SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2004
Commission File Number 1-14840
AMDOCS LIMITED
Suite 5, Tower Hill House Le Bordage
St. Peter Port, Island of Guernsey, GY1 3QT Channel Islands
Amdocs, Inc.
1390 Timberlake Manor Parkway, Chesterfield, Missouri 63017
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F:
FORM 20-F X FORM 40-F
------- -------
Indicate by check mark whether the registrant by furnishing the information
contained in this form is also thereby furnishing the information to the
Commission pursuant to rule 12g3-2(b) under the Securities Exchange Act of 1934:
YES NO X
------- -------
AMDOCS LIMITED
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
FOR THE QUARTER ENDED MARCH 31, 2004
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statement of Changes in
Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Unaudited Consolidated Financial
Statements
Item 2. Operating and Financial Review and Prospects
PART II OTHER INFORMATION
Item 1. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities
Item 2. 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
-----------------------------
MARCH 31, SEPTEMBER 30,
2004 2003
----------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 796,318 $ 847,600
Short-term interest-bearing investments 770,217 443,292
Accounts receivable, net 247,766 198,274
Deferred income taxes and taxes receivable 75,103 60,868
Prepaid expenses and other current assets 80,275 85,902
----------- -----------
Total current assets 1,969,679 1,635,936
Equipment, vehicles and leasehold improvements, net 182,937 203,467
Deferred income taxes 111,824 105,943
Goodwill 807,305 797,134
Intangible assets, net 60,880 58,841
Other noncurrent assets 107,013 76,196
----------- -----------
Total assets $ 3,239,638 $ 2,877,517
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 80,778 $ 101,116
Accrued expenses and other current liabilities 158,374 123,223
Accrued personnel costs 117,675 106,857
2% convertible notes 395,454 400,454
Short-term portion of financing arrangement 1,777 2,179
Deferred revenue 232,444 174,616
Short-term portion of capital lease obligations 23,439 27,140
Deferred income taxes and taxes payable 146,395 133,002
----------- -----------
Total current liabilities 1,156,336 1,068,587
Deferred income taxes 52,969 44,835
0.50% convertible notes 450,000 --
Noncurrent liabilities and other 160,582 172,495
----------- -----------
Total liabilities 1,819,887 1,285,917
----------- -----------
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; 224,738 and
223,790 issued and 206,019 and 216,058 outstanding, respectively 3,597 3,580
Additional paid-in capital 1,834,838 1,820,956
Treasury stock, at cost - 18,719 and 7,732 Ordinary Shares, respectively (402,360) (109,281)
Accumulated other comprehensive (loss) income (1,387) 3,715
Unearned compensation (925) --
Accumulated deficit (14,012) (127,370)
----------- -----------
Total shareholders' equity 1,419,751 1,591,600
----------- -----------
Total liabilities and shareholders' equity $ 3,239,638 $ 2,877,517
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
2
AMDOCS LIMITED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ---------------------
2004 2003 2004 2003
-------- -------- -------- --------
Revenue:
License (*) $ 18,107 $ 19,159 $ 34,728 $ 39,685
Service (*) 424,651 335,855 836,325 654,715
-------- -------- -------- --------
442,758 355,014 871,053 694,400
-------- -------- -------- --------
Operating expenses:
Cost of license 1,227 1,546 2,359 2,682
Cost of service 278,258 212,080 550,361 416,066
Research and development 30,084 29,328 60,582 58,947
Selling, general and administrative 53,836 51,121 106,333 102,701
Amortization of purchased intangible assets 3,769 4,625 8,865 9,779
Restructuring charges -- -- -- 9,956
-------- -------- -------- --------
367,174 298,700 728,500 600,131
-------- -------- -------- --------
Operating income 75,584 56,314 142,553 94,269
Interest income and other, net (*) 1,711 4,186 2,778 9,163
-------- -------- -------- --------
Income before income taxes 77,295 60,500 145,331 103,432
Income taxes 17,005 15,125 31,973 25,858
-------- -------- -------- --------
Net income $ 60,290 $ 45,375 $113,358 $ 77,574
======== ======== ======== ========
Basic earnings per share $ 0.29 $ 0.21 $ 0.53 $ 0.36
======== ======== ======== ========
Diluted earnings per share $ 0.28 $ 0.21 $ 0.52 $ 0.36
======== ======== ======== ========
Basic weighted average number of shares outstanding 209,977 215,797 212,556 215,711
======== ======== ======== ========
Diluted weighted average number of shares outstanding 216,164 219,109 218,379 218,179
======== ======== ======== ========
(*) See Note 4.
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)
Ordinary Shares Additional Accumulated Other
----------------- Paid-in Treasury Comprehensive Unearned Accumulated Accumulated
Shares Amount Capital Stock (Loss) Income Compensation Deficit Equity
-------- ------ ---------- ---------- ----------------- ------------ ----------- ------------
BALANCE AS OF SEPTEMBER
30, 2003 216,058 $3,580 $1,820,956 $(109,281) $ 3,715 $ -- $(127,370) $ 1,591,600
Comprehensive income:
Net income -- -- -- -- -- -- 113,358 113,358
Unrealized loss on
foreign currency
hedging contracts, net
of $(1,758) tax -- -- -- -- (5,562) -- -- (5,562)
Unrealized income on
cash equivalents and
short-term interest-
bearing investments,
net of $128 tax -- -- -- -- 460 -- -- 460
-----------
Comprehensive income 108,256
-----------
Issuance of ordinary
shares related to
acquisition, net 561 -- 747 14,392 -- -- -- 15,139
Employee stock options
exercised 948 17 9,772 -- -- -- -- 9,789
Tax benefit of stock
options exercised -- -- 2,406 -- -- -- -- 2,406
Repurchase of ordinary
shares (11,548) -- -- (307,471) -- -- -- (307,471)
Expense related to vesting
of stock options -- -- 6 -- -- -- -- 6
Stock options granted -- -- 951 -- -- (951) -- --
Amortization of unearned
compensation -- -- -- -- -- 26 -- 26
-------- ------ ---------- --------- ------- ----- --------- -----------
BALANCE AS OF MARCH 31,
2004 206,019 $3,597 $1,834,838 $(402,360) $(1,387) $(925) $ (14,012) $ 1,419,751
======== ====== ========== ========= ======= ===== ========= ===========
As of March 31, 2004 and September 30, 2003, accumulated other comprehensive
(loss) income is comprised of unrealized (loss) gain on derivatives, net of tax,
of $(1,879) and $3,683, respectively, and unrealized gain on cash equivalents
and short-term interest-bearing investments, net of tax, of $492 and $32,
respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
4
AMDOCS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - CONTINUED
(in thousands)
SIX MONTHS ENDED MARCH 31,
--------------------------
2004 2003
---------- ----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 113,358 $ 77,574
Reconciliation of net income to net cash provided by operating activities:
Depreciation and amortization 49,447 46,444
(Gain) loss on sale of equipment (86) 509
Gain on repurchase of 2% convertible notes (13) --
Deferred income taxes 7,762 5,314
Tax benefit of stock options exercised 2,406 46
Realized (gain) loss from short-term interest-bearing investments (305) 1,077
Net changes in operating assets and liabilities, net of amounts acquired:
Accounts receivable (46,709) 74,122
Prepaid expenses and other current assets 460 (11,460)
Other noncurrent assets (24,121) (6,318)
Accounts payable and accrued expenses 23,808 (22,244)
Deferred revenue 56,035 28,930
Income taxes payable 817 3,890
Noncurrent liabilities and other (920) (2,190)
--------- ---------
Net cash provided by operating activities 181,939 195,694
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment, vehicles and leasehold improvements 470 1,283
Payments for purchase of equipment, vehicles, leasehold improvements and
other (23,373) (26,998)
Proceeds from sale of short-term interest-bearing investments 587,180 328,759
Purchase of short-term interest-bearing investments (913,216) (329,606)
(Cash paid for) reimbursement of cash in acquisition (10,386) 11,111
--------- ---------
Net cash used in investing activities (359,325) (12,684)
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from employee stock options exercised 9,789 1,109
Net proceeds from issue of long-term 0.50% convertible notes 442,075 --
Repurchase of ordinary shares (307,471) --
Repurchase of 2% convertible notes (4,987) --
Principal payments under financing arrangement (1,090) --
Principal payments on capital lease obligations (12,212) (5,949)
--------- ---------
Net cash provided by (used in) financing activities 126,104 (4,840)
--------- ---------
Net (decrease) increase in cash and cash equivalents (51,282) 175,403
Cash and cash equivalents at beginning of period 847,600 466,655
--------- ---------
Cash and cash equivalents at end of period $ 796,318 $ 642,058
========= =========
SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for:
Income taxes, net of refunds $ 16,190 $ 15,982
Interest 5,290 4,801
NON-CASH INVESTING AND FINANCING ACTIVITIES
In the six months ended March 31, 2004, the Company issued 561 ordinary shares
in connection with the acquisition of XACCT (as defined below). See Note 10.
The accompanying notes are an integral part of these consolidated financial
statements.
5
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
1. BASIS OF PRESENTATION
Amdocs Limited (the "Company") is a leading provider of software
products and services to the communications industry. The Company and its
subsidiaries operate in one operating segment, providing integrated
customer management systems and related services primarily for the
communications industry. The Company designs, develops, markets,
implements, supports and operates information systems solutions, including
Managed Services, primarily for 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, 2003, set forth in the
Company's Annual Report on Form 20-F filed on December 24, 2003 with the
Securities and Exchange Commission.
Reclassification
Certain prior year amounts have been reclassified to conform to the
current year presentation.
2. SIGNIFICANT ACCOUNTING POLICY
Accounting for Stock-Based Compensation
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. Employee stock-based
compensation cost of $26 and $0 is reflected in net income for the six
months ended March 31, 2004 and 2003, respectively.
As presented below, the Company determined net income and earnings
per share information as if the fair value method described in Statements
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation", as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an Amendment of
Financial Accounting Standards Board Statement No. 123", 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
6
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
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 SIX MONTHS ENDED
MARCH 31, MARCH 31,
----------------------- ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Risk-free interest rate 2.12% 2.72% 2.10% 2.72%
Expected life of options 3.00 2.91 3.00 2.92
Expected annual volatility 0.461 0.54 0.44 0.58
Expected dividend yield None None None None
Fair value per option $ 11.65 $ 6.01 $ 10.40 $ 4.71
The following table sets forth the pro forma effect of applying SFAS
No. 123 on net income and earnings per share for the three months and six
months ended March 31, 2004 and 2003:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- -----------------------
2004 2003 2004 2003
-------- -------- --------- ---------
Net income, as reported $ 60,290 $ 45,375 $ 113,358 $ 77,574
Add: Stock-based employee compensation expense
included in net income, net of related tax
effects 20 5 25 19
Less: Total stock-based employee compensation
expense determined under fair value method
for all awards, net of related tax effects (8,489) (9,623) (19,204) (30,007)
-------- -------- --------- ---------
Pro forma net income $ 51,821 $ 35,757 $ 94,179 $ 47,586
======== ======== ========= =========
Basic earnings per share:
As reported $ 0.29 $ 0.21 $ 0.53 $ 0.36
======== ======== ========= =========
Pro forma $ 0.25 $ 0.17 $ 0.44 $ 0.22
======== ======== ========= =========
Diluted earnings per share:
As reported $ 0.28 $ 0.21 $ 0.52 $ 0.36
======== ======== ========= =========
Pro forma $ 0.24 $ 0.17 $ 0.44 $ 0.22
======== ======== ========= =========
The pro forma results for the three months and six months ended
March 31, 2003 have been revised due to a correction of the stock-based
employee compensation expense amounts for such periods. These corrections
resulted in a decrease in pro forma net income of $8,364 and $15,799 from
the amounts previously reported in the three months and six months ended
March 31, 2003, respectively, and a decrease in pro forma diluted earnings
per share of $0.03 and $0.07 from the per share amounts previously
reported in the three months and six months ended March 31, 2003,
respectively. Additionally, the pro forma results for the three months
ended December 31, 2003 and 2002 have been revised due to the correction
of the stock-based compensation amount for such periods. The correction
resulted in a decrease in pro forma net income of $4,003 and $7,435 from
the amounts previously reported, respectively, and a decrease in pro forma
diluted earnings per share of $0.02 and $0.04 from the per share amounts
previously reported, respectively, for such periods. The effect of this
correction for fiscal 2003 resulted in a decrease in pro forma net income
of $33,732 and a decrease in pro forma diluted earnings per share of $0.15
from the amounts previously reported. As of June 10, 2004, the Company
analyzed the impact of the correction only for the aforementioned periods.
The information with respect to prior periods will be included in the
Company's Form 20-F for the 2004 fiscal year.
7
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
3. NEW ACCOUNTING STANDARDS
Variable Interest Entities
In January 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 46 ("FIN No. 46"), "Consolidation of Variable
Interest Entities", which was further revised in December 2003. FIN No. 46
requires the consolidation of entities in which an enterprise absorbs a
majority of the entity's expected losses, receives a majority of the
entity's expected residual returns, or both, as a result of ownership,
contractual or other financial interests in the entity. FIN No. 46
currently has no effect on the Company's consolidated financial position
and results of operations.
4. RELATED PARTY TRANSACTIONS
The Company had licensed software and provided computer systems
integration and related services to Certen Inc. ("Certen") prior to the
acquisition of the remaining 90% of Certen by the Company on July 2, 2003
(see Note 10). As a result of the acquisition of the remaining 90% of
Certen by the Company, commencing on the acquisition date, the fair market
value of Certen's assets and liabilities has been included in the
Company's consolidated balance sheet and the results of Certen's
operations are included in the Company's consolidated statements of
income. Certen is now a wholly owned subsidiary of the Company, and Certen
ceased to be a related party as of July 2, 2003, according SFAS No. 57,
"Related Party Disclosures".
The following related party revenue is included in the statements of
income for the three months and six months ended March 31, 2003:
THREE MONTHS SIX MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
------------ ----------
2003 2003
------------ ----------
Revenue:
License $ 1,191 $ 3,243
Service 26,702 51,748
The following related party expense is included in the statements of
income for the three months and six months ended March 31, 2003:
THREE MONTHS SIX MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2003 2003
------------ ----------
Interest income and other, net (1) $ 458 $ 1,098
(1) Represents interest and exchange rate differences, net of hedging,
on the convertible debentures of Certen. Absent hedging, these
amounts would be $3,601 and $4,611 for the three and six months
ended March 31, 2003, respectively.
8
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
5. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consists of the following:
AS OF
--------------------------
MARCH 31, SEPTEMBER 30,
2004 2003
--------- -------------
Accounts receivable -billed $ 253,293 $ 200,220
Accounts receivable -unbilled 11,223 16,072
Less - allowances (16,750) (18,018)
--------- ---------
Accounts receivable, net $ 247,766 $ 198,274
========= =========
6. COMPREHENSIVE INCOME
Comprehensive income represents the change in shareholders' equity
during a period from transactions and other events and circumstances from
nonowner sources. It includes all changes in equity except those resulting
from investments by owners and distributions to owners.
The following table sets forth the reconciliation from net income to
comprehensive income for the following periods:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- -----------------------
2004 2003 2004 2003
-------- -------- --------- --------
Net income $ 60,290 $ 45,375 $ 113,358 $ 77,574
Other comprehensive (loss) income:
Unrealized (loss) income on foreign currency
hedging contracts, net of tax (2,363) 3,666 (5,562) 9,134
Unrealized gain (loss) on short-term
interest-bearing investments, net of tax 925 (943) 460 (1,049)
-------- -------- --------- --------
Comprehensive income $ 58,852 $ 48,098 $ 108,256 $ 85,659
======== ======== ========= ========
7. INCOME TAXES
The provision for income taxes for the following periods consisted
of:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- -----------------------
2004 2003 2004 2003
-------- -------- --------- --------
Current $ 7,589 $ 7,623 $ 24,211 $ 20,544
Deferred 9,416 7,502 7,762 5,314
-------- -------- --------- --------
$ 17,005 $ 15,125 $ 31,973 $ 25,858
======== ======== ========= ========
9
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
The effective income tax rate varied from the statutory Guernsey tax
rate as follows for the following periods:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ----------------
2004 2003 2004 2003
---- ---- ---- ----
Statutory Guernsey tax rate 20% 20% 20% 20%
Guernsey tax-exempt status (20) (20) (20) (20)
Foreign taxes 22 25 22 25
--- --- --- ---
Effective income tax rate 22% 25% 22% 25%
=== === === ===
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 2004 is expected to approximate 22%.
8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ---------------------
2004 2003 2004 2003
-------- -------- -------- --------
Numerator:
Net income $ 60,290 $ 45,375 $113,358 $ 77,574
======== ======== ======== ========
Denominator:
Denominator for basic earnings per share -
weighted average number of shares
outstanding (1) 209,977 215,797 212,556 215,711
Effect of dilutive stock options granted 6,187 3,312 5,823 2,468
-------- -------- -------- --------
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed conversions (1) 216,164 219,109 218,379 218,179
======== ======== ======== ========
Basic earnings per share $ 0.29 $ 0.21 $ 0.53 $ 0.36
======== ======== ======== ========
Diluted earnings per share $ 0.28 $ 0.21 $ 0.52 $ 0.36
======== ======== ======== ========
(1) The weighted average number of shares outstanding during the
three months and six months ended March 31, 2003 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 were exchangeable for the Company's ordinary shares on a
one-for-one basis. As of August 2003, none of the exchangeable
shares remained outstanding.
The effect of the 2% Convertible Notes due June 1, 2008 issued by
the Company in May 2001 (the "2% Notes") on diluted earnings per share was
anti-dilutive for the three months and six months ended March 31, 2004 and
2003, and, therefore, was not included in the above calculation. The
effect of the 0.50% Convertible Senior Notes due 2024 (the "0.50% Notes")
issued by the Company in March 2004 on diluted earnings per share was not
included in the above calculation due to the conditions on their
conversion (see Note 11). The weighted average effect of the repurchase of
ordinary shares by the Company has been included in the calculation of
basic earnings per share.
10
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
9. REPURCHASE OF SECURITIES
On November 5, 2003, the Company announced that its board of
directors had authorized a share repurchase program of up to 5,000
ordinary shares during fiscal 2004. The authorization permits the Company
to purchase ordinary shares in the open market or in privately negotiated
transactions and at prices the Company deems appropriate. The Company
stated that one of the main purposes of the repurchase program was to
offset the dilutive effect of any future share issuances, including
issuances pursuant to employee equity plans or in connection with
acquisitions. During the three months ended December 31, 2003 the Company
repurchased 4,990 ordinary shares under this repurchase program, for an
aggregate purchase price of $123,993. No share repurchases under this
program were made in the three months ended March 31, 2004.
In connection with the Company's acquisition of XACCT Technologies
Ltd. (see Note 10), the Company's board of directors approved the
repurchase of ordinary shares to offset the dilutive effect of share
issuances in the acquisition. The closing of the acquisition occurred in
February 2004, and the Company repurchased 484 ordinary shares in February
2004 for an aggregate purchase price of $13,417.
In connection with the Company's issuance of the 0.50% Notes (see
Note 11), the board of directors approved the repurchase of ordinary
shares sold short by purchasers of the 0.50% Notes in negotiated
transactions, concurrently with the sale of the notes, to offset the
dilutive effect of the ordinary shares issuable upon conversion of the
0.50% Notes. The closing of the sale of the 0.50% Notes occurred in March
2004, and the Company repurchased 6,074 ordinary shares for an aggregate
purchase price of $170,061, out of the 10,436 ordinary shares issuable
upon conversion of the 0.50% Notes, based on a conversion rate of 23.1911
shares per $1,000 principal amount.
In July 2002, the board of directors authorized the Company to
repurchase its outstanding 2% Notes, in such amounts, at such prices and
at such times considered appropriate by the Company. During the three
months ended December 31, 2003, the Company repurchased $5,000 aggregate
principal amount of the 2% Notes for an aggregate purchase price of
$4,987. No repurchases of 2% Notes were made in the three months ended
March 31, 2004. During fiscal 2003 and 2002, the Company repurchased
$99,546 aggregate principal amount of the 2% Notes for an aggregate
purchase price of $93,087.
On June 1, 2004, the Company completed a cash offer for the 2%
Notes. Pursuant to the indenture for the 2% Notes, each holder of the 2%
Notes had the right to require the Company to repurchase on June 1, 2004
all or any part of such holder's notes at a price equal to 100% of the
principal amount plus accrued and unpaid interest. Under the terms of the
2% Notes, the Company had the option to pay for the 2% Notes with cash,
ordinary shares, or a combination of cash and ordinary shares. The Company
elected to pay for the notes solely with cash. The Company accepted for
payment $395,110 principal amount of 2% Notes surrendered for repurchase
pursuant to the offer. The untendered $344 principal amount of 2% Notes
will remain as obligations of the Company, due June 1, 2008, in accordance
with their terms.
11
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
10. ACQUISITIONS
CERTEN INC.
On July 2, 2003, the Company acquired from Bell Canada ("Bell") its 90%
ownership interest in Certen (renamed Amdocs Canada Managed Services, Inc.) for
approximately $66,000 in cash. In addition, the Company had related transaction
costs of approximately $5,000. 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, the Company owned 10% of
Certen. 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. This acquisition expanded the
Company's Managed Services offerings and positioned it as a major provider of
Managed Services to the communications industry and was its next logical step in
the evolution of its relationship with Bell. In addition, as a result of this
acquisition, the Company continued to develop an integrated billing platform to
replace legacy systems built on a product-by-product basis. Following the
acquisition, Certen continued to provide Managed Services to Bell as it did
prior to the acquisition, and the wholly owned subsidiary contributes a positive
cash flow to the Company. The acquisition did not affect the Company's liquidity
position.
The following is the revised preliminary allocation of the purchase price
and deferred tax liability:
Purchase price $ 65,887
Estimated transaction costs 5,000
---------
Total purchase price 70,887
Write-off of deferred revenue and allowance on Amdocs books, net of tax (33,666)
---------
Net amount for purchase price allocation $ 37,221
=========
Allocation of purchase price:
90% tangible assets acquired, net of capitalized Amdocs system on
Certen's books $ 80,929
90% liabilities assumed (241,760)
---------
Net liabilities acquired (160,831)
Customer arrangement 36,385
Adjustment to fair value of pension and other post-employment
benefit liabilities (10,534)
EITF 95-3 and other liabilities (4,936)
Deferred taxes resulting from the difference between the assigned value
of certain assets and liabilities and their respective tax bases 74,307
---------
Net fair value of liabilities acquired (65,609)
Goodwill 102,830
---------
$ 37,221
=========
The following table sets forth the unaudited pro forma revenue, operating
income, net income and earnings per share figures for the three months and six
months ended March 31, 2003, as if Certen had been acquired as of October 1,
2001:
THREE MONTHS SIX MONTHS
ENDED ENDED
------------ ----------
MARCH 31, 2003
-------------------------
Revenue $396,198 $778,988
Operating income 46,967 77,973
Net income 37,858 63,409
Basic earnings per share 0.18 0.29
Diluted earnings per share 0.17 0.29
12
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
XACCT TECHNOLOGIES LIMITED
On February 19, 2004, the Company acquired XACCT Technologies Ltd.
("XACCT"), a privately-held provider of mediation software to
communications service providers. The Company acquired XACCT's outstanding
shares for $28,425, of which $13,286 was paid in cash and the balance in
561 of the Company's ordinary shares. In addition, the Company had related
transaction costs of approximately $750. This acquisition further expands
the scope of the Company's billing capabilities in the network mediation
space, enabling the collection, formatting and distribution of network
usage events. With this acquisition, the Company achieves the capability
to support end-to-end event processing, from network mediation through
billing, for voice, data, content and commerce prepaid and postpaid
transactions. The Company repurchased 484 ordinary shares in February 2004
to offset the dilutive effect of share issuances in the acquisition. The
fair market value of XACCT's assets and liabilities has been included in
the Company's balance sheet and the results of XACCT's operations have
been included in the Company's consolidated statements of income,
commencing on February 19, 2004.
The following is the preliminary allocation of the purchase price
and deferred tax assets:
Net assets acquired $ 608
Technology 9,058
Customer arrangements 1,046
Deferred tax assets 6,326
Goodwill 12,137
-------
$29,175
=======
Proforma information on the Company's results of operations for the
six months and three months ended March 31, 2004 and 2003, to reflect the
XACCT acquisition is not presented as its results of operations during
such periods are not material to the Company's results of operations.
11. 0.50% CONVERTIBLE SENIOR NOTES DUE 2024
In March 2004 the Company issued $450,000 aggregate principal amount
of 0.50% Notes. The Company is obligated to pay interest on the 0.50%
Notes semi-annually on March 15 and September 15 of each year. The 0.50%
Notes are senior unsecured obligations of the Company and rank equal in
right of payment with all existing and future senior unsecured
indebtedness of the Company. The 0.50% Notes are convertible, at the
option of the holders at any time before the maturity date, into ordinary
shares of the Company at a conversion rate of 23.1911 shares per one
thousand dollars principal amount, representing a conversion price of
approximately $43.12 per share, as follows: (i) during any fiscal quarter
commencing after March 31, 2004, and only during that quarter if the
closing sale price of the Company's ordinary shares exceeds 130% of the
conversion price for at least 20 trading days in the 30 consecutive
trading days ending on the last trading day of the proceeding fiscal
quarter (initially 130% of $43.12, or $56.06); (ii) upon the occurrence
of specified credit rating events with respect to the notes; (iii) subject
to certain exceptions, during the five business day period after any five
consecutive trading day period in which the trading price per note for
each day of that measurement period was less than 98% of the product of
the closing sale price of the Company's ordinary shares and the conversion
rate; provided, however, holders may not convert their notes (in reliance
on this subsection) if on any trading day during such measurement period
the closing sale price of the Company's ordinary shares was between 100%
and 130% of the then current conversion price of the notes (initially,
between $43.12 and $56.06); (iv) if the notes have been called for
redemption, or (v) upon the occurrence of specified corporate events. The
0.50% Notes are subject to redemption at any time on or after March 20,
2009, in
13
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
whole or in part, at the option of the Company, at a redemption price of
100% of the principal amount plus accrued and unpaid interest, if any, on
such redemption date. The 0.50% Notes are subject to repurchase, at the
holders' option, on March 15, 2009, 2014 and 2019, at a repurchase price
equal to 100% of the principal amount plus accrued and unpaid interest, if
any, on such repurchase date. The Company may choose to pay the repurchase
price in cash, ordinary shares or a combination of cash and ordinary
shares.
12. OPERATIONAL EFFICIENCY AND COST REDUCTION PROGRAMS
Fiscal Year Ended September 30, 2003
In the first quarter of fiscal 2003, the Company implemented a
series of measures designed to reduce costs and improve productivity, with
targeted quarterly savings of approximately $8,000. As part of this plan,
the Company reduced its workforce by approximately 400 employees,
representing approximately 4% of the Company's worldwide workforce of
9,000 full-time employees, vacated facilities in different centers around
the world and implemented other cost reduction measures, including travel
cuts and reduction in other discretionary costs.
The restructuring charge associated with these actions and recorded
in the first quarter of fiscal 2003 was $9,956. Approximately $5,710 of
the total charge was paid in cash as of March 31, 2004.
Details of Restructuring Charge of $9,956:
The Company recorded a charge of $4,011 related to employee
separation costs in connection with the termination of employment of
software information technology specialists and administrative
professionals from various locations around the world. The Company
recorded a charge of $4,022 related to facilities, representing rent
obligations relating to vacated facilities in Raanana, Israel and St.
Louis, Missouri. The Company also recorded a provision of $1,829 for asset
write-offs, principally for leasehold improvements in Raanana, Israel and
St. Louis, Missouri that were abandoned.
The first quarter of fiscal 2003 restructuring charge is comprised
of the following as of March 31, 2004:
EMPLOYEE
SEPARATION ASSET
COSTS FACILITIES WRITE-OFFS OTHER TOTAL
---------- ---------- ---------- ----- --------
Balance as of October 1, 2002 $ -- $ -- $ -- $ -- $ --
Charges 4,011 4,022 1,829 94 9,956
Cash payments (3,890) (467) -- (94) (4,451)
Non cash -- -- (1,829) -- (1,829)
Adjustments 38 (453) -- -- (415)
------- ------- ------- ---- -------
Balance as of September 30, 2003 159 3,102 -- -- 3,261
Cash payments (167) (1,092) -- -- (1,259)
Adjustments 8 -- -- -- 8
------- ------- ------- ---- -------
Balance as of March 31, 2004 $ -- $ 2,010 $ -- $ -- $ 2,010
======= ======= ======= ==== =======
The financial savings of these actions, of approximately $8,000
quarterly commencing in the second quarter of 2003, is reflected as a
reduction in operating expense. These costs savings may not be permanent
as increased activity levels resulting from, among other factors,
acquisitions, new Managed
14
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
Services agreements and increased revenue, may require an increase in
headcount and other increased spending.
Fiscal Year Ended September 30, 2002
In the fourth quarter of fiscal 2002, the Company implemented a cost
reduction program targeted to reduce costs by approximately $30,000 in
response to a decline of the forecasted revenue for the third and fourth
quarters of fiscal 2002. The decline resulted from, among other factors,
slowdowns in customer buying decisions in the third quarter of fiscal
2002, stemming from overall reductions in the capital investment budgets
of many communications service providers, leading to fewer new contracts
than expected, as well as from smaller than expected initial spending
commitments and reduced discretionary spending under contracts with some
customers.
The restructuring charge associated with these actions and recorded
in the fourth quarter of fiscal 2002 was $20,919. Approximately $16,728 of
the total charge was paid in cash as of March 31, 2004.
Details of Restructuring Charge of $20,919:
The Company recorded a charge of $11,353 related to employee
separation costs in connection with the termination of employment of
approximately 1,000 employees, representing approximately 10% of the
Company's worldwide workforce of 9,900 full-time employees. The actual
number of employees terminated approximated original estimates. There was
not a single group of employees or business function that was solely
impacted by these measures; instead it impacted information technology
specialists and administration professionals across a broad range of
functions according to the areas with reduced activities. The Company
recorded a charge of $7,880 related to facilities, representing rent
obligations relating to vacated facilities in various locations in Canada,
Israel and the United States. The Company also recorded a provision of
$1,584 for asset write-offs, principally for leasehold improvements in
Canada, Israel and the United States that were abandoned.
The fourth quarter of fiscal 2002 restructuring charge is comprised
of the following as of March 31, 2004:
EMPLOYEE
SEPARATION ASSET
COSTS FACILITIES WRITE-OFFS OTHER TOTAL
---------- ---------- ---------- ------ ---------
Balance as of October 1, 2001 $ -- $ -- $ -- $ -- $ --
Charges 11,353 7,880 1,584 102 20,919
Cash payments (8,053) (456) -- (57) (8,566)
Non cash -- -- (1,584) -- (1,584)
-------- ------- ------- ----- --------
Balance as of September 30, 2002 3,300 7,424 -- 45 10,769
Cash payments (3,240) (4,082) -- (45) (7,367)
Adjustments 22 (148) -- -- (126)
-------- ------- ------- ----- --------
Balance as of September 30, 2003 82 3,194 -- -- 3,276
Cash payments -- (795) -- -- (795)
Adjustments (82) 82 -- -- --
-------- ------- ------- ----- --------
Balance as of March 31, 2004 $ -- $ 2,481 $ -- $ -- $ 2,481
======== ======= ======= ===== ========
15
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
The financial savings of these actions of approximately $30,000
quarterly commencing in the first quarter of fiscal 2003, is reflected as
a reduction in operating expense. These costs savings may not be permanent
as increased activity levels resulting from, among other factors,
acquisitions, Managed Services agreements and increased revenue, may
require an increase in headcount and other increased spending.
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.
Details of Restructuring charge of $13,311:
Approximately $6,255 of the total restructuring charge related to
facilities and represented rent obligation outstanding for the Stamford
site. Approximately $4,126 of the total restructuring charge related to
the write-off of leasehold improvements at the Stamford site that were
abandoned. The Company also recorded a provision of $2,930 related to
employee separation costs in connection with the termination of employment
of 166 employees.
The restructuring charge related to the consolidation of the
Stamford and Champaign facilities is comprised of the following as of
March 31, 2004:
EMPLOYEE
SEPARATION ASSET
COSTS FACILITIES WRITE-OFFS OTHER TOTAL
---------- ---------- ---------- ------ ---------
Balance as of October 1, 2001 $ -- $ -- $ -- $ -- $ --
Charges 2,530 6,255 4,126 400 13,311
Cash payments (2,473) (2,592) -- (5) (5,070)
Non cash -- -- (4,126) -- (4,126)
------- ------- ------- ----- --------
Balance as of September 30, 2002 57 3,663 -- 395 4,115
Cash payments -- (785) -- (141) (926)
Adjustments (57) (168) -- (254) (479)
------- ------- ------- ----- --------
Balance as of September 30, 2003 -- 2,710 -- -- 2,710
Cash payments -- (465) -- -- (465)
------- ------- ------- ----- --------
Balance as of March 31, 2004 $ -- $ 2,245 $ -- $ -- $ 2,245
======= ======= ======= ===== ========
The operating costs related to the Stamford site that were
eliminated were approximately $8,500 in its last quarter of activity.
16
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
13. EMPLOYEE BENEFITS
FASB Statement No. 132 (revised 2003), "Employers' Disclosures about
Pensions and Other Postretirement Benefits", requires additional
disclosures about assets, obligations, cash flows, and net periodic
benefit cost of defined benefit pension plans and other post-retirement
benefit plans. The provisions of this Statement are effective for fiscal
years ending after December 15, 2003. The interim-period disclosures are
effective for interim periods beginning after December 15, 2003. The
Company adopted the interim disclosure provisions in the quarter ended
March 31, 2004.
As a result of the Company's acquisition of Certen (see Note 10) on
July 2, 2003, the Company now maintains several non-contributory defined
benefit plans that provide for pension, other retirement and
post-employment benefits for Certen employees based on length of service
and rate of pay. Contributions by the Company are based on various
generally accepted actuarial methods and reflect actuarial assumptions
concerning future investment returns, salary projections and future
service benefits. Plan assets consist primarily of Canadian and other
equities, government and corporate bonds, debentures and secured
mortgages, which are held in units of the BCE Master Trust Fund, a trust
established by Bell.
The net periodic benefit cost under these plans for the three months
and six months ended March 31, 2004, was as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, 2004 MARCH 31, 2004
------------------- -------------------
PENSION OTHER PENSION OTHER
BENEFITS BENEFITS BENEFITS BENEFITS
-------- -------- -------- --------
Service costs $ 478 $ 87 $ 973 $177
Interest on benefit obligations 624 90 1,271 183
Expected return on plan assets (533) -- (1,086) --
----- ------ ------- ----
$ 569 $ 177 $ 1,158 $360
===== ====== ======= ====
For the three and six months ended March 31, 2004, no contributions
had been made by the Company, although the Company expects that
contributions for the fiscal year ending September 30, 2004 will
approximate the net periodic benefit cost.
14. CONTINGENCIES
Legal Proceedings
On December 2, 2003 the Company announced that the United States
District Court for the Eastern District of Missouri had issued an order
granting the Company's motion to dismiss the securities class action
lawsuits that had been pending against the Company and certain of its
directors and officers since June 2002. The court's order also directed
that judgment be entered in favor of the defendants. The consolidated
complaint filed in the action alleged that the Company and the individual
defendants had made false or misleading statements about the Company's
business and future prospects during a putative class period between July
18, 2000 and June 20, 2002. On December 29, 2003 the lead plaintiffs
appealed to the United States Court of Appeals for the Eighth Circuit from
the final judgment entered on December 1, 2003.
17
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, except per share data)
The Company is involved in various other legal proceedings arising
in the normal course of its business. Based upon the advice of counsel,
the Company does not believe that the ultimate resolution of these matters
will have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.
Securities and Exchange Commission Investigation
The Company has been informed that the Midwest Regional Office of
the SEC is conducting a private investigation into the events leading up
to the Company's 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, 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.
Guarantor's Accounting and Disclosure Requirements for Guarantees
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
March 31, 2004 and September 30, 2003, the maximum potential amount of the
Company's future exposure under this guarantee as determined in accordance
with Financial Accounting Standards Board Interpretation No. 45
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" was $4,717.
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, only minimal warranty services have been
required and, as a result, the Company did not accrue any amounts for
product warranty liability during the six months ended March 31, 2004 and
2003.
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 incurred only
minimal costs as a result of such obligations and has not accrued any
liabilities related to such indemnification in its financial statements.
18
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 2003 that we have filed with the United States
Securities and Exchange Commission ("SEC").
INTRODUCTION
In this section, we discuss the general financial condition and the
results of operations for Amdocs and its subsidiaries including:
- the factors that affect our business,
- our revenue and costs for the six months and three months ended
March 31, 2004 and 2003,
- the reasons why such revenue and costs were different from period to
period,
- the sources of our revenue,
- how all of this affects our overall financial condition,
- our expenditures for the six months and three months ended March 31,
2004 and 2003, and
- the sources of our cash to pay for future capital expenditures and
possible acquisitions.
In this section, we also analyze and explain the changes in the specific
line items in our consolidated statements of income between the six-month and
three-month periods ended March 31, 2004 and 2003. You should read this section
in conjunction with our consolidated financial statements.
19
OVERVIEW OF BUSINESS AND TREND INFORMATION
Our market focus is primarily the communications industry, and we are a
leading provider of software products and services to major communications
companies in North America, Europe and the rest of the world. The products and
services that we provide are known as integrated customer management systems,
which we refer to as "Integrated Customer Management". Our Integrated Customer
Management product offerings consist primarily of billing and customer
relationship management systems, which we refer to, collectively, as "Customer
Care and Billing Systems", or "CC&B Systems". We refer to customer relationship
management products included within CC&B Systems as "CRM" products. Our
portfolio of products also includes 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 Integrated Customer Management 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 bundled or
convergent service packages. Due to the complexity of our customers' projects
and the expertise required for system support, we also provide extensive
implementation, system integration, system modification, ongoing support, system
enhancement and maintenance services. In addition, we offer Managed Services,
which include a combination of services, such as system modernization and
consolidation, management and operation of data centers, purchase and management
of related hardware assets, billing operations and application support, in all
cases on either or a combination of a fixed or unit charge basis to our
customers.
Our business is conducted on a global basis. We maintain five development
facilities located in Israel, the United States, Cyprus, Ireland and Canada.
Recently, we established a new development center in India. We expect this
development center to grow and support the overall activity of our business
worldwide, at comparatively lower operating costs.
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 modification, implementation and integration
services,
- providing Managed Services 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.
Revenue is recognized only when all of the following conditions have been
met: (i) there is persuasive evidence of an arrangement; (ii) delivery has
occurred; (iii) the fee is fixed and determinable; and (iv) collectability of
the fee is probable. We usually sell our software as part of an overall solution
offered to a customer, in which significant modification is normally 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,
based on a customer's subscriber level or number of users when greater than the
level specified in the contract for the initial license fee. 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 Managed Services contracts, we
typically recognize revenue from the operation
20
of a customer's system either ratably over the service period or as services are
performed. Revenue from ongoing support services is recognized as work is
performed. Revenue from third-party hardware and software sales is recognized
upon installation and delivery, respectively. 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 communications industry during the last two
years, the market value, financial results and prospects, and capital spending
levels of communications companies declined or degraded. The challenging
environment in the communications industry significantly impacted our business.
During the last two years, delays in customer buying decisions stemming from
rigorous management of operating expenses and overall reductions in the capital
investment budgets of many communications service providers led to fewer new
contracts, as well as smaller initial spending commitments and reduced
discretionary spending under contracts with some of our customers. As a result
of the market conditions during fiscal 2002 mentioned above, our revenue in the
fiscal 2002 third quarter decreased by more than $75 million from the previous
quarter. Revenue continued to decline in the fourth quarter of fiscal 2002 and
the first quarter of fiscal 2003. During calendar 2003, the market began to
stabilize. As a result, we resumed sequential revenue growth in the second
quarter of fiscal 2003, although revenue for the second quarter of fiscal 2004
is still below the level achieved in the second quarter of fiscal 2002. During
the six months ended March 31, 2004, communications service providers
demonstrated a greater readiness to commit to new projects. While difficulties
remain in the communications industry, we believe that, with the overall
improvement of market conditions, we will be able to achieve modest sequential
growth in revenues and earnings in the coming quarters.
Our quarterly revenue for the last ten quarters are summarized below (in
millions):
Q1 Q2 Q3 Q4
-------- -------- -------- --------
Fiscal 2004 $ 428.3 $ 442.8 NA NA
Fiscal 2003 $ 339.4 $ 355.0 $ 377.2 $ 411.7
Fiscal 2002 $ 422.6 $ 455.3 $ 380.2 $ 355.5
Due to our heavy dependence on the communications industry and a limited
number of significant customers, we can be adversely affected by consolidations
of service providers and by bankruptcies or other business failures in that
industry. The potential loss of a customer due to consolidation or failures in
the communications industry could harm our business and might have a material
adverse effect on our consolidated operating results and financial condition.
Our total revenue in the three months ended March 31, 2004 increased by
$87.7 million, or 24.7%, from the three months ended March 31, 2003, as set
forth below (in millions):
THREE MONTHS PERCENTAGE
ENDED MARCH 31, INCREASE
--------------------- ----------
2004 2003
------- -------
Total revenue $ 442.8 $ 355.0 24.7%
The increase in total revenue was primarily as a result of new Managed
Services agreements and additional revenue resulting from our acquisition of
Certen in the fourth quarter of fiscal 2003.
License and service revenue from the sale of CC&B Systems was $756.7
million and $604.5 million in the six months ended March 31, 2004 and 2003,
respectively, representing 86.9% and 87.1%, respectively, of our total revenue
for such periods. License and service revenue from the sale of CC&B Systems was
$381.3
21
million and $305.8 million in the three months ended March 31, 2004 and 2003,
respectively, representing 86.1% 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 billing and CRM products, with proven functionality and
scalability, accompanied by a comprehensive range of support services.
We believe that demand for our CC&B Systems is driven by, among other key
factors:
- the global penetration of communications service providers,
- the emergence of new communications products and services,
especially IP, data and content services,
- technological changes, such as the introduction of wireless Internet
services via GPRS (General Packet Radio Services) and UMTS
(Universal Mobile Telecommunications System) technology,
- the ongoing consolidation within the communications industry,
- the business needs of communications service providers to reduce
costs and retain high value 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 their subscribers multiple service
packages, commonly referred to as bundled or convergent services (combinations
of voice, broadband, electronic and mobile commerce and IP services), and the
ability of our CC&B Systems to improve productivity.
License and service revenue from the sale of Directory Systems was $114.3
million and $89.9 million in the six months ended March 31, 2004 and 2003,
respectively, accounting for 13.1% and 12.9%, respectively, of our total revenue
for such periods. License and service revenue from the sale of Directory Systems
totaled $61.5 million and $49.2 million in the three months ended March 31, 2004
and 2003, respectively, accounting for 13.9% 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. We expect that our revenue from Directory Systems
will remain relatively stable in fiscal 2004.
License and service revenue from the sale of CC&B Systems and Directory
Systems includes revenue from Managed Services arrangements. Managed Services
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 Managed Services projects, we generally invest in modernization and
consolidation of the customer's systems. Invoices are usually structured on a
periodic fixed or unit charge basis. As a result, Managed Services projects can
be less profitable in the initial period. Margins tend to improve over time as
we benefit from the operational efficiencies provided by system modernization
and consolidation. We expect that our Managed Services relationships will
generate margins comparable to sales of our other products and related license
and services over the entire relationships. Revenue related to Managed Services
in the three months and six months ended March 31, 2004 was approximately 40% of
total revenue for such periods.
22
RESULTS OF OPERATIONS
The following table sets forth for the six months and three months ended
March 31, 2004 and 2003 certain items in our consolidated statements of income
reflected as a percentage of total revenue:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ------------------
2004 2003 2004 2003
------ ------ ------ ------
Revenue:
License ............................ 4.1% 5.4% 4.0% 5.7%
Service ............................ 95.9 94.6 96.0 94.3
------ ------ ------ ------
100.0 100.0 100.0 100.0
------ ------ ------ ------
Operating expenses:
Cost of license .................... 0.3 0.4 0.3 0.4
Cost of service .................... 62.8 59.7 63.1 59.9
Research and development ........... 6.8 8.3 7.0 8.5
Selling, general and
administrative .................. 12.2 14.4 12.2 14.8
Amortization of purchased intangible
assets .......................... 0.9 1.3 1.0 1.4
Restructuring charges .............. -- -- -- 1.4
------ ------ ------ ------
83.0 84.1 83.6 86.4
------ ------ ------ ------
Operating income ...................... 17.0 15.9 16.4 13.6
Interest income and other, net ........ 0.4 1.2 0.3 1.3
------ ------ ------ ------
Income before income taxes ............ 17.4 17.1 16.7 14.9
Income taxes .......................... 3.8 4.3 3.7 3.7
------ ------ ------ ------
Net income ............................ 13.6% 12.8% 13.0% 11.2%
====== ====== ====== ======
SIX MONTHS ENDED MARCH 31, 2004 AND 2003
The following is a tabular presentation of our results of operations for
the six months ended March 31, 2004 compared to the six months ended March 31,
2003. Following the table is a discussion and analysis of our business and
results of operations for such periods.
SIX MONTHS ENDED
MARCH 31, INCREASE (DECREASE)
--------------------- -----------------------
2004 2003 AMOUNT %
-------- -------- ---------- ----------
Revenue:
License ............................ $ 34,728 $ 39,685 $ (4,957) (12.5)%
Service ............................ 836,325 654,715 181,610 27.7
-------- -------- ---------
871,053 694,400 176,653 25.4
-------- -------- ---------
Operating expenses:
Cost of license .................... 2,359 2,682 (323) (12.0)
Cost of service .................... 550,361 416,066 134,295 32.3
Research and development ........... 60,582 58,947 1,635 2.8
Selling, general and
administrative .................. 106,333 102,701 3,632 3.5
Amortization of purchased intangible
assets .......................... 8,865 9,779 (914) (9.3)
Restructuring charges ............ -- 9,956 (9,956) (100.0)
-------- -------- ---------
728,500 600,131 128,369 21.4
-------- -------- ---------
Operating income ...................... 142,553 94,269 48,284 51.2
Interest income and other, net ........ 2,778 9,163 (6,385) (69.7)
-------- -------- ---------
Income before income taxes ............ 145,331 103,432 41,899 40.5
Income taxes .......................... 31,973 25,858 6,115 23.6
-------- -------- ---------
Net income ............................ $113,358 $ 77,574 $ 35,784 46.1%
======== ======== =========
23
REVENUE. The increase in total revenue in the six months ended March 31,
2004 is due to an increase in service revenue as a result of new Managed
Services agreements signed during fiscal 2003 and additional revenue resulting
from our acquisition of Certen in the fourth quarter of fiscal 2003. Revenue
related to Managed Services agreements in the six months ended March 31, 2004
was approximately 40% of total revenue. The net impact of the new Managed
Services agreements, including the impact of the Certen acquisition, was
approximately $150 million in the six months ended March 31, 2004.
The significant new contracts that we obtained during fiscal 2003 were for
Managed Services arrangements, which contain only a small license revenue
component. In addition, the current communications market environment has
resulted in pricing pressure, particularly with respect to license fees. As a
result, license revenue in the six months ended March 31, 2004 decreased from
the six months ended March 31, 2003.
Total CC&B Systems revenue was $756.7 million for the six months ended
March 31, 2004, an increase of $152.2 million, or 25.2%, over the six months
ended March 31, 2003. The increase is attributable primarily to our acquisition
of Certen in the fourth quarter of fiscal 2003. The demand for our CC&B Systems
is primarily driven by the need for communications companies to continue to
upgrade their billing, CRM and order management systems. In fiscal 2003, many
communications companies reduced or delayed expenditures on system upgrades as a
result of the slowdown in the communications industry. Recently, however, there
has been an improvement in market conditions, accounting in part for the
increase in revenue in the six months ended March 31, 2004.
Revenue from Directory Systems was $114.3 million for the six months ended
March 31, 2004, an increase of $24.5 million, or 27.2%, over the six months
ended March 31, 2003. The increase is attributable primarily to the new Managed
Services agreements and was partially offset by the completion of some
implementation projects.
In the six months ended March 31, 2004, revenue from customers in North
America, Europe and the rest of the world accounted for 67.2%, 26.6% and 6.2%,
respectively, of total revenue compared to 60.1%, 31.3% and 8.6%, respectively,
for the six months ended March 31, 2003. The increase in revenue from customers
in North America is attributable primarily to the acquisition of Certen, which
expanded our activity and revenue from customers in North America, and to the
forming of relationships with new customers and the expansion of relationships
with existing customers in North America. The decreased contribution to revenue
from customers in the rest of the world was attributable primarily to a decrease
in the scope of certain projects and completion of other projects.
COST OF LICENSE. Cost of license mainly includes amortization of purchased
computer software and intellectual property rights. Because such amortization is
relatively stable from period to period and, absent impairment, is generally
fixed in amount, an increase or decrease in license revenue will cause a
significant fluctuation in cost of license as a percentage of license revenue.
In the six months ended March 31, 2004 and 2003, cost of license, as a
percentage of license revenue, was 6.8%.
COST OF SERVICE. The increase in cost of service in the six months ended
March 31, 2004 was higher than the increase in our revenue in the six months
ended March 31, 2004, and resulted in a decrease in our gross margin. Our gross
margin was affected by the new Managed Services projects, which we expect to be
less profitable in their initial period, and to a lesser extent, by the decrease
in our license revenue.
RESEARCH AND DEVELOPMENT. Research and development expense was primarily
comprised of compensation expense attributed to research and development
activities, which involve the development of new software modules and product
offerings, either in conjunction with customer projects or as part of our
internal product development program. We are currently focusing significant
development efforts on the integration between our products in order to provide
Integrated Customer Management to our customers, while continuing to upgrade
our existing systems. The majority of our research and development expenditures
are for our billing and CRM systems, and the remainder for directory, content
and order management solutions. The increase in research and development
expense was proportionally less than the increase in our total revenue. Although
we intend to continue to devote resources to research and development, our
research and development budget, like all of our costs, is sensitive to our
overall financial condition but to a lesser extent. We believe that our research
and development efforts are a key element of our strategy and are essential to
our success. However, an increase or a decrease in our total revenue would not
necessarily result in a proportional increase or decrease in the levels of our
research and development expenditures, which could affect our operating margin.
24
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense is primarily comprised of compensation expense. The increase in selling,
general and administrative expense in the six months ended March 31, 2004 was
primarily due to the overall increase in our operations and to the increase in
our selling and marketing efforts. The increase in selling, general and
administrative expense in the six months ended March 31, 2004 was proportionally
less than the increase in our total revenue.
RESTRUCTURING CHARGE. The restructuring charge in the six months ended
March 31, 2003 consisted of the cost reduction program we implemented during the
first quarter of fiscal 2003.
OPERATING INCOME. The increase in operating income in the six months ended
March 31, 2004 is attributable primarily to the increase in our total revenue,
which was partially offset by relative low gross margin of our new Managed
Services projects in their early stages of implementation in the six months
ended March 31, 2004, and to the effect of the restructuring charge in the six
months ended March 31, 2003.
INTEREST INCOME AND OTHER, NET. The decrease in interest income and other,
net, in the six months ended March 31, 2004 is primarily attributable to the
decline in interest rates on our short-term interest-bearing investments as a
result of our decision to shorten the duration of our investments due to
volatility in the interest rate environment, the increase in our interest
expense as a result of capital lease obligations acquired in the Certen
acquisition and the decrease of interest income on debentures issued by Certen
to us and eliminated as a result of the Certen acquisition.
INCOME TAXES. Our effective tax rate in the six months ended March 31,
2004 was 22% compared to 25% in the six months ended March 31, 2003. Our
effective tax rate for fiscal year 2004 is expected to be approximately 22% 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. The reduction in
our effective tax rate is due to our continued expansion into countries with
lower effective tax rates.
NET INCOME. The increase in net income in the six months ended March 31,
2004 is attributable primarily to the increase in our total revenue and to the
effect of the restructuring charge in the six months ended March 31, 2003. The
increase was partially offset by relative low gross margin of our new Managed
Services projects in their early stages of implementation.
DILUTED EARNINGS PER SHARE. Diluted earnings per share were $0.52 for the
six months ended March 31, 2004, compared to $0.36 in the six months ended March
31, 2003.
25
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
The following is a tabular presentation of our results of operations for
the three months ended March 31, 2004 compared to the three months ended March
31, 2003. Following the table is a discussion and analysis of our business and
results of operations for such periods.
THREE MONTHS ENDED
MARCH 31, INCREASE (DECREASE)
--------------------- ---------------------
2004 2003 AMOUNT %
-------- -------- --------- --------
Revenue:
License ............................ $ 18,107 $ 19,159 $ (1,052) (5.5)%
Service ............................ 424,651 335,855 88,796 26.4
-------- -------- --------
442,758 355,014 87,744 24.7
-------- -------- --------
Operating expenses:
Cost of license .................... 1,227 1,546 (319) (20.6)
Cost of service .................... 278,258 212,080 66,178 31.2
Research and development ........... 30,084 29,328 756 2.6
Selling, general and
administrative .................. 53,836 51,121 2,715 5.3
Amortization of purchased intangible
assets .......................... 3,769 4,625 (856) (18.5)
-------- -------- --------
367,174 298,700 68,474 22.9
-------- -------- --------
Operating income ...................... 75,584 56,314 19,270 34.2
Interest income and other, net ........ 1,711 4,186 (2,475) (59.1)
-------- -------- --------
Income before income taxes ............ 77,295 60,500 16,795 27.8
Income taxes .......................... 17,005 15,125 1,880 12.4
-------- -------- --------
Net income ............................ $ 60,290 $ 45,375 $ 14,915 32.9%
======== ======== ========
REVENUE. The increase in total revenue in the three months ended March 31,
2004 is due to an increase in service revenue as a result of new Managed
Services agreements signed during fiscal 2003 and additional revenue resulting
from our acquisition of Certen in the fourth quarter of fiscal 2003. Revenue
related to Managed Services agreements in the three months ended March 31, 2004
was approximately 40% of total revenue. The net impact of the new Managed
Services agreements, including the impact of the Certen acquisition, was
approximately $69 million in the three months ended March 31, 2004.
The significant new contracts that we obtained during fiscal 2003 were for
Managed Services arrangements, which contain only a small license revenue
component. In addition, the current communications market environment has
resulted in pricing pressure, particularly with respect to license fees. As a
result, license revenue in the three months ended March 31, 2004 decreased from
the three months ended March 31, 2003.
Total CC&B Systems revenue was $381.3 million for the three months ended
March 31, 2004, an increase of $75.5 million, or 24.7%, over the three months
ended March 31, 2003. The increase is attributable primarily to our acquisition
of Certen in the fourth quarter of fiscal 2003. The demand for our CC&B Systems
is primarily driven by the need for communications companies to continue to
upgrade their billing, CRM and order management systems. In fiscal 2003, many
communications companies reduced or delayed expenditures on system upgrades as a
result of the slowdown in the communications industry. Recently, however, there
has been an improvement in market conditions, accounting in part for the
increase in revenue in the second quarter of fiscal 2004.
Revenue from Directory Systems was $61.5 million for the three months
ended March 31, 2004, an increase of $12.3 million, or 25.0%, over the three
months ended March 31, 2003. The increase is attributable primarily to the new
Managed Services agreements, which was partially offset by the completion of
some implementation projects.
In the three months ended March 31, 2004, revenue from customers in North
America, Europe and the rest of the world accounted for 68.0%, 26.4% and 5.6%,
respectively, of total revenue compared to 58.3%, 32.5% and 9.2%, respectively,
for the three months ended March 31, 2003. The increase in revenue from
customers in North America is attributable primarily to the acquisition of
Certen, which expanded our activity and revenue from customers in North America,
and to the forming of relationships with new customers and
26
the expansion of relationships with existing customers in North America. The
decreased contribution to revenue from customers in the rest of the world was
attributable primarily to a decrease in the scope of certain projects and
completion of other projects.
COST OF LICENSE. Cost of license mainly includes amortization of purchased
computer software and intellectual property rights. Because such amortization is
relatively stable from period to period and, absent impairment, is generally
fixed in amount, an increase or decrease in license revenue will cause a
significant fluctuation in cost of license as a percentage of license revenue.
In the three months ended March 31, 2004, cost of license, as a percentage of
license revenue, was 6.8%, compared to 8.1% in the three months ended March 31,
2004.
COST OF SERVICE. The increase in cost of service in the three months ended
March 31, 2004 was higher than the increase in our revenue in the three months
ended March 31, 2004, and resulted in a decrease in our gross margin. Our gross
margin was affected by the new Managed Services projects, which we expect to be
less profitable in their initial period, and to a lesser extent, by the decrease
in our license revenue.
RESEARCH AND DEVELOPMENT. Research and development expense was primarily
comprised of compensation expense attributed to research and development
activities, which involve the development of new software modules and product
offerings, either in conjunction with customer projects or as part of our
internal product development program. We are currently focusing significant
development efforts on the integration between our products in order to provide
Integrated Customer Management to our customers, while continuing to upgrade
our existing systems. The majority of our research and development expenditures
are for our billing and CRM systems, and the remainder for directory, content
and order management solutions. The increase in research and development
expense was proportionally less than the increase in our total revenue. Although
we intend to continue to devote resources to research and development, our
research and development budget, like all of our costs, is sensitive to our
overall financial condition but to a lesser extent. We believe that our research
and development efforts are a key element of our strategy and are essential to
our success. However, an increase or a decrease in our total revenue would not
necessarily result in a proportional increase or decrease in the levels of our
research and development expenditures, which could affect our operating margin.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense is primarily comprised of compensation expense. The increase in selling,
general and administrative expense in the three months ended March 31, 2004 was
primarily due to the overall increase in our operations and to the increase in
our selling and marketing efforts. The increase in selling, general and
administrative expense in the three months ended March 31, 2004 was
proportionally less than the increase in our total revenue.
OPERATING INCOME. The increase in operating income in the three months
ended March 31, 2004 is attributable primarily to the increase in our total
revenue, which was partially offset by relative low gross margin of our new
Managed Services projects in their early stages of implementation in the three
months ended March 31, 2004.
INTEREST INCOME AND OTHER, NET. The decrease in interest income and other,
net, in the three months ended March 31, 2004 is primarily attributable to the
decline in interest rates on our short-term interest-bearing investments as a
result of our decision to shorten the duration of our investments due to
volatility in the interest rate environment, the increase in our interest
expenses as a result of capital lease obligations acquired in the Certen
acquisition, the decrease of interest income on debentures issued by Certen to
us and eliminated as a result of the Certen acquisition, and due to 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 interest income and other, net.
INCOME TAXES. Our effective tax rate in the three months ended March 31,
2004 was 22% compared to 25% in the three months ended March 31, 2003. Our
effective tax rate for fiscal year 2004 is expected to be approximately 22% 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. The reduction in
our effective tax rate is due to our continued expansion into countries with
lower effective tax rates.
NET INCOME. The increase in net income is attributable primarily to the
increase in our total revenue, which was partially offset by relative low gross
margin of our new Managed Services projects in their early stages of
implementation in the three months ended March 31, 2004.
DILUTED EARNINGS PER SHARE. Diluted earnings per share were $0.28 for the
three months ended March 31, 2004, compared to $0.21 in the three months ended
March 31, 2003.
27
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term interest-bearing investments totaled
$1,567 million as of March 31, 2004, compared to $1,291 million as of September
30, 2003. The increase is attributable primarily to the net proceeds from the
issuance of $450.0 million 0.50% Convertible Senior Notes due 2024 (the "0.50%
Notes") in March 2004 and positive cash flows from operations, which was
partially offset by the use of approximately $170.1 million to repurchase
ordinary shares sold short by purchasers of the 0.50% Notes in negotiated
transactions concurrently with the sale of the 0.50% Notes, and the use of an
additional $137.4 million to repurchase our ordinary shares pursuant to our
share repurchase program and in connection with our acquisition of XACCT. Net
cash provided by operating activities amounted to $181.9 million and $195.7
million for the six months ended March 31, 2004 and 2003, respectively. Although
net income before depreciation and amortization increased in the six months
ended March 31, 2004, cash flows from operations decreased, due primarily to
increases in accounts receivable resulting from the quarterly sequential
increase in our revenue. We currently intend to retain our future operating cash
flows to support the further expansion of our business, including investments
related to new Managed Services projects and acquisitions. We also may use a
portion of our cash balances for future repurchases of our outstanding
securities. On June 1, 2004, we used a portion of our cash balances for the
redemption of our 2% Convertible Notes due June 1, 2008 (the "2% Notes"), as
described below.
Our policy is to retain substantial cash balances in order to support the
growth of the Company. We believe that our current cash balances, cash generated
from operations and our current lines of credit will provide sufficient
resources to meet our liquidity needs for at least the next fiscal year.
As of March 31, 2004, $395.5 million and $450.0 million aggregate
principal amount of our 2% Notes and 0.50% Notes were outstanding, respectively.
In July 2002, our board of directors authorized us to repurchase outstanding 2%
Notes, in such amounts, at such prices and at such times considered appropriate
by us. During the three months ended December 31, 2003, we repurchased $5.0
million aggregate principal amount of the 2% Notes. No repurchases of the 2%
Notes were made in the three months ended March 31, 2004. During fiscal 2002 and
2003, the Company repurchased $99.5 million aggregate principal amount of the 2%
Notes. We funded these repurchases with available funds. On June 1, 2004, we
completed a cash offer for the 2% Notes. Pursuant to the indenture for the 2%
Notes, each holder of the 2% Notes had the right to require us to repurchase on
June 1, 2004 all or any part of such holder's notes at a price equal to 100% of
the principal amount plus accrued and unpaid interest. Under the terms of the 2%
Notes, we had the option to pay for the 2% Notes with cash, ordinary shares, or
a combination of cash and ordinary shares. We elected to pay for the 2% Notes
solely with cash. We accepted for payment $395.1 million principal
amount of 2% Notes surrendered for repurchase pursuant to the offer. The
untendered $344,000 principal amount of 2% Notes will remain as our obligations,
due June 1, 2008, in accordance with their terms.
As of March 31, 2004, we had an available short-term general revolving
line of credit totaling $30 million, none of which had been used as of such
date. In addition, as of March 31, 2004 we had credit facilities totaling $35.8
million, limited for the use of letters of credit and bank guarantees from
various banks. Outstanding letters of credit and bank guarantees as of March 31,
2004 totaled $23.8 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 March 31, 2004, we had outstanding long-term obligations of $37.0
million in connection with leasing arrangements.
We have contractual obligations for our convertible notes, financing
arrangements, capital leases and non-cancelable operating leases that were
summarized in a table of contractual obligations in our Annual Report on Form
20-F for the year ended September 30, 2003. There have been no material changes
in
28
contractual obligations outside the ordinary course of our business since
September 30, 2003, with the exception of the issuance of our 0.50% Notes in
March 2004 and the repurchase of the 2% Notes, as discussed above.
Our capital expenditures were approximately $23.4 million in the six
months ended March 31, 2004. These expenditures consisted primarily of purchases
of computer equipment and, to a lesser degree, leasehold improvements. We funded
our capital expenditures principally from operating cash flows. We do not
anticipate any changes to this policy in the foreseeable future.
CURRENCY FLUCTUATIONS
The U.S. dollar is our functional currency. We manage our foreign
subsidiaries as integral direct components of our operations. Our management
does not review separately the results of operations of each subsidiary. During
the six months ended March 31, 2004, our revenue and operating expenses
(excluding acquisition-related charges) in U.S. dollars or linked to the U.S.
dollar decreased compared to fiscal 2003, from 80% to 70% and from 60% to 50%,
respectively, primarily as a result of the acquisition of Certen Inc., the
majority of whose business is in Canadian dollars. As a result of long-term
contracts in currencies other than the U.S. dollar and more customers seeking
contracts that are denominated in currencies such as the Euro, we expect that
the percentage of our revenue and operating expenses in U.S. dollars or linked
to the U.S. dollar will decrease slightly over time. Historically, the effect of
fluctuations in currency exchange rates has had a minimal impact on our
consolidated operations. As more of our customers seek contracts that are
denominated in currencies other than the U.S. dollar, our exposure to
fluctuations in currency exchange rates could increase. In managing our foreign
exchange risk, we enter from time to time into various foreign exchange hedging
contracts. We do not hedge all of our exposure in currencies other than the U.S.
dollar, but rather our policy is to hedge significant net exposures in the major
foreign currencies in which we operate.
29
PART II OTHER INFORMATION
ITEM 1. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
(a) Recent Sales of Unregistered Securities
On February 19, 2004, the Company acquired XACCT Technologies Ltd., a
privately-held company organized under the laws of the State of Israel and a
provider of mediation software to communications service providers. The Company
acquired XACCT's outstanding shares for approximately $28.4 million, of which
approximately $13.3 million was paid in cash and the balance in 560,777 of the
Company's ordinary shares. The shares were issued in a private placement
pursuant to exemptions from registration provided by Section 4(2) and Regulation
S of the Securities Act of 1933, as amended.
On March 5, 2004 the Company issued $450.0 million aggregate principal
amount of 0.50% Senior Notes due 2024 (the "0.50% Notes") in a private placement
to Morgan Stanley & Co. Incorporated, Goldman, Sachs & Co. and Merrill Lynch,
Pierce, Fenner & Smith Incorporated, as initial purchasers. The initial
purchasers resold the 0.50% Notes to qualified institutional buyers in
accordance with Rule 144A under the Securities Act of 1933, as amended. The
Company received net proceeds of approximately $442.1 million from the sale of
the notes, after deducting discounts and commissions and offering expenses. The
Company used approximately $170.1 million of the net proceeds to repurchase
6,073,600 ordinary shares sold short by purchasers of the 0.50% Notes in
negotiated transactions, concurrently with the sale of the notes, to offset the
dilutive effect of 10,435,995 ordinary shares issuable upon conversion of the
0.50% Notes, based on a conversion rate of 23.1911 shares per $1,000 principal
amount.
(b) Issuer Purchases of Equity Securities
The following table provides information about purchases by the Company
and its affiliated purchasers during the quarter ended March 31, 2004 of equity
securities that are registered by the Company pursuant to Section 12 of the
Exchange Act:
ISSUER PURCHASES OF EQUITY SECURITIES
(A) (B) (C) (D)
MAXIMUM NUMBER (OR
TOTAL NUMBER OF SHARES APPROXIMATE DOLLAR
(OR UNITS) PURCHASED AS VALUE) OF SHARES (OR
AVERAGE PRICE PART OF PUBLICLY UNITS)3 THAT MAY YET BE
TOTAL NUMBER OF SHARES PAID PER SHARE (OR ANNOUNCED PLANS OR PURCHASED UNDER THE PLANS
PERIOD (OR UNITS) PURCHASED UNIT) PROGRAMS OR PROGRAMS (1)
----------------- ---------------------- ------------------ ----------------------- -------------------------
01/01/04-01/31/04 -- -- -- 10,100
02/01/04-02/29/04 484,500 (2) $27.69 484,500 (2) 10,100
03/01/04-03/31/04 6,073,600 (3) $28.00 6,073,600 (3) 10,100
------------- -------------
Total 6,558,100 $27.98 6,558,100 10,100
(1) On November 5, 2003, the Company announced that its board of directors had
authorized a share repurchase program of up to five million ordinary
shares during fiscal 2004. The authorization permits the Company to
purchase ordinary shares in open market or privately negotiated
transactions and at prices the Company deems appropriate. The Company
stated that one of the main purposes of the repurchase program was to
offset the dilutive effect of any future share issuances, including
issuances pursuant to employee equity plans or in connection with
acquisitions. The Company has repurchased through open market purchases
4,989,900 ordinary shares under this repurchase program, with 10,100
shares available for repurchase pursuant to the board authorization for
the program. No share repurchases under this program were made in the
three months ended March 31, 2004.
(2) In connection with the Company's acquisition of XACCT Technologies Ltd.,
the board of directors approved the repurchase of ordinary shares to
offset the dilutive effect of share issuances in the acquisition. The
closing of the
30
acquisition occurred in February 2004, and the Company repurchased through
open market purchases 484,500 ordinary shares in February 2004. No
additional share repurchases are authorized in connection with the
acquisition.
(3) In connection with the Company's issuance of the 0.50% Notes, the board of
directors approved the repurchase of ordinary shares sold short by
purchasers of the 0.50% Notes in negotiated transactions, concurrently
with the sale of the notes, to offset the dilutive effect of the ordinary
shares issuable upon conversion of the 0.50% Notes. The closing of the
sale of the 0.50% Notes occurred in March 2004, and the Company
repurchased 6,073,600 ordinary shares, out of the 10,435,995 ordinary
shares issuable upon conversion of the 0.50% Notes, based on a conversion
rate of 23.1911 shares per $1,000 principal amount.
ITEM 2. 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 March 31, 2004:
(1) Form 6-K dated February 17, 2004.
(2) Form 6-K dated March 1, 2004.
(3) Form 6-K dated March 2, 2004.
(4) Form 6-K dated March 5, 2004.
31
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: June 10, 2004
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
99.1 Amdocs Limited Press Release dated April 21, 2004.