their subscribers multiple service
packages, commonly referred to as convergent services (combinations of voice,
broadband, electronic and mobile commerce and IP services), and the ability of
our CC&B Systems to improve productivity and reduce costs of communications
providers.
Another key to demand for our CC&B Systems is the practice by certain
communications service providers to outsource entirely their customer care and
billing functions.
We expect that, as a result of the downturn in the communications industry,
with its direct negative impact on the number of new contracts we have been able
to obtain, and the smaller initial spending commitments and reduced
discretionary spending being made by some of our customers, revenue attributable
to our CC&B Systems will decrease in the fourth quarter of fiscal 2002. Although
we are unable at this time to forecast demand for our CC&B Systems beyond the
fourth quarter of fiscal 2002, we could experience additional revenue softness
in the future.
License and service fee revenue from the sale of Directory Systems totaled
$133.9 million and $116.7 million in the nine months ended June 30, 2002 and
2001, respectively, accounting for 10.6% and 10.4%, respectively, of our revenue
for such periods. License and service fee revenue from the sale of Directory
Systems totaled $41.3 million and $39.9 million in the three months ended June
30, 2002 and 2001, respectively, accounting for 10.9% and 9.9%, respectively, of
our revenue for such periods.
We believe that we are a leading provider of Directory Systems in most of
the markets that we serve and, although we are unable at this time to forecast
demand for our Directory Systems beyond the fourth quarter of fiscal 2002, we
currently expect that the demand for our Directory Systems will remain
relatively stable in future periods.
SENIOR MANAGEMENT TRANSITION
On June 20, 2002, our board of directors accepted the request of Avinoam
Naor, who at that time was serving as President and Chief Executive Officer of
Amdocs Management Limited, to accelerate the senior management transition we
first announced on March 13, 2002. Effective July 1, 2002, Dov Baharav, who
previously had served as Chief Financial Officer of Amdocs Management Limited,
assumed the role of President and Chief Executive Officer. Ron Moskovitz, who
previously had served as Vice President of Finance for Amdocs Management
Limited, took over the role of Chief Financial Officer.
16
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 BSS offerings. Research and development expenditures amounted to
$92.3 million and $76.7 million in the nine months ended June 30, 2002 and 2001,
respectively, representing 7.3% and 6.9%, respectively, of our revenue in these
periods. Research and development expenditures amounted to $32.8 million and $28
million in the three months ended June 30, 2002 and 2001, respectively,
representing 8.6% and 6.9%, 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 BSS offerings. Although we intend to continue
devoting 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 and a
decrease in our total revenue could, in certain circumstances, lead to
reductions in the levels of our research and development expenditures.
We regard significant portions of our software products and systems as
proprietary and rely on a combination of statutory and common law copyright,
trademark and trade secret laws, customer licensing agreements, employee and
third-party nondisclosure agreements and other methods to protect our
proprietary rights. We generally enter into confidentiality agreements with our
employees, consultants, customers and potential customers and limit access to,
and distribution of, our proprietary information. We believe that the
sophistication and complexity of our BSS offerings make it very difficult to
copy such information or to subject such information to unauthorized use. We
maintain sole ownership of our software products.
ACQUISITION
On November 28, 2001, we completed our acquisition from Nortel Networks
Corporation of substantially all of the assets of Clarify, a leading provider of
CRM software to communications companies and other enterprise sectors. This
acquisition positioned us as a leading provider of CRM software to the
communications industry and, through our addition of Clarify's CRM software to
our BSS offerings, reinforced our leadership in delivering a comprehensive
portfolio of business software applications. Following the acquisition, we have
continued to sell Clarify's CRM software to customers other than communication
service providers, although this is not the focus of our business and, as a
result, we believe that revenue from such customers will remain relatively
stable over time.
The aggregate purchase price for Clarify was $203.8 million in cash. The
purchase price is subject to final price adjustments that may result in a
reduction. Transaction costs were $8.3 million. The acquisition was accounted
for as a business combination using the purchase method of accounting, as
required by SFAS 141. The fair market value of Clarify's assets and liabilities
is included in our balance sheet and the results of Clarify's operations are
included in our consolidated statements of operations, in each case as of the
closing date of the acquisition.
We obtained a valuation of the intangible assets acquired in the Clarify
transaction. The value of acquired technology included both existing technology
and in-process research and development. The valuation of these technologies was
made by applying the income forecast method, which considered the present value
of cash flows by product lines. Of the $65.6 million of acquired identifiable
intangible assets, $17.4 million was assigned to in-process research and
development and was written off as of the closing date of the acquisition, in
accordance with FASB Interpretation No. 4, "Applicability of FASB Statement No.
2 to Business Combinations Accounted for by the Purchase Method". This write-off
was included in "in-process research and development and nonrecurring charge"
for the nine months ended June 20, 2002. The fair value assigned to core
technology was $13.4 million and is being amortized over two years commencing on
November 28, 2001. The fair value assigned to customer arrangements was $34.8
million and is being amortized over three years commencing on November 28, 2001.
The excess of the purchase price over the fair value of the net assets
acquired, or goodwill, is $165.4
17
million. The amount assigned to goodwill is subject to the possible purchase
price adjustment and other contingencies. The goodwill is accounted for under
SFAS 142. In accordance with SFAS 142, goodwill from acquisitions after July 1,
2001 is no longer amortized, but is subject to impairment tests. Under the
transition provisions of SFAS 142, goodwill for acquisitions prior to July 1,
2001 will continue to be amortized only through September 30, 2002. As a result,
goodwill associated with the acquisition of Clarify is not amortized, while
goodwill associated with other acquisitions will be amortized only for the
remainder of this fiscal year.
ADJUSTMENT TO THE BASIS OF INVESTMENTS
In the third quarter of fiscal 2002, we recorded pretax charges of $5.5
million to adjust the carrying value of two investments, accounted for by us
under the cost method. In the third quarter of fiscal 2001, we recorded pretax
charges of $6.8 million to adjust the carrying value of four investments,
accounted for by us under the cost method. We monitor the economic and financial
aspects of our interests in all of our investments.
OPERATIONAL EFFICIENCY AND COST REDUCTION PROGRAM
As part of a plan to achieve increased operational efficiency and to more
closely monitor and reduce costs, in October 2001 we consolidated our Stamford,
Connecticut data center into our Champaign, Illinois facility, and we closed the
Stamford facility. As a direct result of this closure, we incurred a
nonrecurring charge of $13.3 million in the first quarter of fiscal 2002,
primarily for the write-off of leasehold improvements and rent obligations, with
the remainder for severance payments. This nonrecurring charge is included in
"in-process research and development and nonrecurring charge" for the nine
months ended June 30, 2002. In addition, as part of a general effort to reduce
costs, we have decreased our overall commitments for employee compensation,
through a lesser reliance on fixed compensation programs and a greater reliance
on discretionary arrangements.
On June 20, 2002, we announced our intention to implement a cost reduction
program to reduce costs by approximately 10% in response to a decline of our
forecasted revenue for the third and fourth quarters of fiscal 2002. The decline
resulted from, among other factors, slowdowns in customer buying decisions in
the third quarter of fiscal 2002, stemming from overall reductions in the
capital investment budgets of many communications service providers, leading to
fewer new contracts for us than we had expected, as well as smaller than
expected initial spending commitments and reduced discretionary spending under
our contracts with some of our customers. These cost reductions, implementation
of which will take place during the fourth quarter of fiscal 2002, include
workforce reductions of approximately 10% that occurred in July 2002, and
general overhead expense reduction measures, such as the closure of excess
facilities.
We expect to record a charge of $20 million to $25 million in the fourth
quarter of fiscal 2002, consisting primarily of the severance payments for
approximately 1,000 positions that have been eliminated, and facility closing
costs. Except for certain lease termination costs that will be paid over the
respective lease terms, we expect to pay substantially all of the remaining
costs of the cost reduction program throughout the first quarter of fiscal 2003.
We believe that implementation of our cost reduction program will permit us
to achieve cost savings of approximately $20 million in the fourth quarter of
fiscal 2002, and cost savings of approximately $30 million in the first quarter
of fiscal 2003, from the cost levels we otherwise would have incurred in those
respective periods.
We also have begun work to redirect certain of our existing resources in
response to changing market conditions. An internal analysis of the
organizational changes that may be appropriate in order to implement such a
strategy has begun and, although specific details have not yet been fully
formulated, we currently anticipate that certain decisions will be made and
changes implemented in the next several months.
18
SECURITIES REPURCHASE PROGRAMS
On November 6, 2001, we announced that our board of directors had approved
a share repurchase program authorizing the repurchase of up to 11 million of our
Ordinary Shares, or approximately 5% of our outstanding Ordinary Shares as of
that date. On April 23, 2002, we announced that our board of directors had
expanded the existing stock repurchase plan to authorize the purchase of up to
20 million shares, or approximately 9% of our outstanding Ordinary Shares. Under
the program, from time to time through November 2002, shares may be repurchased
on the open market, in privately negotiated transactions or otherwise, in
accordance with any applicable laws, and at times and prices as we deem
appropriate. During the three and nine months ended June 30, 2002 we repurchased
7.1 million and 7.7 million, respectively, of our Ordinary Shares at an average
price of $13.16 and $14.13, per share, respectively. We funded these
repurchases, and intend to fund any future repurchases, with available funds.
On July 23, 2002, our board of directors authorized us to repurchase
outstanding 2% Convertible Notes due June 1, 2008, originally issued in May 2001
(the "Notes"), in such amounts, at such prices and at such times considered
appropriate. Such repurchases may be made on the open market, in privately
negotiated transactions or otherwise, in accordance with any applicable laws and
the terms of the Notes. No repurchases have been made to date.
RESULTS OF OPERATIONS
The following tables set forth for the nine months and three months ended
June 30, 2002 and 2001 certain items in our consolidated statements of
operations reflected as a percentage of total revenue:
NINE MONTHS ENDED JUNE 30,
--------------------------------
2002 2001 2002 2001
----- ----- ----- -----
PRO FORMA(*) AS REPORTED
-------------- --------------
Revenue:
License 9.9% 11.6% 9.9% 11.6%
Service 90.1 88.4 90.1 88.4
----- ----- ----- -----
100.0 100.0 100.0 100.0
----- ----- ----- -----
Operating expenses:
Cost of license 0.3 0.4 0.3 0.4
Cost of service 56.6 55.3 56.6 55.3
Research and development 7.3 6.9 7.3 6.9
Selling, general and
administrative 13.5 12.9 13.5 12.9
Amortization of goodwill and
purchased intangible assets -- -- 13.9 14.7
In-process research and
development and nonrecurring charge -- -- 2.5 --
----- ----- ----- -----
77.7 75.5 94.1 90.2
----- ----- ----- -----
Operating income 22.3 24.5 5.9 9.8
Interest income and other, net 0.7 1.4 0.7 1.4
----- ----- ----- -----
Income before income taxes 23.0 25.9 6.6 11.2
Income taxes 6.4 7.8 6.3 7.1
----- ----- ----- -----
Net income 16.6% 18.1% 0.3% 4.1%
===== ===== ===== =====
(*) The above pro forma financial information regarding our operating
results is provided as a complement to results reported in
accordance with GAAP. This pro forma financial information
excludes (i) $175.2 million for amortization of goodwill and
purchased intangible assets and all related tax effects
attributable to acquisitions and (ii) for the nine months ended
June 30, 2002 only, $17.4 million for purchased in-process
research and development attributable to the acquisition of
Clarify and $13.3 million for a nonrecurring
19
charge related to the consolidation of data centers and the
resulting closure of our Stamford, Connecticut facility, and all
related tax effects.
THREE MONTHS ENDED JUNE 30,
---------------------------------------------------------
2002 2001 2002 2001
----- ----- ----- -----
PRO FORMA (*) AS REPORTED
---------------------- -----------------------
Revenue:
License 9.7% 12.0% 9.7% 12.0%
Service 90.3 88.0 90.3 88.0
----- ----- ----- -----
100.0 100.0 100.0 100.0
----- ----- ----- -----
Operating expenses:
Cost of license 0.3 0.4 0.3 0.4
Cost of service 60.9 54.7 60.9 54.7
Research and development 8.6 6.9 8.6 6.9
Selling, general and
administrative 14.6 13.1 14.6 13.1
Amortization of goodwill and
purchased intangible assets -- -- 14.9 13.8
----- ----- ----- -----
84.4 75.1 99.3 88.9
----- ----- ----- -----
Operating income 15.6 24.9 0.7 11.1
Interest income and other, net 0.8 1.3 0.8 1.3
----- ----- ----- -----
Income before income taxes 16.4 26.2 1.5 12.4
Income taxes 4.6 7.9 8.6 7.8
----- ----- ----- -----
Net income (loss) 11.8% 18.3% (7.1)% 4.6%
===== ===== ===== =====
(*) The above pro forma financial information regarding our operating
results is provided as a complement to results reported in
accordance with GAAP. This pro forma financial information
excludes amortization of goodwill and purchased intangible assets
and all related tax effects attributable to acquisitions.
NINE MONTHS ENDED JUNE 30, 2002 AND 2001
REVENUE. Revenue for the nine months ended June 30, 2002 was $1,258
million, an increase of $139.6 million, or 12.5%, over the nine months ended
June 30, 2001. This reflected a lower growth rate than the 39.2% revenue
increase we had been able to achieve a year earlier, attributable primarily to a
pronounced decrease in our CC&B revenue in the third quarter of fiscal 2002.
Following CC&B Systems revenue levels in the first six months of fiscal 2002
that were 23.8% higher than revenue levels for CC&B Systems in the comparable
period of fiscal 2001, and 6.3% higher sequentially based on a comparison of our
second to our first fiscal quarters of 2002, the Company experienced a
$65.8 million, or 16.3%, decline in revenue from our CC&B Systems between the
second and third quarters of fiscal 2002.
License revenue decreased from $129.9 million in the nine months ended June
30, 2001 to $124.6 million during the nine months ended June 30, 2002, a
decrease of 4.1%, while service revenue increased 14.7% from $988.6 million in
the nine months ended June 30, 2001 to $1,133.5 million in the nine months ended
June 30, 2002. The decrease in license revenue is attributable primarily to the
slowdown in customer buying decisions in the third quarter of fiscal 2002,
stemming from overall reductions in the capital investment budgets of many
communications service providers, which has resulted in our obtaining fewer new
contracts than expected and smaller than expected initial spending commitments
under contracts with some of our customers. The smaller than anticipated
increase in service revenue is attributable primarily to our obtaining fewer new
contracts than expected, as well as to smaller initial spending commitments and
reduced discretionary spending under our contracts with some of our customers in
the third quarter of fiscal 2002.
Total CC&B Systems revenue for the nine months ended June 30, 2002 was
$1,124.1 million, an increase of $122.3 million, or 12.2%, over the nine months
ended June 30, 2001. During the nine months ended June 30, 2002, the demand for
our CC&B Systems was primarily driven by the need for communications
20
companies to continue to upgrade their customer care and billing, CRM software
and order management systems in response to competition in the subscriber
markets, the need to offer new data services, and the need to improve
productivity and operational efficiency. In addition, demand for our CC&B
Systems was enhanced by our acquisition of Clarify, including the addition of
Clarify's CRM software to our CC&B Systems offerings. As a result of our
acquisition of Clarify, a portion of our CC&B Systems revenue in the nine months
ended June 30, 2002 was derived from customers other than communications service
providers. For the nine months ended June 30, 2002, approximately $40 million of
our CC&B Systems revenue is attributable to such customers. Our business is not
focused on such non-communications service provider customers and, as a result,
we believe that revenue from such customers will remain relatively stable over
time.
Revenue from Directory Systems was $133.9 million for the nine months ended
June 30, 2002, an increase of $17.2 million, or 14.7%, over the nine months
ended June 30, 2001. The increase is attributable primarily to extensions of
agreements with and additional services rendered to existing customers.
In the nine months ended June 30, 2002, revenue from customers in North
America, Europe and the rest of the world accounted for 62.4%, 28% and 9.6%,
respectively, compared to 52.7%, 36.8% and 10.5%, respectively, for the nine
months ended June 30, 2001. The growth in North America in the nine months ended
June 30, 2002, was attributable primarily to revenue we gained from increased
activity from existing customers.
COST OF LICENSE. Cost of license for the nine months ended June 30, 2002
was $3.6 million, a decrease of $1.1 million, or 23.8%, over the cost of license
for the nine months ended June 30, 2001. Cost of license includes amortizations
of purchased computer software and intellectual property rights, and is
decreasing as a result of our amortizing on a faster than straight line basis.
COST OF SERVICE. Cost of service for the nine months ended June 30, 2002
was $711.5 million, an increase of $92.7 million, or 15%, over the cost of
service of $618.8 million for the nine months ended June 30, 2001. As a
percentage of revenue, cost of service increased to 56.6% in the nine months
ended June 30, 2002 from 55.3% in the nine months ended June 30, 2001. The
increase in cost of service as a percentage of revenue is attributable to our
costs growing at a rate closer to what we had previously believed would be the
growth rate of our revenue. As a result of the general economic and other
factors negatively impacting our markets, we are taking steps to make parallel
decreases in our costs. See discussion above - "Operational Efficiency and Cost
Reduction Program".
RESEARCH AND DEVELOPMENT. Research and development expense was primarily
comprised of compensation expense attributable to research and development
activities, either in conjunction with customer projects or as part of our
internal product development program. In the nine months ended June 30, 2002,
research and development expense was $92.3 million, or 7.3% of revenue, compared
with $76.7 million, or 6.9% of revenue, in the nine months ended June 30, 2001.
The increase in expense reflects ongoing expenditures primarily for CC&B
Systems. Our research and development budget, like all of our costs, is
sensitive to our overall financial condition and a decrease in our total revenue
could, in certain circumstances, lead to reductions in the levels of our
research and development expenditures. See discussion above - "Research and
Development, Patents and Licenses".
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense was primarily comprised of compensation expense and increased by 17.9%
to $170.2 million, or 13.5% of revenue, in the nine months ended June 30, 2002
from $144.3 million, or 12.9% of revenue, in the nine months ended June 30,
2001. The increase in selling, general and administrative expense as a
percentage of revenue is attributable primarily to the increase in our selling
and marketing efforts in the nine months ended June 30, 2002 and, to a lesser
degree, to the reduction in our revenue growth, which was not offset by a
parallel decrease in our selling, general and administrative expense.
21
AMORTIZATION OF GOODWILL AND PURCHASED INTANGIBLE ASSETS. Amortization of
goodwill and purchased intangible assets for the nine months ended June 30, 2002
was $175.2 million, compared to $164.1 million in the nine months ended June 30,
2001. The increase in amortization expense in the nine months ended June 30,
2002 is due to non-goodwill related amortization resulting from the Clarify
acquisition. As a result of SFAS 142, goodwill related to Clarify, an
acquisition made by us after July 1, 2001, is not amortized, but is subject to
impairment tests. For acquisitions we made prior to July 1, 2001, SFAS 142
requires us to amortize the goodwill resulting from such acquisitions only
through September 30, 2002. In the nine months ended June 30, 2002, total
amortization related to such goodwill is $151.5 million. Effective as of October
1, 2002, SFAS 142 will be adopted by us and goodwill related to our acquisitions
will no longer be amortized. Instead, any such goodwill will be subject only to
the same impairment tests now applicable to Clarify-related goodwill. See
discussion above - "Acquisition".
IN-PROCESS RESEARCH AND DEVELOPMENT AND NONRECURRING CHARGE. In-process
research and development and nonrecurring charge in the nine months ended June
30, 2002 consisted of a one-time charge of $17.4 million related to the Clarify
transaction for write-off of purchased in-process research and development, and
a nonrecurring charge of $13.3 million related to the consolidation of data
centers and the resulting closure of our Stamford, Connecticut facility.
OPERATING INCOME. Operating income in the nine months ended June 30, 2002,
was $74.5 million, compared to $109.8 million in the nine months ended June 30,
2001, a decrease of 32.1%, due to the reduction in our revenue growth in the
nine months ended June 30, 2002, which was not offset by a parallel decrease in
our costs, and by the Clarify acquisition-related charges and the nonrecurring
charge resulting from the Stamford facility closing. Pro forma operating income
for the nine months ended June 30, 2002, excluding acquisition-related charges
and the nonrecurring charge, was $280.5 million, or 22.3% of revenue, compared
to $273.9 million, or 24.5% of revenue, for the nine months ended June 30, 2001,
an increase of 2.4%.
INTEREST INCOME AND OTHER, NET. In the nine months ended June 30, 2002,
interest income and other, net, was $8.8 million, a decrease of $7.1 million
from the nine months ended June 30, 2001. The decrease in interest income and
other, net, is primarily attributable to the overall decline in interest rates
and, to a lesser degree, to the decrease in our cash equivalents and short-term
interest-bearing investments, and the interest obligations on the Notes.
INCOME TAXES. Income taxes in the nine months ended June 30, 2002 were
$79.4 million on pretax income of $83.3 million. Our blended effective tax rate
for the nine months ended June 30, 2002 was 95%, resulting from the non-cash
amortization of goodwill related to acquisitions, much of which is not tax
deductible. The pro forma effective tax rate for the nine months ended June 30,
2002, excluding the acquisition-related charges and the nonrecurring charge
resulting from the Stamford facility closing, was 28%. In the nine months ended
June 30, 2001, income taxes were $79.2 million on income before taxes of $125.6
million. The pro forma effective tax rate for the nine months ended June 30,
2001, excluding acquisition-related charges, was 30%. See discussion below -
"Effective Tax Rate".
NET INCOME. Net income was $3.9 million in the nine months ended June 30,
2002, compared to $46.5 million in the nine months ended June 30, 2001. Net
income was 0.3% of revenue for the nine months ended June 30, 2002, compared to
4.1% for the nine months ended June 30, 2001. The decrease is attributable
primarily to the reduction in our revenue growth in the nine months ended June
30, 2002, which was not offset by a parallel decrease in our costs, and by the
Clarify acquisition-related charges and the nonrecurring charge resulting from
the Stamford facility closing. We expect our results to be impacted positively
in fiscal 2003 by our adoption of SFAS 142 as of October 1, 2002. As a result of
the adoption, we will no longer be required to amortize the goodwill from any of
our acquisitions made prior to July 1, 2001. Instead, any such goodwill will be
subject only to impairment tests, as is the case currently for the goodwill from
the Clarify acquisition. See discussion above - "Acquisition". Pro forma net
income for the nine months ended June 30, 2002, excluding the
acquisition-related charges and the nonrecurring charge resulting from the
Stamford facility closing, increased by 2.7% over the nine months ended June 30,
2001, reaching $208.3 million,
22
representing 16.6% of revenue. The lower than historic percentage increase in
our pro forma net income is due to the reduction in our revenue growth in the
nine months ended June 30, 2002, caused by a significant slowdown in our market
in the third quarter of fiscal 2002, which was not offset by a parallel decrease
in the growth of our costs.
DILUTED EARNINGS PER SHARE. Diluted earnings per share were $0.02 for the
nine months ended June 30, 2002, compared to $0.20 in the nine months ended June
30, 2001. Pro forma diluted earnings per share in the nine months ended June 30,
2002, excluding the acquisition-related charges and the nonrecurring charge
resulting from the Stamford facility closing, increased by 4.5% from the nine
months ended June 30, 2001, reaching $0.93 per diluted share.
THREE MONTHS ENDED JUNE 30, 2002 AND 2001
REVENUE. Revenue for the three months ended June 30, 2002 was $380.1
million, a decrease of $23.9 million, or 5.9%, from the three months ended June
30, 2001. License revenue decreased from $48.5 million in the three months ended
June 30, 2001 to $36.8 million during the three months ended June 30, 2002, a
decrease of 24.2%, and service revenue decreased 3.4% from $355.5 million in the
three months ended June 30, 2001 to $343.4 million in the three months ended
June 30, 2002. The decrease in license revenue is attributable primarily to the
significant slowdown in customer buying decisions in the third quarter of fiscal
2002, stemming from overall reductions in the capital investment budgets of many
communications service providers, which resulted in our obtaining fewer new
contracts than expected and smaller than expected initial spending commitments
under contracts with some of our customers. The decrease in service revenue is
attributable primarily to our obtaining fewer new contracts than expected, as
well as to smaller initial spending commitments and reduced discretionary
spending under our contracts with some of our customers.
We currently expect that revenue for the fourth quarter ending September
30, 2002 will be in the range of $350 million to $360 million. Although we are
unable at this time to forecast beyond the fourth quarter of fiscal 2002, we
could experience additional revenue softness in the future. As a result of the
decrease in our revenue levels, we moved decisively to reduce costs. See
discussion above - "Operational Efficiency and Cost Reduction Program".
Reduced revenue from CC&B Systems was the reason for the decline in our
overall revenue in the three months ended June 30, 2002. Total CC&B Systems
revenue for the three months ended June 30, 2002 was $338.9 million, a decrease
of $25.2 million, or 6.9%, from the three months ended June 30, 2001. Following
a period of sequential growth each fiscal quarter since our initial public
offering in 1998, based on a comparison of our third to our second fiscal
quarters of 2002, our CC&B Systems revenue declined by $65.8 million,
representing a 16.3% decline. Approximately $20 million of our CC&B Systems
revenue for the three months ended June 30, 2002 is attributable to revenue from
Clarify's CRM software involving customers other than communications service
providers. This is not the focus of our business and, as a result, we believe
that revenue from such customers will remain relatively stable over time.
Revenue from Directory Systems was $41.3 million for the three months
ended June 30, 2002, an increase of $1.4 million, or 3.5%, over the three months
ended June 30, 2001. The increase was attributable primarily to extensions of
agreements with and additional services rendered to existing customers.
In the three months ended June 30, 2002, revenue from customers in North
America, Europe and the rest of the world accounted for 65.1%, 27.4% and 7.5%,
respectively, compared to 51.5%, 38.1% and 10.4%, respectively, for the three
months ended June 30, 2001. The growth in North America was attributable
primarily to revenue we gained from increased activity for existing customers.
COST OF LICENSE. Cost of license for the three months ended June 30, 2002
was $1.2 million, a decrease of $0.6 million, or 32.9%, from cost of license for
the three months ended June 30, 2001. Cost of license included amortization of
purchased computer software and intellectual property rights, and is decreasing
as a result of our amortizing on a faster than straight line basis.
23
COST OF SERVICE. Cost of service for the three months ended June 30, 2002
was $231.6 million, an increase of $10.8 million, or 4.9%, over the cost of
service of $220.8 million for the three months ended June 30, 2001. As a
percentage of revenue, cost of service increased to 60.9% in the three months
ended June 30, 2002 from 54.7% in the three months ended June 30, 2001. The
increase in cost of service as a percentage of revenue is attributable to our
costs growing at a rate closer to what we had previously believed would be the
growth rate of our revenue. As a result of the general economic and other
factors negatively impacting our markets, we have taken steps to make parallel
decreases in our costs. See discussion above - "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 June 30, 2002,
research and development expense was $32.8 million, or 8.6% of revenue, compared
with $28 million, or 6.9% of revenue, in the three months ended June 30, 2001.
The increase reflected ongoing expenditures primarily for CC&B Systems. Our
research and development budget, like all of our costs, is sensitive to our
overall financial condition and a decrease in our total revenue could, in
certain circumstances, lead to reductions in the levels of our research and
development expenditures. See discussion above - "Research and Development,
Patents and Licenses".
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense was primarily comprised of compensation expense and increased by 5.1% to
$55.4 million, or 14.6% of revenue, in the three months ended June 30, 2002 from
$52.7 million, or 13.1% of revenue, in the three months ended June 30, 2001. The
increase in selling, general and administrative expense as a percentage of
revenue is attributable primarily to the increase in our selling and marketing
efforts in the three months ended June 30, 2002 and, to a lesser degree, to the
reduction in our revenue, which was not offset by a parallel decrease in our
selling, general and administrative expense.
AMORTIZATION OF GOODWILL AND PURCHASED INTANGIBLE ASSETS. Amortization of
goodwill and purchased intangible assets for the three months ended June 30,
2002 was $56.6 million, compared to $55.8 million in the three months ended June
30, 2001. The increase in amortization expense in the three months ended June
30, 2002 was due to the non-goodwill related amortization resulting from the
Clarify acquisition, partially offset by the completion of the core technology
amortization acquired in the ITDS and Solect acquisitions. As a result of SFAS
142, goodwill related to Clarify, an acquisition made by us after July 1, 2001,
is not amortized, but is subject to impairment tests. For acquisitions we made
prior to July 1, 2001, SFAS 142 requires us to amortize the goodwill resulting
from such acquisitions only through September 30, 2002. In the three months
ended June 30, 2002, total amortization related to such goodwill was $50.5
million. Effective as of October 1, 2002, SFAS 142 will be adopted by us and
goodwill related to our acquisitions will no longer be amortized. Instead, any
such goodwill will be subject only to the same impairment tests now applicable
to Clarify-related goodwill. See discussion above - "Acquisition".
OPERATING INCOME. Operating income in the three months ended June 30, 2002,
was $2.5 million, compared to $44.9 million in the three months ended June 30,
2001, a decrease of 94.4%, due to the reduction in our revenue in the three
months ended June 30, 2002, which was not offset by a parallel decrease in our
costs. As a result, most of the reduction in revenue was reflected directly as a
reduction in operating income. Moreover, the Clarify acquisition-related charges
further reduced our operating income. Pro forma operating income for the three
months ended June 30, 2002, excluding acquisition-related charges, was $59.1
million, or 15.6% of revenue, compared to $100.7 million, or 24.9% of revenue,
for the three months ended June 30, 2001, a decrease of 41.3%.
INTEREST INCOME AND OTHER, NET. In the three months ended June 30, 2002,
interest income and other, net, was $3.1 million, a decrease of $2.1 million
over the three months ended June 30, 2001. The decrease in interest income and
other, net, was primarily attributable to the overall decline in interest rates
and, to a lesser degree, to the decrease in our cash equivalents and short-term
interest-bearing investments, and the interest obligations on the Notes.
24
INCOME TAXES. Income taxes in the three months ended June 30, 2002 were
$32.4 million on pretax income of $5.6 million. The disproportionate tax rate
resulted primarily from our revised annual estimated pretax income, due to the
non-cash amortization of goodwill related to acquisitions, much of which is not
tax deductible. The pro forma effective tax rate for the three months ended June
30, 2002, excluding the acquisition-related charges, was 28%. In the three
months ended June 30, 2001, income taxes were $31.6 million on income before
taxes of $50.1 million. The pro forma effective tax rate for the three months
ended June 30, 2001, excluding acquisition-related charges, was 30%. See
discussion below - "Effective Tax Rate".
NET INCOME (LOSS). Net loss was $26.9 million in the three months ended
June 30, 2002, compared to net income of $18.5 million for the three months
ended June 30, 2001. The net loss is attributable primarily to the reduction in
our revenue growth in the three months ended June 30, 2002, which was not offset
by a parallel decrease in our costs, and also by the disproportionate level of
taxes allocated in our third quarter resulting from our revised annual estimated
pretax income. See discussion below - "Effective Tax Rate". We expect our
results to be impacted positively in fiscal 2003 by our adoption of SFAS 142 as
of October 1, 2002. As a result of the adoption, we will no longer be required
to amortize the goodwill from any of our acquisitions made prior to July 1,
2001. Instead, any such goodwill will be subject only to impairment tests, as is
the case currently for the goodwill from the Clarify acquisition. See discussion
above - "Acquisition". Pro forma net income in the three months ended June 30,
2002, excluding the acquisition-related charges, decreased by 39.6% from the
three months ended June 30, 2001, reaching $44.7 million, representing 11.8% of
revenue.
DILUTED EARNINGS (LOSS) PER SHARE. Diluted loss per share was $0.12 for the
three months ended June 30, 2002, compared to diluted earnings per share of
$0.08 for the three months ended June 30, 2001. Pro forma diluted earnings per
share for the three months ended June 30, 2002, excluding the
acquisition-related charges, decreased by 39.4% from the three months ended June
30, 2001, reaching $0.20 per diluted share. We currently expect that we will
have a loss per share for the fourth quarter ending September 30, 2002.
Excluding the effects of acquisition-related charges and the non-recurring
charge to be made in the fourth quarter of fiscal 2002 related to the cost
reduction program commenced in July 2002, we expect that our pro forma earnings
per share in the fourth quarter of fiscal 2002 will be in the range of $0.17 to
$0.20 per share. Although we are unable at this time to forecast beyond the
fourth quarter of fiscal 2002, we could experience additional revenue softness
in the future. As a result of the decrease in our revenue levels, we moved
decisively to reduce costs. See discussion above - "Operational Efficiency and
Cost Reduction Program".
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term interest-bearing investments totaled
$1,013.4 million as of June 30, 2002, compared to $1,110.1 million as of
September 30, 2001. The decrease is attributable primarily to the acquisition of
Clarify and the implementation of our share repurchase program, and was
partially offset by positive cash flows from operations. Net cash provided by
operating activities amounted to $311.4 million and $242.9 million for the nine
months ended June 30, 2002 and 2001, respectively. The increase in cash flows
from operations was primarily due to a decrease in working capital. We currently
intend to retain our future operating cash flows to support the further
expansion of our business, although some portion may also be used for the
repurchase of our outstanding securities. See discussion above - "Securities
Repurchase Programs".
As of June 30, 2002, we had positive working capital of $899.9 million,
compared to positive working capital of $1,059.9 million as of September 30,
2001. The decrease is attributable primarily to cash paid for the acquisition of
Clarify and the implementation of our share repurchase program. We believe that
current cash balances, cash generated from operations and our current lines of
credit will provide sufficient resources to meet our needs in the near future.
All of the Notes were outstanding as of June 30, 2002, representing an
aggregate principal amount of $500 million plus accumulated interest. On July
23, 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.
No repurchases by us have been made to date. See discussion above - "Securities
Repurchase Programs".
25
As of June 30, 2002, we had available short-term general revolving lines of
credit totaling $40 million, none of which were outstanding. In addition, as of
June 30, 2002 we had credit facilities totaling $43.8 million, limited for the
use of letters of credit and bank guaranties from various banks. Outstanding
letters of credit and bank guaranties as of June 30, 2002 totaled $24 million.
These were supported by a combination of the credit facilities described above
and compensating cash balances that we maintain with the issuing banks.
As of June 30, 2002, we had outstanding long-term obligations of $28.9
million in connection with leasing arrangements.
Currently, our capital expenditures, which for the nine months ended June
30, 2002 were approximately $42 million, consist primarily of computer equipment
and, to a lesser degree, vehicles and leasehold improvements and are funded
principally by operating cash flows and capital leasing arrangements. We do not
anticipate any changes to this policy in the foreseeable future.
Our allowance for doubtful accounts receivable for the nine months ended
June 30, 2002 was adjusted upward by approximately $12 million, from the
allowance provided for at the time of our fiscal year ended September 30, 2001.
The increase in our doubtful accounts receivable is primarily a result of our
purchase accounting treatment of the Clarify acquisition.
As of June 30, 2002, we have treasury stock of 7.7 million Ordinary Shares,
resulting from our having initiated our share repurchase program in fiscal 2002.
See discussion above - "Securities Repurchase Programs".
NET DEFERRED TAX ASSETS
As of June 30, 2002, deferred tax assets of $25.2 million, derived
primarily from carry-forward net operating losses relating to losses incurred by
Solect prior to our acquisition of that company in April 2000, were offset by
valuation allowances due to the uncertainty of realizing any tax benefit for
such losses. When realization of the tax benefits associated with such net
operating losses is deemed probable, the valuation allowance will be released,
resulting primarily in an offsetting reduction of the goodwill recorded in the
Solect acquisition.
EFFECTIVE TAX RATE
Our blended effective tax rate was 95% and 63% for the nine months ended
June 30, 2002 and June 30, 2001, respectively. These high effective tax rates
were primarily attributable to amortization of goodwill related to our
acquisitions, much of which is not tax deductible. In the nine months ended June
30, 2002 our effective tax rate was also adversely affected by the revision we
made in our third fiscal quarter to our annual estimated pretax income levels.
Our blended effective tax rate was 581% and 63% for the three months ended June
30, 2002 and June 30, 2001, respectively. The effective tax rate was exaggerated
in the third quarter of fiscal 2002 because, in accordance with SFAS 109, our
effective tax rates are estimated in advance of each fiscal year, based on a
forecast of pretax income for the coming fiscal year, and our current pretax
income estimate is substantially less than the pretax income level originally
forecast by us for the full fiscal year. The downward adjustment in the pretax
income forecast had the effect of increasing our effective tax rates, due to
fixed non-deductible expenditures representing a larger component of our revised
pretax income, and accordingly resulted in the tax allocations made by us in the
prior two quarters being too low. Until we revised our pretax income forecast in
the third quarter of fiscal 2002, we had believed our pretax income, and thus
our related allocations for taxes, would be increasing in the third and fourth
quarters so as to permit us, over all four quarters, to satisfy our full fiscal
year's tax obligations. Due to the drop in our forecasted pretax income in the
third quarter of fiscal 2002, we were required in accordance with SFAS No. 109
to allocate additional
26
taxes to the third quarter of fiscal 2002 in order to compensate in that quarter
for our earlier lower tax allocations.
Our overall pro forma effective tax rate for fiscal year 2002, excluding
amortization related to our acquisitions and nonrecurring charges, is expected
to be approximately 28% compared to our historical pro forma effective tax rate
of approximately 30%, due to the corporate income tax rates in the various
countries in which we operate and changes in the relative magnitude of our
business in those countries.
CURRENCY FLUCTUATIONS
Approximately 90% of our revenue is in U.S. dollars or linked to the dollar
and therefore the dollar is our functional currency. Approximately 60% of our
operating expenses (excluding amortization for goodwill and intangible assets,
in-process research and development and nonrecurring charge) are paid in dollars
or linked to dollars. Other significant currencies in which we receive revenue
or pay expenses are Australian dollars, British pounds, Canadian dollars, the
euro and Israeli shekels. Historically, the effect of fluctuations in currency
exchange rates has had a minimal impact on our operations. As more of our
customers seek contracts that are denominated in currencies such as the euro and
not the U.S. dollar, our exposure to fluctuations in currency exchange rates
could increase. In managing our foreign exchange risk, we enter from time to
time into various foreign exchange contracts. As of June 30, 2002, we had
substantially hedged our 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 four of our officers and directors, in the
United States District Courts for the Eastern District of Missouri and the
Southern District of New York. The complaints allege violations of the
Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated
thereunder. Each plaintiff seeks to represent a putative class of all purchasers
of our Ordinary Shares between July 18, 2000 (or, in some of the complaints,
July 24, 2001) and June 20, 2002. The complaints generally allege that, during
that period, we and the individual defendants made false or misleading
statements, in press releases and Securities and Exchange Commission filings,
regarding among other things our future prospects, backlog, revenue, gross
margin, acquisitions and accounting practices. Each plaintiff seeks unspecified
monetary damages and other relief against all defendants. We dispute the
allegations of wrongdoing in these complaints and intend to defend ourself
vigorously.
27
ITEM 6. EXHIBITS AND REPORTS ON FORM 6-K.
(a) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
99.1 Amdocs Limited Press Release dated July 24, 2002.
99.2 Certification of Chief Executive Officer and Chief Financial
Officer.
(b) Reports on Form 6-K
The Company filed the following reports on Form 6-K during the three months
ended June 30, 2002:
(1) Form 6-K dated May 13, 2002.
(2) Form 6-K dated June 21, 2002.
28
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: August 15, 2002
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
99.1 Amdocs Limited Press Release dated July 24, 2002.
99.2 Certification of Chief Executive Officer and Chief Financial
Officer.