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, 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 JUNE 30, 2003
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 1. Reports on Form 6-K
SIGNATURES
1
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMDOCS LIMITED
CONSOLIDATED BALANCE SHEETS
(in U.S. dollars, unless otherwise stated)
(in thousands, except per share data)
AS OF
------------------------------
JUNE 30, SEPTEMBER 30,
2003 2002
------------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 664,647 $ 466,655
Short-term interest-bearing investments 624,070 581,164
Accounts receivable, net (*) 280,273 312,732
Deferred income taxes and taxes receivable 44,146 48,154
Prepaid expenses and other current assets (*) 98,527 72,196
------------- -------------
Total current assets 1,711,663 1,480,901
Equipment, vehicles and leasehold improvements, net 148,907 160,902
Deferred income taxes 35,546 37,582
Goodwill and other intangible assets, net 724,619 750,530
Other noncurrent assets (*) 126,304 110,179
------------- -------------
Total assets $ 2,747,039 $ 2,540,094
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 185,850 $ 192,129
Accrued personnel costs 102,044 86,942
Deferred revenue 197,479 149,590
Short-term portion of capital lease obligations 7,873 10,347
Convertible notes 445,054 -
Deferred income taxes and taxes payable 111,300 103,315
------------- -------------
Total current liabilities 1,049,600 542,323
Convertible notes - 445,054
Deferred income taxes 18,758 12,363
Noncurrent liabilities and other 121,764 124,079
------------- -------------
Total liabilities 1,190,122 1,123,819
------------- -------------
Shareholders' equity:
Preferred Shares - Authorized 25,000 shares; L0.01 par value;
0 shares issued and outstanding - -
Ordinary Shares - Authorized 550,000 shares; L0.01 par value;
223,754 and 223,316 issued and 216,021 and 215,583
outstanding, respectively 3,579 3,572
Additional paid-in capital 1,820,614 1,818,345
Treasury stock (109,281) (109,281)
Accumulated other comprehensive income (loss) 13,246 (108)
Accumulated deficit (171,241) (296,253)
------------- -------------
Total shareholders' equity 1,556,917 1,416,275
------------- -------------
Total liabilities and shareholders' equity $ 2,747,039 $ 2,540,094
============= =============
(*) See Note 5.
The accompanying notes are an integral part of these consolidated financial
statements.
2
AMDOCS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenue:
License (*) $ 11,491 $ 36,778 $ 51,176 $ 124,596
Service (*) 365,677 343,357 1,020,392 1,133,449
------------ ------------ ------------ ------------
377,168 380,135 1,071,568 1,258,045
------------ ------------ ------------ ------------
Operating expenses:
Cost of license 1,455 1,189 4,137 4,257
Cost of service (*) 230,323 231,648 646,389 710,799
Research and development 29,941 32,822 88,888 92,281
Selling, general and administrative (*) 50,943 55,411 153,644 170,213
Amortization of goodwill and
purchased intangible assets 4,524 56,562 14,303 175,238
Restructuring charges and in-process
research and development - - 9,956 30,711
------------ ------------ ------------ ------------
317,186 377,632 917,317 1,183,499
------------ ------------ ------------ ------------
Operating income 59,982 2,503 154,251 74,546
Interest income and other, net (*) 3,269 3,080 12,432 8,790
------------ ------------ ------------ ------------
Income before income taxes 63,251 5,583 166,683 83,336
Income taxes 15,813 32,434 41,671 79,411
------------ ------------ ------------ ------------
Net income (loss) $ 47,438 $ (26,851) $ 125,012 $ 3,925
============ ============ ============ ============
Basic earnings (loss) per share $ 0.22 $ (0.12) $ 0.58 $ 0.02
============ ============ ============ ============
Diluted earnings (loss) per share $ 0.21 $ (0.12) $ 0.57 $ 0.02
============ ============ ============ ============
Basic weighted average number of shares
outstanding 215,938 220,245 215,786 221,979
============ ============ ============ ============
Diluted weighted average number of
shares outstanding 220,792 220,245 218,953 223,968
============ ============ ============ ============
(*) See Note 5.
The accompanying notes are an integral part of these consolidated financial
statements.
3
AMDOCS LIMITED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
(in thousands)
Accumulated
Ordinary Shares Additional Other Total
----------------- Paid-in Treasury Comprehensive Accumulated Shareholders'
Shares Amount Capital Stock Income (Loss) Deficit Equity
------- --------- ----------- ----------- -------------- ----------- -------------
BALANCE AS OF SEPTEMBER 30, 2002 215,583 $ 3,572 $ 1,818,345 $ (109,281) $ (108) $ (296,253) $ 1,416,275
Comprehensive income:
Net income - - - - - 125,012 125,012
Unrealized income on foreign
currency hedging contracts,
net of $5,385 tax - - - - 15,285 - 15,285
Unrealized loss on cash
equivalents and short-term
interest-bearing
investments, net of $(928)
tax - - - - (1,931) - (1,931)
------------
Comprehensive income 138,366
------------
Employee stock options exercised 438 7 2,017 - - - 2,024
Tax benefit of stock options
exercised - - 221 - - - 221
Expense related to vesting of
stock options - - 31 - - - 31
------- --------- ----------- ---------- ------------ ---------- -----------
BALANCE AS OF JUNE 30, 2003 216,021 $ 3,579 $ 1,820,614 $ (109,281) $ 13,246 $ (171,241) $ 1,556,917
======= ========= =========== ========== ============ ========== ===========
As of June 30, 2003 and September 30, 2002, accumulated other comprehensive
income (loss) is comprised of unrealized gain (loss) on derivatives, net of tax,
of $10,065 and $(5,220), respectively, and unrealized gain on cash equivalents
and short-term interest-bearing investments, net of tax, of $3,181 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)
NINE MONTHS ENDED JUNE 30,
--------------------------
2003 2002
----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 125,012 $ 3,925
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization 69,973 233,068
Adjustment to the basis of investments - 5,500
In-process research and development - 17,400
Loss on sale of equipment 427 335
Deferred income taxes 10,556 6,607
Tax benefit of stock options exercised 221 6,203
Unrealized income on other comprehensive income 17,811 2,282
Net changes in operating assets and liabilities, net of
amounts acquired:
Accounts receivable 32,365 50,845
Prepaid expenses and other current assets (27,158) (16,430)
Other noncurrent assets (18,795) (10,272)
Accounts payable and accrued expenses 14,320 38,491
Deferred revenue 47,889 (36,583)
Income taxes payable 5,411 (616)
Other noncurrent liabilities 2,927 10,647
----------- -----------
Net cash provided by operating activities 280,959 311,402
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from sale of equipment, vehicles and leasehold
improvements 1,710 1,267
Payments for purchase of equipment, vehicles, leasehold
improvements and other (47,192) (42,417)
Purchase of short-term interest-bearing investments, net (42,906) (352,872)
Investment in noncurrent assets - (41,026)
Reimbursement of cash in (cash paid for) acquisition 11,111 (213,180)
----------- -----------
Net cash used in investing activities (77,277) (648,228)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from employee stock options exercised 2,024 5,028
Repurchase of shares - (109,281)
Principal payments on capital lease obligations (7,714) (8,504)
----------- -----------
Net cash used in financing activities (5,690) (112,757)
----------- -----------
Net increase (decrease) in cash and cash equivalents 197,992 (449,583)
Cash and cash equivalents at beginning of period 466,655 872,998
----------- -----------
Cash and cash equivalents at end of period $ 664,647 $ 423,415
=========== ===========
SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for:
Income taxes, net of refunds $ 25,611 $ 68,800
Interest 9,323 10,949
NON CASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations of $0 and $2,245 were incurred during the nine months
ended June 30, 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 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 on 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") No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
Amendment of FASB Statement No. 123". SFAS No. 148 amends SFAS No. 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 No. 148
amends the disclosure requirements of SFAS No. 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 No. 148 are effective for fiscal years ending after December 15,
2002. The disclosure provision of SFAS No. 148 is effective for interim
periods beginning after December 15, 2002. The transition and annual
disclosure requirements of SFAS No. 148 were effective for the Company
commencing January 1, 2003. The Company adopted the interim disclosure
provision in the quarter ended March 31, 2003.
6
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
The Company follows Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" in accounting for its employee
stock options. 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 (loss) for the three months and nine months ended
June 30, 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 (loss) and earnings (loss)
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 No. 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.
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 NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------ --------------------
2003 2002 2003 2002
-------- ------- -------- ---------
Risk-free interest rate 2.56% 2.85% 2.70% 2.85%
Expected life of options 2.98 3.32 2.93 2.85
Expected annual volatility 0.51 0.74 0.57 0.70
Expected dividend yield None None None None
Fair value per option $ 5.43 $ 7.06 $ 3.98 $ 13.35
The pro forma effect on net income (loss) and earnings (loss) per share
is as follows for the three months and nine months ended June 30, 2003 and
2002:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income (loss), as reported $ 47,438 $ (26,851) $ 125,012 $ 3,925
Less: Total stock-based employee
compensation expense
determined under fair value
method for all awards, net of
related tax effects 1,679 20,119 14,614 42,977
----------- ----------- ----------- -----------
Pro forma net income (loss) $ 45,759 $ (46,970) $ 110,398 $ (39,052)
=========== =========== =========== ===========
Basic earnings (loss) per share:
As reported $ 0.22 $ (0.12) $ 0.58 $ 0.02
=========== =========== =========== ===========
Pro forma $ 0.21 $ (0.21) $ 0.51 $ (0.18)
=========== =========== =========== ===========
Diluted earnings (loss) per share:
As reported $ 0.21 $ (0.12) $ 0.57 $ 0.02
=========== =========== =========== ===========
Pro forma $ 0.21 $ (0.21) $ 0.51 $ (0.18)
=========== =========== =========== ===========
7
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
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 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 segment, and this operating segment comprises its only reporting unit.
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 No. 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 (loss) and earnings
(loss) per share for the three months and nine months ended June 30, 2002
adjusted to exclude amortization of goodwill and workforce-in-place
expenses, net of tax, are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ---------------------------
2003 2002 2003 2002
----------- ----------- ----------- ------------
Reported net income (loss) $ 47,438 $ (26,851) $ 125,012 $ 3,925
Add back: goodwill and
workforce-in-place amortizations - 51,142 - 153,414
Attributable tax effect - (679) - (2,038)
----------- ----------- ----------- ------------
Adjusted net income $ 47,438 $ 23,612 $ 125,012 $ 155,301
=========== =========== =========== ============
Adjusted basic earnings per share $ 0.22 $ 0.11 $ 0.58 $ 0.70
=========== =========== =========== ============
Adjusted diluted earnings per share $ 0.21 $ 0.11 $ 0.57 $ 0.69
=========== =========== =========== ============
The following table presents details of amortization expense of
purchased intangible assets as reported in the consolidated statements of
operations:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ---------------------------
2003 2002 2003 2002
---------- ----------- ----------- ------------
Cost of license $ 1,217 $ 655 $ 2,857 $ 2,620
Amortization of purchased
intangible assets 4,524 5,420 14,303 21,824
---------- ----------- ----------- ------------
Total $ 5,741 $ 6,075 $ 17,160 $ 24,444
========== =========== =========== ============
8
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
---------- ------------ ---------
JUNE 30, 2003
Core technology $ 44,535 $ (41,743) $ 2,792
Customer arrangements 36,658 (22,690) 13,968
Intellectual property rights and
purchased computer software 51,996 (36,474) 15,522
---------- ----------- ---------
Total $ 133,189 $ (100,907) $ 32,282
========== =========== =========
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 June 30, 2003 is as follows:
AMOUNT
----------
FISCAL YEAR:
2003 (remaining 3 months) $ 5,741
2004 14,975
2005 5,748
2006 3,416
2007 2,402
Guarantor's Accounting and Disclosure Requirements for Guarantees
In November 2002 the FASB issued FASB Interpretation ("FIN") No. 45
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtness of Others". FIN No. 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 No. 45 are effective for guarantees issued or modified
after December 31, 2002. The additional disclosure requirements of FIN No.
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 entered into prior to December
31, 2002 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 June
30, 2003 and September 30, 2002, the maximum potential amount of the
Company's future exposure under this guarantee pursuant to FIN No. 45 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 June 30, 2003.
9
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
The Company generally indemnifies its customers against claims of
intellectual property infringement made by third parties arising from the
use of the Company's software. To date, the Company has not incurred
material costs as a result of such obligations and has not accrued any
liabilities related to such indemnification in its financial statements.
4. RECENT ACCOUNTING PRONOUNCEMENTS
Costs Associated with Exit or Disposal Activities
In June 2002 the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 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 No.
146 may affect the timing of amounts recognized for future restructuring
activities that are not associated with a business combination. SFAS No. 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
---------------------------
JUNE 30, SEPTEMBER 30,
2003 2002
---------- -------------
Accounts receivable, including unbilled of $0 and $100, respectively (1) $ 59,508 $ 55,458
Prepaid expenses and other current assets (2) 1,432 1,550
Other noncurrent assets (3) 55,731 48,453
(1) The information as of September 30, 2002 includes balances with SBC
Communications, Inc. ("SBC") and Certen Inc. ("Certen"), a company formed
by Bell Canada ("Bell") and the Company in January 2001. Since December 31,
2002, SBC has ceased to be a principal shareholder of the Company,
according to SFAS No. 57, "Related Party Disclosures", and thus is no
longer a related party. Certen was the Company's only related party as of
June 30, 2003. In July 2003, the Company acquired Bell's ownership interest
in Certen, and Certen became a wholly owned subsidiary of the Company. See
Note 14.
(2) Consists of accrued interest receivable on convertible debentures issued to
the Company by Certen.
(3) Consists of an investment by the Company in equity and convertible
debentures of Certen. The investment in Certen has been accounted for under
the cost method, based on the Company's 10% ownership of Certen as of the
balance sheet date. The convertible debentures issued by Certen to the
Company are denominated in Canadian dollars. The majority of the Company's
exposure to currency fluctuation with respect to the convertible debentures
investment was hedged.
The Company has licensed software and provided computer systems integration
and related services to Certen. The following related party revenue is included
in the statements of operations:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ----------------------
2003 2002 2003 2002
--------- ----------- --------- ---------
Revenue (1):
License $ 583 $ 9,607 $ 3,827 $ 20,281
Service 32,374 71,545 84,122 244,667
(1) The three months and nine months ended June 30, 2002 include license and
service revenue related to SBC and Certen. The three months and nine months
ended June 30, 2003 include license and service revenue related only to
Certen.
10
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
operations:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ----------------------
2003 2002 2003 2002
-------- --------- -------- ----------
Operating expenses (1):
Cost of service $ - $ 750 $ - $ 1,962
Selling, general and - 96 - 267
administrative
Interest income and other, net (2) 564 1,038 1,662 1,334
(1) In the three months and nine months ended June 30, 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 formation of Certen.
Absent hedging, these amounts would be $4,733 and $9,344 for the three
months and nine months ended June 30, 2003, respectively, and $2,448 and
$2,692 for the three months and nine months ended June 30, 2002,
respectively.
6. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consists of the following:
AS OF
----------------------------
JUNE 30, SEPTEMBER 30,
2003 2002
----------- -------------
Accounts receivable - billed $ 287,898 $ 314,828
Accounts receivable - unbilled 21,330 24,144
Less - allowances (28,955) (26,240)
----------- -----------
Accounts receivable, net $ 280,273 $ 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
(loss) to comprehensive income (loss) for the following periods:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- -----------------------
2003 2002 2003 2002
------------ ----------- ---------- ----------
Net income (loss) $ 47,438 $ (26,851) $ 125,012 $ 3,925
Other comprehensive income (loss):
Unrealized income on foreign
currency hedging contracts,
net of tax 6,151 5,411 15,285 1,079
Unrealized income (loss) on
short-term interest-bearing
investments, net of tax (882) 3,179 (1,931) 382
------------ ----------- ---------- ----------
Comprehensive income (loss) $ 52,707 $ (18,261) $ 138,366 $ 5,386
============ =========== ========== ==========
11
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 NINE MONTHS ENDED
----------------------- -----------------------
JUNE 30, JUNE 30,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Current $ 10,571 $ 26,988 $ 31,115 $ 72,804
Deferred 5,242 5,446 10,556 6,607
---------- ---------- ---------- ----------
$ 15,813 $ 32,434 $ 41,671 $ 79,411
========== ========== ========== ==========
The effective income tax rate from continuing operations varied from
the statutory Guernsey tax rate as follows for the following periods:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
JUNE 30, JUNE 30,
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
acquisitions-related costs and
restructuring charges 25 28 25 28
Effect of amortization of goodwill
and purchased intangible assets,
in-process research and development
and restructuring charges - 553 - 67
--- --- --- ---
Effective income tax rate 25% 581% 25% 95%
=== === === ===
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 approximate 25%. Effective October 1, 2002,
following the adoption of SFAS No. 142, the Company no longer amortizes
goodwill resulting from acquisitions. See Note 3 above. As a result,
goodwill amortization that is not tax-deductible no longer affects the
Company's effective tax rate.
In the three months and nine months ended June 30, 2002 the effective
tax rate was 581% and 95%, respectively. The high effective tax rates
resulted from the substantial amount of the Company's non-deductible
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 APB No. 28, "Interim Financial
Reporting", the Company's effective tax rates are estimated in advance of
each fiscal year, based on a forecast by the Company of its estimate of
pretax income for the coming fiscal year. In the third quarter of fiscal
2002, the Company updated its fiscal 2002 pretax income, which was
substantially less than the amount of the original estimate. Excluding the
impact of acquisitions-related costs, the Company's overall effective tax
rate was approximately 28% for the three months and nine months ended June
30, 2002.
12
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 (loss) per share:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ------------------------
2003 2002 2003 2002
---------- --------- ---------- ----------
Numerator:
Net income (loss) $ 47,438 $ (26,851) $ 125,012 $ 3,925
========== ========= ========== ==========
Denominator:
Denominator for basic earnings (loss)
per share-
weighted average number of shares
outstanding (1) 215,938 220,245 215,786 221,979
Effect of dilutive stock options
granted (2) 4,854 - 3,167 1,989
---------- --------- ---------- ----------
Denominator for diluted earnings
(loss) per share-
adjusted weighted average shares and
assumed conversions (1) 220,792 220,245 218,953 223,968
========== ========= ========== ==========
Basic earnings (loss) per share $ 0.22 $ (0.12) $ 0.58 $ 0.02
========== ========= ========== ==========
Diluted earnings (loss) per share $ 0.21 $ (0.12) $ 0.57 $ 0.02
========== ========= ========== ==========
(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. As of August 2003, none of the exchangeable
shares remained outstanding.
(2) Due to the net loss for the three months ended June 30, 2002, 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, 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 operations, commencing on November 29, 2001.
13
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:
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 are the unaudited pro forma revenue, operating income,
net income and earnings per share as if Clarify had been acquired as of
October 1, 2000, excluding the write-off of purchased in-process research
and development:
NINE MONTHS
ENDED
JUNE 30,
2002
-----------
Revenue $ 1,278,045
Operating income 80,346
Net income 11,261
Basic earnings per share 0.05
Diluted earnings per share 0.05
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.
14
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 June 30, 2003, the remaining accrual balances were $11,343.
Facility-related costs are expected to be paid through April 2012. Actual
future cash requirements may differ materially from the accrual as of June
30, 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,
2002 $ 3,357 $ 11,087 $ - $ 440 $ 14,884
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,
2002 4,689 14,048 - 394 19,131
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
Cash payments (5) (1,373) - - (1,378)
Adjustments (1) (43) - - - (43)
Adjustments (2) 300 (416) - - (116)
--------- -------- --------- -------- ---------
Balance as of June 30, 2003 $ 676 $ 10,373 $ - $ 294 $ 11,343
========= ======== ========= ======== ========
(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".
(2) Reflects adjustments due to changes in previous estimates, which resulted
in a decrease of $416 of restructuring liabilities related to facilities,
and an increase of $300 of restructuring liabilities related to employee
separation costs. The net amount was credited to "cost of service" and
"selling, general and administrative" expenses.
12. 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 has moved to
dismiss the amended complaint. The Company disputes all allegations of
wrongdoing and intends to defend itself vigorously.
15
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
13. SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
The Company has been informed that the Midwest Regional Office of the
United States Securities and Exchange Commission (the "SEC") is conducting
a private investigation into the events leading up to the announcement by
the Company in June 2002 of revised projected revenue for the third and
fourth quarters of fiscal 2002. The investigation appears to be focused on,
but is not explicitly limited to, the Company's forecasting beginning with
its April 23, 2002 press release. Although the Company believes that it
will be able to satisfy any concerns the SEC staff may have in this regard,
the Company is unable to predict the duration, scope, or outcome of the
investigation. The Company is cooperating fully with the SEC staff.
14. CERTEN TRANSACTION
On July 2, 2003, the Company acquired from Bell its 90% ownership
interest in Certen for approximately CDN $89,000 (US $66,000) in cash,
pursuant to an Acquisition Agreement, dated as of May 28, 2003. The Company
and Bell formed Certen in January 2001 to provide customer care and billing
solutions to Bell and a number of Bell's affiliated companies. Prior to
this acquisition, Bell's ownership interest in Certen was 90% and the
Company owned the remainder. As a result of the acquisition, Certen is now
a wholly owned subsidiary of the Company. Since Certen's inception, the
Company has provided customer care and billing software required by Certen,
including related customization, installation, maintenance and other
services. In conjunction with the acquisition, the comprehensive billing
operations outsourcing agreement with Bell was extended by three years
through December 2010.
16
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; litigation and regulatory
proceedings; 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 nine months and three months ended June
30, 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 nine months and three months ended June 30,
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 operations between the nine-month
and three-month periods ended June 30, 2003 and 2002. You should read this
section in conjunction with our consolidated financial statements.
17
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 initial sales of our products and related services, including
license fees and customization, implementation and integration
services,
- providing outsourcing and other related services for our solutions,
and
- recurring revenue from ongoing support and maintenance provided to our
customers, and from incremental license fees resulting from increases
in a customer's business volume.
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.
18
The persistent stagnation of the communications industry has significantly
impacted our business. Over the past year, delays 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 nine months ended June 30, 2003 decreased by $186.5 million,
or 14.8%, from the same period in fiscal 2002. We continue to encounter delays
in obtaining commitments from customers. However, there have been some initial
signs of stability in the market. During 2003, total quarterly revenue increased
by 4.6% between the first and second quarters and by 6.2% between the second and
third quarters, primarily as a result of the new Directory Systems outsourcing
agreements. Given continued uncertain conditions in the communications industry,
we do not know if we will be able to sustain sequential growth beyond the next
quarter, 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 nine months and three months
ended June 30, 2003 was $1,071.6 million and $377.2 million, respectively,
compared to $1,258.0 million and $380.1 million in the nine months and three
months ended June 30, 2002, respectively.
License and service revenue from the sale of CC&B Systems was $925.7
million and $1,124.1 million in the nine months ended June 30, 2003 and 2002,
respectively, representing 86.4% and 89.4%, respectively, of our total revenue
for such periods. License and service revenue from the sale of CC&B Systems was
$321.2 million and $338.9 million in the three months ended June 30, 2003 and
2002, respectively, representing 85.1% and 89.1%, 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 beyond
the next quarter. The industry-wide downturn in the communications industry has
had a significant negative impact on our results for the three months and nine
months ended June 30, 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.
19
License and service revenue from the sale of Directory Systems was $145.9
million and $133.9 million in the nine months ended June 30, 2003 and 2002,
respectively, accounting for 13.6% and 10.6%, respectively, of our total revenue
for such periods. License and service revenue from the sale of Directory Systems
totaled $56.0 million and $41.3 million in the three months ended June 30, 2003
and 2002, respectively, accounting for 14.9% and 10.9%, 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. As a result of new agreements announced in 2003, we
expect that our revenue from Directory Systems will be higher in fiscal 2003
than in fiscal 2002.
License and service revenue includes revenue from outsourcing arrangements
for the provision of CC&B Systems and Directory Systems solutions. Outsourcing
projects are a significant part of our business, and generate substantial,
long-term revenue streams, cash flow and operating income. In the initial period
of our outsourcing projects, we generally invest in modernization and
consolidation of the customer's systems. Revenue is usually structured on a
periodic fixed or unit charge basis. As a result, outsourcing projects can be
less profitable in the initial period. Margins typically improve over time as we
benefit from the operational efficiencies provided by system modernization and
consolidation. Over the entire life cycle of the project, we expect that our
outsourcing projects will generate margins comparable to sales of our products
and related license and services.
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.
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 No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement No.
123". SFAS No. 148 amends SFAS No. 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 No. 148 amends the
disclosure requirements of
20
SFAS No. 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 No. 148 are effective for fiscal years
ending after December 15, 2002. The disclosure provision of SFAS No. 148 is
effective for interim periods beginning after December 15, 2002. We follow APB
No. 25 in accounting for our employee stock options. The transition and annual
disclosure requirements of SFAS No. 148 are effective for us commencing January
1, 2003. We adopted the interim disclosure provision in the quarter ended March
31, 2003, which is provided in Note 2 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 No. 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 FIN No. 45 "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtness of Others". FIN No. 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 No. 45 are effective for
guarantees issued or modified after December 31, 2002. The additional disclosure
requirements of FIN No. 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 entered into prior to December 31, 2002 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 June 30, 2003 and September 30, 2002, the maximum potential
amount of our future exposure under this guarantee pursuant to FIN No. 45 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 June 30, 2003.
21
We generally indemnify our customers against claims of intellectual
property infringement made by third parties arising from the use of our
software. To date, we have not incurred material costs as a result of such
obligations and have not accrued any liabilities related to such indemnification
in our financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
Costs Associated with Exit or Disposal Activities
In June 2002 the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 requires that a liability for
costs associated with an exit or disposal activity, including restructuring
activities, be recognized and measured initially at fair value only when the
liability is incurred, or for certain one-time employee termination costs over a
future service period. Previously, a liability for an exit cost was recognized
when a company committed to an exit plan. As a result, SFAS No. 146 may affect
both the timing and amounts of the recognition of future restructuring costs.
SFAS No. 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 operations, 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 $88.9 million and $92.3 million in the nine months ended June 30, 2003 and
2002, respectively, representing 8.3% and 7.3%, respectively, of our revenue in
these periods. Research and development expenditures amounted to $29.9 million
and $32.8 million in the three months ended June 30, 2003 and 2002,
respectively, representing 7.9% and 8.6%, 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 future potential opportunities 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
22
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.
RESULTS OF OPERATIONS
The following table sets forth for the nine months and three months ended
June 30, 2003 and 2002 certain items in our consolidated statements of
operations reflected as a percentage of total revenue:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
---------------- ----------------
2003 2002 2003 2002
----- ----- ----- -----
Revenue:
License ..................... 3.0% 9.7% 4.8% 9.9%
Service ..................... 97.0 90.3 95.2 90.1
----- ----- ----- -----
100.0 100.0 100.0 100.0
----- ----- ----- -----
Operating expenses:
Cost of license ............. 0.4 0.3 0.4 0.3
Cost of service ............. 61.1 60.9 60.4 56.6
Research and development .... 7.9 8.6 8.3 7.3
Selling, general and
administrative ............ 13.5 14.6 14.3 13.5
Amortization of goodwill and
purchased intangible assets 1.2 14.9 1.3 13.9
Restructuring charges and
in-process research and
development ............... - - 0.9 2.5
----- ----- ----- -----
84.1 99.3 85.6 94.1
----- ----- ----- -----
Operating income .............. 15.9 0.7 14.4 5.9
Interest income and other, net 0.9 0.8 1.2 0.7
----- ----- ----- -----
Income before income taxes .... 16.8 1.5 15.6 6.6
Income taxes .................. 4.2 8.6 3.9 6.3
----- ----- ----- -----
Net income (loss) ............. 12.6% (7.1)% 11.7% 0.3%
===== ===== ===== =====
NINE MONTHS ENDED JUNE 30, 2003 AND 2002
REVENUE. Total revenue for the nine months ended June 30, 2003 was $1,071.6
million, a decrease of $186.5 million, or 14.8%, from the nine months ended June
30, 2002. The decrease in revenue was primarily due to the slowdown in customer
buying decisions, stemming from overall reductions in the capital investment
budgets of many communications service providers.
License revenue decreased from $124.6 million in the nine months ended June
30, 2002 to $51.2 million during the nine months ended June 30, 2003, a decrease
of 58.9%, and service revenue decreased by 10.0% from $1,133.4 million in the
nine months ended June 30, 2002 to $1,020.4 million in the nine months ended
June 30, 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 nine months ended June
30, 2002 and smaller initial spending commitments under contracts with some of
our customers. The significant new contracts that we did obtain were for
Directory Systems 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 to smaller initial
spending commitments by our telecommunications customers and reduced
discretionary spending under our contracts with some of our customers. Recently,
there have been some initial signs of stability in the market. Total quarterly
revenue
23
increased by 4.6% between the first and second quarters and by 6.2% between the
second and third quarters of fiscal 2003, primarily as a result of the new
Directory Systems outsourcing agreements.
The decline in our overall revenue in the nine months ended June 30, 2003
was primarily attributable to a decrease in revenue from CC&B Systems. Total
CC&B Systems revenue for the nine months ended June 30, 2003 was $925.7 million,
a decrease of $198.4 million, or 17.7%, from the nine months ended June 30,
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 stagnation in the communications industry, the demand for our CC&B
Systems and our CC&B Systems revenue were significantly lower during the nine
months ended June 30, 2003. Approximately $44.9 million of our CC&B Systems
revenue for the nine months ended June 30, 2003 was derived from customers other
than communications service providers.
Revenue from Directory Systems was $145.9 million for the nine months
ended June 30, 2003, an increase of $12.0 million, or 8.9%, over the nine months
ended June 30, 2002. The increase is attributable primarily to extensions of
agreements with and additional services rendered to existing customers and
contracts with new customers, which was partially offset by completion of some
major implementation projects.
In the nine months ended June 30, 2003, revenue from customers in North
America, Europe and the rest of the world accounted for 61.1%, 30.2% and 8.7%,
respectively, compared to 62.4%, 28.0% and 9.6%, respectively, for the nine
months ended June 30, 2002. The increased contribution to revenue from customers
in Europe relative to customers outside of Europe, as a percentage of revenue,
was attributable primarily to a relatively greater reduction in activity from
customers outside of Europe than in Europe during the nine months ended June 30,
2003.
COST OF LICENSE. Cost of license for the nine months ended June 30, 2003
was $4.1 million, compared to $4.3 million cost of license for the nine months
ended June 30, 2002. Cost of license mainly includes amortization of purchased
computer software and intellectual property rights.
COST OF SERVICE. Cost of service for the nine months ended June 30, 2003
was $646.4 million, a decrease of $64.4 million, or 9.1%, from the cost of
service of $710.8 million for the nine months ended June 30, 2002. As a
percentage of revenue, cost of service increased to 60.4% in the nine months
ended June 30, 2003 from 56.6% in the nine months ended June 30, 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 nine months ended June 30, 2003, our gross
margin also decreased. The decrease in the gross margin is attributable to the
decrease in license revenue and to the fact that our cost reductions were
proportionally less than the decrease in our service revenue. We have taken
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 nine months ended June 30, 2003,
research and development expense was $88.9 million, or 8.3% of revenue, compared
with $92.3 million, or 7.3% of revenue, in the nine months ended June 30, 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 9.7% to
$153.6 million, or 14.3% of revenue, in the nine months ended June 30, 2003 from
$170.2 million, or 13.5% of revenue, in the nine months ended June 30, 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 nine months ended June 30, 2003, our revenue decreased
24
by a larger percentage, resulting in an increase of our selling, general and
administrative expense as a percentage of revenue.
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 nine
months ended June 30, 2002 was $153.4 million. Amortization of purchased
intangible assets for the nine months ended June 30, 2003 and 2002 was $14.3
million and $21.8 million, respectively. Amortization of purchased intangible
assets in the nine months ended June 30, 2002 includes amortization of purchased
intangible assets that were fully amortized by March 31, 2002.
RESTRUCTURING CHARGES AND IN-PROCESS RESEARCH AND DEVELOPMENT.
Restructuring charges and in-process research and development in the nine months
ended June 30, 2003 consisted of the additional cost reduction program we
implemented during the first quarter of 2003. See the discussion above under the
caption "Operational Efficiency and Cost Reduction Program". Restructuring
charges and in-process research and development in the nine months ended June
30, 2002 consisted of a one-time charge of $17.4 million related to the Clarify
transaction for the 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 nine months ended June 30, 2003,
was $154.3 million, or 14.4% of revenue, compared to $74.5 million, or 5.9% of
revenue, in the nine months ended June 30, 2002, an increase of 106.9%. The
increase is attributable primarily to our adoption of SFAS No. 142, which
resulted in no amortization of goodwill in the nine months ended June 30, 2003,
and the in-process research and development charge related to the Clarify
acquisition, which was included only in the nine months ended June 30, 2002.
Operating income for the nine months ended June 30, 2002 included
amortization of goodwill of $153.4 million, amortization of purchased intangible
assets of $21.8 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 nine months ended
June 30, 2002 was $267.2 million, or 21.2% of revenue. Operating income for the
nine months ended June 30, 2003 included amortization of purchased intangible
assets of $14.3 million and restructuring charges of $10.0 million. Excluding
amortization of purchased intangible assets, operating income for the nine
months ended June 30, 2003, was $168.6 million, or 15.7% of revenue, a decrease
of 36.9% 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
nine months ended June 30, 2003, caused by the slowdown in our market, which was
not offset by a corresponding decrease in our operating costs.
INTEREST INCOME AND OTHER, NET. In the nine months ended June 30, 2003,
interest income and other, net, was $12.4 million, an increase of $3.6 million
over the nine months ended June 30, 2002. The increase in interest income and
other, net, is primarily attributable to a decrease in interest expense 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. These factors
were partially offset by the decline in interest rates on our short-term
interest-bearing investments. Although we hedge significant exposures in
currencies other than the dollar, currency fluctuations partially affect our
results.
INCOME TAXES. Income taxes in the nine months ended June 30, 2003 were
$41.7 million on pretax income of $166.7 million. Our effective tax rate in the
nine months ended June 30, 2003 was 25%. As a result of the adoption of SFAS No.
142 we no longer amortize goodwill resulting from acquisitions, thus goodwill
amortization that is not tax-deductible no longer affects our effective tax
rate. In the nine months ended June 30, 2002, income taxes were $79.4 million on
pretax income of $83.3 million, or 95% of pretax income, resulting from the
non-cash amortization of goodwill related to acquisitions, much of which is not
tax deductible. The effective tax rate for the nine months ended June 30, 2002,
excluding amortization of
25
purchased intangible assets and goodwill, was 28%. See the discussion below
under the caption "Effective Tax Rate".
NET INCOME. Net income was $125.0 million in the nine months ended June 30,
2003, compared to $3.9 million in the nine months ended June 30, 2002. Net
income was 11.7% of revenue for the nine months ended June 30, 2003, compared to
0.3% for the nine months ended June 30, 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 nine months ended June 30, 2003, and the
in-process research and development charge related to the Clarify acquisition,
which was included only in the nine months ended June 30, 2002.
Net income for the nine months ended June 30, 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 nine months ended June 30, 2002 was
$198.7 million, or 15.8% of revenue. Net income for the nine months ended June
30, 2003 included amortization of purchased intangible assets and restructuring
charges. Excluding amortization of purchased intangible assets, net income was
$135.7 million, representing 12.7% of revenue, a decrease of 31.7% from the
prior year. The decrease in our net 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 nine months ended June
30, 2003, caused by the 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 nine months ended June 30, 2002 adjusted to exclude amortization of
goodwill and workforce-in-place expenses, net of tax, is as follows (in
millions, except per share data):
NINE MONTHS
ENDED
JUNE 30,
2002
----------
Reported net income $ 3.9
Add back: goodwill and
workforce-in-place amortization 153.4
Attributable tax effect (2.0)
----------
Adjusted net income $ 155.3
==========
Adjusted basic earnings per share $ 0.70
==========
Adjusted diluted earnings per share $ 0.69
==========
DILUTED EARNINGS PER SHARE. Diluted earnings per share were $0.57 for the
nine months ended June 30, 2003, compared to $0.02 in the nine months ended June
30, 2002. Diluted earnings per share in the nine months ended June 30, 2003,
excluding amortization of purchased intangible assets and goodwill and the
write-off of in-process research and development, decreased by 30.3% from $0.89
in the nine months ended June 30, 2002, to $0.62 per diluted share.
THREE MONTHS ENDED JUNE 30, 2003 AND 2002
REVENUE. Total revenue for the three months ended June 30, 2003 was $377.2
million, a decrease of $3.0 million, or 0.8%, from the three months ended June
30, 2002, although a sequential increase of $22.2 million, or 6.2%, over the
second quarter of fiscal 2003. Year-over-year revenue was relatively unchanged,
and resulted primarily from a slowdown in customer buying decisions stemming
from overall reductions in the capital investment budgets of many communications
service providers, offset by the increase in new Directory Systems outsourcing
agreements. The sequential increase in revenue is primarily as a result of the
new Directory Systems outsourcing agreements. We do not know if we will be able
to sustain sequential growth beyond the next quarter, and if so, at what rate.
26
The following table sets forth our total revenue for each of the last five
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
June 30, 2003 377.2
License revenue decreased from $36.8 million in the three months ended June
30, 2002 to $11.5 million during the three months ended June 30, 2003, a
decrease of 68.8%, and service revenue increased 6.5% from $343.4 million in the
three months ended June 30, 2002 to $365.7 million in the three months ended
June 30, 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
June 30, 2002 and smaller initial spending commitments under contracts with some
of our customers. The significant new contracts that we did obtain were for
Directory Systems 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 increase in service revenue is primarily attributable to the
new significant Directory Systems outsourcing agreements that we signed this
year.
The decline in our revenue in the third 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 June 30, 2003 was $321.2 million, a
decrease of $17.7 million, or 5.2%, from the three months ended June 30, 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 stagnation in the communications industry, the demand for our CC&B
Systems and our CC&B Systems revenue were lower during the three months ended
June 30, 2003, although our CC&B Systems revenue increased sequentially from the
second quarter of fiscal 2003 by $15.3 million. Approximately $14.5 million of
our CC&B Systems revenue for the three months ended June 30, 2003 is
attributable to customers other than communications service providers.
Revenue from Directory Systems was $56.0 million for the three months
ended June 30, 2003, an increase of $14.7 million, or 35.7%, over the three
months ended June 30, 2002. The increase is attributable primarily to the
extensions of agreements with and additional services rendered to existing
customers and contracts with new customers.
In the three months ended June 30, 2003, revenue from customers in North
America, Europe and the rest of the world accounted for 62.9%, 28.1% and 9.0%,
respectively, compared to 65.1%, 27.4% and 7.5%, respectively, for the three
months ended June 30, 2002. Revenue from customers in North America decreased in
absolute terms and as a percentage of revenue, due to a reduction in activity
from customers in North America, which was partially offset by forming
relationships with new customers and expanding relationships with existing
customers in North America. The growth in revenue from customers in Europe and
the rest of the world was primarily attributable to revenue we gained from
existing customers.
COST OF LICENSE. Cost of license for the three months ended June 30, 2003
was $1.5 million, compared to $1.2 million cost of license for the three months
ended June 30, 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 June 30, 2003
was $230.3 million, a decrease of $1.3 million, or 0.6%, from the cost of
service of $231.6 million for the three months ended June 30, 2002. As a
percentage of revenue, cost of service increased to 61.1% in the three months
ended June 30, 2003 from 60.9% in the three months ended June 30, 2002. Cost of
service remained relatively unchanged as a result of the decrease in costs
associated with the cost reduction programs that we implemented in fiscal 2002
and in the first quarter of fiscal 2003, offset by additional expenses related
to the implementation of some significant
27
Directory Systems outsourcing projects. We have taken 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 June 30, 2003,
research and development expense was $29.9 million, or 7.9% of revenue, compared
with $32.8 million, or 8.6% of revenue, in the three months ended June 30, 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 8.1% to
$50.9 million, or 13.5% of revenue, in the three months ended June 30, 2003 from
$55.4 million, or 14.6% of revenue, in the three months ended June 30, 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.
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 June 30, 2002 was $51.1 million. Amortization of purchased
intangible assets for the three months ended June 30, 2003 and 2002 was $4.5
million and $5.4 million, respectively.
OPERATING INCOME. Operating income in the three months ended June 30, 2003,
was $60.0 million, or 15.9% of revenue, compared to $2.5 million, or 0.7% of
revenue, in the three months ended June 30, 2002, an increase of $57.5 million.
The increase is attributable primarily to our adoption of SFAS No. 142, which
resulted in no amortization of goodwill in the three months ended June 30, 2003.
Operating income for the three months ended June 30, 2002 included
amortization of goodwill of $51.1 million and amortization of purchased
intangible assets of $5.4 million. Excluding amortization of goodwill and
purchased intangible assets, operating income for the three months ended June
30, 2002 was $59.1 million, or 15.5% of revenue. Operating income for the three
months ended June 30, 2003 included amortization of purchased intangible assets
of $4.5 million. Excluding this charge, operating income in the three months
ended June 30, 2003 was $64.5 million, or 17.1% of revenue, an increase of 9.2%
from prior year. The increase in our operating income, excluding amortization of
purchased intangible assets and goodwill, was attributable to the cost reduction
programs that we implemented in fiscal 2002 and in the first quarter of fiscal
2003, which was partially offset by relative low gross margin of new Directory
Systems outsourcing projects in their early stages of implementation in the
three months ended June 30, 2003.
INTEREST INCOME AND OTHER, NET. In the three months ended June 30, 2003,
interest income and other, net, was $3.3 million, an increase of $0.2 million
over the three months ended June 30, 2002. Interest income and other, net, was
relatively unchanged primarily as a result of the decrease in interest expenses
due to the reduction in our outstanding convertible notes following our
repurchase of a portion of the convertible notes, offset by 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 June 30, 2003 were
$15.8 million on pretax income of $63.3 million. Our effective tax rate in the
three months ended June 30, 2003 was 25%. As a result of the adoption of SFAS
No. 142 we no longer amortize goodwill resulting from acquisitions, thus
goodwill amortization that is not tax-deductible no longer affects our effective
tax rate. In the three months ended June 30, 2002, income taxes were $32.4
million on pretax income of $5.6 million, or 581% of pretax income. The
disproportionate tax rate in the three months ended June 30, 2002, resulted
primarily from our revised annual estimated pretax income for fiscal 2002, and
the substantial amount of the non-deductible non-cash goodwill amortization
related to acquisitions, relative to our fiscal 2002 level of pretax income. The
effective tax rate for the three months ended June 30, 2002, excluding
amortization of purchased intangible assets and goodwill, was 28%. See
discussion below under the caption "Effective Tax Rate".
28
NET INCOME (LOSS). Net income was $47.4 million in the three months ended
June 30, 2003, compared to net loss of $26.9 million in the three months ended
June 30, 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 June 30, 2003, and the tax effect related to the revised
annual estimated pretax income for fiscal 2002 in the three months ended June
30, 2002.
Net loss for the three months ended June 30, 2002 included amortization of
goodwill and purchased intangible assets. Excluding these charges, net income
for the three months ended June 30, 2002 was $44.7 million, or 11.8% of revenue.
Net income in the three months ended June 30, 2003 included amortization of
purchased intangible assets. Excluding this charge, net income was $50.8
million, representing 13.5% of revenue, an increase of 13.6% from the prior
year. The increase in our net income, excluding amortization of purchased
intangible assets and goodwill, was primarily attributable to the cost reduction
programs that we implemented in fiscal 2002 and in the first quarter of fiscal
2003, which was partially offset by relative low gross margin of new Directory
Systems outsourcing projects in their early stages of implementation in the
three months ended June 30, 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 ended June 30, 2002 adjusted to exclude amortization of goodwill
and workforce-in-place expenses, net of tax, is as follows (in millions, except
per share data):
THREE MONTHS
ENDED
JUNE 30,
2002
----------
Reported net loss $ (26.9)
Add back: goodwill and
workforce-in-place amortization 51.1
Attributable tax effect (0.6)
----------
Adjusted net income $ 23.6
==========
Adjusted basic earnings per share $ 0.11
==========
Adjusted diluted earnings per share $ 0.11
==========
DILUTED EARNINGS (LOSS) PER SHARE. Diluted earnings per share were $0.21
for the three months ended June 30, 2003, compared to diluted loss per share of
$0.12 in the three months ended June 30, 2002. Diluted earnings per share,
excluding amortization of purchased intangible assets and goodwill, in the three
months ended June 30, 2003, increased by 15.0% from $0.20 in the three months
ended June 30, 2002, to $0.23 per diluted share.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term interest-bearing investments totaled
$1,288.7 million as of June 30, 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 $281.0 million and $311.4 million
for the nine months ended June 30, 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 2% Convertible Notes due June 1, 2008 (the
"Notes").
As of June 30, 2003, we had working capital of $662.1 million, compared to
$938.6 million as of September 30, 2002. The decrease is attributable primarily
to the reclassification of the Notes as a short-term
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liability because the holders of the Notes may require us to redeem the Notes on
June 1, 2004. The decrease was partially offset by 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 June 30, 2003, $445.1 million aggregate principal amount of 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 nine months ended June 30, 2003, we did not
repurchase any 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. Due to the high conversion price for the Notes, it is
likely that the holders of the Notes will require us to redeem their Notes. We
may choose to redeem the Notes in cash, in ordinary shares, or in a combination
of cash and ordinary shares.
As of June 30, 2003, we had no outstanding borrowings under our short-term
general revolving line of credit of $30.0 million. In addition, as of June 30,
2003 we had credit facilities totaling $38.9 million limited for the use of
letters of credit and bank guarantees from various banks. Outstanding letters of
credit and bank guarantees as of June 30, 2003 totaled $22.8 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 June 30, 2003, we had outstanding long-term obligations of $17.8
million in connection with leasing arrangements.
Our capital expenditures were approximately $47.2 million in the nine
months ended June 30, 2003. These expenditures consisted primarily of purchases
of computer equipment, computer software and related intangible assets. 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 June 30, 2003, deferred tax assets of $13.6 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 the discussion above under the caption
"Adoption of New Accounting Standards". As a result, goodwill amortization that
is not tax-deductible no longer affects our effective tax rate.
In the nine months ended June 30, 2002, our blended effective tax rate was
95%. This high effective tax rate was primarily attributable to amortization of
goodwill related to our acquisitions, much of which was 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 quarter of fiscal 2002 to our
annual estimated pretax income levels. In the three months ended June 30, 2002,
our blended effective tax rate was 581%. The effective tax rate was exaggerated
in the third quarter of fiscal 2002 because, in accordance with APB No. 28, 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 fiscal 2002 pretax
income estimate was substantially less than the pretax income level originally
forecasted by us for the full fiscal year. The downward adjustment in the pretax
income forecast had the effect of increasing our effective tax rates in fiscal
2002, due to fixed non-deductible expenditures representing a larger component
of our revised pretax income, and accordingly resulted in the tax allocations
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made by us in the prior two quarters being too low. Until we revised our pretax
income forecast for fiscal 2002 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 fiscal 2002 forecasted pretax income in the third quarter of fiscal 2002, we
were required in accordance with APB No. 28 to allocate additional taxes to the
third quarter of fiscal 2002 in order to compensate in that quarter for our
earlier lower tax allocations. Excluding the amortization related to our
acquisitions, our overall effective tax rate would have been 28% for the nine
months ended June 30, 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 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 June 30, 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 have moved
to dismiss the amended complaint. We dispute all allegations of wrongdoing and
intend to defend ourselves vigorously.
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
We have been informed that the Midwest Regional Office of the SEC is
conducting a private investigation into the events leading up to our
announcement in June 2002 of revised projected revenue for the third and fourth
quarters of fiscal 2002. The investigation appears to be focused on, but is not
explicitly limited to, our forecasting beginning with our April 23, 2002 press
release. Although we believe that we will be able to satisfy any concerns the
SEC staff may have in this regard, we are unable to predict the duration, scope,
or outcome of the investigation. We are cooperating fully with the SEC staff.
CERTEN TRANSACTION
On July 2, 2003, we acquired from Bell Canada ("Bell") its 90% ownership
interest in Certen Inc. ("Certen") for approximately CDN $89 million (US $66
million) in cash, pursuant to an Acquisition Agreement, dated as of May 28,
2003. We formed Certen with Bell in January 2001 to provide customer care and
billing solutions to Bell and a number of Bell's affiliated companies. Prior to
this acquisition, Bell's ownership interest was 90% and we owned the remainder.
As a result of the acquisition, Certen is now our wholly owned subsidiary. Since
Certen's inception, we have provided customer care and billing software required
by Certen, including related customization, installation, maintenance and other
services. In conjunction with the acquisition, the comprehensive billing
operations outsourcing agreement with Bell was extended by three years through
December 2010.
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PART II - OTHER INFORMATION
ITEM 1. REPORTS ON FORM 6-K
(a) Reports on Form 6-K
The Company filed the following report on Form 6-K during the three
months ended June 30, 2003:
(1) Form 6-K dated May 15, 2003.
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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 14, 2003