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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _____________
Commission File No. 0-57495
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Saville Systems PLC
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(Exact Name of Registrant as Specified in its Charter)
Republic of Ireland Not Applicable
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
IDA Business Park Dangan Galway None
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code
from the United States: (011 353-91-5266-11)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of Each Exchange on Which Registered
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American Depositary Shares, The Nasdaq National Market
$0.0025 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [X]
The aggregate market value of voting Common Stock held by non-affiliates of the
registrant was $499,920,190.60 based on the last reported sale price of the
Common Stock on the Nasdaq consolidated transaction reporting system on March 3,
1997.
Number of shares outstanding of the registrant's class of Common Stock as of
March 3, 1997: 18,127,986.
Documents incorporated by reference:
Proxy Statement for the 1997 Annual Meeting of Shareholders - Part III
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PART I
ITEM 1. BUSINESS
Saville Systems PLC (together with its subsidiaries, "Saville" or the
"Company") creates innovative, high quality, customized customer care and
billing solutions for service providers in the competitive global
telecommunications industry. The Company's customer care and billing systems are
designed to enable these service providers to quickly bring new offerings in
voice, video and data communications to market, while billing accurately and
reliably for these services. Working closely with its customers, Saville
utilizes its library of proprietary software applications to provide each
customer with a customized, flexible and cost-effective customer care and
billing solution. The Company has typically continued to serve as a billing
partner for its customers by implementing new systems as the customer enters new
service categories or geographic markets, and by further developing and
enhancing the customer's installed systems in response to changes in the
customer's service offerings, marketing strategies and network technology. In
addition, Saville offers its customers the option of having Saville operate the
customer care and billing system in one of the Company's in-house service
bureaus.
The market for telecommunications services is becoming increasingly
competitive due to worldwide telecommunications liberalization and new
technologies. New entrants are competing for market share with established
service providers by providing discounted service access, offering competitive
prices and introducing new features and services, such as customized usage-based
calling plans. In addition, technological advances are permitting
telecommunications service providers to offer a variety of new voice and data
services to their customers, such as caller ID, call waiting and voice mail.
These and other developments have increased the complexity and variety of
telecommunications services, as service providers seek to differentiate
themselves by being more responsive to their customers and by expanding the
number of telecommunications services and features they offer.
These market trends have created the need for sophisticated and
flexible customer care and billing solutions because telecommunications service
providers can compete only if they are able to efficiently and accurately bill
customers for the varied services and features they provide. As a result of
their multiple and evolving billing needs, many established telecommunications
service providers are replacing or augmenting their existing billing systems,
which are often difficult and time consuming to modify. In addition, many
emerging telecommunications service providers are seeking external customer care
and billing solutions because efficient, flexible customer care and billing
software is often too costly and time consuming for them to develop internally.
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Saville has developed, and continuously refines, its sophisticated base
software applications, which it combines and customizes to meet the current and
evolving requirements of its customers. The Company's systems are designed to
operate in a multiservice environment, capable of billing local exchange, long
distance, wireless (cellular, paging, satellite and Personal Communications
Services ("PCS")) and data telecommunications services. These systems are
designed to support the discrete service offerings of large telecommunications
service providers, including larger industry-leading customers such as AT&T
Corporation ("AT&T") and Sprint Corporation ("Sprint") and Ameritech
Communications, Inc. ("Ameritech"), or to serve as the complete customer care
and billing systems of emerging and small- to medium-sized service providers,
including customers such as Energis Communications Limited ("Energis"), a United
Kingdom long distance telecommunications service provider, and Frontier
Communications of Rochester Inc. ("Frontier"), a local exchange carrier. The
Company supports its customers through offices in Galway, Ireland; Burlington,
Massachusetts; Edmonton, Alberta; and Toronto, Ontario.
The Company was incorporated in the Republic of Ireland in June 1993 as
Saville Systems Ireland Limited, a private limited company. On November 9, 1995,
the Company was re-registered as a public limited company and changed its name
to Saville Systems PLC. Unless the context otherwise requires, references to the
"Company" or "Saville" are to Saville Systems PLC and its consolidated
subsidiaries. The Company's principal executive office is located at IDA
Business Park, Dangan, Galway, Ireland, and its telephone number at that address
from the United States is (011) 353-9-152-6611. The address of the Company's
United States subsidiary is 25 Burlington Mall Road, Sixth Floor, Burlington, MA
01803, and its telephone number at that address is (617) 270-6500. The address
of the Company's Canadian subsidiary is 4445 Calgary Trail, Seventh Floor,
Edmonton, AB Canada T6H 5R7 and its telephone number at that address is (403)
430-2000.
INDUSTRY BACKGROUND
The Telecommunications Industry
The telecommunications services industry in the United States generated
over $199 billion in revenue in 1995 and is becoming increasingly competitive
due to telecommunications liberalization and the development of new service
technologies. Competition in this market began to increase in 1984 when AT&T was
required to divest its local telephone operations, and the long distance market
was opened to new entrants. By 1994, there were over 500 long distance service
providers in a market that was primarily dominated by AT&T a decade earlier. New
long distance competitors, such as MCI Communications Corp. and Sprint,
initially competed by providing discounted service and later by offering new
features and services, such as
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customized usage-based calling plans. As a result of increased competition,
consumer long distance rates have been reduced by over 60% while overall long
distance industry revenues have increased from $38.8 billion in 1984 to $76.8
billion in 1995.
Although the Telecommunication Act of 1996 (the "Telecommunications
Act") is expected to allow further competition within the U.S. local exchange
market, it remains primarily a regulated market. Improved switching technology
is permitting local exchange telecommunications service providers to offer a
variety of new features and services to their customers such as caller ID, call
waiting, voice mail and others. New service-based technologies, which
facilitated the commercial introduction of cellular telephony in the mid-1980's
and the current licensing of radio frequencies allocated for PCS have
substantially increased the complexity and variety of telecommunications
services, as providers seek to compete and differentiate themselves with
enhanced telecommunications service offerings.
The Telecommunications Act has increased competition in the
telecommunications services market by allowing local, long distance and cable
companies to offer competing services, provided they meet specified regulatory
benchmarks. Many service providers are competing by offering multiple services,
including combinations of local exchange, long distance, wireless (cellular,
paging, satellite and PCS) and data communications services, to customers in
single geographic markets.
Internationally, privatization and telecommunications liberalization
are resulting in increased international competition and the emergence of newly
authorized telecommunications service providers. For example, approximately 150
new communications licenses were granted in the United Kingdom during the period
between 1991 and 1996, 27 new communications licenses were issued in South Korea
and over 100 new licenses are expected to be issued in Germany during 1997. When
new markets are opened to competition, local and emerging service providers
within these markets typically compete for market share with more established
carriers, such as AT&T and British Telecommunications PLC, initially by
providing access to service and then by providing competitive prices and
introducing new features and services. In addition, technological advances and
global expansion by multinational service providers are opening markets in less
developed countries to enhanced telecommunications services and competition.
As a result of these factors, telecommunications service providers are
differentiating themselves by being more responsive to customers and by
expanding the number of telecommunications services and features they offer.
These trends, in turn, have created the need for sophisticated and flexible
customer care and billing solutions. Telecommunications service providers can
compete only if they are able to
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efficiently and accurately bill customers for the varied services and features
they provide.
Telecommunications Customer Care and Billing
Telecommunications customer care and billing involves end to end
customer management including customer acquisition, service initiation and
collecting and pricing customer telecommunications usage in order to generate
residential and business telephone invoices for local, long distance and
wireless (cellular, paging, satellite and PCS) service. Customer care and
billing systems typically interact with most aspects of the telecommunications
network and generally incorporate data collection, processing and invoice
generation. The billing function continues to evolve from primarily a service
support function to a revenue enhancement tool used to differentiate services,
such as competitive long distance rate plans offered by AT&T, Sprint, MCI
Communications Corp. ("MCI") and others. Within the regulated local exchange
market, customer care and billing systems support features made available by new
switching technologies such as caller ID, call waiting and voice mail. The rapid
pace of technological change coupled with the emphasis on time to market for new
services and features places a significant burden on the telecommunications
service provider to install and then modify its customer care and billing system
quickly. This has created significant demand for software that can perform all
functions in a timely, accurate, cost-effective manner for a variety of
services.
Established telecommunications service providers have existing billing
systems, many of which are maintained in-house. Frequently, however, these
systems were designed prior to deregulation to provide a single-service billing
function. These older systems generally are difficult to maintain and modify and
often do not meet the multiple and evolving needs of the telecommunications
service provider. Many of these service providers are therefore seeking to
replace or augment their in-house billing systems through outsourced customer
care and billing solutions.
Many emerging telecommunications service providers lack customer care
and billing systems. One of the primary challenges that these newer service
providers face is to bring new services to market quickly. They typically focus
their capital resources on developing networking and switching technology and on
creating marketable services rather than on creating customer care and billing
systems. These providers typically seek external customer care and billing
solutions because efficient, flexible customer care and billing solutions are
often too costly and time consuming to develop internally.
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THE SAVILLE SOLUTION
Saville provides advanced customer care and billing solutions that
address a spectrum of billing and customer care functions, ranging from sales
support and order processing, through actual invoice calculation and production
to management reporting and marketing analysis. The Company's customer care and
billing systems are designed to enable telecommunications service providers to
meet their primary competitive objectives, including:
* Reducing costs of development, implementation, operation and
enhancement of core systems
* Reducing time to market for new services and features
* Improving marketing and planning through better customer
information
* Enhancing customer retention by providing accurate and useful
information to customers
Saville has developed, and continuously refines, its sophisticated base
software applications, which it combines and customizes to meet the current and
evolving requirements of its customers. The Company develops close, ongoing
relationships with its customers to identify customer needs, and then designs
and implements a customized customer care and billing solution that can operate
on a stand-alone basis or interface with a provider's existing billing system.
Saville typically continues to work closely with its customers after initial
implementation, particularly as customers require additional customized customer
care and billing applications that enable them to offer new features and
services, expand into additional geographic markets or operate with new network
technologies and protocols. In addition, the Company provides ongoing support,
maintenance and training related to the customer's customer care and billing
system. Saville also offers its customers the option of retaining the Company to
operate all or part of the customized customer care and billing system at a
Company-maintained service bureau.
In order to meet the significant technological challenges in developing
and implementing telecommunications customer care and billing software, as of
December 31, 1996, 486 of Saville's 624 employees were dedicated primarily to
software development. The experience and expertise of Saville's personnel enable
Saville to provide customer care and billing solutions for the varied
requirements of the Company's global client base, which includes local exchange,
long distance and wireless service providers, as well as providers of other
specialty applications, such as data communications and audio- and
videoconferencing services. The Company has developed relationships with
customers ranging from small service providers to industry leaders such as AT&T,
Sprint, Ameritech and GTE. Based on its experience
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with these customers, the Company believes that it is a leader in providing
customer care and billing software systems for small- to medium-sized
telecommunications service providers as well as to large telecommunications
service providers that utilize the Company's software and services to support
new market expansions or as an integral component of a larger customer care and
billing system.
STRATEGY
The Company's objective is to be a market leader in providing customer
care and billing solutions to the global telecommunications industry. The
critical elements of the Company's strategy include:
Develop and Maintain Long-Term Customer Relationships. Saville seeks to
establish and maintain long-term working relationships with its customers, which
enable the Company to gain an ongoing understanding of customer needs. The
implementation of features that meet these needs makes the Company's customer
care and billing solutions a critical competitive component of the customer's
service offering. This customer-driven focus is key to creating a loyal customer
base and providing product direction. In 1996, approximately 63.1% of the
Company's total revenues was derived from service providers who were customers
in 1995.
Focus on Growth-Oriented Telecommunications Service Providers and
Leverage Existing Multi-Market Experience. The Company's marketing emphasis is
on two types of telecommunications service providers. First, the Company focuses
on existing providers who are either replacing their older customer care and
billing systems, augmenting their existing systems to support new features and
services or adding new customer care and billing systems to enable them to
expand into new geographic markets. Second, the Company focuses on emerging
providers that offer new types of services such as PCS or that are entering
existing service markets newly opened to competition. These emerging providers
require sophisticated and flexible customer care and billing solutions like the
Company's that can be deployed on a timely and cost-effective basis. In
addition, as the telecommunications industry continues to evolve, with
individual providers offering more diverse services, these providers require
increasingly flexible customer care and billing systems. The Company believes
that its experience in providing customer care and billing services to multiple
markets within the telecommunications industry, including local exchange, long
distance and wireless, provides it with a significant competitive advantage.
Expand Internal Software Development. Saville is focusing its internal
software development on capturing and refining its existing software features
into Company-standard software modules, which are designed to work together and
serve as the base for further customized systems. In addition, the Company
continues to expand the number of features available in its modules. The Company
expects that this effort will continue to reduce the amount of customization
required for each
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system and enable customers to initiate services more rapidly. The Company
believes that these improvements will be particularly important for the more
complex customer care and billing requirements expected to arise as the
telecommunications market converges and single providers offer a more varied
array of services.
Expand Direct Sales and Develop Strategic Relationships. The Company
continues to invest significantly in the development of a direct sales force and
sales support organization to focus on new customer opportunities in North
America and Europe. The Company is also seeking to create additional strategic
distribution and marketing alliances as a means of expanding new business
opportunities and entering new markets. For example, the Company provides
customer care and billing solutions to divisions of AT&T and Sprint in a number
of markets now being addressed by those divisions, as well as to GTE Data
Services Incorporated ("GTEDS"), a company that is in the business of defining
end user requirements and software integration in the domestic and international
telecommunications market.
Support Leading Hardware Platforms Saville intends to continue to
develop and support software for the IBM AS/400 platform, which is widely used
throughout the telecommunications industry and which the Company believes will
continue to be a leading platform for telecommunications billing systems. The
Company has also jointly developed with AT&T a UNIX-based customer care and
billing system, which the Company believes will offer additional opportunities
to provide customer care and billing solutions through AT&T. See "-Customers-
AT&T."
Develop and Offer Complementary Customer Applications. The Company's
long-term strategy includes the expansion of its product offerings to include
software applications complementary to the customer care and billing system. The
Company's software currently interfaces with other aspects of the customer's
operating systems. To the extent the Company successfully expands its suite of
software products, the Company believes that it can take advantage of its
established position in the customer care and billing systems market and
leverage its existing customer accounts and distribution channels to promote the
sale of new product offerings.
PRODUCTS AND SERVICES
The Company's primary business is the development and subsequent
delivery or operation of customer care and billing solutions to meet its
customers' specific needs. Due to the flexibility inherent in the Company's
software and the expertise of its software development personnel, the Company is
able to develop solutions that allow service providers to offer a wide variety
of services as well as collect, process and bill for multiple services on a
single invoice. This functionality is key to enabling telecommunications service
providers to offer on a cost-effective basis, multiple services such as local,
long distance, cellular and data communications.
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The Company's customer relationships typically begin with the Company
providing, on a time and materials basis, system design, customization and
installation services. After the system is in operation, the Company continues
the relationship by providing upgrading, ongoing system management and system
enhancement to accommodate new telecommunications services and technologies. The
customer can choose either to operate the customer care and billing system
directly, resulting in a license fee to the Company, or to retain the Company to
perform all or a substantial part of the customer's customer care and billing
operations in a Company-maintained service bureau, resulting in ongoing
processing fees.
Software Applications Modules
The Company uses its library of proprietary software to provide each of
its customers with a customized customer care and billing solution. The
Company's software makes extensive use of relational databases, which allow
billing rates and other key parameters to be changed without reprogramming the
software code. The Company's software may be grouped into four general
categories: Customer Care, Event Processing, Billing and Post Billing. These
categories include hundreds of discrete software functionalities.
Customer Care. Customer care enables the customer service
representative to interact with the customer and input, maintain and access
customer information beginning with the customer's initial service request and
continuing through the conclusion of service. Key functionalities within this
application include:
Customer Initiation Switch Interface
Bill Cycle Assignment Customer History
Phone Number Assignment Invoice Messaging
Calling Card Assignment System Notation
Inventory Administration Directory Listing
Customer Hierarchy Lead Generation and Management
Customer Search Customer Information Maintenance
Event Processing. Event processing encompasses the collection,
conversion and rating of customer call detail records used in the production of
the service invoice. Key functionalities within this application include:
Data Collection Rating
Data Distribution Reporting
Conversion/Reformatting
Error Management Validation
External Interfaces Guiding
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Billing. Billing integrates customer usage-based charges with recurring
charges and other credits and adjustments to create the periodic service
invoice. Key functionalities within this application include:
Multiple Bill Pulls Auto Balancing
Rerating Recurring Charges
Discounting Taxation
Invoice Generation Quick Invoicing
Invoice Hierarchy Management Reporting
Multi-Currency Revenue Reporting
Multi-Language
Post Billing. Post billing is the primary interface with the service
provider's accounting system and relates to the invoicing and remittance of the
periodic service invoice. Key functionalities within this application include:
Payment Processing Financial Reporting
Adjustments Commissioning
Deposit and Deposit Interest Accounting Interface
Accounts Receivable Trouble Reporting
Collections and Treatment
Development and Enhancement Services
Saville provides ongoing development and enhancement services to nearly
all of its customers on a time and materials basis. The Company establishes a
relationship with a customer at the design stage, when the Company assists the
customer in designing the required customer care and billing system based on the
customer's market segment, network configuration and protocols and other
customer-specific requirements. The Company then develops customized
applications of the Company's base software for the customer. Once the Company
develops a customer care and billing system, its relationship with the customer
usually continues with ongoing development, maintenance, training, systems
analysis and further expansion of systems to accommodate new products and
technologies. Frequently, a customer will initially retain Saville because of
its ability to deliver a customer care and billing system in a relatively short
period of time.
Service Bureaus
A customer of the Company may elect to contract with the Company to
operate its customer care and billing system in a Company-maintained service
bureau. In a typical service bureau arrangement, the Company develops the
customer's customer care and billing system and installs it in one of the
Company's technical data centers. The customer then transmits its customer usage
data to the
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Company, or the Company obtains the information directly from the switch. In
either case, the Company processes and rates the information using the customer
care and billing system developed for the customer and then either (i) transmits
the processed and rated information to a third party or the customer for
printing and mailing or, less frequently, (ii) prints and mails the invoice.
Customers are charged a negotiated fee for utilizing the Company's
service bureaus. This fee is typically comprised of a charge per invoice
produced and a charge per call based on the amount and type of information
contained in the bill's call detail record. The Company's service bureau
contracts typically have three-year terms.
Sales and Marketing and Customer Support
Historically, the Company's sales and marketing activities were handled
by a small group of senior executives of the Company whose experience in the
telecommunications industry, coupled with Saville's reputation for providing
high-quality software solutions, resulted in "word-of-mouth" sales. During 1995
and 1996, the Company established a direct sales organization to support the
sales and marketing activities of senior executives. The Company's sales
strategy is to pursue strategic relationships with its customers through a
consultative sales process, working closely with customers to understand and
define their needs and determine how they can be addressed by the Company's
products. The Company, through ongoing sales, maintenance, training and systems
analysis activities, maintains close contact with its existing customers in
order to determine the customers' evolving requirements for updates and
enhancements to their customer care and billing systems. For new customers, the
Company generally has a lengthy sales cycle that typically requires involvement
of the Company's senior executives and systems design personnel.
The Company's sales force focuses on local exchange, long distance and
wireless (cellular, satellite, paging and PCS) opportunities, as well as the
convergence of these services primarily in North America. The Company believes
that it has significant growth opportunities outside North America due to
increased telecommunications liberalization and the resulting competition in
these markets. To date, the Company has primarily pursued these opportunities
through certain of its existing customers who are expanding into other markets
around the world. The Company plans to continue to expand its sales and
marketing efforts in these markets through the expansion of its direct sales
force, particularly in its Galway, Ireland location, and through the
establishment of additional strategic distribution and marketing alliances.
During 1994, 1995 and 1996, sales by Saville Systems PLC and Saville
Canada, Ltd. ("Saville Canada") represented approximately 95.1%, 83.9% and 54.4%
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respectively, of the Company's total revenues. A significant portion of sales by
Saville Systems PLC are made to United States-based customers. United States-
based customers who purchase products from either Saville Systems PLC or Saville
Systems, Inc. ("Saville U.S.") may, in turn, deploy the products sold to them
outside of the United States. The Company's business outside the United States
is subject to risks such as fluctuations in exchange rates, difficulties or
delays in developing and supporting non-English language versions of the
Company's products, political and economic conditions in various jurisdictions,
unexpected changes in regulatory requirements, tariffs and other trade barriers,
difficulties in staffing and managing foreign operations and longer accounts
receivable payment cycles. There can be no assurance that such factors will not
have a material adverse effect on the Company's revenues outside the United
States or its overall financial performance.
The Company has technical support capabilities in Canada and the
Republic of Ireland. The Company is expanding its customer service and support
capabilities to provide technical support to its customers on a 24-hour per day,
7-day per week basis. The Company believes that it is essential to provide a
high level of reliable service to customers in order to solidify customer
relationships and to be the vendor of choice when new services or system
expansions are sought by its customers.
CUSTOMERS
The Company provides its software and services to a range of
telecommunications service providers, including those providing local exchange,
long distance, wireless, and audio- and video-conferencing services. The
Company's typical customers are small- to medium-sized telecommunications
service providers that require complete customer care and billing systems, and
large service providers that require the Company's software and services to
support new market expansions or as integral components of larger customer care
and billing systems.
During 1995 and 1996, the Company's four largest customers accounted
for approximately 73.4% and 64.5%, respectively, of the Company's total
revenues. AT&T, Energis and AT&T Canada Long Distance Services Corp., each
accounted for over 10% of the Company's total revenues in 1995, and AT&T,
Billing Information Concepts Inc., and Ameritech Communications Inc. each
accounted for 34.9%, 11.9% and 10.8%, respectively, of the Company's total
revenues in 1996. This concentration of customers can cause the Company's
revenues and earnings to fluctuate from quarter to quarter, based on these
customers' requirements and the timing of their orders. Although the Company
believes it has good relationships with its largest customers and has in the
past received a substantial portion of its revenues from repeat business with
established customers, none of the Company's major customers has a significant
obligation to purchase additional products or services. Therefore, there can be
no assurance that any of the Company's major customers will continue to purchase
new systems, systems enhancements and services in amounts similar to
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previous years. A significant decrease in business from any of its major
customers would have a material adverse effect on the Company's results of
operations and financial condition. Additionally, the acquisition by a third
party of one of the Company's major customers could result in the loss of that
customer and have a material adverse effect on the Company's results of
operations and financial condition.
A description of the types of work performed and services provided by
the Company for certain of its customers follows.
AT&T
AT&T is the largest telecommunications company in the United States.
The Company began its relationship with AT&T in 1993 by providing domestic
customer care and billing services. The Company currently provides customer care
and billing services to four divisions of AT&T. The Company worked with AT&T to
develop the customer care and billing system for a program designed to provide
AT&T calling cards to international telecommunications customers with direct
billing to the user's commercial credit card. The Company also developed a
single feature, inexpensive method of billing AT&T's small business customers.
The Company provides ongoing support and service for this software. The Company
has also developed UNIX-based billing software jointly with AT&T. See
"-Strategy."
Telus Communications (Edmonton), Inc.
Telus Communications (Edmonton), Inc. ("Telus") is an Edmonton-based
public telecommunications provider owned by Telus Corp. The Company began
designing a long distance customer care and billing system for Telus in 1982.
The Company continues to provide ongoing support and maintenance to Telus.
Energis
The Company has been working with Energis since 1994, when Energis
began providing long distance services in the United Kingdom. The Company
developed a complete turnkey customer care and billing system for Energis to
support its entry into the long distance market. The Company also provided on-
site facilities management to Energis, including systems maintenance, technical
support and operational staffing.
Sprint Corporation
In 1996, Global One was the third largest long distance service
provider in the United States. The Company has provided domestic and
international customer care
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and billing services to two divisions of Sprint for the past three years. For
one division, the Company provides long distance customer care and billing
systems to international subsidiaries of Sprint and expects to continue to
support Sprint's entry into certain new international markets. For a second
division, the Company implemented an automated customer care and billing system
that manages the on- demand use of video conferencing products and services,
including network usage, access fees, equipment purchases and other charges.
AT&T Canada Long Distance Services Corp.
In 1992, the Company began working with AT&T Canada Long Distance
Services Corp., formerly Unitel Communications Inc., Canada's second largest
long distance carrier, to develop a customer care and billing system that would
support both residential and small business customers. The Company enhanced its
base software modules to support AT&T Canada Long Distance Services Corp.'s
entrance into the Canadian long distance market. The Company has continued to
upgrade and enhance this customer care and billing system for AT&T Canada Long
Distance Services Corp. since installation in order to bill for new features,
such as calling card billing, and to interface with other network technology and
operating systems.
Frontier
Frontier is a local exchange carrier located in Rochester, New York,
the first competitive local exchange market in the United States. Frontier
contracted with the Company in 1994 to provide domestic customer care and
billing services that integrate local, long distance and cellular services on a
single invoice. Saville operates the customer care and billing system through
its Toronto service bureau under a three year agreement.
Ameritech Communications, Inc.
Ameritech Communications, Inc. ("ACI") is a Regional Bell Operating
Company with its principal offices located in Rosemont, IL. The company signed a
contract with ACI in September of 1996 for the licensing of its billing and
customer care software application. In addition, the company will also assist
Ameritech in the operation and management of this software in ACI's data center.
Billing Information Concepts, Inc.
The Company entered into a contract with Billing Information Concepts,
Inc. ("BIC") in June of 1996 for the license of the Company's core software as
well as additional software modifications. BIC will operate this software in its
billing service bureau located in San Antonio, Texas and serve customers
throughout the United States.
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Other Customers Added During 1996
In addition to ACI and BIC the Company also added the following new
customers during 1996; GTE Long Distance, NetSource Communications, Inc., and
Toll Free Cellular.
COMPETITION
The market for telecommunications customer care and billing systems is
highly competitive, and the Company expects this competition to increase. The
Company competes with both independent providers of customer care and billing
systems and services and with the internal billing departments of
telecommunications service providers. The Company expects that the continued
growth of the telecommunications industry will encourage new competitors to
enter the telecommunications customer care and billing market in the future.
The Company believes that the principal competitive factors in its
market include responsiveness to client needs, timeliness of implementation,
quality of service, price, project management capability and technical
expertise. The Company also believes that its ability to compete depends in part
on a number of competitive factors outside its control, including the
development by others of software that is competitive with the Company's
services and products, the price at which competitors offer comparable services
and products, the extent of competitors' responsiveness to customer needs and
the ability of the Company's competitors to hire, retain and motivate key
personnel.
In addition, the Company competes with a number of companies that have
substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition than the Company. As a result,
the Company's competitors may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the promotion and sale of their products than can the Company.
PROPRIETARY RIGHTS AND LICENSES
The Company does not currently hold any patents and relies upon a combination of
statutory and common law copyright, trademark and trade secret laws to establish
and maintain its proprietary rights to its products. The Company believes that,
because of the rapid pace of technological change in the telecommunication and
software industries, the legal protections for its products are less significant
factors in the Company's success than the knowledge, ability and experience of
the Company's employees, the frequency of product enhancements and the
timeliness and quality of support services provided by the Company.
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The Company generally enters into confidentiality agreements with its
employees, consultants, clients and potential clients and limits access to, and
distribution of, its proprietary information. Use of the Company's software
products is usually restricted to specified locations and is subject to terms
and conditions prohibiting unauthorized reproduction or transfer of the software
products. The Company also seeks to protect the source code of its software as a
trade secret and as a copyrighted work.
RESEARCH AND DEVELOPMENT
Prior to 1994, Company software was developed for customer
applications, and related expenses were included as part of cost of services in
those periods. In 1994, the Company commenced internally funded research and
development efforts. Research and development expenses were $1.6 million and
$4.2 million in 1995 and 1996, respectively. The Company intends to continue to
increase its investment in research and development efforts in the future.
EMPLOYEES
As of December 31, 1996, the Company employed a total of 624 employees.
None of the Company's employees is represented by a labor union. The Company has
experienced no work stoppages and believes that its employee relations are good.
The Company believes that its facilities are adequate for its current
needs and that suitable additional space will be available as required.
ITEM 2. PROPERTIES
The Company leases space at its four office locations: Galway, Ireland;
Toronto, Ontario; Edmonton, Alberta and Burlington, Massachusetts. The Galway
office is the Company's corporate headquarters and is used for sales and
marketing, software development and customer support. The Burlington office is
primarily used for sales and marketing, corporate development and finance. The
Edmonton and Toronto locations are primarily used for software development,
customer support and service bureau operations.
The following shows information concerning the Company's leased
facilities:
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Location Square Footage Lease Expiration
Galway, Ireland 4,000 April 1, 2004
Burlington, Massachusetts 5,079 November 30, 1998
Edmonton, Alberta 66,588 April 30, 2000
Toronto, Ontario 24,030 January 31, 2005
Toronto, Ontario 21,479 June 30, 2005
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company,
through solicitation of proxies or otherwise, during the last quarter of the
year ended December 31, 1996.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and positions of the
current executive officers of the Company.
Name Age Position
---- --- --------
Bruce A. Saville 52 Chairman of the Board of Directors
John J. Boyle, III 50 President, Chief Executive Officer
and Director
Marc J. Venator 40 Chief Operating Officer
Padraig W. Kenny 36 Senior Vice President, Europe
Michael A. Shulist 41 Senior Vice President, Global
Consulting Services
John J. Kiley 41 Senior Vice President, Global
Sales and Marketing
Christopher Hanson 38 Chief Financial Officer
Andrew Campbell 36 Senior Vice President of Research
and Development
Mr. Saville founded the Company in 1982 and served as the Company's
President and Chief Executive Officer until becoming the Company's Chairman of
the Board of Directors in August 1994. Prior to founding the Company, Mr.
Saville served as the General Manager of Compu/Data Ltd., a computer service
bureau, from 1976 until 1982. From 1974 to 1976, Mr. Saville served as Manager
of Systems and Procedure for Northern Telephone Limited, a telephone company.
Prior to that time, Mr. Saville was a programmer and Programmer/Systems Analyst
for Goodyear Tire & Rubber Company and then for the Canada System Group.
Mr. Boyle has served as the Company's President and Chief Executive
Officer since August 1994. From 1981 to August 1994, Mr. Boyle served in various
management positions with CSC Intelicom, a global supplier of information
technology, most recently as Senior Vice President of Work Process/Network
Practice. Prior to 1981, Mr. Boyle held various management positions with New
England Telephone & Telegraph Company over the course of 14 years.
Mr. Venator served as Saville's Chief Financial Officer from April 1995
until becoming Chief Operating Officer in March 1997. From March 1992 to April
1995, Mr. Venator was Corporate Controller for Systems Software Associates,
Inc., a provider of applications software to industrial businesses worldwide.
Mr. Venator served as Manager, Corporate Financial Reporting for the Quaker Oats
Company, a manufacturer of foods, pet foods and beverages, from November 1988 to
March 1992. Prior to November 1988, Mr. Venator served for three years as
Manager, Corporate
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Reporting of Gould, Inc., and for seven years with Coopers & Lybrand in various
audit positions.
Mr. Kenny has served as Senior Vice President, Europe since joining the
Company in May 1995. From March 1990 to May 1995, Mr. Kenny served in various
positions with AT&T, most recently as Project Manager of AT&T wireless services.
Prior to 1990, Mr. Kenny served for 12 years with Telecom Eireann, a
telecommunications operating company in the Republic of Ireland, most recently
as Head of Marketing in the International Division.
Mr. Kiley has served as Senior Vice President, Global Sales and
Marketing of the Company since October 1995. From January 1994 to September
1995, Mr. Kiley served as President and Chief Operating Officer of Performance
Software, Inc., a provider of commercial UNIX server based automated software
testing products and services. From November 1992 to November 1993, Mr. Kiley
served as Vice President, Consulting of Oracle Corp., a provider of systems
integration, application development and consulting services. From January 1979
to November 1992, Mr. Kiley served in a variety of positions, including most
recently Vice President Eastern Sales, with Comshare Inc., a software provider.
Mr. Shulist has served as Senior Vice President, Global Consulting
Services of the Company since March 1995. From June 1991 to March 1995, Mr.
Shulist served in various positions with AT&T Canada Long Distance Services
Corps, a long distance provider in Canada, most recently as Vice President of
Customer and Network Maintenance. Mr. Shulist was a Director in charge of
Customer Services Development at Bell Canada, a telecommunications company, from
August 1990 to June 1991.
Mr. Hanson has served as Saville's Chief Financial Officer since the
beginning of March 1997. From November 1991 to March 1997, Mr. Hanson was in
charge of tax and treasury operations at System Software Associates, Inc. most
recently serving as its Treasurer. Prior to November 1991, Mr. Hanson held
various tax positions with Coopers & Lybrand over the course of 10 years.
Mr. Campbell has served as Senior Vice President of Research and
Development of the Company since joining in January 1997. From February 1990 to
December 1996, Mr. Campbell served in various positions with BHA Computer, an
Australian-based developer of customer care and billing software, most recently
as the General Manager for the company's projects division.
Executive officers of the Company are elected by and serve at the
discretion of the Board of Directors. There are no family relationships among
any of the executive officers or directors of the Company.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
MARKET INFORMATION AND HOLDERS
American Depositary Shares ("ADSs") representing the Ordinary Shares of
the Company have been traded on the Nasdaq National Market under the symbol
"SAVLY" since November 16, 1995. Each ADS represents one Ordinary Share of the
Company. Prior to November 16, 1995, neither the ADSs nor the Company's Ordinary
Shares were publicly traded. Neither the ADSs nor the Ordinary Shares of the
Company are traded on any market, foreign or domestic, other than the Nasdaq
National Market. The following table sets forth, for the periods indicated, the
high and low sales prices of the ADSs as reported on the Nasdaq National Market.
1996
----
High Low
---- ---
First Quarter............................... $19.00 $13.875
Second Quarter.............................. 34.75 18.625
Third Quarter............................... 37.00 18.00
Fourth Quarter.............................. 47.875 33.00
1995
----
High Low
---- ---
Fourth Quarter.............................. $17.375 $9.50
(November 16, 1995 through
December 31, 1995)
The depositary for the American Depositary Receipts ("ADRs")
representing the ADSs is the Bank of New York (the "Depositary"), 48 Wall
Street, New York, New York 10286. On March 3, 1997, the Company had
approximately 80 holders of Ordinary Shares of record. The Bank of New York, as
Depositary, is the holder of record of the Ordinary Shares evidenced by ADSs. On
March 3, 1997, the closing price of the Company's ADSs on the Nasdaq National
Market was $34.375.
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DIVIDENDS
On September 25, 1995, the Company paid a cash dividend of $3.0 million
on its Ordinary Shares, which it determined to pay primarily due to the
incurrence of certain tax liabilities by its majority shareholders as a result
of their ownership interests in the Company and the Company's classification at
that time as a "Controlled Foreign Corporation." Except for such payment,
Saville has never declared or paid any cash dividends on its Ordinary Shares.
The Company currently intends to retain all future earnings to finance future
operations and therefore does not anticipate paying any cash dividends in the
foreseeable future. Moreover, under the Companies Acts of the Republic of
Ireland, dividends may only be paid out of the profits of the Company legally
available for distribution.
TAXATION
The statements of United States, Irish and Canadian tax laws set out
below are based on the laws, regulations, administrative rulings and practices
of the United States Internal Revenue Service (the "IRS"), the Revenue
Commissioners of Ireland and Revenue Canada in force and as interpreted by the
relevant taxation authorities as of December 31, 1996 and are subject to any
changes in United States, Irish or Canadian law, or in the interpretation
thereof by the relevant taxation authorities, or in the double taxation
conventions between the Republic of Ireland and the United States (the
"Conventions") (the Conventions were ratified in 1951 and are currently being
renegotiated) and between the Republic of Ireland and Canada, occurring after
such date.
The following is a general summary of certain Republic of Ireland and
United States federal income tax consequences of the purchase, ownership and
disposition of ADSs evidenced by ADRs to U.S. Holders. For purposes of this
discussion, a "U.S. Holder" means an individual citizen or resident of the
United States for United States federal income tax purposes, corporations, or
partnerships created or organized under the laws of the United States or any
state thereof or the District of Columbia, or estates or trusts which are
residents in the United States for United States Federal Income tax purposes, in
each case who (i) is not also resident of, or ordinarily resident in, the
Republic of Ireland for Irish tax purposes, (ii) is not engaged in trade or
business in the Republic of Ireland through a permanent establishment and (iii)
does not own, directly, indirectly or by attribution, 10% or more of the shares
of the Company (by vote or value).
This summary is of a general nature only and does not discuss all
aspects of United States and Irish taxation that may be relevant to a particular
investor. The summary deals only with ADRs held as capital assets and does not
address special classes of purchasers, such as dealers in securities, U.S.
Holders whose functional currency is not the United States dollar and certain
U.S. Holders (including, but not
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limited to, insurance companies, tax-exempt organizations, financial
institutions and persons subject to the alternative minimum tax) who may be
subject to special rules not discussed below. In particular the following
summary does not address the adverse tax treatment of U.S. Holders who own,
directly, or by attribution, 10% or more of the Company's outstanding voting
stock in the event that the Company were to be classified as a "Controlled
Foreign Corporation" for United States federal income tax purposes. Although the
Company was not classified as a Controlled Foreign Corporation at December 31,
1996, there can be no assurance that it will not be a Controlled Foreign
Corporation in the future.
OWNERS OF ADSs ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE UNITED STATES FEDERAL, STATE AND LOCAL TAX CONSEQUENCES, AS WELL
AS WITH RESPECT TO THE TAX CONSEQUENCES IN THE REPUBLIC OF IRELAND AND OTHER
JURISDICTIONS, OF THE OWNERSHIP OF ADSs AND THE ORDINARY SHARES REPRESENTED
THEREBY APPLICABLE IN THEIR PARTICULAR TAX SITUATIONS.
For purposes of the Conventions and the Internal Revenue Code of 1986,
as amended (the "Code"), U.S. Holders will be treated as the owners of the
Ordinary Shares represented by ADSs evidenced by ADRs.
TAXATION OF THE COMPANY
Republic of Ireland Taxation. For Irish tax purposes, the residence of
a company is in the jurisdiction where the central management and control of the
company is located. Companies which are resident in the Republic of Ireland are
subject to Irish corporation tax on their total profits (wherever arising and,
generally, whether or not remitted to the Republic of Ireland). The question of
residence is essentially one of fact. It is the present intention of the
Company's management to manage and control the Company from the Republic of
Ireland, so that the Company will be resident in the Republic of Ireland.
The standard rate of Irish corporation tax on both trading and non-
trading income is currently 38%. However, in 1980, the Irish government enacted
legislation, with the approval of the European Union, enabling companies to pay
a reduced 10% rate of tax on profits from the manufacture of goods in the
Republic of Ireland and certain other activities deemed to be the manufacture of
goods. Current legislation provides that the reduced rate will be available
until 2010. Certain activities of the Company in the Republic of Ireland
currently qualify for the 10% rate. To qualify for the 10% tax rate, the Company
must satisfy certain conditions, including achieving target employment levels in
the Republic of Ireland and rendering computer services there. Although the
Company believes that it currently satisfies these conditions, there can be no
assurance that the Company will continue to do so. If the Company
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could no longer qualify for this 10% tax rate or if the tax laws were rescinded
or changed, the Company's net income could be materially adversely affected.
United States Taxation. Under the Convention relating to income
taxation (the "Income Tax Convention"), the Company will generally not be
subject to United States federal income tax unless it engages in a trade or
business in the United States through a permanent establishment. The Company
currently operates in the United States through Saville Systems, Inc. ("Saville
U.S."), its subsidiary. The Company intends to conduct its business activities
in a manner that will not result in its being considered to be engaged in a
trade or business or to have a permanent establishment in the United States,
even though Saville U.S. is a United States taxpayer. Dividends paid by Saville
U.S. to the Company will generally be subject to United States withholding tax
at the rate of 5%, which tax should generally be creditable by the Company
against Irish corporation tax. Saville U.S. is currently subject to United
States federal and state income taxation at a rate of approximately 41%.
Canadian Taxation. The Company carries on business in Canada through
Saville Canada. Saville Canada is currently subject to Canadian federal and
provincial taxation at a rate of approximately 45%. Entities other than Saville
Canada are subject to Canadian taxation only with respect to income derived
by them from Canada in the form of royalties, license fees, interest, dividends
and similar payments, from the disposition of "taxable Canadian property" (as
defined in the Income Tax Act (Canada)) or from business activities carried on
through permanent establishments in Canada as determined under tax treaties
entered into by Canada with the Republic of Ireland and the United States.
Dividends paid by Saville Canada to the Company will generally be subject to
Canadian withholding tax at a rate of 15%, which tax should generally be
creditable against Irish corporation tax.
TAXATION OF DIVIDENDS
Republic of Ireland Taxation. The Company does not expect to pay cash
dividends for the foreseeable future. Should the Company begin paying dividends,
the dividends will carry an imputed tax credit (the "Tax Credit"). The amount of
the Tax Credit is calculated as a weighted average of tax credits applicable to
different portions of the dividend, which vary depending on the nature of the
income out of which the dividend is paid. Accordingly, dividends paid out of
profits taxable at the standard corporation tax rate of 38% carry a Tax Credit
equal to 23/77 of the amount of such dividend; dividends paid out of profits
taxable at the 10% incentive corporation tax rate carry a Tax Credit equal to
1/18 of the amount of such dividend. Dividends paid out of income not subject to
tax do not carry a Tax Credit.
The Company would be required, when paying a dividend in respect of the
Ordinary Shares, to account to the Revenue Commissioners of Ireland for a
payment
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known as advance corporation tax ("ACT") equal to the amount of the Tax Credit.
ACT would be available for setoff against the corporation tax liability of the
Company on its profits exclusive of taxable gains.
Persons who are neither resident nor ordinarily resident in the
Republic of Ireland do not have an Irish income tax liability on dividends
received from Irish resident companies. Although a net Irish income tax is
imposed, the income tax liability of each such person is restricted to the
amount of the Tax Credit attaching to the dividend and, as the Tax Credit is
allowed against the restricted liability, the Irish income tax liability is
fully offset by the Tax Credit. Individuals are liable for Irish health and
employment levies of 2.25% on such dividends. There is no Irish withholding tax
on dividends paid by an Irish resident company.
United States Taxation. For United States federal income tax purposes,
the gross amount (i.e., including the amount of Tax Credit) of any dividend paid
(to the extent of the current or accumulated earnings and profits of the
Company) will be included in gross income and treated as foreign source dividend
income in the year the shareholder becomes entitled to such dividend. The
dividend will not be eligible for the dividends-received deduction allowed to
United States corporations. The amount includable in income will be the United
States dollar value of the payment on the date of payment regardless of whether
the payment is in fact converted into United States dollars. Generally, gain or
loss (if any) resulting from currency fluctuations during the period from the
date any dividend is paid to the date such payment is converted into United
States dollars will be treated as ordinary income or loss. The IRS has ruled
privately that a U.S. Holder will be eligible for a United States foreign tax
credit under Article XIII of the Income Tax Convention for the Irish tax imposed
on a dividend paid by an Irish company. The amount of the allowable foreign tax
credit will not exceed the amount of the Irish Tax Credit described above.
Although private letter rulings are not binding authority and are directed only
to the taxpayer who requests them, they are considered persuasive in determining
the position of the IRS.
If the U.S. Holder is a United States partnership, trust or estate, the
foreign tax credit will be available only to the extent that the income derived
by such partnership, trust or estate is subject to United States tax as the
income of a resident either in its hands or in the hands of its partners or
beneficiaries, as the case may be.
TAXATION OF CAPITAL GAINS
A U.S. Holder is not subject to Irish capital gains tax on the disposal
of ADSs quoted on the Nasdaq National Market. It is the intention of the
Company's management to continue the Company's quotation on the Nasdaq National
Market.
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Subject to the discussion below under the heading "Passive Foreign
Investment Company Considerations," a U.S. Holder will be liable for United
States federal income tax on such gains to the same extent as on any other gains
from sales or dispositions of shares.
A U.S. Holder that is liable for both Irish and U.S. tax on a gain on
the disposal of the ADSs will generally be entitled, subject to certain
limitations and pursuant to the Income Tax Convention, to credit the amount of
Irish capital gains or corporation tax, as the case may be, paid in respect of
such gain against such U.S. Holder's United States federal income tax liability.
Such gain is, however, likely to be considered to be from sources within the
United States, which may effectively limit the amount of foreign tax credit
allowed to the U.S. Holder.
PASSIVE FOREIGN INVESTMENT COMPANY CONSIDERATIONS
The Company will be classified as a passive foreign investment company
("PFIC") for United States federal income tax purposes if either (i) 75% or more
of its gross income is passive income or (ii) on average for the taxable year,
50% or more of its assets (by value or, if the Company so elects or if the
Company is classified as a Controlled Foreign Corporation, by adjusted tax
bases) produce or are held for the production of passive income. Based on an
analysis of its income and assets during 1996, the Company believes that it is
not a PFIC. While there can be no assurance, the Company expects, based on
projections of its income and assets and the manner in which the Company intends
to manage its business, that it will not be a PFIC. The Company will continue to
monitor its status and will, promptly following the end of each taxable year,
notify shareholders if it believes that it is properly classified as a PFIC for
that taxable year.
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U.S. INFORMATION REPORTING AND BACKUP WITHHOLDING
Generally, the amount of dividends paid to U.S. Holders of ADSs, the
name and address of the recipient and the amount, if any, of tax withheld must
be reported annually to the IRS. A similar report is sent to the U.S. Holder.
Backup withholding tax at the rate of 31% will apply to certain
payments made to U.S. Holders who fail to furnish certain identifying
information under the United States information reporting rules. Amounts
withheld from payments will be allowed as a credit against such U.S. Holders'
United States federal income tax liability.
IRISH CAPITAL ACQUISITIONS TAX
Irish capital acquisitions tax ("CAT") applies to gifts and
inheritances (i) where the person making the gift or inheritance is domiciled in
the Republic of Ireland at the date of the gift or inheritance or (ii) to the
extent that the property of which the gift or inheritance consists is situated
in the Republic of Ireland at the date of the gift or inheritance. The person by
whom CAT is primarily payable is the person who receives the gift or
inheritance. Persons who are secondarily liable include the donor, an agent,
personal representative, trustee or other person in whose care the property
constituting the gift or inheritance or the income therefrom is placed. All
taxable gifts and inheritances received by an individual since June 2, 1982 are
aggregated and only the excess over a certain tax-free threshold is taxed. The
tax-free threshold is dependent on the relationship between the deceased/donor
and successor/donee and the aggregation of all previous gifts and inheritances.
The tax-free threshold amounts currently range from IR(pound)12,370
(approximately $20,931 at December 31, 1996) in the case of persons who are not
related to one another to IR(pound)24,740 (approximately $41,862 at December 31,
1996) in the case of gifts and inheritances received from a brother, sister or
from a brother or sister of a parent or from a grandparent to IR(pound)185,550
(approximately $313.969 at December 31, 1996) in the case of gifts and
inheritances received from a parent. Gifts and inheritances passing between
spouses are exempt from CAT. CAT is charged at progressive rates ranging in the
case of gifts from 15% to 30% and in the case of inheritances from 20% to 40%.
Although ADSs may be held by persons who are neither domiciled nor
resident in the Republic of Ireland, the underlying Ordinary Shares are deemed
to be situated in the Republic of Ireland because the Company is required to
maintain its Ordinary Share register in the Republic of Ireland. Accordingly,
ADSs may be subject to CAT notwithstanding the fact that the holder may be
domiciled and/or resident outside of the Republic of Ireland. The Convention
between the United States and the Republic of Ireland relating to estate taxes
generally provides for CAT paid on inheritances in the Republic of Ireland to be
credited against tax payable in the United States and for tax paid in the United
States to be credited against tax
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payable in the Republic of Ireland, based on priority rules set forth in the
Convention, in a case where an ADS is subject to both Irish CAT with respect to
inheritance and U.S. federal estate tax. The Convention does not apply to gifts.
In addition to gift and inheritance taxes, a probate tax of 2% applies
to the value of all assets passing under the will or intestacy of an Irish-
domiciled person other than to the spouse of the deceased. Where the deceased
was not domiciled in the Republic of Ireland, only assets situated in Ireland
are liable for this tax.
UNITED STATES GIFT AND ESTATE TAX
An individual U.S. Holder will be subject to United States gift and
estate taxes with respect to the ADRs in the same manner and to the same extent
as with respect to other types of personal property.
IRISH STAMP DUTY
Irish stamp duty, which is tax on certain documents, is payable on all
transfers of Ordinary Shares in companies incorporated in the Republic of
Ireland wherever the instrument of transfer may be executed. In the case of a
sale, stamp duty will be charged at the rate of IR(pound)1.00 for every
IR(pound)100 (or part thereof) of the amount of value of the consideration
(i.e., purchase price). Where the consideration for the sale is expressed in a
currency other than Irish pounds, the duty will be charged on the Irish pound
equivalent calculated at the rate of exchange prevailing on the date of the
transfer. In the case of a transfer by way of gift (subject to certain
exceptions) or for a consideration less than the market value of the shares
transferred, stamp duty will be charged at the above rate on such market value.
A transfer to the Depositary or custodian of Ordinary Shares for
deposit under the Deposit Agreement in return for ADRs will be similarly
chargeable with stamp duty as will a transfer of Ordinary Shares from the
Depositary or the custodian upon surrender of an ADR for the purpose of the
withdrawal of the underlying Ordinary Shares in accordance with the terms of the
Deposit Agreement, unless, in either case, the transfer does not relate to a
sale or contemplated sale or any other change in the beneficial ownership of
such Ordinary Shares, in which case the transfer will be chargeable with nominal
duty of IR(pound)10.
Transfers of ADRs are exempt from Irish stamp duty as long as the ADSs
are quoted on the Nasdaq National Market or any recognized stock exchange in the
United States.
The person accountable for payment of stamp duty is the transferee or,
in the case of a transfer by way of gift or for a consideration less than the
market value, both parties to the transfer. Stamp duty is normally payable
within 30 days after the
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date of execution of the transfer. Late or inadequate payment of stamp duty will
result in liability to interest, penalties and fines.
IRISH EXCHANGE CONTROL REGULATIONS
Irish exchange control regulations ceased to apply from and after
December 31, 1992. Except as indicated below, there are no restrictions on non-
residents of the Republic of Ireland dealing in domestic securities, which
includes shares or depositary receipts of Irish companies such as the Company,
and dividends and redemption proceeds are freely transferable to non-resident
holders of such securities.
The Financial Transfers Act, 1992 gives power to the Minister for
Finance of the Republic of Ireland to make provision for the restriction of
financial transfers between the Republic of Ireland and other countries.
Financial transfers are broadly defined and include all transfers which would be
movements of capital or payments within the meaning of the treaties governing
the European Communities. The acquisition or disposal of American Depositary
Receipts representing shares issued by an Irish incorporated company and
associated payments may fall within this definition. In addition, dividend,
redemption and liquidation payments in respect of shares in an Irish
incorporated company would fall within this definition. Currently, orders under
this Act prohibit any financial transfer to or by the order of or on behalf of
residents of Iraq or Libya, unless permission for the transfer has been given by
the Central Bank of Ireland.
The Company does not anticipate that orders under the Financial
Transfers Act, 1992 will have a material effect on its business.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is attached as Appendix A.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by this Item is attached as Appendix B.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is attached as Appendix C.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no disagreements on accounting and financial disclosure
matters.
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PART III
ITEMS 10-13.
The information required for Part III in this Annual Report on Form 10-
K is incorporated by reference from the Company's definitive proxy statement for
the Company's 1997 Annual General Meeting of Shareholders. Such information is
contained in the sections of such proxy statement captioned "Share Ownership of
Certain Beneficial Owners and Management," "Election of Directors," "Board and
Committee Meetings," "Determination of Ordinary Remuneration of Directors,"
"Executive Compensation," "Certain Relationships and Related Transactions" and
"Compliance with Section 16(a) of the Exchange Act." Information regarding
executive officers of the Company is also furnished in Part I of this Annual
Report on Form 10-K under the heading "Executive Officers of the Registrant."
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) The following documents are incorporated by reference or
included as part of this Annual Report on Form 10-K.
Page
----
1. The following financial statements (and related
notes) of the Company filed as Appendix C hereto
----------
Report of Independent Auditors on Financial
Statements.
Consolidated Balance Sheets at December 31, 1995
and 1996
Consolidated Statements of Income for the
Years Ended December 31, 1994, 1995 and 1996
Consolidated Statements of Changes in
Shareholders' Equity for the Years Ended
December 31, 1994, 1995 and 1996
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1994, 1995 and 1996
Notes to the Consolidated Financial Statements
2. Except for the schedules listed below, all schedules are
omitted as the information required is inapplicable or the
information is presented in the consolidated financial
statements or the related notes.
Schedule II - Valuation and Qualifying Accounts
3. The Exhibits listed in the Exhibit Index immediately preceding the
Exhibits are filed as a part of this Annual Report on Form 10-K.
(b) No Current Reports on Form 8-K were filed by the Company
during the last quarter of the period covered by this report.
-31-
<PAGE>
The following trademarks are mentioned in this Annual Report on Form
10-K: "Saville Systems"
-32-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) 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 on the
31 day of March, 1997.
SAVILLE SYSTEMS PLC
By: /s/ John J. Boyle, III
---------------------------
John J. Boyle, III, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ John J. Boyle, III )
- -------------------------- President, Chief )
John J. Boyle, III Executive Officer )
and Director )
(Principal Executive )
Officer) )
)
/s/ Christopher Hanson )
- -------------------------- Chief Financial- ) March 31, 1997
Christopher Hanson Officer )
(Principal )
Financial Officer) )
)
/s/ Lorraine Kruper )
- -------------------------- Vice President )
Lorraine Kruper and Controller )
(Principal )
Accounting Officer) )
)
/s/ Bruce A. Saville )
- -------------------------- Chairman of the Board )
Bruce A. Saville of Directors )
)
/s/ John A. Blanchard, III )
- -------------------------- Director )
John A. Blanchard, III )
)
-33-
<PAGE>
/s/ Brian E. Boyle )
- ------------------------- Director )
Brian E. Boyle )
)
/s/ William F. Cunningham )
- ------------------------- Director )
William F. Cunningham )
)
/s/ Richard A. Licursi )
- ------------------------- Director )
Richard A. Licursi )
)
/s/ Fergus G. McGovern )
- ------------------------- Director )
Fergus G. McGovern )
)
/s/ David P. Mixer )
- ------------------------- Director )
David P. Mixer )
)
/s/ James B. Murray, Jr. )
- ------------------------- Director )
James B. Murray, Jr. )
)
/s/ John W. Sidgmore )
- ------------------------- Director )
John W. Sidgmore )
-34-
<PAGE>
SAVILLE SYSTEMS PLC
SCHEDULE II (VALUATION AND QUALIFYING ACCOUNTS)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Col. A Col. B Col. C Col. D Col. E
- --------------------------------------------------------------------------------------------------------------------------
Additions Deductions
Balance at Charged to
beginning of To costs & other Balance at end
Description period expenses accounts of period
- ------------------------ ------------------- ----------------- -------------------- ------------------- -----------------------
Allowance for doubtful $ $ $
accounts
31-Dec-94 nil nil
31-Dec-95 nil 370 370
31-Dec-96 370 386 756
</TABLE>
-35-
<PAGE>
Appendix A
----------
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands except per share data)
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $53,920 $30,296 $20,073 $9,309 $4,967
Net income (loss) 11,569 6,382 5,357 13 (343)
Net income (loss) per share 0.61 0.40 0.34 0.00 (0.02)
At December 31 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------
Total assets $56,489 $36,031 $ 9,857 $3,207 $1,606
Long term debt, excluding current portion - 44 689 - 560
</TABLE>
<PAGE>
Appendix B
----------
SAVILLE SYSTEMS PLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(thousands of $, unless otherwise noted)
OVERVIEW
Saville creates innovative, high quality, customized billing and customer care
solutions for service providers in the global telecommunications industry. The
Company utilizes its library of proprietary software to provide its customers
with customized, flexible, scaleable and cost-effective billing systems. Saville
typically continues its relationships with customers by implementing new systems
when the customers enter new service categories or geographic markets and by
further developing and enhancing installed systems in response to its customers'
needs. During the first quarter of 1996 the Company released Saville's
Convergent Billing Platform (TM) (CBP) which is a software solution that
supports billing for multiple services from a single integrated system.
The Company's strategy is to target growth-oriented telecommunications service
providers, leverage its multi-market experience and establish and maintain
long-term relationships with its customers. The successful implementation of the
Company's strategy has resulted in revenue growth over the preceding year of
115.6%, 50.9% and 78.0% in 1994, 1995, and 1996, respectively. The Company's
four largest customers, in aggregate, accounted for 78.9%, 73.4% and 64.5% of
the Company's total revenues in 1994, 1995, and 1996, respectively. AT&T,
Energis, and AT&T Canada each accounted for over 10% of the Company's total
revenues in 1995. AT&T, Billing Information Concepts Inc. and Ameritech
Communications Inc. accounted for 34.9%, 11.9% and 10.8%, respectively, of the
Company's total revenues in 1996.
The Company derives revenues from services and license fees. Services revenue is
comprised of two major components: (1) consulting services and, to a lesser
extent, (2) service bureau operations. Consulting services relate primarily to
the development of new systems, enhancement of existing installed systems and
related customer maintenance and training. This revenue is primarily earned on a
time and material basis. Service bureau operations revenue is earned when a
customer contracts with the Company to operate its billing system in a
Company-maintained service bureau. Services revenue accounted for 87.7%, 82.8%
and 82.5% of total revenues for 1994, 1995 and 1996, respectively. The Company
recognizes revenue from services in the period in which the services are
provided. License fees comprise the remainder of the Company's revenues and are
recognized at the time of delivery of the product to the customer, provided that
the Company has no significant related obligations or collection uncertainties
remaining. Where there are significant obligations related to the development
and enhancement of the software installed, license fees are recorded over the
expected term of the initial customization period.
Cost of services is comprised primarily of the salaries and benefits of software
development, technical, service bureau and client service personnel. It also
includes operating costs of computer equipment, training and travel expenses.
Cost of license fees consist of the commission expense on new license fees
earned by the Company and, to a lesser extent, royalty expense for use by the
Company of software that is incorporated into the Company's base software.
Sales and marketing expenses consist of the salaries, sales commissions and
benefits of those employees involved in this function as well as the related
travel and promotional expenses.
<PAGE>
SAVILLE SYSTEMS PLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(thousands of $, unless otherwise noted)
OVERVIEW (CONTINUED)
Research and development expenses are comprised of the salaries and benefits of
the employees involved in internal software development, travel and related
expenses. Prior to 1994, Company software was developed for customer
applications, and related expenses were included in costs of services in those
periods. In 1994, the Company commenced internally funded research and
development efforts.
General and administrative expenses consist mainly of the salaries and benefits
of management and administrative personnel and general office administration
expenses (rent and occupancy, telephone and other office supply costs) of the
Company. It also includes recruitment expenses, professional fees and
depreciation.
The Company earns significant taxable income in the Republic of Ireland, the
"manufacturing income" of which is taxed at rates substantially lower than tax
rates in the United States and Canada. The Company anticipates that it will
continue to benefit from this tax treatment until the treatment terminates in
2010, although the extent of the benefit could vary from period to period, and
there can be no assurance that the Company's tax situation will not change. If
the Company could no longer qualify for this lower tax rate or if tax laws were
rescinded or changed, the Company's net income would be materially adversely
affected.
RESULTS OF OPERATIONS
The following tables sets forth, for the periods indicated, the percentage of
total revenues represented by certain items in the Company's Consolidated
Statements of Income.
<TABLE>
<CAPTION>
Percentage of Total Revenues
- --------------------------------------------------------------------------------
Year Ended December 31,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Services 82.5% 82.5% 87.7%
License fees 17.5% 17.2% 12.3%
- --------------------------------------------------------------------------------
100.0% 100.0% 100.0%
- --------------------------------------------------------------------------------
Costs and Expenses:
Costs of services 40.9% 40.3% 43.0%
Cost of license fees 0.6% 0.2% 0.2%
Sales and marketing 6.3% 5.0% 6.9%
Research and development 7.7% 5.3% 0.9%
General and administrative 19.9% 22.4% 14.8%
- --------------------------------------------------------------------------------
75.4% 73.2% 65.8%
- --------------------------------------------------------------------------------
Income from operations 24.6% 26.8% 34.2%
Other income, net 2.8% 0.7% 1.3%
- --------------------------------------------------------------------------------
Income before income taxes 27.4% 27.5% 35.5%
Provision for income taxes 5.7% 6.2% 8.0%
- --------------------------------------------------------------------------------
Income before minority interest 21.7% 21.3% 27.5%
Minority interest share in subsidiaries' net
income 0.2% 0.2% 0.8%
- --------------------------------------------------------------------------------
Net income 21.5% 21.1% 26.7%
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
SAVILLE SYSTEMS PLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(thousands of $, unless otherwise noted)
YEARS ENDED DECEMBER 31, 1995 AND 1996
Revenues. Total revenues increased 78.0% from $30.3 million in 1995 to
$53.9 million in 1996 due to overall increases in services revenue and license
fees, as discussed below.
Services. Services revenue increased 77.3% from $25.1 million in 1995 to
$44.5 million in 1996 due to expansion of the Company's client base and
increases in projects for existing clients. Consulting services increased 87.2%
from 1995 to 1996, and service bureau revenues increased 22.3% over the same
period. Approximately 69.3% of the services revenue reported during the year
ended December 31, 1996 was derived from services to customers existing in 1995
compared to 84.2% in the year ended December 31, 1995. The Company attributes
this change to its continued efforts to expand its customer base.
License Fees. License fees revenue increased 81.2% from $5.2 million in
1995 to $9.4 million in 1996 due primarily to license fees for the company's new
software, Saville CBP (TM), that were negotiated during 1996.
Cost of Services. Cost of services expense increased $9.8 million from
$12.2 million in 1995 to $22.1 million in 1996 and increased as a percentage of
services revenue from 48.7% to 49.6%, respectively. The overall increase was
primarily due to expenditures associated with additional personnel hired during
1996 to support the growth of the Company's business.
Cost of License Fees. Cost of license fees expense increased from $65,000
in 1995 to $337,000 in 1996 due to an increase in commission expenses resulting
from the increase in the license fees earned by the Company.
Sales and Marketing. Sales and marketing expense increased 122.4% from
$1.5 million in 1995 to $3.4 million in 1996 and increased as a percentage of
total revenues from 5.0% in 1995 to 6.3% in 1996. During 1996, the Company
continued to develop its direct sales force within the United States and Europe
to support the development of new business. The Company anticipates that its
continued expansion of its sales force in North America and Europe, as well as
its intention to establish a sales presence in Latin America and Asia Pacific,
will increase its sales and marketing expense in fiscal 1997 which may have an
adverse effect on the Company's earnings.
Research and Development. Research and development expense increased
162.2% from $1.6 million in 1995 to $4.2 million in 1996. This increase was due
to increased development efforts by the Company in creating new and enhanced
billing and customer care products, including the Company's Convergent Billing
Platform (TM) (CBP), which was released in the first quarter of 1996. The
Company intends to continue to increase its investment in research and
development efforts in the future and therefore expects that research and
development expenses will continue to increase.
General and Administrative. General, and administrative expense increased
57.8% from $6.8 million in 1995 to $10.7 million in 1996 and decreased as a
percentage of revenues from 23.4% to 19.9%, respectively. The increased
expenditure was attributable to the additional costs of building infrastructure
during 1996 to support the growth in the Company's employee base and the
expansion of the Company's business. Significant areas of increased spending
included additional senior and middle management, and general expenses related
to an increased number of employees. The Company increased the allowance for
doubtful accounts by $386,000 and recorded compensation expense of $73,000 in
connection with certain options that were granted to employees in 1995 and
having an exercise price below the then fair market value.
<PAGE>
SAVILLE SYSTEMS PLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(thousands of $, unless otherwise noted)
YEARS ENDED DECEMBER 31, 1995 AND 1996 (CONTINUED)
Other income, net. Other income, net of other expenses, increased from
$208,000 in 1995 to $1.5 million in 1996. This increase was primarily the result
of interest earned on cash and cash equivalents on the net proceeds from the
Company's public offerings in November 1995 and June 1996.
Provision for income taxes. The Company recorded a tax provision of $1.9
million in 1995 representing an effective tax rate of 22.5% compared to a
provision of $3.1 million in 1996 representing an effective tax rate of 20.7%.
The Company's effective tax rate is largely dependent on the proportion of the
Company's income earned in different tax jurisdictions. The Company is currently
eligible for a 10% tax rate on "manufacturing" income earned in the Republic of
Ireland. The rate is not available for other types of income such as income
earned by the Company on its cash investments. The eligibility for the 10% tax
rate is the reason that the Company's effective tax rate is below the Irish
standard rate of 38%, and below the statutory rates of Canada and the United
States. There can be no assurances that the Company will continue to be eligible
for this 10% tax rate in future periods.
YEARS ENDED DECEMBER 31, 1994 AND 1995
Revenues. Total revenues increased 50.9% from $20.1 million in 1994 to
$30.3 million in 1995. A substantial portion of the growth in total revenues
resulted from an increase in revenues from the Company's existing client base.
Both services and license fee revenue increased as described below.
Services. Services revenue increased 42.5% from $17.6 million in 1994 to
$25.1 million in 1995. The increase was due to more development programming
services being provided to existing clients by way of enhancements to existing
installations and through development of new projects for clients on both AS/400
and UNIX platforms. Service bureau revenues also contributed to this overall
increase as service bureau revenues increased 46.9% from $2.6 million in 1994 to
$3.8 million in 1995, due to growth in existing service bureau clients' call
traffic and, to a lesser extent, to new clients choosing to utilize the
Company's service bureaus.
License Fees. License fees revenue increased 110.5% from $2.5 million in
1994 to $5.2 million in 1995. Two new AS/400 installations were completed in
1995 and three license fees were earned on two partially completed UNIX projects
and one partially completed AS/400 project. The remainder of the fees on these
incomplete projects were earned in the first half of 1996 as the Company
completed the development and enhancement for these projects. In addition,
during 1995, the Company continued to earn license fees with respect to
installations made in prior years as the Company completed certain work on such
installations resulting in additional license fees.
Cost of Service. Cost of services expense increased 41.4% from $8.6
million in 1994 to $12.2 million in 1995, but decreased slightly as a percentage
of services revenue from 49.1% to 48.7%. The increase in total expenses was
primarily due to additional personnel hired during the period to support the
growth of the Company's business.
Cost of License Fees. Cost of license fees expense increased from $31,000
in 1994 to $65,000 in 1995 due to the increase in license fees earned by the
Company which, in turn, required the Company to pay additional royalties.
<PAGE>
SAVILLE SYSTEMS PLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(thousands of $, unless otherwise noted)
YEARS ENDED DECEMBER 31, 1994 AND 1995 (CONTINUED)
Sales and Marketing. Sales and marketing expense increased 9.2% from $1.4
million in 1994 to $1.5 million in 1995, but decreased as a percentage of total
revenues from 6.9% to 5.0%. Sales and marketing expenses in 1994 included a
settlement payment of $740,000 related to the termination of a service contract
for marketing of the Company's software with a former executive and shareholder.
Excluding this settlement payment, sales and marketing expenses increased
$868,000 and increased as a percentage of total revenues from 3.2% to 5.0%. The
increase in 1995 was due primarily to the development of a direct sales force
within North America.
Research and Development. Prior to 1994, Company software was developed
for customer applications, and related expenses were included as part of cost of
services in those periods. Research and development expenses increased from
$184,000 in 1994 to $1.6 million in 1995. In 1994, the Company commenced
internally funded research and development efforts undertaken during 1995 with
respect to the UNIX-based billing software being developed jointly with AT&T,
and continued internally funded research and development efforts on the AS/400
product.
General and Administrative. General and administrative expense increased
128.3% from $2.9 million in 1994 to $6.8 million in 1995. These expenses also
increased as a percentage of total revenues from 14.8% to 22.4%, respectively.
This increase in expenses was primarily attributable to the growth in the
business of the company. Significant areas in which Company increased spending
included the addition of senior and middle management, employee training,
relocation to larger office space in both Edmonton and Toronto and general
expense related to an increased number of employees. In addition, in 1995 the
Company recorded an allowance for doubtful accounts of $370,000 and compensation
expenses of $95,000 in connection with certain options that were granted to
employees having an exercise price below the then fair market value.
Other Income, net. Other income, net primarily includes interest income,
interest expense and foreign exchange gains and losses. Other income decreased
from $252,000 in 1994 to $208,000 in 1995. The Company's increased
profitability, and the proceeds from the Company's public offering in 1995
resulted in the Company having substantially higher cash balances which, in
turn, generated greater interest income. This increase in income was partially
offset, however, by foreign exchange losses.
Provision for Income Taxes. The Company recorded a tax provision of $1.6
million in 1994, representing an effective tax rate of 22.5%, as compared to a
provision of $1.9 million in 1995, representing an effective tax rate of 22.5%.
The rate may vary period to period due to income being earned in different
jurisdictions. The Company was eligible during 1994 and 1995 for a 10% tax rate
on "manufacturing income" earned in the Republic of Ireland.
<PAGE>
SAVILLE SYSTEMS PLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(thousands of $, unless otherwise noted)
QUARTERLY INFORMATION
The following table presents selected unaudited consolidated financial
information for the Company's last eight quarters, as well as the percentage of
the Company's total revenues represented by each item. In the opinion of the
Company's management, this unaudited information reflects all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly
this information when read in conjunction with the Consolidated Financial
Statements and Notes thereto appearing elsewhere in this report. The Company's
operating results for any quarter are not necessarily indicative results for any
future period.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Quarter Ended
- ------------------------------------------------------------------------------------------------------------------------
(in thousands of U.S. dollars March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
except per share data) 1995 1995 1995 1995 1996 1996 1996 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Services $5,845 $6,550 $5,087 $6,883 $ 9,032 $10,237 $12,051 $13,158
License fees 1,617 1,054 1,239 1,302 1,523 2,068 2,696 3,155
- ------------------------------------------------------------------------------------------------------------------------
7,462 7,604 7,046 8,185 10,555 12,305 14,747 16,313
- ------------------------------------------------------------------------------------------------------------------------
EXPENSES
Cost of services 2,878 2,957 2,930 3,456 4,478 5,112 5,932 6,536
Cost of license fees 14 15 24 12 22 26 140 149
Sales and marketing 333 331 370 484 637 819 920 1,003
Research and development 133 289 553 616 860 1,021 1,085 1,205
General and administrative 1,403 1,666 1,687 2,028 2,321 2,476 2,830 3,078
- ------------------------------------------------------------------------------------------------------------------------
4,761 5,258 5,564 6,596 8,318 9,454 10,907 11,971
- ------------------------------------------------------------------------------------------------------------------------
Income from operations 2,701 2,346 1,482 1,589 2,237 2,851 3,840 4,342
Other income, net 75 56 8 68 243 383 393 472
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,776 2,402 1,490 1,657 2,480 3,234 4,233 4,814
Provisions for income taxes 732 475 388 277 440 597 910 1,015
- ------------------------------------------------------------------------------------------------------------------------
Income before minority interest 2,044 1,927 1,102 1,380 2,040 2,637 3,323 3,709
Minority interest share in
subsidiaries' net income 6 38 48 (21) (2) 75 12 55
- ------------------------------------------------------------------------------------------------------------------------
Net income $2,038 $1,889 $1,054 $1,401 $2,042 $2,562 $3,311 $3,654
- ------------------------------------------------------------------------------------------------------------------------
Net income per share $0.13 $0.12 $0.07 $0.08 $0.11 $0.14 $.017 $0.19
- ------------------------------------------------------------------------------------------------------------------------
Weighted average shares
and share equivalents
(in thousands) 15,797 15,797 15,797 17,213 18,585 18,892 19,048 19,168
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
SAVILLE SYSTEMS PLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(thousands of $, unless otherwise noted)
QUARTERLY INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDED
- -------------------------------------------------------------------------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
(percentage of total revenues) 1995 1995 1995 1995 1996 1996 1996 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Services 78.3% 86.1% 82.4% 84.1% 85.6% 83.2% 81.7% 80.7%
License fees 21.7% 13.9% 17.6% 15.9% 14.4% 16.8% 18.3% 19.3%
- -------------------------------------------------------------------------------------------------------------------------------
100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
- -------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Cost of services 38.5% 38.9% 41.6% 42.2% 42.4% 41.5% 40.2% 40.1%
Cost of license fees 0.2% 0.2% 0.3% 0.2% 0.2% 0.2% 1.0% 0.9%
Sales and marketing 4.5% 4.4% 5.3% 5.9% 6.0% 6.7% 6.2% 6.1%
Research and development 1.8% 3.8% 7.9% 7.5% 8.2% 8.3% 7.4% 7.4%
General and administrative 18.8% 21.9% 23.9% 24.8% 22.0% 20.1% 19.2% 18.9%
- -------------------------------------------------------------------------------------------------------------------------------
63.8% 69.2% 79.0% 80.6% 78.8% 76.8% 74.0% 73.4%
- -------------------------------------------------------------------------------------------------------------------------------
Income from operations 36.2% 30.8% 21.0% 19.4% 21.2% 23.2% 26.0% 26.6%
Other income, 1.0% 0.8% 0.1% 0.8% 2.3% 3.1% 2.7% 2.9%
net
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 37.2% 31.6% 21.1% 20.2% 23.5% 26.3% 28.7% 29.5%
Provisions for income taxes 9.8% 6.3% 5.5% 3.4% 4.2% 4.9% 6.2% 6.8%
- -------------------------------------------------------------------------------------------------------------------------------
Income before minority
interest 27.4% 25.3% 15.6% 16.8% 19.3% 21.4% 22.5% 22.7%
Minority interest share in
subsidiaries' net income 0.1% 0.5% 0.7% (0.3%) 0.0% 0.6% 0.1% 0.3%
- -------------------------------------------------------------------------------------------------------------------------------
Net income 27.3% 24.8% 14.9% 17.1% 19.3% 20.8% 22.4% 22.4%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's quarterly operating results have in the past and may in the future
vary significantly depending on factors such as increased competition, the size
and timing of significant client projects and license fees, cancellations of
significant projects by customers, changes in operating expenses, changes in
Company strategy, personnel changes, foreign currency exchange rates and general
economic factors.
The Company's expense levels are based, in part, on its expectations as to
future revenues. If revenue levels are below expectations, operating results are
likely to be adversely affected. Net income may be disproportionately affected
by a reduction in revenues because a proportionately smaller amount of the
Company's expenses varies with its revenues. As a result, the Company believes
that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance.
<PAGE>
SAVILLE SYSTEMS PLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(thousands of $, unless otherwise noted)
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased $10.7 million from $23.7 million at December
31, 1995 to $34.4 million at December 31, 1996. The increase in cash was
primarily from cash provided by operations and, to a lesser extent, from net
proceeds received from issuance of Ordinary Shares. Cash and cash equivalents
increased $20.2 million from $3.5 million at December 31, 1994 to $23.7 million
at December 31, 1995. This increase was due primarily to the receipt of the
proceeds from the Company's initial public offering and, to a lesser extent,
from cash provided by operations. The increase in cash and cash equivalents of
$2.8 million during the year ended December 31, 1994 was comprised largely of
cash provided by operations offset by repayments to related parties on financing
provided to the Company prior to it's initial offering during 1995.
During the year ended December 31, 1996, $10.4 million of cash was provided by
operating activities representing an increase of $6.3 million from 1995
primarily due to the increased net income during the year. Working capital
components have generally increased in relation to the continued growth in total
revenues. At December 31, 1996 the Company had deferred revenue of $1.4 million
representing funds received in advance of the completion of software
customizations and installations. During the year ended December 31, 1995, $4.0
million of cash was provided by operating activities representing a decrease of
$418,000 over the previous year. The change was the result of an increase in net
income of $1.0 million over the previous year and net increases in current
liabilities, more than offset by increases in accounts receivable and other
current liabilities. The cash provided by operating activities during the year
ended December 31, 1994 was comprised of an increase in net income of $5.3
million, offset by a general growth in working capital items.
The net cash used in investing activities during the year ended December 31,
1996 was comprised of $2.7 million to purchase fixed assets and $1.0 million
invested in short-term marketable securities. This represented an increase of
$545,000 over the $2.2 million used to purchase fixed assets in 1995. The
Company continues to make fixed asset investments for infrastructure to support
its historical business growth and its anticipated needs in future fiscal
periods. The Company expects to continue its fixed asset investments in 1997. As
of February 1, 1997, the Company had no material commitments for capital
expenditures.
The net cash provided by financing activities during the year ended December 31,
1996 was $4.0 million consisting primarily of net proceeds from issuances of
Ordinary Shares. During 1996, the Company issued Ordinary Shares pursuant to
exercises of options under the employee stock option plan for proceeds of
approximately $2.1 million. On June 24, 1996, the Company issued 100,000
Ordinary Shares in a public offering for proceeds to the Company of
approximately $2.6 million before expenses. Also, during the year ended December
31, 1996, the Company paid public offering costs of approximately $735,000 and
received $100,000 on the repayment of an employee share purchase loan. The net
proceeds from the initial public share issuance provided the majority of the
$18.3 million of the cash provided by financing in 1995. The cash provided was
offset by a cash dividend paid on September 25, 1995 and repayments on long term
debt. In 1994 $1.2 million was used to repay advances made by related parties
offset by a loan from an affiliated company.
Prior to the initial public share issuance in November 1995 the Company had a
$2.5 million line of credit. Borrowings under this line of credit bore interest
at the greater of the bank's announced annual rate plus 0.5% and the Federal
Funds effective rate plus 1.0% per annum. The Company paid 0.5% per annum for
the unused portion of the line of credit. Subsequent to the initial public share
issuance, the Company repaid all amounts outstanding under the line of credit
and canceled the line of credit. The Company had capitalized lease obligations
in principal amount of $43,000 as at December 31, 1996 ($97,000 at December 31,
1995) and subsequent to such date has incurred no capital lease obligations.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
<PAGE>
SAVILLE SYSTEMS PLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(thousands of $, unless otherwise noted)
As of December 31, 1996 the Company had $15.3 million in net accounts
receivable. The average days sales outstanding ("DSO") at December 31, 1996 was
approximately 86 days as compared to approximately 91 at December 31, 1995. DSO
is calculated based on the average daily sales of the immediately preceding
three month period divided by the net trade accounts receivable balance at the
end of the period. The Company established an allowance for doubtful accounts in
1995 and continues to maintain a balance because increases in revenues that may
be caused by the expansion of the Company's customer base increases the risk
that such an allowance will be necessary. The Company considers the allowance
for doubtful accounts of $756,000 at December 31, 1996 to be adequate.
The Company believes that existing cash balances and funds generated by
operations will be sufficient to meet its anticipated liquidity and working
capital requirements through at least fiscal 1998.
FOREIGN CURRENCY EXPOSURE
The Company's international sales are predominately invoiced and paid in U.S.
currency with the exception of certain clients who are invoiced primarily in
Canadian dollars and Pounds Sterling. The impact of foreign currency translation
has not been material to the Company's operations.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Annual Report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements, including statements
regarding the Company's plans to establish a sales presence in Latin America and
Asia Pacific, the Company's plans to continue to invest in research and
development efforts, the Company's expectation that it will continue to make
capital asset investments in 1997, the Company's belief that its existing cash
balance and funds generated by operations will be sufficient to meet its
anticipated liquidity and working capital requirements through at least fiscal
1998 and the Company's general expectations of growth. A number of uncertainties
exist that could affect the Company's future operating results, including,
without limitation, the Company's ability to retain existing customers and
attract new customers, the Company's ability to attract and retain qualified
employees, the costs associated with significant increases in number of
employees, the Company's continuing ability to develop products that are
responsive to the evolving needs of its customers, increased competition,
changes in operating expenses, foreign currency exchange rates, the Company's
continued ability to take advantage of favorable tax treatment currently
available to the Company, and general economic factors.
To date, a substantial portion of the Company's total revenues has derived from
a small number of customers. This concentration of customers can cause the
Company's revenues and earnings to fluctuate from quarter to quarter, based on
these customers' requirements and the timing of their orders. A significant
decrease in business from any of its major customers would have a material
adverse effect on the Customer's business, financial condition, and results of
operations.
The Company competes with both independent providers of systems and services
like the Company and with internal billing departments of existing
telecommunications service providers, many of which have substantially greater
financial, technical, sales, marketing and other resources, as well as greater
name recognition, than the Company. There can be no assurance that the Company
will be able to compete successfully with its existing competitors or with new
competitors.
<PAGE>
SAVILLE SYSTEMS PLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(thousands of $, unless otherwise noted)
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS (CONTINUED)
The Company's future success depends in large part on its ability to develop new
customer relationships with successful telecommunications service providers.
There can be no assurance that the Company will be able to develop such
relationships or that service providers that become customers of the Company
will be successful. Historically, the Company has been dependent on long-term
customer relationships and therefore, the failure of the Company's customers to
compete effectively in the telecommunications market could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Although the Company has developed software for UNIX-based operating systems,
the Company's billing and customer care software currently runs primarily on the
IBM AS/400 platform which represents a leading platform for existing and new
billing systems. If there should be a rapid shift away from the current use of
the AS/400 platform by the telecommunications industry for billing, the Company
would be required to expend substantial capital resources to develop new
software and likely experience delays or losses in customer orders.
The Company's success will depend upon its ability to enhance its existing
products and to introduce new products and features to meet changing customer
requirements. The Company is currently devoting significant resources to
refining and expanding its base software modules and to continuing the
development of billing software that will operate on UNIX-based operating
systems. If the Company were unable, due to resource, technological or other
constraints, to adequately anticipate or respond to such changes, the Company's
business, financial condition and results of operations would be materially
adversely affected.
Historically, the Company's sales outside the United States have represented a
significant portion of the Company's total revenues, and the Company expects
that non-U.S. operations will continue to account for a significant portion of
its revenues in the future. The Company's international business is subject to
risks such as fluctuations in exchange rates, difficulties or delays in
developing and supporting non-English language versions of the Company's
products, political and economic conditions in various jurisdictions, unexpected
changes in regulatory requirements, tariffs and other trade barriers,
difficulties in staffing and managing foreign operations and longer accounts
receivable payment cycles.
Recently, the Company has expanded its operations rapidly, which has placed
significant demands on the Company's administrative, operational and financial
personnel and systems. Additional expansion by the Company may further strain
the Company's management, financial and other resources. There can be no
assurance that the Company's systems, procedures, controls and existing space
will be adequate to support expansion of the Company's operations. The Company's
future operating results will substantially depend on the ability of its
officers and key employees to manage changing business conditions and to
implement and improve its operational, financial control and reporting systems.
If the Company is unable to respond to and manage changing business conditions,
the quality of the Company's services, its ability to retain key personnel and
its results of operations could be materially adversely affected.
Fluctuation in exchange rates may have a material adverse effect on the
Company's results of operations, particularly its operating margins, and could
also result in exchange losses. The impact of future exchange rate fluctuations
on the Company's results of operations cannot be accurately predicted. To date,
the Company has not sought to hedge the risks associated with fluctuations in
exchange rates, but may undertake such transactions in the future. There can be
no assurance that any hedging techniques implemented by the Company will be
successful or that the Company's results of operations will not be materially
adversely affected by exchange rate fluctuations.
<PAGE>
SAVILLE SYSTEMS PLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(thousands of $, unless otherwise noted)
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS (CONTINUED)
The Company has significant operations and generates a substantial portion of
its taxable income in the Republic of Ireland, and, under an incentive tax
program due to terminate in 2010, is taxed on its "manufacturing income" at a
10% rate, which is substantially lower than U.S. tax rates. If the Company could
no longer qualify for this 10% tax rate or if the tax laws were rescinded or
changed, the Company's net income could be materially adversely affected. In
addition, if U.S., Canadian or other foreign tax authorities were to challenge
successfully the manner in which profits are recognized among the Company and
its subsidiaries, the Company's effective tax rate could increase, and its cash
flow and results of operations could be materially adversely affected.
<PAGE>
Appendix C
----------
SAVILLE SYSTEMS PLC
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors 2
-
Consolidated Balance Sheets as of December 31, 1996
and 1995 3
-
Consolidated Statements of Income for the years
ended December 31, 1996, 1995 and 1994 4
-
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1996, 1995 and 1994 5
-
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 6
-
Notes to Consolidated Financial Statements 7-20
----
Page 1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
SAVILLE SYSTEMS PLC
We have audited the accompanying consolidated balance sheets of Saville Systems
PLC and its subsidiaries as of December 31, 1996 and 1995 and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the years in the three year period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Saville
Systems PLC and its subsidiaries at December 31, 1996 and 1995 and the
consolidated results of their operations and their cash flows for each of the
years in the three year period ended December 31, 1996 in conformity with
accounting principles generally accepted in the United States.
ERNST & YOUNG
/s/ Ernst & Young
Galway, Ireland
January 22, 1997 Chartered Accountants
Page 2
<PAGE>
SAVILLE SYSTEMS PLC
CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
---------------------
AS AT DECEMBER 31
- ---------------------------------------------------------------------
1996 1995
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents $34,395 $23,722
Marketable securities 1,000 -
Accounts receivable, less allowance for doubtful
accounts of $756 and $370, respectively 15,308 8,177
Prepaid expenses and other assets 1,511 1,056
- ---------------------------------------------------------------------
52,214 32,955
Property and equipment, net [note 3] 4,275 2,335
Long-term receivable [note 4] - 741
- ---------------------------------------------------------------------
$56,489 $36,031
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 1,711 1,079
Accrued compensation and related benefits 2,704 1,527
Accrued royalties - 663
Income taxes payable 2,910 1,228
Deferred revenue 1,420 -
Other current liabilities 770 296
Current portion of long-term debt 43 53
- ----------------------------------------------------------------------
9,558 4,846
Long-term debt [note 6] - 44
Minority interest [note 8] 320 217
- ----------------------------------------------------------------------
320 261
Commitments and contingencies [note 7]
SHAREHOLDERS' EQUITY
Share capital [note 8] 93 92
Additional paid-in capital [note 8] 27,778 23,636
Retained earnings 18,813 7,244
Cumulative translation account [note 8] (73) (48)
46,611 30,924
- ----------------------------------------------------------------------
$56,489 $36,031
- ----------------------------------------------------------------------
</TABLE>
See accompanying notes
Page 3
<PAGE>
SAVILLE SYSTEMS PLC
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of U.S. dollars, except per share data)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31
- ----------------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
REVENUE
Services $44,478 $25,084 $17,597
License Fees 9,442 5,212 2,476
- ----------------------------------------------------------------------------------------
53,920 30,296 20,073
EXPENSES
Cost of services 22,058 12,221 8,640
Cost of license fees 337 65 31
Sales and marketing 3,379 1,519 1,391
Research and development 4,171 1,591 184
General and administrative 10,705 6,784 2,971
- ----------------------------------------------------------------------------------------
40,650 22,180 13,217
INCOME FROM OPERATIONS 13,270 8,116 6,856
Other income, net [note 9] 1,491 208 252
- ----------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 14,761 8,324 7,108
Provision for income taxes [note 10] 3,052 1,872 1,597
- ----------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST 11,709 6,452 5,511
Minority interest share in subsidiaries' net income (loss) 140 70 154
- ----------------------------------------------------------------------------------------
NET INCOME $11,569 $ 6,382 $ 5,357
- ----------------------------------------------------------------------------------------
NET INCOME PER SHARE $0.61 $0.40 $0.34
- ----------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES AND SHARE EQUIVALENTS
(IN THOUSANDS) 18,948 16,151 15,721
- ----------------------------------------------------------------------------------------
</TABLE>
See Accompanying notes
Page 4
<PAGE>
Saville Systems PLC
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
(in thousands of U.S. dollars, except number of shares)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Years ended December 31
-----------------------
Share Capital Addi- Retained Cumula- Total
tional tive
paid-in earnings translation shareholders
Shares Amount capital (deficit) account ' equity
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 2,980 $ 0 $682 $(492) $ (1) $189
Ordinary Shares issued 14,897,020 10 10
Increase in paid-in capital 980 (980)
Dividends paid by subsidiary (23) (23)
Net income 5,357 5,357
Foreign currency translation adjustment (81) (81)
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 14,900,000 10 1,662 3,862 (82) 5,452
- -----------------------------------------------------------------------------------------------------------------------------
Ordinary Shares issued 2,676,406 34 25,772 25,806
Deferred Shares issued 30,000 48 (48)
Shares issued by subsidiary companies 148 148
Public offering costs (3,914) (3,914)
Reduction in minority interest 116 116
Note receivable on sale of shares by
subsidiary prior to reorganization (100) (100)
Dividends paid (3,000) (3,000)
Net income 6,382 6,382
Foreign currency translation adjustment 34 34
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 17,606,406 92 23,636 7,244 (48) 30,924
- -----------------------------------------------------------------------------------------------------------------------------
Ordinary Shares issued 505,165 1 4,740 4,741
Reduction in minority interest 37 37
Repayment of note receivable 100 100
Public offering costs (735) (735)
Net income 11,569 11,569
Foreign currency translation adjustment (25) (25)
=============================================================================================================================
Balance at December 31, 1996
18,111,571 $93 $27,778 $18,813 $(73) $46,611
</TABLE>
See accompanying notes
Page 5
<PAGE>
Saville Systems PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Years ended December 31
- -----------------------------------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $11,569 $6,382 $5,357
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 782 360 222
Allowance for doubtful accounts 386 370
Minority interest in net income 140 70 154
Changes in operating assets and liabilities:
Accounts receivable (7,521) (2,936) (3,476)
Prepaids and other assets (461) (886) (87)
Long-term receivable 741 (741)
Accounts payable 632 401 237
Accrued compensation and related benefits 1,177 803 415
Accrued royalties (663) 348 220
Income taxes payable 1,682 127 1,099
Deferred revenue 1,420
Other current liabilities 474 (251) 324
- -----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 10,358 4,047 4,465
CASH FLOWS FROM INVESTING ACTIVITIES
Net purchase of property and equipment (2,723) (2,178) (327)
Purchase of marketable securities (1,000)
- -----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,723) (2,178) (327)
CASH FLOWS FROM FINANCING ACTIVITIES
Loan repayments from an officer 50 7
Proceeds from long-term debt 500
Repayment of long-term debt (54) (703) (57)
Advances from related parties 759
Repayments to related parties (14) (2,423)
Proceeds from share issuances 4,841 25,880 10
Dividends paid by subsidiary prior to company reorganization (25)
Public offering costs (735) (3,914)
Dividends paid (3,000)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 4,052 18,299 (1,229)
- -----------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (14) 45 (97)
- -----------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 10,673 20,213 2,812
Cash and cash equivalents, beginning of period 23,722 3,509 697
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $34,395 $ 23,722 $3,509
- -----------------------------------------------------------------------------------------------------------
Supplement disclosure of cash flow information:
Cash paid for interest 15 182 71
Cash paid for income taxes 1,504 1,894 471
Computer equipment under capital lease 177
Note receivable from sale of shares (100) 100
</TABLE>
Page 6
<PAGE>
Saville Systems PLC
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1996
(Tabular information is in thousands of U.S. dollars, unless otherwise
specified)
1. ORGANIZATION
SAVILLE SYSTEMS PLC (THE "COMPANY") IS A COMPANY INCORPORATED UNDER THE LAWS OF
THE REPUBLIC OF IRELAND IN 1993.
Saville Systems PLC, Saville Systems Canada, Ltd. ("Saville Canada") and Saville
Systems Inc. ("Saville U.S.") were companies under common control and with
identical share ownership structures.
On September 27, 1995, Saville Canada and Saville U.S. (collectively, the
"Subsidiaries") became majority-owned subsidiaries of the Company (the
"Restructuring"). The Restructuring was accomplished through the contribution of
shares of the Subsidiaries to the Company by all but one of the shareholders of
the Subsidiaries who previously owned, directly or indirectly, identical
percentages of all three companies; and through the contribution of 100% of the
shares of 2916746 Canada, Inc., a Canadian holding corporation whose only
material asset is shares in Saville Canada.
The Restructuring has been accounted for in a manner similar to a pooling of
interests and accordingly the consolidated financial statements of the Company
include the results of the Company and its two subsidiaries since their
inception, which in the case of Saville Canada was 1982 and Saville U.S. was
1991. The share capital of the Subsidiaries has been presented as additional
paid-in capital in these consolidated financial statements.
An approximate 15% interest in Saville Canada and Saville U.S. was not
contributed by one of the shareholders as at the date of Restructuring and has
been presented as a minority interest. As at December 31, 1996, this minority
interest has decreased to approximately 7% (12% as at December 31, 1995).
The Company's principal line of business is the design and development of
customized billing and customer care solutions for the use of its customers in
the global telecommunications industry. In addition, the Company licenses the
use of its software to customers throughout the world and operates its software
for certain customers under a service bureau arrangement. The Company's
principal markets are currently located in the United States, Europe and Canada.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared by management in
accordance with accounting principles generally accepted in the United States.
The preparation of financial statements in conformity with such principles
requires management to make estimates and assumptions that affect the reported
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting periods. Actual results could differ from those
estimates.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of the Company and
its subsidiaries. All intercompany accounts and transactions have been
eliminated in consolidation.
Page 7
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
Page 8
<PAGE>
Saville Systems PLC
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1996
(Tabular information is in thousands of U.S. dollars, unless otherwise
specified)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Services are provided primarily on a time and materials basis for which revenue
is recognized in the period that the services are provided. These services
primarily include system requirements definition, system design and analysis,
customization and installation services, ongoing system management, system
enhancements and service bureau processing fees.
Revenue from the licensing of software rights is recognized at the time of
delivery of the product to the customer, provided that the Company has no
significant related obligations or collection uncertainties remaining. Where
there are significant obligations related to the development and enhancement of
the software delivered, license fees are recorded over the expected term of the
initial customization period.
FOREIGN CURRENCY TRANSLATION
The Company uses the United States dollar as the unit of measurement of its
financial statements, as a significant portion of the Company's operating and
financing activities are transacted in United States dollars. The functional
currencies of the Company's subsidiaries are their local currencies.
Transactions and balances denominated in currencies other than the functional
currencies of the Company or its subsidiaries are remeasured in the applicable
functional currency. Translation adjustments arising on such remeasurement are
included in the determination of net income.
The balance sheets of the Company's foreign subsidiaries are translated at year-
end rates of exchange and results of operations are translated at weighted
average rates of exchange for the fiscal period reported. Translation
adjustments resulting from this process are recorded in shareholders' equity as
an adjustment to the cumulative translation account.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
various methods over the estimated useful lives as follows:
<TABLE>
<CAPTION>
RATE BASIS
<S> <C> <C>
Furniture and equipment 20% Declining balance
Computer equipment 25% Straight-line
Leasehold improvements 20% Straight-line
Automobiles 30% Declining balance
</TABLE>
Gains or losses resulting from sales or retirements are recorded as incurred, at
which time related costs and accumulated depreciation are removed from the
accounts. Maintenance and repairs are expensed as incurred.
Page 9
<PAGE>
Saville Systems PLC
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1996
(Tabular information is in thousands of U.S. dollars, unless otherwise
specified)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LEASES
Leases are recorded as capital or operating leases. Any lease where
substantially all of the benefits and risks related to the ownership of the
leased asset are transferred to the lessee, as defined by Statement of Financial
Accounting Standards (SFAS) No. 13 "Leases" is accounted for as if the asset
were acquired and as if the obligation were assumed as of the date of lease. All
other leases are recorded as operating leases and payments are expensed as they
become due.
SOFTWARE DEVELOPMENT COSTS
Software development costs, principally the design and development of billing
software, are expensed as incurred. Costs incurred after technological
feasibility has been established, as defined by SFAS No.86, "Software
Development Costs," have not been significant.
STOCK OPTIONS
The Company records compensation expense relating to stock based compensation to
employees in accordance with Accounting Principles Board Opinion No.25 (APB
No.25) "Accounting for Stock Issued to Employees and related interpretations.
Proforma footnote disclosures have also been provided to comply with the
Financial Accounting Standards Board SFAS 123 "Accounting for Stock Based
Compensation."
INCOME TAX
Income taxes are accounted for in accordance with the liability method of SFAS
No.109, "Accounting for Income Taxes." Under this method, the Company provides
deferred and prepaid taxes for temporary differences in the recognition of
income and expense for financial reporting and tax accounting purposes.
NET INCOME PER SHARE
Net income per share is computed based upon the weighted average number of
Ordinary Shares and dilutive share equivalents outstanding and gives effect to
certain adjustments described below. Share equivalents are not included in the
per share calculations where the effect of their inclusion would be
antidilutive, except that, in accordance with Securities and Exchange Commission
requirements, common and common share equivalents issued during the twelve month
period prior to the filing of the Company's initial public offering have been
included in the calculation as if they were outstanding for all periods, using
the treasury stock method and the initial public offering price.
CASH EQUIVALENTS
Cash equivalents are recorded at cost which approximates market value, and
include only short-term highly liquid investments with maturities at the date
purchased of less than three months.
Page 10
<PAGE>
Saville Systems PLC
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1996
(Tabular information is in thousands of U.S. dollars, unless otherwise
specified)
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
-------------------------------------------------------
1996 1995
- -----------------------------------------------------------------------------------------------
COST ACCUMULATED COST ACCUMULATED
DEPRECIATION DEPRECIATION
<S> <C> <C> <C> <C>
Furniture and equipment $2,838 $591 $1,503 $266
Computer equipment 1,118 409 744 207
Computer equipment under capital lease 182 136 182 91
Leasehold improvements 1,507 250 521 59
Automobiles 39 23 28 20
- -----------------------------------------------------------------------------------------------
$5,684 $1,409 $2,978 $643
- -----------------------------------------------------------------------------------------------
Net book value $4,275 $2,335
- ---------------------------------------
</TABLE>
4. LONG-TERM RECEIVABLE
The Company made arrangements with one of its customers whereby the payment of
one half of certain license fees earned during the year ended December 3 1, 1995
were deferred. These amounts are non-interest bearing with minimum monthly
repayments of approximately $135,000. This long-term receivable will be repaid
during 1997 and has been included in accounts receivable at December 31, 1996.
5. RELATED PARTY TRANSACTIONS AND BALANCES
In 1995, Saville U.S. extended a loan to an officer in the amount of $100,000
due August 1, 1997 in connection with the issue of shares of Saville U.S. This
loan was repaid in full in June, 1996. The
Page 11
<PAGE>
Saville Systems PLC
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1996
(Tabular information is in thousands of U.S. dollars, unless otherwise
specified)
repayment is presented as an addition to additional paid-in capital in the
statement of changes in shareholders' equity (note 8).
Page 12
<PAGE>
Saville Systems PLC
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1996
(Tabular information is in thousands of U.S. dollars, unless otherwise
specified)
6. LONG-TERM DEBT
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1996 1995
<S> <C> <C>
CAPITAL LEASE OBLIGATION
- --------------------------------------------------------------------------------------------------------------
Payable in 24 monthly payments of $5 and one payment of $43 at the
end of the lease (7.2% interest rate). The lease is denominated in $43 $97
Canadian dollars
43 97
Less amount due within one year 43 53
==============================================================================================================
$ - $44
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Principal repayment of $43,000 is due in 1997.
7. COMMITMENTS AND CONTINGENCIES
The Company is committed to make operating lease payments on premises, computer
hardware, and equipment under agreements which expire over the next five years
as follows:
<TABLE>
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
1997 $ 5,116
1998 4,183
1999 2,967
2000 1,535
2001 1,113
Thereafter 2,759
$17,673
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Total rental expense was approximately $3,582,000, $1 ,950,000, and $992,000 for
the years ended December 31, 1996, 1995 and 1994, respectively.
Saville Canada entered into an exclusive agreement with TELUS Communications
(Edmonton) Inc.
Page 13
<PAGE>
Saville Systems PLC
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1996
(Tabular information is in thousands of U.S. dollars, unless otherwise
specified)
(formerly Ed Tel Inc.) to market and license a Message Processing System whereby
Saville Canada was required to pay royalties based on a percentage of the annual
increase in total gross revenue of Saville Canada over base revenue established
in 1991. The royalty expense for the years ended December 31, 1996, 1995 and
1994 was $38,000, $655,000 and $328,000, respectively. The original agreement
expired on December 31, 1995. The Company has entered into a non-exclusive five
year extension with the royalties fixed at CDN_$50,000 annually for that period.
Page 14
<PAGE>
Saville Systems PLC
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1996
(Tabular information is in thousands of U.S. dollars, unless otherwise
specified)
8. SHARE CAPITAL
Details of the authorized and issued share capital are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
1996 1995
<S> <C> <C>
AUTHORIZED
40,000,000 Ordinary Shares, nominal value $0.0025 per share
30,000 Deferred Shares, nominal value IR(Pounds) 1.00 per share
ISSUED
18,081,571 Ordinary Shares (1995 - 17,576,406) $45 $44
30,000 Deferred Shares (1995 - 30,000) 48 48
===============================================================================================================
$93 $92
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
AUTHORIZED SHARE CAPITAL
Upon incorporation, the Company's authorized share capital comprised 100,000
Ordinary Shares.
On January 20, 1995, the Company redesignated each of its Ordinary Shares
authorized and issued to be Class A voting, convertible, participating shares
and increased its authorized share capital by 100,000 Class B non-voting,
convertible, participating shares which ranked pari passu in all respects with
the Class A shares. Each fully paid Class B non-voting, convertible,
participating share could be converted at any time into a Class A voting,
convertible, participating share on the basis of one to one. Likewise, each
fully paid Class A voting, convertible, participating share could be converted
at any time into a Class B non-voting, convertible, participating share on the
basis of one to one.
In connection with the Restructuring, authorized share capital was amended by
the cancellation of 100,000 Class B shares, the redesignation of Class A shares
as Ordinary Shares with a nominal value of $0.0025 per share and the
authorization of 30,000 Deferred Shares with a nominal value of IR(Pounds) 1.00
per share. Authorized capital was then increased to 40,000,000 Ordinary Shares.
ISSUED SHARE CAPITAL
An analysis of the number of shares issued and outstanding for the three year
period ended December 31, 1996 is as follows:
. during 1994, the Company issued 14,897,020 Ordinary Shares for cash
consideration of $9,998;
Page 15
<PAGE>
Saville Systems PLC
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1996
(Tabular information is in thousands of U.S. dollars, unless otherwise
specified)
. on January 20, 1995, the Company's 14,900,000 issued and outstanding Ordinary
Shares were redesignated as Class A Shares;
Page 16
<PAGE>
Saville Systems PLC
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1996
(Tabular information is in thousands of U.S. dollars, unless otherwise
specified)
8. SHARE CAPITAL (CONTINUED)
. in connection with the Restructuring in 1995, 15,004,300 Class A shares were
redesignated as 15,004,300 Ordinary Shares, one additional Ordinary Share
was issued, and the Company issued 30,000 Deferred Shares. In addition, on
September 27, 1995, the Company completed a 400-for-1 division of all
Ordinary Shares and subsequently declared and allotted a share dividend of
2.725 Ordinary Shares for each post-division share outstanding. All
outstanding shares and per share amounts in these consolidated financial
statements have been retroactively adjusted to reflect this share division
and dividend. The division and dividend were approved by the shareholders by
unanimous written consent on September 27, 1995.
. during the year ended December 31, 1995 , the Company issued 176,406
Ordinary Shares to officers and employees for cash consideration of
$805,808 and conducted a public offering issuing 2,500,000 ordinary shares
for total gross proceeds of $25,000,000.
. during the year ended December 31, 1996, the Company issued 405,165 Ordinary
Shares to officers and employees for cash consideration of $2,140,816 and
conducted a second public offering issuing 100,000 Ordinary Shares for total
gross proceeds of $2,600,000.
ADDITIONAL PAID-IN CAPITAL
During 1994, Saville Canada reorganized its share capital, reducing its retained
earnings and increasing its share capital by an amount of $1,153,985. The
increase in this subsidiary's share capital has been reflected as an increase in
additional paid-in capital in these financial statements in the amount of
$980,000 and an increase in minority interest of $173,985.
During 1995 and prior to the Restructuring described in note 1, 70.04 shares of
Saville Canada and 6.135 shares of Saville U.S. were issued for aggregate cash
consideration of $174,000 and a note receivable of $100,000. The aggregate
cash consideration, net of the note receivable, has been reflected in these
financial statements as additional paid-in capital in the amount of $48,000 and
an increase in minority interest of $26,000.
During 1996, the note receivable issued in 1995 for shares of Saville U.S. was
repaid in full. This repayment has been reflected in these financial statements
as additional paid-in capital in the amount of $100,000.
DIVIDENDS
Shareholders are entitled to receive dividends as may be recommended by the
Board of Directors of the Company and approved by the shareholders, which will
be declared and paid in United States dollars. Under Irish Company law,
dividends are payable only out of profits available for distribution, where
profits are determined in accordance with accounting principles generally
accepted in the Republic of Ireland. The amount available for distribution to
shareholders includes only the retained earnings of the Company, and not that of
its subsidiaries, calculated in accordance with accounting principles generally
accepted in the Republic of Ireland which amounted to approximately $16,670,000
at December 31, 1996 ($7,254,000 at December 31, 1995).
Page 17
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
Page 18
<PAGE>
Saville Systems PLC
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1996
(Tabular information is in thousands of U.S. dollars, unless otherwise
specified)
8. SHARE CAPITAL (CONTINUED)
MINORITY INTEREST
Concurrent with the Restructuring of the Company, the minority shareholder has
entered into a share restriction and contribution agreement which prohibits the
minority shareholder from transferring any securities of the Company, unless a
proportionate number of Subsidiary shares are contributed to the Company. The
minority shareholder must contribute all of its shares in the Subsidiaries no
later than September 1, 2005.
SHARE OPTIONS
The Company has elected to follow Accounting Principle Board Opinion No.25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee share options because, as
discussed below, the alternative fair value accounting provided under FASB
Statement No.123, "Accounting for Stock-Based Compensation," requires the use of
option valuation models that were not developed for use in valuing employee
share options ("FAS 123"). Under APB 25, where the exercise price of the
Company's employee share options equals the market price of the underlying share
on the date of grant, no compensation expense is recognized. As noted below,
certain options have been granted with an exercise price below the market price
on the date of grant and compensation expense has been recognized for these
options.
Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee share options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following assumptions for 1995 and 1996
respectively: risk-free weighted average interest rates of 6.30 % and 5.98% and
volatility factors of the expected market price of the Company's common shares
of .84 and .69; dividend yield of 0% and an expected life of the option of 4
years. The calculation of the fair value of options granted prior to the initial
public offering on November 16, 1995 has used a volatility factor of nil as the
Company was a nonpublic entity at the time.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected share price volatility. Because
the Company's employee share options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee share options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for earnings per share
information):
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31
1996 1995
Page 19
<PAGE>
Saville Systems PLC
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1996
(Tabular information is in thousands of U.S. dollars, unless otherwise
specified)
<TABLE>
- --------------------------------------------------------------------------------
<S> <C> <C>
Pro forma net income $10,028 $5,573
- --------------------------------------------------------------------------------
Pro forma net income per share $.53 $.35
</TABLE>
Page 20
<PAGE>
Saville Systems PLC
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1996
(Tabular information is in thousands of U.S. dollars, unless otherwise
specified)
8. SHARE CAPITAL (CONTINUED)
During the years ended December 31, 1994 and 1995 prior to the restructuring
described in note 1, the Company granted share 'option units' to certain
officers, directors and employees of the Company. Each option unit was comprised
of 1 Class A share of the Company, 1 common share of Saville Canada and .0875
common shares of Saville U.S. upon exercise of the option unit.
In connection with the Restructuring, each option unit outstanding at that date
was exchanged for options which
entitle the holder to 1 Ordinary Share for each option exercised.
On August 21, 1995, the Board of Directors approved the 1995 Share Option Plan
which provides for the grant of stock to employees, officers, directors,
consultants and advisors of the Company. These options generally expire ten
years from the date of grant and vest over periods of one to five years.
On April 25, 1996, the Board of Directors approved the 1996 Employee Share
Purchase Plan which provides for the grant of stock to certain officers and
employees of the Company for purchase.
The following table summarizes the activity in options to December 31, 1996
after giving effect to the reorganization:
<TABLE>
<CAPTION>
NUMBER OF ORDINARY SHARES
- ---------------------------- ---------------
AVAILABLE UNEXER- WEIGHTED
FOR GRANT CISED AVERAGE
PRICE PER
SHARE
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 150,490 $ 1.68
Options granted 540,958 2.40
Ordinary Shares authorized 2,980,000
Options granted (1,205,748) 1,205,748 9.08
Options exercised (72,105) 10.00
</TABLE>
Page 21
<PAGE>
Saville Systems PLC
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1996
(Tabular information is in thousands of U.S. dollars, unless otherwise
specified)
<TABLE>
<S> <C> <C> <C>
Options expired (1,030) 10.00
Options cancelled 21,922 (21,922) 8.66
- --------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 1,796,174 1,802,139 6.43
Ordinary Shares authorized 1,000,000
Options Granted (128,587) 128,587 25.47
Options Exercised (405,165) 5.30
Options Cancelled 24,645 (24,645) 8.66
________________________________________________________________________________
BALANCE AT DECEMBER 31, 1996 2,692,232 1,500,916 $8.33
</TABLE>
The weighted average fair value of options granted during 1996 was $13.32 (1995
- - $1.72 )
Page 22
<PAGE>
Saville Systems PLC
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1996
(Tabular information is in thousands of U.S. dollars, unless otherwise
specified)
8. SHARE CAPITAL (CONTINUED)
The 150,490 options having an exercise price of $1.68 per share and the 540,958
options having an exercise price of $2.40 per share were granted below estimated
fair market value at the date of grant and compensation expense was recorded
over their vesting periods. Compensation expense of $73,000, $95,000 and
$12,000 was recorded in the years ended December 31, 1996, 1995 and 1994
respectively. During 1996, 228,866 of these options were exercised.
A summary of options outstanding as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Total Range of Weighted Weighted Exercisable at Weighted
outstanding Exercise Average Average December Average
Prices Exercise Remaining 31, 1996 Exercise
Price Contractual Price of
Life (in Exercisable
years) Options
<S> <C> <C> <C> <C> <C>
20,490 $1.68 $1.68 2.5 20,490 $1.68
442,092 2.40 2.40 3.0 442,092 2.40
916,744 8.66-10.00 8.99 8.7 318,369 9.28
71,590 15.00-26.63 19.68 4.4 17,091 16.38
50,000 28.63-43.00 35.02 9.7 - -
- --------------------------------------------------------------------------------
1,500,916 $1.68-$43.00 $8.33 6.8 798,042 $5.43
</TABLE>
<PAGE>
Page 23
Saville Systems PLC
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1996
(Tabular information is in thousands of U.S. dollars, unless otherwise
specified)
CUMULATIVE TRANSLATION ACCOUNT
Changes in the Canadian dollar exchange rate relative to the United States
dollar has caused the adjustments to the cumulative translation account.
9. OTHER INCOME
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31
- --------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Interest income $1,563 $369 $118
Interest on long-term debt (5) (61) (24)
Other interest expense (10) (15) (54)
Foreign currency exchange gains (losses), net (107) (70) 182
Other 50 (15) 30
- --------------------------------------------------------------------------------
$1,491 $208 $252
- --------------------------------------------------------------------------------
</TABLE>
Page 24
<PAGE>
Saville Systems PLC
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1996
(Tabular information is in thousands of U.S. dollars, unless otherwise
specified)
10. INCOME TAXES
The provision for income taxes consists of the following:
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31
- --------------------------------------------------------------------------------
1996 1995 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Current:
Ireland $1,628 $1,165 $533
Foreign 1,424 707 1,064
- --------------------------------------------------------------------------------
$3,052 $1,872 $1,597
- --------------------------------------------------------------------------------
</TABLE>
Pretax income from foreign operations amounted to $3,105,000, $1,677,000 and
$2,078,000 for the years ended December 31, 1996, 1995 and 1994 respectively.
The effective income tax rate differed from the statutory federal income tax
rate due to:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Standard Irish federal income tax rate 38.0% 38.5% 40.0%
Computed tax provision $ 5,609 $ 3,205 $ 2,843
Tax relief on Irish manufacturing operations (2,833) (1,750) (1,539)
Foreign tax rate differences 240 95 93
Change in valuation allowance in respect
of subsidiary losses 120 152 27
</TABLE>
Page 25
<PAGE>
Saville Systems PLC
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1996
(Tabular information is in thousands of U.S. dollars, unless otherwise
specified)
<TABLE>
<S> <C> <C> <C>
Other (84) 170 173
- ------------------------------------------------------------------------------------------
$3,052 $1,872 $1,597
- ------------------------------------------------------------------------------------------
Per share effect of the tax relief on Irish manufacturing $ 0.15 $ 0.11 $ 0.10
operations
- ------------------------------------------------------------------------------------------
</TABLE>
The Company has significant operations and generates a substantial portion of
its taxable income in the Republic of Ireland, and under an incentive tax
program due to terminate in 2010, is taxed on its "manufacturing income" at a
10% rate. To qualify for the 10% tax rate, the Company must satisfy certain
conditions, including achieving target employment levels in the Republic of
Ireland and rendering computer services there. The Irish standard rate was
reduced from 40% to 38% effective April 1, 1995.
As at December 31, 1996 the Company has no significant deferred tax assets or
liabilities.
Page 26
<PAGE>
Saville Systems PLC
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1996
(Tabular information is in thousands of U.S. dollars, unless otherwise
specified)
10. INCOME TAXES (CONTINUED)
Undistributed earnings of the Company's foreign subsidiaries amount to
approximately $2,131,000 at December 31, 1996 and $881,000 at December 31, 1995.
Those earnings are considered to be indefinitely reinvested and, accordingly, no
provision for withholding taxes has been provided thereon. Upon distribution of
those earnings in the form of dividends or otherwise, the Company would be
subject to withholding taxes payable in the amount of $304,000 ($132,000 at
December 31, 1995) to various foreign governments. Determination of the amount
of the unrecognized deferred income tax liability is not practicable because of
the complexities associated with its hypothetical calculation; however,
unrecognized foreign tax credit carryforwards would be available to reduce some
portion of the liability.
11. INDUSTRY AND GEOGRAPHIC INFORMATION
The Company and its subsidiaries operate primarily in one industry segment, the
development and marketing of proprietary customer administration and billing
systems. Transfers between geographic areas are accounted for using methods
designed to approximate comparable arm's length amounts. Such transfers are
eliminated in the consolidated financial statements. Identifiable assets are
those assets that can be directly associated with a particular geographic area.
The following is a summary of operations by geographic area.
<TABLE>
<CAPTION>
ADJUST-
UNITED MENTS AND
IRELAND CANADA STATES ELIMINA- CONSOLI-
$ $ $ TIONS DATED
$ $
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Sales to unaffiliated customers 22,313 7,009 24,598 - 53,920
Transfers between geographic areas 11,594 26,177 - (37,771) -
===========================================================================================
Total revenues 33,907 33,186 24,598 (37,771) 53,920
===========================================================================================
Operating profit 10,069 2,374 744 83 13,270
</TABLE>
Page 27
<PAGE>
Saville Systems PLC
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1996
(Tabular information is in thousands of U.S. dollars, unless otherwise
specified)
<TABLE>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
IDENTIFIABLE ASSETS 39,350 8,041 9,320 (222) 56,489
</TABLE>
Page 28
<PAGE>
Saville Systems PLC
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1996
(Tabular information is in thousands of U.S. dollars, unless otherwise
specified)
11. INDUSTRY AND GEOGRAPHIC INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
ADJUST-
UNITED MENTS AND
IRELAND CANADA STATES ELIMINA CONSOLI-
$ $ $ TIONS DATED
$ $
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995
Sales to unaffiliated customers 16,519 9,098 4,679 30,296
Transfers between geographic areas (210) 11,309 210 (11,309)
- --------------------------------------------------------------------------------
TOTAL REVENUES 16,309 20,407 4,889 (11,309) 30,296
- --------------------------------------------------------------------------------
OPERATING PROFIT 6,141 1,534 357 84 8,116
- --------------------------------------------------------------------------------
IDENTIFIABLE ASSETS 27,737 5,598 2,995 (299) 36,031
Year ended December 31, 1994
Sales to unaffiliated customers 10,470 8,612 991 20,073
Transfers between geographic areas 5,950 40 (5,990)
- --------------------------------------------------------------------------------
TOTAL REVENUES 10,470 14,562 1,031 (5,990) 20,073
- --------------------------------------------------------------------------------
OPERATING PROFIT (LOSS) 4,753 2,091 (119) 131 6,856
</TABLE>
Page 29
<PAGE>
Saville Systems PLC
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1996
(Tabular information is in thousands of U.S. dollars, unless otherwise
specified)
<TABLE>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
IDENTIFIABLE ASSETS 5,545 4,793 1,157 (1,638) 9,857
</TABLE>
All of the sales to unaffiliated customers for Ireland are export sales for all
periods presented. Of these export sales, sales to customers located in the
United states accounted for 80.9%, 68.0%, and 68.5% for the years ended December
31, 1996, 1995 and 1994 respectively. Sales to customers located in Europe and
Asia accounted for the balance of export sales for all periods presented.
Page 30
<PAGE>
Saville Systems PLC
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1996
(Tabular information is in thousands of U.S. dollars, unless otherwise
specified)
12. SALES TO MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
The Company has contracts with certain customers which comprise a significant
portion of consolidated revenues as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31
- --------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
AT & T Corporation 35% 37% 28%
Billing Information Concepts Inc. 12 - -
Ameritech Communications Inc. 11 - -
AT&T Canada Long Distance Services Corp. 7 11 18
3 16 24
Energis Communications Limited
- --------------------------------------------------------------------------------
68% 64% 70%
- --------------------------------------------------------------------------------
</TABLE>
Financial instruments which potentially subject the Company to concentrations of
credit risk consist entirely of trade receivables. The Company sells its
products to customers primarily in the telecommunications industry within North
America. The Company performs ongoing credit evaluations of its customers and
does not require collateral. The Company provides an allowance for potential
credit losses and such losses were not material during the periods reported.
The aggregate accounts receivable balances relating to the above customers
totalled $9,860,000, $4,037,000, and $3,841,000 on December 31, 1996, 1995 and
1994 respectively.
The Company's cash and cash equivalents as at December 31, 1996 and 1995 include
approximately $27,458,000 and $20,791,000, respectively, on deposit with one
institution, the majority of which is invested in short-term commercial papers.
The fair value is approximately equal to the cost of these instruments. Interest
rates on these short term deposits range from 5 to 6%.
13. GOVERNMENT ASSISTANCE
The Company is eligible for government assistance in certain jurisdictions for
certain expenditures incurred. The Company accrues and offsets these eligible
grants against the related costs. The amounts included in income were $390,000
and $196,000 for the years ended December 31, 1996 and 1995 respectively.
Page 31
<PAGE>
Exhibit Index
-------------
The following exhibits are filed as part of this Annual Report on Form
10-K.
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ---------- ----------- ----
<S> <C> <C>
*2.1 - Contribution Agreement between the Registrant and certain
shareholders of the Registrant, dated as of September 27, 1995.
*2.2 - Stock Restriction and Contribution Agreement between Invoice
Systems (Canada), Inc. and the Registrant, dated as of September
27, 1995.
***2.3 - Amended and Restated Contribution Agreement between the
Registrant, 29916746 Canada, Inc. and Columbia Saville Ireland
Investors, L.P., dated as of November 22, 1995.
*3.1 - Memorandum of Association of the Registrant.
*3.2 - Articles of Association of the Registrant.
*4.1 - Specimen Certificate for Ordinary Shares, $0.0025 par value, of
the Registrant.
*4.2 - Deposit Agreement among the Registrant, The Bank of
New York, as Depositary, and the holders from time to
time of American Depositary Shares issued thereunder
(including as an exhibit the form of American
Depositary Receipt).
*4.3 - Amended and Restated Saville Systems Agreement among the
Registrant, Saville Systems Canada, Ltd., and Saville Systems
U.S., Inc., and the Shareholders thereof, dated as of August 2,
1994.
*4.4 - Amendment No. 1 to Amended and Restated Saville Systems
Agreement among the Registrant, Saville Systems Canada, Ltd.
and Saville Systems U.S., Inc., and the Shareholders thereof, dated
as of September 27, 1995
**4.5 - Waiver and Amendment No. 2 to Amended and Restated Saville
Systems Agreement among the Registrant, Saville Systems
Canada, Ltd. and Saville Systems U.S., Inc. and the Shareholders
thereof, dated as of November 8, 1995.
</TABLE>
-36-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
**4.6 - Registration Rights Agreement among the Registrant
and certain shareholders thereof, dated as of
November 8, 1995.
*10.1+ - Software Development and Support Agreement between the
Registrant and American Telephone and Telegraph Company,
dated as of January 1, 1994.
*10.2+ - Software Development and Support Agreement between Invoice
Systems, Inc., B.A. Saville & Associates Limited and Unitel
Communications Inc., dated as of February 24, 1993.
*10.3 - Letter Agreement between Invoice Systems, Inc., B.A. Saville &
Associates Limited and Unitel Communications Inc. dated
September 1, 1993.
*10.4+ - Software License Agreement between Invoice Systems, Inc., B.A.
Saville & Associates Limited and Unitel Communications Inc.,
dated as of February 24, 1993.
*10.5+ - Processing Services Contract between Saville Systems U.S., Inc.
and Frontier Communications of Rochester Inc., dated as of
September 15, 1994.
*10.6 - Master Services Agreement between Saville Systems U.S., Inc. and
Frontier Communications of Rochester Inc., dated as of September
15, 1994.
*10.7+ - Marketing and License Agreement between Saville Systems
Canada, Ltd. and Edmonton Telephones Corporation, effective as
of January 1, 1992 and dated as of February 14, 1994.
*10.8 - Letters from Saville Systems Canada, Ltd. to the Legal Counsel
and the Chief Financial Officer of Ed Tel, Inc. dated June 30, 1995
renewing the Marketing and License Agreement between Saville
Systems Canada, Ltd. and Edmonton Telephones Corporation.
*10.9+ - Core Processing Agreement between Saville Systems Canada, Ltd.
and Ed Tel, Inc., dated as of February 14, 1994.
*10.10+ - Agreement for Software System Development and Billing Services
between Saville Systems U.S., Inc., Saville Systems Canada, Ltd.
and Sprint Communications Company, L.P., dated as of March 1,
1993.
</TABLE>
-37-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
*10.11 - Software License Agreement between Saville Systems U.S., Inc.
Saville Systems Canada, Ltd. and Sprint Communications
Company, L.P., dated as of March 1, 1993.
*10.12+ - Agreement between Saville Systems U.S., Inc., Saville Systems
Canada, Ltd. and Spring International Communications
Corporation, dated as of April 19, 1993.
*10.13+ - Supply Agreement between the Registrant and Energis
Communications Limited, effective as of October 8,
1994 and dated as of July 25, 1995.
*10.14 - Guarantee and Assignment between Saville Systems Canada, Ltd.
and Energis Communications Limited, dated July 25, 1995.
*10.15 - 1995 Share Option Plan.
*10.16(1) - Amended and Restated Employment Agreement between
the Registrant and Bruce A. Saville, dated as of
August 2, 1994.
*10.17(1) - Employment Agreement between the Registrant and
John J. Boyle, III, dated as of July 8, 1994, amended
as of January 31, 1995.
*10.18 - Sublease between Evered Bardon USA, Inc. and Saville Systems
U.S., Inc. dated December 1, 1994.
*10.19 - Lease Agreement between Barbican Properties Inc. and Saville
Systems Canada, Ltd. made as of May 1, 1995.
*10.20 - Letter Agreement between Barbican Properties Inc. and Saville
Systems Canada, Ltd. dated July 19, 1995.
*10.21 - Indenture between Orfus Investments and Saville Systems
Canada, Ltd. dated November 25, 1994.
*10.22 - Lease between Clybaun Construction Limited, Saville Systems
Ireland Limited, Saville Systems Canada, Ltd. and Anglo Irish
Bank Corporation PLC, dated April 27, 1994.
*10.23 - Deed between Saville Systems Ireland Limited and Clybaun
Construction Limited, dated April 27, 1994.
</TABLE>
-38-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
*10.24 - Lease between Clybaun Construction Limited, Saville Systems
Ireland Limited and Remington Fox Ireland Limited, dated July 1,
1994.
*10.25 - Promissory Note in the amount of $500,000 executed by Saville
Systems Canada, Ltd. in favor of 167818 Canada Ltd. (now
known as Grannarville Interest Group Ltd.), dated August 2,
1994.
*10.26 - Agreement between Saville Systems Ireland Limited, Saville
Systems Canada, Ltd. and Industrial Development Agency
(Ireland), dated June 9, 1995.
*10.27+ - Intellectual Property Purchase Agreement between the Registrant
and Saville Systems Canada, Ltd. made as of July 1, 1993.
*10.28(1) - Employment Letter Agreement between Saville Systems Ireland
Limited and Padraig W. Kenny, dated March 30, 1995.
*10.29(1) - Employment Letter Agreement between Saville Systems U.S., Inc.
and Michael A. Shulist, dated February 21, 1995.
*10.30(1) - Employment Letter Agreement between Saville Systems U.S., Inc.
and Marc J. Venator, dated March 22, 1995.
*10.31(1) - Employment Letter Agreement between the Registrant
and John J. Kiley, dated October 17, 1995.
**10.32 - Letter Agreement between Saville Systems
Canada, Ltd. and Ed Tel, Inc., dated
June 30, 1995.
**10.33 - Sublease Agreement between Saville Systems
U.S., Inc. and Boston Private Bank & Trust Company, dated
November 22, 1995.
**10.34 - 1996 Employee Share Purchase Plan.
***10.35 - Lease Agreement between Saville Systems Canada, Ltd. and
Orfus Investments, dated April 25, 1996.
***10.36 - Indemnity Agreement between the Company and Orfus
Investments, dated April 25, 1996.
</TABLE>
-39-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
11.1 - Calculation of shares used in determining earnings per share.
*21.1 - List of Subsidiaries.
23.1 - Consent of Ernst & Young.
24.1 - Powers of Attorney (included on the signature page to this
Annual Report on Form 10-K).
27.1 - Financial Data Schedule.
</TABLE>
- --------------------
(1) Management contract or compensatory plan or arrangement filed as an
exhibit to this Form pursuant to Items 14(a) and 14(c) of Form 10-K.
* Incorporated herein by reference to the Company's Registration
Statement on Form S-1, as amended (File No. 33-97576).
** Incorporated herein by reference to the Company's Annual Report on Form
10- K for the year ended December 31, 1995.
*** Incorporated by reference to the Company's Registration
Statement on Form S-1, as amended (File No. 333-04199).
+ Confidential treatment requested as to certain portions, which are
omitted and filed separately with the Commission.
-40-
<PAGE>
EXHIBIT 11.1
- ------------
SAVILLE SYSTEMS PLC
Calculation of Shares Used in Determining
Net Income (Loss) Per Share(1)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
(in thousands, except per share data) 1994 1995 1996
-------------- ------------ ------------
<S> <C> <C> <C>
Net income (loss) $ 5,357 $ 6,382 $ 11,569
============== ============ ============
Weighted average number of Ordinary equivalent shares:
Ordinary shares 15,004 15,316 17,729
Non-qualified share options(2) 717 835 1,219
-------------- ------------ ------------
15,721 16,151 18,948
Net income (loss) per share(3) $ 0.34 $ 0.40 $ 0.61
============== ============ ============
</TABLE>
(1) This Exhibit should be read in connection with "Net Income (Loss) per
share" in Note 2 of the notes to the consolidated financial statements
(2) Pursuant to the requirements of the Securities and Exchange Commission,
Ordinary Shares and share equivalents issued during the twelve month
period prior to the Company's initial public offering have been included
in the calculation (using the treasury stock method and the initial public
offering price) as if they were outstanding for all periods peresented.
(3) The calculation of fully diluted earnings per share is not substantially
different from the primary earnings per share for the periods presented.
<PAGE>
Exhibit 23.1
------------
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 333-16861 and Form S-8 File No. 33-80607) of Saville Systems PLC
and in the related Prospectus of our reports dated January 22, 1997 with respect
to the consolidated financial statements of Saville Systems PLC incorporated by
reference in this Annual Report (Form 10-K) for the year ended December 31,
1996.
Our audits also included the financial statement schedules of Saville Systems
PLC listed in Item 14(a)(2). These schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedules referred to above,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
ERNST & YOUNG
/s/ Ernst & Young
Galway, Ireland
March 27, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 34,395
<SECURITIES> 1,000
<RECEIVABLES> 16,064
<ALLOWANCES> 756
<INVENTORY> 0
<CURRENT-ASSETS> 52,214
<PP&E> 5,684
<DEPRECIATION> 1,409
<TOTAL-ASSETS> 56,489
<CURRENT-LIABILITIES> 9,558
<BONDS> 0
0
48
<COMMON> 45
<OTHER-SE> 46,518
<TOTAL-LIABILITY-AND-EQUITY> 56,489
<SALES> 0
<TOTAL-REVENUES> 53,920
<CGS> 0
<TOTAL-COSTS> 25,774
<OTHER-EXPENSES> 12,984
<LOSS-PROVISION> 386
<INTEREST-EXPENSE> 15
<INCOME-PRETAX> 14,761
<INCOME-TAX> 3,052
<INCOME-CONTINUING> 11,569 <F1>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,569
<EPS-PRIMARY> 0.61
<EPS-DILUTED> 0.61
<FN>
<F1> AFTER DEDUCTING MINORITY INTEREST OF 140.
</FN>
</TABLE>
