SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 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 JUNE 30, 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
--------------------------
June 30, September 30,
2004 2003
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 492,446 $ 847,600
Short-term interest-bearing investments 735,779 443,292
Accounts receivable, net 270,560 198,274
Deferred income taxes and taxes receivable 68,180 60,868
Prepaid expenses and other current assets 66,769 85,902
----------- -----------
Total current assets 1,633,734 1,635,936
Equipment, vehicles and leasehold improvements, net 174,801 203,467
Deferred income taxes 108,033 105,943
Goodwill 803,606 797,134
Intangible assets, net 52,653 58,841
Other noncurrent assets 125,145 76,196
----------- -----------
Total assets $ 2,897,972 $ 2,877,517
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 93,540 $ 101,116
Accrued expenses and other current liabilities 141,044 123,223
Accrued personnel costs 126,959 106,857
2% convertible notes -- 400,454
Financing arrangements 2,076 2,179
Deferred revenue 230,952 174,616
Short-term portion of capital lease obligations 19,863 27,140
Deferred income taxes and taxes payable 161,376 133,002
----------- -----------
Total current liabilities 775,810 1,068,587
Deferred income taxes 37,424 44,835
0.50% convertible notes 450,000 --
Noncurrent liabilities and other 151,777 172,495
----------- -----------
Total liabilities 1,415,011 1,285,917
----------- -----------
Shareholders' equity:
Preferred Shares - Authorized 25,000 shares;(pound)0.01 par value; 0 shares
issued and outstanding -- --
Ordinary Shares - Authorized 550,000 shares;(pound)0.01 par value; 224,854 and
223,790 issued and 206,135 and 216,058 outstanding, respectively 3,599 3,580
Additional paid-in capital 1,836,743 1,820,956
Treasury stock, at cost - 18,719 and 7,732 Ordinary Shares, respectively (402,360) (109,281)
Accumulated other comprehensive (loss) income (358) 3,715
Unearned compensation (571) --
Retained earnings (accumulated deficit) 45,908 (127,370)
----------- -----------
Total shareholders' equity 1,482,961 1,591,600
----------- -----------
Total liabilities and shareholders' equity $ 2,897,972 $ 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 Nine months ended
June 30, June 30,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Revenue:
License (*) $ 17,298 $ 11,491 $ 52,026 $ 51,176
Service (*) 432,926 365,677 1,269,251 1,020,392
---------- ---------- ---------- ----------
450,224 377,168 1,321,277 1,071,568
---------- ---------- ---------- ----------
Operating expenses:
Cost of license 1,448 1,455 3,807 4,137
Cost of service 283,109 230,323 833,470 646,389
Research and development 31,665 29,941 92,247 88,888
Selling, general and administrative 52,745 50,943 159,078 153,644
Amortization of purchased intangible 4,558 4,524 13,423 14,303
assets
Restructuring charges -- -- -- 9,956
---------- ---------- ---------- ----------
373,525 317,186 1,102,025 917,317
---------- ---------- ---------- ----------
Operating income 76,699 59,982 219,252 154,251
Interest income and other, net (*) 121 3,269 2,899 12,432
---------- ---------- ---------- ----------
Income before income taxes 76,820 63,251 222,151 166,683
Income taxes 16,900 15,813 48,873 41,671
---------- ---------- ---------- ----------
Net income $ 59,920 $ 47,438 $ 173,278 $ 125,012
========== ========== ========== ==========
Basic earnings per share $ 0.29 $ 0.22 $ 0.82 $ 0.58
========== ========== ========== ==========
Diluted earnings per share $ 0.28 $ 0.21 $ 0.80 $ 0.57
========== ========== ========== ==========
Basic weighted average number of shares
outstanding 206,093 215,938 210,409 215,786
========== ========== ========== ==========
Diluted weighted average number of shares
outstanding 211,801 220,792 216,186 218,953
========== ========== ========== ==========
(*) 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
Shares Amount Capital Stock (Loss) Income
-------- --------- ----------- ------------- --------------------
Balance as of September
30, 2003 216,058 $ 3,580 $ 1,820,956 $ (109,281) $ 3,715
Comprehensive income:
Net income -- -- -- -- --
Unrealized loss on
foreign currency
hedging contracts,
net of $(991) tax -- -- -- -- (2,846)
Unrealized loss on cash
equivalents and
short-term
interest-bearing
investments, net of
$(348) tax -- -- -- -- (1,227)
Comprehensive income
Issuance of ordinary 561 -- 747 14,392 --
shares related to
acquisition, net
Employee stock options
exercised 1,064 19 11,345 -- --
Tax benefit of stock
options exercised -- -- 2,738 -- --
Repurchase of ordinary
shares (11,548) -- -- (307,471) --
Expense related to vesting
of stock options -- -- 6 -- --
Stock options granted -- -- 951 -- --
Amortization of unearned
compensation -- -- -- -- --
------- ------- ----------- ---------- ---------
Balance as of June 30, 2004 206,135 $ 3,599 $ 1,836,743 $ (402,360) $ (358)
======= ======= =========== ========== =========
Retained
Earnings
Unearned (Accumulated Accumulated
Compensation Deficit) Equity
--------------- --------------- ---------------
Balance as of September
30, 2003 $ -- $ (127,370) $ 1,591,600
Comprehensive income:
Net income -- 173,278 173,278
Unrealized loss on
foreign currency
hedging contracts,
net of $(991) tax -- -- (2,846)
Unrealized loss on cash
equivalents and
short-term
interest-bearing
investments, net of
$(348) tax -- -- (1,227)
-----------
Comprehensive income 169,205
-----------
Issuance of ordinary -- -- 15,139
shares related to
acquisition, net
Employee stock options
exercised -- -- 11,364
Tax benefit of stock
options exercised -- -- 2,738
Repurchase of ordinary
shares -- -- (307,471)
Expense related to vesting
of stock options -- -- 6
Stock options granted (951) -- --
Amortization of unearned
compensation 380 -- 380
----------- ----------- -----------
Balance as of June 30, 2004 $ (571) $ 45,908 $ 1,482,961
=========== =========== ===========
As of June 30, 2004 and September 30, 2003, accumulated other comprehensive
(loss) income is comprised of unrealized gain on derivatives, net of tax, of
$837 and $3,683, respectively, and unrealized (loss) gain on cash equivalents
and short-term interest-bearing investments, net of tax, of $(1,195) and $32,
respectively.
The accompanying notes are an integral part of these
consolidated financial statements.
4
AMDOCS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Nine months ended June 30,
--------------------------
2004 2003
----------- -----------
Cash Flow from Operating Activities:
Net income $ 173,278 $ 125,012
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization 76,944 69,973
(Gain) loss on sale of equipment (444) 427
Gain on repurchase of 2% convertible notes (13) --
Deferred income taxes (8,093) 10,556
Tax benefit of stock options exercised 2,738 221
Realized loss from short-term interest-bearing
investments 1,039 199
Net changes in operating assets and liabilities, net of
amounts acquired:
Accounts receivable (69,503) 32,365
Prepaid expenses and other current assets 14,879 (12,597)
Other noncurrent assets (41,941) (18,795)
Accounts payable and accrued expenses 32,947 20,436
Deferred revenue 54,543 47,889
Income taxes payable 27,735 5,411
Noncurrent liabilities and other (6,442) 2,920
----------- -----------
Net cash provided by operating activities 257,667 284,017
----------- -----------
Cash Flow from Investing Activities:
Proceeds from sale of equipment, vehicles and leasehold
improvements 1,841 1,710
Payments for purchase of equipment, vehicles, leasehold
improvements and other (33,532) (47,192)
Proceeds from sale of short-term interest-bearing
investments 863,304 631,845
Purchase of short-term interest-bearing investments (1,158,407) (637,148)
(Cash paid for) reimbursement of cash in acquisition (10,567) 11,111
----------- -----------
Net cash used in investing activities (337,361) (39,674)
----------- -----------
Cash Flow from Financing Activities:
Proceeds from employee stock options exercised 11,364 2,024
Net proceeds from issue of long-term 0.50% convertible
notes 441,736 --
Repurchase of ordinary shares (307,471) --
Redemption of 2% convertible notes (395,110) --
Repurchase of 2% convertible notes (4,987) --
Borrowings under financing arrangements 910 --
Principal payments under financing arrangements (1,651) --
Principal payments on capital lease obligations (20,251) (7,714)
----------- -----------
Net cash used in financing activities (275,460) (5,690)
----------- -----------
Net (decrease) increase in cash and cash equivalents (355,154) 238,653
Cash and cash equivalents at beginning of period 847,600 466,655
----------- -----------
Cash and cash equivalents at end of period $ 492,446 $ 705,308
=========== ===========
Supplementary Cash Flow Information
Cash paid for:
Income taxes, net of refunds $ 22,734 $ 25,611
Interest 9,733 9,323
Non-Cash Investing and Financing Activities
In the nine months ended June 30, 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
(dollar and share amounts 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 $354 and
$380 is reflected in net income for the three months and nine months ended
June 30, 2004, respectively. No employee stock-based compensation cost was
reflected in net income for the three months and nine months ended June 30,
2003.
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
(dollar and share amounts 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 Nine months ended
June 30, June 30,
--------------------------------- ----------------------------------
2004 2003 2004 2003
--------------- ---------------- ---------------- ----------------
Risk-free interest rate 3.10% 2.56% 2.14% 2.70%
Expected life of options 3.00 2.98 3.00 2.93
Expected annual volatility 44.1% 51.1% 44.3% 57.0%
Expected dividend yield None None None None
Fair value per option $ 11.2 $ 7.01 $ 10.4 $ 5.02
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 nine
months ended June 30, 2004 and 2003:
Three months ended Nine months ended
June 30, June 30,
------------------------------- --------------------------------
2004 2003 2004 2003
------------- -------------- -------------- --------------
Net income, as reported $ 59,920 $ 47,438 $ 173,278 $ 125,012
Add: Stock-based employee
compensation expense included
in net income, net of related
tax effects 276 4 301 23
Less: Total stock-based employee
compensation expense
determined under fair value
method for all awards, net of
related tax effects (7,131) (17,182) (26,335) (47,189)
----------- ------------ ------------ ------------
Pro forma net income $ 53,065 $ 30,260 $ 147,244 $ 77,846
=========== ============ ============ ============
Basic earnings per share:
As reported $ 0.29 $ 0.22 $ 0.82 $ 0.58
=========== ============ ============ ============
Pro forma $ 0.26 $ 0.14 $ 0.70 $ 0.36
=========== ============ ============ ============
Diluted earnings per share:
As reported $ 0.28 $ 0.21 $ 0.80 $ 0.57
=========== ============ ============ ============
Pro forma $ 0.25 $ 0.14 $ 0.68 $ 0.36
=========== ============ ============ ============
The pro forma results for the three months and nine months ended June
30, 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 $15,499 and $32,552 in the three
months and nine months ended June 30, 2003, respectively, and a decrease in
pro forma diluted earnings per share of $0.07 and $0.15 in the three months
and nine months ended June 30, 2003, respectively. The 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. The Company has
analyzed the impact of the correction only for the aforementioned periods.
7
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts 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 to SFAS No. 57, "Related Party
Disclosures".
The following related party revenue is included in the statements of
income for the three months and nine months ended June 30, 2003:
Three months Nine months
ended ended
June 30, June 30,
-------------- -----------------
2003 2003
-------------- -----------------
Revenue:
License $ 583 $ 3,827
Service 32,374 84,122
The following related party expense is included in the statements of
income for the three months and nine months ended June 30, 2003:
Three months Nine months
ended ended
June 30, June 30,
--------------- ----------------
2003 2003
--------------- ----------------
Interest income and other, net (1) $ 564 $ 1,662
(1) Represents interest and exchange rate differences, net of hedging, on
the convertible debentures of Certen. Absent hedging, these amounts
would be $4,733 and $9,344 for the three and nine months ended June
30, 2003, respectively.
8
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
5. Accounts Receivable, Net
Accounts receivable, net consists of the following:
As of
---------------------------------
June 30, September 30,
2004 2003
------------- -------------
Accounts receivable -billed $ 269,660 $ 200,220
Accounts receivable -unbilled 16,086 16,072
Less - allowances (15,186) (18,018)
------------- -------------
Accounts receivable, net $ 270,560 $ 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 Nine months ended
June 30, June 30,
----------------------------- ------------------------------
2004 2003 2004 2003
----------- ------------ ------------ ------------
Net income $ 59,920 $ 47,438 $ 173,278 $ 125,012
Other comprehensive income (loss):
Unrealized income (loss) on
foreign currency hedging
contracts, net of tax 2,716 6,151 (2,846) 15,285
Unrealized loss on short-term
interest-bearing investments,
net of tax (1,687) (882) (1,227) (1,931)
----------- ------------ ------------ ------------
Comprehensive income $ 60,949 $ 52,707 $ 169,205 $ 138,366
=========== ============ ============ ============
7. Income Taxes
The provision for income taxes for the following periods consisted of:
Three months ended Nine months ended
June 30, June 30,
------------------------------ ------------------------------
2004 2003 2004 2003
----------- ------------- ------------- -------------
Current $ 32,755 $ 10,571 $ 56,966 $ 31,115
Deferred (15,855) 5,242 (8,093) 10,556
----------- ------------- ------------ ------------
$ 16,900 $ 15,813 $ 48,873 $ 41,671
=========== ============= ============ ============
9
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts 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 Nine months ended
June 30, June 30,
------------------------------- -------------------------------
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 Nine months ended
June 30, June 30,
--------------------------------- -----------------------------
2004 2003 2004 2003
------------- ------------- ----------- -----------
Numerator:
Net income $ 59,920 $ 47,438 $ 173,278 $ 125,012
=========== ========== =========== ==========
Denominator:
Denominator for basic earnings per
share-
weighted average number of shares
outstanding (1) 206,093 215,938 210,409 215,786
Effect of dilutive stock options
granted 5,708 4,854 5,777 3,167
----------- --------- ---------- ---------
Denominator for diluted earnings per
share -
adjusted weighted average shares and
assumed conversions (1) 211,801 220,792 216,186 218,953
=========== ========== =========== ==========
Basic earnings per share $ 0.29 $ 0.22 $ 0.82 $ 0.58
=========== ========== =========== ===========
Diluted earnings per share $ 0.28 $ 0.21 $ 0.80 $ 0.57
=========== ========== =========== ===========
(1) The weighted average number of shares outstanding during the three
months and nine months ended June 30, 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 nine months ended June 30, 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
(dollar and share amounts in thousands, except per share data)
9. Repurchase of Securities
Ordinary Shares
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 six
months ended June 30, 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.
On July 28, 2004 the Company announced that its board of directors had
extended the Company's share repurchase program by authorizing the
repurchase of up to $100,000 of its outstanding ordinary shares. The
authorization permits the Company to purchase its ordinary shares in open
market or privately negotiated transactions at times and prices considered
appropriate by the Company. As of August 10, 2004, the Company had
repurchased 2,219 ordinary shares under this repurchase program, for an
aggregate purchase price of $46,811.
Convertible Notes
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. 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
11
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
their terms, and are included in "Noncurrent liabilities and other" in the
accompanying consolidated balance sheet as of June 30, 2004.
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 $3,000. 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 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 have been included in
the Company's consolidated statements of income, commencing on July 2,
2003.
The following is the revised allocation of the purchase price and
deferred tax liability:
Purchase price $ 65,887
Estimated transaction costs 2,925
-----------
Total purchase price 68,812
Write-off of deferred revenue and allowance on Amdocs books, net of
tax (33,666)
-----------
Net amount for purchase price allocation $ 35,146
===========
Allocation of purchase price:
90% tangible assets acquired, net of capitalized Amdocs system on
Certen's books $ 80,929
90% liabilities assumed (241,460)
-----------
Net liabilities acquired (160,531)
Customer arrangement 36,385
Adjustment to fair value of pension and other post-employment benefit
liabilities (12,605)
EITF 95-3 and other liabilities (2,857)
Deferred taxes resulting from the difference between the assigned
value of certain assets and liabilities and their respective tax
bases 73,673
-----------
Net fair value of liabilities acquired (65,935)
Goodwill 101,081
-----------
$ 35,146
===========
12
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
The following table sets forth the unaudited pro forma revenue,
operating income, net income and earnings per share figures for the three
months and nine months ended June 30, 2003, as if Certen had been acquired
as of October 1, 2001:
THREE MONTHS NINE MONTHS
ENDED ENDED
------------ -----------
JUNE 30, 2003
--------------------------
Revenue $ 432,383 $ 1,210,198
Operating income 51,727 129,381
Net income 40,883 104,107
Basic earnings per share 0.19 0.48
Diluted earnings per share 0.19 0.48
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 shares issued 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 revised preliminary allocation of the purchase
price and deferred tax assets:
Net assets acquired $ 551
Technology 9,209
Customer arrangements 1,064
Deferred tax assets 8,164
Goodwill 10,187
-------
$29,175
=======
Pro forma information on the Company's consolidated results of
operations for the nine months and three months ended June 30, 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
consolidated results of operations.
13
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
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 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 $5,816 of the
total charge was paid in cash as of June 30, 2004. The remainder of the
charge, comprised of facility related costs, is expected to be paid out
through June 2008.
Details of $9,956 Restructuring Charge:
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,
14
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
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 June 30, 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) (1,198) -- -- (1,365)
Adjustments 8 -- -- -- 8
--------- -------- -------- -------- --------
Balance as of June 30, 2004 $ -- $ 1,904 $ -- $ -- $ 1,904
========= ======== ======== ======== ========
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 cost savings may not be permanent as
increased activity levels resulting from, among other factors,
acquisitions, new Managed 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
quarterly 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 $16,957 of the
total charge was paid in cash as of June 30, 2004. The remainder of the
charge, comprised of facility related costs, is expected to be paid out
through April 2012.
Details of $20,919 Restructuring Charge:
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.
15
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
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 June 30, 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 - (1,024) - - (1,024)
Adjustments (82) 43 - - (39)
------------- ------------- ------------- ------------- -------------
Balance as of June 30, 2004 $ - $ 2,213 $ - $ - $ 2,213
============= ============= ============= ============= =============
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 cost 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.
The restructuring charge associated with this action and recorded in
the first quarter of fiscal 2002 was $13,311. Approximately $6,789 of the
total charge was paid in cash as of June 30, 2004. The remainder of the
charge, comprised of facility related costs, is expected to be paid out
through August 2008.
Details of $13,311 Restructuring charge:
Approximately $6,255 of the total restructuring charge related to
facilities and represented rent obligations 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 $2,530 related to
employee separation costs in connection with the termination of employment
of 166 employees.
16
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
The restructuring charge related to the consolidation of the Stamford
and Champaign facilities is comprised of the following as of June 30, 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 - (793) - - (793)
-------- -------- -------- -------- --------
Balance as of June 30, 2004 $ - $ 1,917 $ - $ - $ 1,917
======== ======== ======== ======== ========
The operating costs related to the Stamford site that were eliminated
were approximately $8,500 in its last quarter of activity.
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.
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 nine months ended June 30, 2004, was as follows:
Three months ended Nine months ended
June 30, 2004 June 30, 2004
------------------------------ -----------------------------
Pension Other Pension Other
Benefits Benefits Benefits Benefits
----------- ----------- ----------- -----------
Service costs $ 515 $ 94 $ 1,488 $ 271
Interest on benefit obligations 673 97 1,943 279
Expected return on plan assets (575) - (1,661) -
----------- ----------- ----------- -----------
$ 613 $ 191 $ 1,770 $ 550
=========== =========== =========== ===========
For the three and nine months ended June 30, 2004, no contributions
were 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.
17
AMDOCS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollar and share amounts in thousands, except per share data)
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.
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 June
30, 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 nine months ended June 30, 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 consolidated 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 nine months and three months ended June
30, 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 nine months and three months ended June 30,
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 nine-month and
three-month periods ended June 30, 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 reasonably assured. We usually sell our software licenses as part of
an overall solution offered to a customer, that combines the sale of software
licenses with a broad range of services, which normally include significant
customization, modification, implementation and integration. As a result, we
generally recognize combined license and service revenue over the course of
these long-term projects, using the percentage of
20
completion method of accounting. 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 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. During the nine months ended June 30, 2004,
communications service providers demonstrated a greater readiness to commit to
new projects, although the market has not grown at the rate expected. While
difficulties remain in the communications industry, we believe that, with the
overall improvement of market conditions, we should achieve very modest
sequential growth in the coming quarters.
Our quarterly revenue for the last eleven quarters is summarized below (in
millions):
Q1 Q2 Q3 Q4
----------------- ----------------- ----------------- -----------------
Fiscal 2004 $ 428.3 $ 442.8 $ 450.2 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.
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,
21
- 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 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
agreements in the three months and nine months ended June 30, 2004 was
approximately 40% of total revenue for such periods.
Results of Operations
The following table sets forth for the nine months and three months ended
June 30, 2004 and 2003 certain items in our consolidated statements of income
reflected as a percentage of total revenue:
Three months ended Nine months ended
June 30, June 30,
------------------- -----------------
2004 2003 2004 2003
------ ------ ------ ------
Revenue:
License .......................... 3.8% 3.0% 3.9% 4.8%
Service .......................... 96.2 97.0 96.1 95.2
------ ------ ------ ------
100.0 100.0 100.0 100.0
------ ------ ------ ------
Operating expenses:
Cost of license .................. 0.3 0.4 0.3 0.4
Cost of service .................. 62.9 61.1 63.1 60.4
Research and development ......... 7.0 7.9 7.0 8.3
Selling, general and
administrative ................. 11.7 13.5 12.0 14.3
Amortization of purchased
intangible assets .............. 1.0 1.2 1.0 1.3
Restructuring charges ............ -- -- -- 0.9
------ ------ ------ ------
82.9 84.1 83.4 85.6
------ ------ ------ ------
Operating income ................... 17.1 15.9 16.6 14.4
Interest income and other, net ..... 0.0 0.9 0.2 1.2
------ ------ ------ ------
Income before income taxes ......... 17.1 16.8 16.8 15.6
Income taxes ....................... 3.8 4.2 3.7 3.9
------ ------ ------ ------
Net income ......................... 13.3% 12.6% 13.1% 11.7%
====== ====== ====== ======
22
NINE MONTHS ENDED JUNE 30, 2004 AND 2003
The following is a tabular presentation of our results of operations for
the nine months ended June 30, 2004 compared to the nine months ended June 30,
2003. Following the table is a discussion and analysis of our business and
results of operations for such periods.
NINE MONTHS ENDED
JUNE 30, INCREASE (DECREASE)
------------------------ -------------------
2004 2003 AMOUNT %
----------- ---------- ---------- -----
(in thousands)
-------------------------------------
Revenue:
License ................... $ 52,026 $ 51,176 $ 850 1.7%
Service ................... 1,269,251 1,020,392 248,859 24.4
---------- ---------- ----------
1,321,277 1,071,568 249,709 23.3
---------- ---------- ----------
Operating expenses:
Cost of license ........... 3,807 4,137 (330) (8.0)
Cost of service ........... 833,470 646,389 187,081 28.9
Research and development .. 92,247 88,888 3,359 3.8
Selling, general and
administrative .......... 159,078 153,644 5,434 3.5
Amortization of purchased
intangible assets ....... 13,423 14,303 (880) (6.2)
Restructuring charges ..... -- 9,956 (9,956) (100.0)
---------- ---------- ----------
1,102,025 917,317 184,708 20.1
---------- ---------- ----------
Operating income ............. 219,252 154,251 65,001 42.1
Interest income and other, net 2,899 12,432 (9,533) (76.7)
---------- ---------- ----------
Income before income taxes ... 222,151 166,683 55,468 33.3
Income taxes ................. 48,873 41,671 7,202 17.3
---------- ---------- ----------
Net income ................... $ 173,278 $ 125,012 $ 48,266 38.6%
========== ========== ==========
REVENUE. The increase in total revenue in the nine months ended June 30,
2004 is due to an increase in service revenue as a result of the 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 nine months ended June 30, 2004
was approximately 40% of total revenue. The net revenue impact of the Managed
Services agreements entered into during fiscal 2003, including the effect of the
Certen acquisition, was approximately $208 million in the nine months ended June
30, 2004.
Managed Services arrangements accounted for the majority part of the
increase in revenue during the nine months ended June 30, 2004 and include only
a small license revenue component, therefore, in the nine months ended June 30,
2004, such arrangements had the effect of decreasing license revenue, as a
percentage of revenue, by 0.9% compared to the nine months ended June 30, 2003.
License and service revenue from the sale of CC&B Systems was $1,144.7
million for the nine months ended June 30, 2004, an increase of $218.1 million,
or 23.5%, over the nine months ended June 30, 2003. Approximately two-thirds of
the increase is attributable to our acquisition of Certen in the fourth quarter
of fiscal 2003, and the remainder is attributable to additional revenue from
existing and new customers. License and service revenue from the sale of CC&B
Systems represented 86.6% and 86.5% of our total revenue in the nine months
ended June 30, 2004 and 2003, respectively. The demand for our CC&B Systems is
primarily driven by the need for communications companies to continue to
integrate their billing, CRM and order management systems into Integrated
Customer Management products and services. 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 contributing to the increase in revenue in the
nine months ended June 30, 2004.
23
License and service revenue from the sale of Directory Systems was $176.6
million for the nine months ended June 30, 2004, an increase of $31.6 million,
or 21.8%, over the nine months ended June 30, 2003. Approximately $59 million of
the increase in Directory Systems revenue in the nine months ended June 30, 2004
was attributable to the Managed Services agreements. This revenue was partially
offset by the completion of certain implementation projects that accounted for
$27 million of revenue in the comparable period of fiscal 2003. License and
service revenue from the sale of Directory Systems represented 13.4% and 13.5%
of our total revenue in the nine months ended June 30, 2004 and 2003,
respectively. We believe that we are a leading provider of Directory Systems in
most of the markets we serve. We expect that our revenue from Directory Systems
will remain relatively stable in fiscal 2004.
In the nine months ended June 30, 2004, revenue from customers in North
America, Europe and the rest of the world accounted for 66.8%, 26.4% and 6.8%,
respectively, of total revenue compared to 61.1%, 30.2% and 8.7%, respectively,
for the nine months ended June 30, 2003. Approximately 90.0% of the increase in
revenue from customers in North America is attributable to Managed Services
agreements, including the acquisition of Certen, which expanded our activity and
revenue from customers in North America, and approximately 10.0% is attributable
to the expansion of relationships with existing customers in North America. The
decreased contribution to revenue from customers in Europe relative to customers
in North America, as a percentage of revenue, resulted from the relatively
greater growth in activity from customers in North America than in Europe during
the nine months ended June 30, 2004. Revenue from customers in the rest of the
world in absolute amount was relatively stable in the nine months ended June 30,
2004 compared to the nine months ended June 30, 2003.
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 nine months ended June 30, 2004, cost of license, as a percentage of
license revenue, was 7.3% compared to 8.1% in the nine months ended June 30,
2003.
Cost of Service. The increase in cost of service in the nine months ended
June 30, 2004 was 28.9%, which was higher than 23.3%, the increase in our total
revenue in the nine months ended June 30, 2004, and resulted in a 2.6% decrease
in our gross margin. Our gross margin was affected by the Managed Services
agreements signed during fiscal 2003, which we expect to be less profitable in
their initial period, and to a lesser extent, by the decrease, as a percentage
of revenue, 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
directed to our billing and CRM systems, and the remainder to directory,
content, mediation, order management solutions and other activities. 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. 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 nine months ended June 30, 2004 was
attributable to the overall increase in our operations, as well as to the
increase in our selling and marketing efforts. The increase in selling, general
and administrative expense in the nine months ended June 30, 2004 was 3.5%,
which was proportionally less than the 23.3% increase in our total revenue.
24
Restructuring Charges. The restructuring charge in the nine months ended
June 30, 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 nine months ended
June 30, 2004 resulted from the 23.3% increase in our total revenue, which was
partially offset by the 2.6% decrease in our gross margin attributable to the
relative low gross margin of our Managed Services projects in their early stages
of implementation, and to the effect of the $10.0 million restructuring charge
in the nine months ended June 30, 2003.
Interest Income and Other, Net. The decrease in interest income and other,
net, in the nine months ended June 30, 2004 is primarily attributable to the
decline in interest rates on our short-term interest-bearing investments, which
resulted from our decision to shorten the duration of our investments due to
volatility in the interest rate environment, and was also affected by the
decrease of interest income on debentures issued by Certen to us that was
eliminated as a result of the Certen acquisition.
Income Taxes. Our effective tax rate in the nine months ended June 30, 2004
was 22% compared to 25% in the nine months ended June 30, 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 nine months ended June 30,
2004 is attributable to the 23.3% increase in our total revenue and to the
effect of the $10.0 million restructuring charge in the nine months ended June
30, 2003. The increase was partially offset by the 2.6% decrease in our gross
margin attributable to the relative low gross margin of our Managed Services
projects in their early stages of implementation.
Diluted Earnings Per Share. Diluted earnings per share were $0.80 for the
nine months ended June 30, 2004, compared to $0.57 in the nine months ended June
30, 2003.
25
THREE MONTHS ENDED JUNE 30, 2004 AND 2003
The following is a tabular presentation of our results of operations for
the three months ended June 30, 2004 compared to the three months ended June 30,
2003. Following the table is a discussion and analysis of our business and
results of operations for such periods.
THREE MONTHS ENDED
JUNE 30, INCREASE (DECREASE)
------------------- ------------------
2004 2003 AMOUNT %
-------- -------- -------- ----
(in thousands)
------------------------------
Revenue:
License .......................... $ 17,298 $ 11,491 $ 5,807 50.5%
Service .......................... 432,926 365,677 67,249 18.4
-------- -------- --------
450,224 377,168 73,056 19.4
-------- -------- --------
Operating expenses:
Cost of license .................. 1,448 1,455 (7) (0.5)
Cost of service .................. 283,109 230,323 52,786 22.9
Research and development ......... 31,665 29,941 1,724 5.8
Selling, general and
administrative ................. 52,745 50,943 1,802 3.5
Amortization of purchased
intangible assets .............. 4,558 4,524 34 0.8
-------- -------- --------
373,525 317,186 56,339 17.8
-------- -------- --------
Operating income .................... 76,699 59,982 16,717 27.9
Interest income and other, net ...... 121 3,269 (3,148) (96.3)
-------- -------- --------
Income before income taxes .......... 76,820 63,251 13,569 21.5
Income taxes ........................ 16,900 15,813 1,087 6.9
-------- -------- --------
Net income .......................... $ 59,920 $ 47,438 $ 12,482 26.3%
======== ======== ========
REVENUE. The increase in total revenue in the three months ended June 30,
2004 is due primarily to an increase in service revenue as a result of 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 June 30, 2004
was approximately 40% of total revenue. The net revenue impact of the Managed
Services agreements entered into during fiscal 2003, including the effect of the
Certen acquisition, was approximately $58 million in the three months ended June
30, 2004.
License revenue in the three months ended June 30, 2004 increased compared
to the three months ended June 30, 2003, as a result of new contracts that we
obtained from new and existing customers during fiscal 2004.
License and service revenue from the sale of CC&B Systems was $388.0
million for the three months ended June 30, 2004, an increase of $65.9 million,
or 20.4%, over the three months ended June 30, 2003. Approximately two-thirds of
the increase is attributable to our acquisition of Certen in the fourth quarter
of fiscal 2003, and the remainder is attributable to additional revenue from
existing and new customers. License and service revenue from the sale of CC&B
Systems represented 86.2% and 85.4% of our total revenue in the three months
ended June 30, 2004 and 2003, respectively. The demand for our CC&B Systems is
primarily driven by the need for communications companies to continue to
integrate their billing, CRM and order management systems into Integrated
Customer Management products and services. 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 contributing for the increase in revenue in the
third quarter of fiscal 2004.
License and service revenue from the sale of Directory Systems was $62.2
million for the three months ended June 30, 2004, an increase of $7.2 million,
or 13.1%, over the three months ended June 30, 2003. Approximately $15 million
of the increase in Directory Systems revenue in the three months ended June 30,
26
2004 was attributable to the Managed Services agreements. This revenue was
partially offset by the completion of certain implementation projects that
accounted for $8 million of revenue in the comparable period of fiscal 2003.
License and service revenue from the sale of Directory Systems represented 13.8%
and 14.6% of our total revenue in the three months ended June 30, 2004 and 2003,
respectively. We believe that we are a leading provider of Directory Systems in
most of the markets we serve. We expect that our revenue from Directory Systems
will remain relatively stable in fiscal 2004.
In the three months ended June 30, 2004, revenue from customers in North
America, Europe and the rest of the world accounted for 65.9%, 26.1% and 8.0%,
respectively, of total revenue compared to 62.9%, 28.1% and 9.0%, respectively,
for the three months ended June 30, 2003. Approximately 95.0% of the increase in
revenue from customers in North America is attributable to Managed Services
agreements, including the acquisition of Certen, which expanded our activity and
revenue from customers in North America, and approximately 5.0% to the expansion
of relationships with existing customers in North America. The decreased
contribution to revenue from customers in Europe relative to customers in North
America, as a percentage of revenue, resulted from the relatively greater growth
in activity from customers in North America than in Europe during the three
months ended June 30, 2004. Revenue from customers in the rest of the world in
absolute amount was relatively stable in the three months ended June 30, 2004
compared to the three months ended June 30, 2003.
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 June 30, 2004, cost of license, as a percentage of
license revenue, was 8.4%, compared to 12.7% in the three months ended June 30,
2003.
Cost of Service. The increase in cost of service in the three months ended
June 30, 2004 was 22.9%, which was higher than 19.4%, the increase in our total
revenue in the three months ended June 30, 2004, and resulted in a 1.7% decrease
in our gross margin. Our gross margin was affected by the Managed Services
agreements signed during fiscal 2003, which we expect to be less profitable in
their initial period.
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
directed to our billing and CRM systems, and the remainder to directory,
content, mediation 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. 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 June 30, 2004 was
attributable to overall increase in our operations, as well as to the increase
in our selling and marketing efforts. The increase in selling, general and
administrative expense in the three months ended June 30, 2004 was 3.5%, which
was proportionally less than the 19.4% increase in our total revenue.
Operating Income. The increase in operating income in the three months
ended June 30, 2004 resulted from the 19.4% increase in our total revenue,
partially offset by the 1.7% decrease in our gross margin attributable to the
relative low gross margin of our Managed Services projects in their early stages
of implementation.
27
Interest Income and Other, Net. The decrease in interest income and other,
net, in the three months ended June 30, 2004 is primarily attributable to the
decline in interest rates on our short-term interest-bearing investments, which
resulted from our decision to shorten the duration of our investments due to
volatility in the interest rate environment, and was also affected by the
decrease resulted from the interest income on debentures issued by Certen to us
that was eliminated as a result of the Certen acquisition.
Income Taxes. Our effective tax rate in the three months ended June 30,
2004 was 22% compared to 25% in the three months ended June 30, 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 to the 19.4%
increase in our total revenue, which was partially offset by the 1.7% decrease
in our gross margin attributable to the relative low gross margin of our Managed
Services projects in their early stages of implementation in the three months
ended June 30, 2004.
Diluted Earnings Per Share. Diluted earnings per share were $0.28 for the
three months ended June 30, 2004, compared to $0.21 in the three months ended
June 30, 2003.
Liquidity and Capital Resources
Cash, cash equivalents and short-term interest-bearing investments totaled
$1,228.3 million as of June 30, 2004, compared to $1,290.9 million as of
September 30, 2003. The decrease is attributable to the use of approximately
$395.1 million to repurchase 2% Convertible Notes due June 1, 2008 (the "2%
Notes") as described below, the use of $170.1 million to repurchase ordinary
shares sold short by purchasers of the 0.50% Convertible Senior Notes due 2024
(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, which was partially offset by the net proceeds from
the issuance of $450.0 million of 0.50% Notes in March 2004 and positive cash
flows from operations. Net cash provided by operating activities amounted to
$257.7 million and $284.0 million for the nine months ended June 30, 2004 and
2003, respectively. Although net income before depreciation and amortization
increased in the nine months ended June 30, 2004, cash flows from operations
decreased, due primarily to increases in accounts receivable. 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.
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.
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 June
30, 2004, $0.3 million and $450.0 million aggregate principal amount of our 2%
Notes and 0.50% Notes were outstanding, respectively.
On July 28, 2004 we announced that our board of directors had extended our
share repurchase program by authorizing the repurchase of up to $100.0 million
of our outstanding ordinary shares. The authorization permits us to purchase our
ordinary shares in open market or privately negotiated transactions at times and
28
prices considered appropriate by us. As of August 10, 2004, we had repurchased
2,218,500 ordinary shares under this repurchase program, for an aggregate
purchase price of 46.8 million.
As of June 30, 2004, we had available short-term general revolving lines of
credit totaling $31.0 million, pursuant to which $0.9 million of loans was
outstanding. In addition, as of June 30, 2004 we had outstanding letters of
credit and bank guarantees from various banks totaling $13.6 million.
As of June 30, 2004, we had outstanding long-term obligations of $28.4
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 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 in June 2004, as discussed above.
Our capital expenditures were approximately $33.5 million in the nine
months ended June 30, 2004. Approximately 85% of these expenditures consisted of
purchases of computer equipment and, the remainder, 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
We manage our foreign subsidiaries as integral direct components of our
operations. The U.S. dollar is our functional currency. According to the salient
economic factors indicated in SFAS No.52, "Foreign Currency Translation", our
cash flow, sale price, sales market, expense, financing and intercompany
transactions and arrangement indicators are denominated in the U.S. dollar. The
operations of our foreign subsidiaries provide the same type of services with
the same type of expenditure throughout Amdocs' group.
During the nine months ended June 30, 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. We periodically assess the applicability
of the U.S. dollar as our functional currency by reviewing the salient
indicators.
29
PART II OTHER INFORMATION
ITEM 1. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
(b) Issuer Purchases of Equity Securities
The following table provides information about purchases by the Company
and its affiliated purchasers during the quarter ended June 30, 2004 of equity
securities that are registered by the Company pursuant to Section 12 of the
Exchange Act:
ISSUER PURCHASES OF EQUITY SECURITIES
Ordinary Shares
(a) (b) (c) (d)
MAXIMUM NUMBER (OR
TOTAL NUMBER OF APPROXIMATE DOLLAR
SHARES (OR UNITS) VALUE) OF SHARES (OR
PURCHASED AS PART UNITS) THAT MAY YET
TOTAL NUMBER OF AVERAGE PRICE OF PUBLICLY BE PURCHASED UNDER
SHARES (OR UNITS) PAID PER SHARE ANNOUNCED PLANS OR THE PLANS OR PROGRAMS
PERIOD PURCHASED (OR UNIT) PROGRAMS (1) (2)
------------------------- --------------------- --------------- ------------------ ---------------------
04/01/04-04/30/04 -- -- -- 10,100
05/01/04-05/31/04 -- -- -- 10,100
06/01/04-06/30/04 -- -- -- 10,100
--------------------- ------------------
Total -- -- 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 had repurchased through open market purchases
4,989,900 ordinary shares under this repurchase program through December
31, 2003, 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 six months ended June 30, 2004.
(2) On July 28, 2004 the Company announced that its board of directors had
extended the Company's share repurchase program by authorizing the
repurchase of up to $100.0 million of its outstanding ordinary shares. The
authorization permits the Company to purchase its ordinary shares in open
market or privately negotiated transactions at times and prices considered
appropriate by the Company. As of August 10, 2004, the Company had
repurchased 2,218,500 ordinary shares under this repurchase program, for an
aggregate purchase price of $46.8 million.
30
Convertible Notes
(a) (b) (c) (d)
AVERAGE PRICE TOTAL NUMBER OF MAXIMUM NUMBER (OR
PAID PER PRINCIPAL AMOUNT OF APPROXIMATE DOLLAR
$1,000 CONVERTIBLE NOTES VALUE) OF PRINCIPAL
TOTAL PRINCIPAL PRINCIPAL PURCHASED AS PART AMOUNT OF CONVERTIBLE
AMOUNT OF AMOUNT OF OF PUBLICLY NOTES THAT MAY YET BE
CONVERTIBLE NOTES CONVERTIBLE ANNOUNCED PLANS OR PURCHASED UNDER THE
PERIOD PURCHASED NOTES PROGRAMS PLANS OR PROGRAMS (1)
----------------- --------------- ------------- ------------------- ---------------------
04/01/04-04/30/04 $ -- -- -- $ 395,454,000
05/01/04-05/31/04 -- -- -- 395,454,000
06/01/04-06/30/04 395,110,000 $ 1,000 395,110,000 344,000
------------- -------------
Total $ 395,110,000 $ 1,000 $ 395,110,000 $ 344,000
(1) 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 2% Notes solely with cash. The
Company accepted for payment $395.1 million principal amount of 2%
Notes surrendered for repurchase pursuant to the offer. The untendered
2% Notes remain as the Company's obligations due June 1, 2008, in
accordance with their terms. Subsequent to June 30, 2004, the Company
purchased an additional $72,000 aggregate principal amount of the 2%
Notes for an aggregate purchase price of $71,640.
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 June 30, 2004:
(1) Form 6-K dated June 10, 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: August 12, 2004
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
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99.1 Amdocs Limited Press Release dated July 21, 2004.