UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
|x| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
Commission File Number 0-27176
SAVILLE SYSTEMS PLC
(Exact name of registrant as specified in its charter)
Republic of Ireland
(State or other jurisdiction of incorporation or organization)
Not Applicable
(I.R.S. Employer Identification No.)
IDA Business Park, Dangan, Galway, Ireland
(Address of principal executive offices, including zip code)
011-353-9-152-6611
(Registrant's telephone number, including area code)
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. |X| Yes | |No
Number of shares outstanding of the registrant's class of Ordinary Shares as of
April 30, 1998 was 38,503,394.
<PAGE>
SAVILLE SYSTEMS PLC
FORM 10-Q REPORT
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as at March 31, 1998
(unaudited)and December 31, 1997 3
Consolidated Statements of Income for the three months ended 4
March 31, 1998 and 1997 (unaudited)
Consolidated Statements of Cash Flows for the three months 5
ended March 31, 1998 and 1997 (unaudited)
Notes to Consolidated Financial Statements (unaudited) 6-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
<PAGE>
Saville Systems PLC
CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars, except share data amounts)
<TABLE>
March 31 December 31
1998 1997
(unaudited)
- ----------------------------------------------------------------------------- ---------------
<S> <C> <C>
ASSETS
Current
Cash and cash equivalents $ 44,729 $ 55,785
Short-term investments 30,867 13,015
Accounts receivable, less allowance for doubtful accounts
of $1,845 and $1,687, respectively 30,845 22,373
Prepaid expenses and other assets 5,594 3,581
- ----------------------------------------------------------------------------- ---------------
Total current assets 112,035 94,754
Property and equipment, net 12,331 10,621
Other assets 4,425 -
- ----------------------------------------------------------------------------- ---------------
Total assets $128,791 $105,375
- ----------------------------------------------------------------------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable 5,722 5,336
Accrued compensation and related benefits 5,759 5,248
Accrued expenses and other liabilities 4,167 3,084
Income taxes payable 6,804 7,167
Deferred revenue 5,913 3,402
Current portion of long-term liabilities 1,140 134
- ----------------------------------------------------------------------------- ---------------
Total current liabilities 29,505 24,371
Long-term liabilities 1,302 336
Minority interest 250 366
- ----------------------------------------------------------------------------- ---------------
Total liabilities 31,057 25,073
- ----------------------------------------------------------------------------- ---------------
Shareholders' equity
Ordinary Shares, nominal value $0.0025 per share
Authorized: 75,000,000
Issued and outstanding: 38,219,696 and 37,504,596 96 94
Deferred Ordinary Shares, nominal value IR(pound)1.00 per share
Authorized, issued and outstanding: 30,000 48 48
Additional paid-in capital 45,937 37,734
Retained earnings 51,946 42,750
Accumulated other comprehensive income (293) (324)
- ----------------------------------------------------------------------------- ---------------
Total shareholders' equity 97,734 80,302
- ----------------------------------------------------------------------------- ---------------
Total liabilities and shareholders' equity $128,791 $105,375
- ----------------------------------------------------------------------------- ---------------
</TABLE>
See accompanying notes
<PAGE>
Saville Systems PLC
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands of U.S. dollars, except share and per share data)
<TABLE>
Three months ended
March 31 March 31
1998 1997
- ---------------------------------------------------------------------- -----------------
<S> <C> <C>
REVENUE
Services $29,939 $16,515
License fees 8,083 3,615
- ---------------------------------------------------------------------- -----------------
Total revenue 38,022 20,130
- ---------------------------------------------------------------------- -----------------
EXPENSES
Cost of services 14,048 8,037
Cost of license fees 280 88
Sales and marketing 1,922 1,202
Research and development 3,931 1,481
General and administrative 6,543 3,909
- ---------------------------------------------------------------------- -----------------
Total expenses 26,724 14,717
- ---------------------------------------------------------------------- -----------------
Income from operations 11,298 5,413
Other income, net 723 354
- ---------------------------------------------------------------------- -----------------
Income before income taxes 12,021 5,767
Provision for income taxes 2,825 1,325
- ---------------------------------------------------------------------- -----------------
Income before minority interest 9,196 4,442
Minority interest share in subsidiaries' net income - 40
- ---------------------------------------------------------------------- -----------------
Net income $ 9,196 $ 4,402
- ---------------------------------------------------------------------- -----------------
Basic earnings per share $ 0.24 $ 0.12
Diluted earnings per share $ 0.23 $ 0.11
- ---------------------------------------------------------------------- -----------------
(in thousands)
Ordinary shares 37,822 36,209
Ordinary shares assuming dilution 40,845 38,551
- ---------------------------------------------------------------------- -----------------
</TABLE>
See accompanying notes
<PAGE>
Saville Systems PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands of U.S. dollars)
<TABLE>
Three months ended
March 31 March 31
1998 1997
- -------------------------------------------------------- -------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 9,196 $ 4,402
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 477 278
Allowance for doubtful accounts 355 370
Minority interest in net income - 40
Gain on sale of property and equipment (97) (19)
Compensation related to stock transactions 51 60
Changes in operating assets and liabilities:
Accounts receivable (8,824) (7,662)
Prepaid expenses and other assets (1,240) (205)
Accounts payable (565) 263
Accrued compensation and related benefits 511 (512)
Accrued expenses and other liabilities 1,083 54
Income taxes payable (363) 373
Deferred revenue 2,511 2,381
- -------------------------------------------------------- -------------- --------------
Net cash provided by (used in) operating activities 3,095 (177)
- -------------------------------------------------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net purchase of property and equipment (1,866) (391)
Purchase of other assets (2,425) -
Purchase of short-term investments (17,852) (7,000)
- -------------------------------------------------------- -------------- --------------
Net cash used in investing activities (22,143) (7,391)
- -------------------------------------------------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term liabilities (31) (43)
Proceeds from share issuances 7,955 706
Share issue costs (121) (46)
Tax benefit on employee stock transactions 204 488
- -------------------------------------------------------- -------------- --------------
Net cash provided by financing activities 8,007 1,105
- -------------------------------------------------------- -------------- --------------
- -------------------------------------------------------- -------------- --------------
Effect of exchange rate changes on cash (15) 3
- -------------------------------------------------------- -------------- --------------
Net decrease in cash and cash equivalents (11,056) (6,460)
Cash and cash equivalents, beginning of period 55,785 34,395
- -------------------------------------------------------- -------------- --------------
Cash and cash equivalents, end of period $44,729 $27,935
- -------------------------------------------------------- -------------- --------------
Short-term investments 30,867 8,000
- -------------------------------------------------------- -------------- --------------
Cash and short-term investments $75,596 $35,935
- -------------------------------------------------------- -------------- --------------
Supplementary disclosure of cash flow information:
Cash paid for interest 30 3
Cash paid for income taxes 3,000 548
</TABLE>
See accompanying notes
<PAGE>
Saville Systems PLC
Notes to Consolidated Financial Statements at March 31, 1998 (unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
by the Company in accordance with U.S. generally accepted accounting principles
for interim financial information and with instructions to Form 10-Q.
Accordingly, certain information and footnote disclosure normally included in
the Company's audited annual consolidated financial statements have been
condensed or omitted in accordance with the rules and regulations of the
Securities and Exchange Commission. The unaudited interim consolidated financial
statements, in the opinion of management, reflect all adjustments (consisting
only of normal and recurring adjustments) necessary for a fair presentation of
the results of the interim periods ended March 31, 1998 and 1997 and the
financial position at March 31, 1998.
The results of operations for the interim periods are not necessarily indicative
of the results of operations to be expected for the fiscal year. These interim
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements of the Company which are contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
Earnings per share amounts for comparative periods have been restated to comply
with Statement of Financial Accounting Standards No. 128.
2. Share Capital
During the quarter ended March 31, 1998, the Company issued 715,100 Ordinary
Shares to officers and employees pursuant to option exercises for aggregate cash
consideration of approximately $7,955,000. All of these shares were issued under
the 1995 Share Option Plan ("1995 Plan") with the exception of approximately
62,000 issued under the 1996 Employee Share Purchase Plan ("1996 Plan").
The following table summarizes the activity in Ordinary Share options under the
1995 and 1996 Plans from December 31, 1997 to March 31, 1998:
<TABLE>
Number of Ordinary Share Options
- ----------------------------------------------- ---------------- --------------
Available for Unexercised Weighted
grant average price
per share
<S> <C> <C> <C>
Balance at December 31, 1997 5,449,408 4,279,435 $13.61
Options granted (2,028,473) 2,028,473 38.44
Options exercised (715,100) 11.12
Options cancelled 43,972 (43,972) 22.36
Balance at March 31, 1998 3,464,907 5,548,836 $22.94
- ----------------------------------------------- ---------------- --------------
</TABLE>
<PAGE>
Saville Systems PLC
Notes to Consolidated Financial Statements at March 31, 1998 (unaudited)
(continued)
A summary of Ordinary Share options outstanding as of March 31, 1998 is as
follows:
<TABLE>
- ------------------ ----------------- ----------------- ----------------- ----------------- -----------------
Total Outstanding Range of Weighted Weighted Exercisable at Weighted
Exercise Prices Average Average March 31, 1998 Average
Exercise Price Remaining Exercise Price
Contractual of Exercisable
Life (in years) Options
<S> <C> <C> <C> <C> <C>
- ------------------ ----------------- ----------------- ----------------- ----------------- -----------------
280,528 $ 1.20 $ 1.20 1.8 280,528 $ 1.20
1,147,696 4.33 - 5.00 4.48 7.5 594,071 4.53
40,590 7.50 - 13.32 8.79 7.8 25,256 8.19
1,652,122 14.06 - 21.50 18.59 8.8 600,450 18.98
209,000 21.75 - 32.56 29.44 9.5 - -
2,218,900 33.50 - 51.38 38.12 9.5 - -
- ------------------ ----------------- ----------------- ----------------- ----------------- -----------------
5,548,836 $1.20 - $51.38 $22.94 8.5 1,500,305 $ 9.76
- ------------------ ----------------- ----------------- ----------------- ----------------- -----------------
</TABLE>
In January 1998, approximately 1,698,000 options were granted to employees and
directors that may vest earlier than the original three year vesting period if
the market price of the Company's American Depositary Receipts (ADRs) increases
in specified time frames. At March 31, 1998, approximately 1,689,000 of these
options were outstanding.
3. Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards No. 130
(SFAS 130), "Reporting Comprehensive Income" which became effective for the
Company's quarter ended March 31, 1998. The Company's comprehensive income was
as follows:
<TABLE>
Three months ended
March 31 March 31
1998 1997
- -------------------------------------------- ------------ ------------------
(in thousands of U.S. dollars)
<S> <C> <C>
Net income $9,196 $4,402
Foreign currency translation adjustment, 31 (33)
net of NIL tax ============ ============
Comprehensive income $9,227 $4,369
============ ============
</TABLE>
The earnings of the Company's non-Irish foreign subsidiaries, which give rise to
the foreign currency translation adjustments, are reinvested with no plan for
repatriation. Therefore, there is no tax effect on this component of other
comprehensive income.
<PAGE>
Saville Systems PLC
Notes to Consolidated Financial Statements at March 31, 1998 (unaudited)
(continued)
4. Other Assets
In February 1998, the Company purchased a telecommunications billing software
product for resale for an amount of $2.0 million in cash with a commitment of at
least $2.0 million in royalties to be paid over the next two years. The total
cost of the software at March 31, 1998, including acquisition costs and minimum
royalty payments, was approximately $4.1 million. Long-term liabilities include
the $2.0 million minimum royalty payments, of which $1.0 million is due on
January 31, 1999 and is included in the current portion of long-term
liabilities. The Company is currently undertaking a review of the product to
confirm that it is ready for sale. Further assessment is necessary to fully
evaluate the status of the product. Should the assessment determine that further
development is required to significantly modify or integrate the product for
future sale the Company would expense the relevant amounts.
Other assets at March 31, 1998 also includes approximately $370,000 of
acquisition costs as described in Note 6.
5. Contingency
From time to time the Company may receive threats of or become involved in
litigation in the ordinary course of its business. During June 1997, the Company
received a letter from a customer purporting to terminate its relationship with
the Company and alleging certain failures to perform by the Company. The
customer alleges damages of $12 million. The Company has denied all of these
allegations and believes that they are without merit. Management believes that
this matter will have no material adverse effect on the Company's operations or
financial position and accordingly, no provision for any liability has been made
in these financial statements.
6. Subsequent Events
On April 3, 1998, Saville Systems PLC and its wholly-owned subsidiary Saville
Systems Aust. Pty Ltd acquired substantially all of the assets of BHA Pty Ltd.
("BHA") and its majority-owned subsidiary BHA Computer Pty Ltd. ("BHAC"),
Australian telecommunications software companies, for approximately $15.8
million in cash, plus the assumption of approximately $3.3 million in net
liabilities. The Company funded the acquisition, in part, by the borrowing of
approximately $15.0 million from the Company's working capital line of credit.
This entire amount outstanding was repaid, in part, by the Company through the
sale of 283,698 of its Ordinary Shares to BHA for aggregate consideration of
approximately $14.0 million. The assets consist of those assets used by BHA and
BHAC in developing and marketing customer care and billing software for the
telecommunications industry, including property, plant and equipment,
intellectual property and the benefit of current BHA and BHAC contracts.
7. Recently Issued Accounting Standards
The Accounting Standards Executive Committee has issued statement of position
97-2 "Software Revenue Recognition" ("SOP 97-2") which is effective for the
Company's quarter ended March 31, 1998. The Company's revenue recognition
policies were largely unaffected by SOP 97-2 and are in accordance with its
requirements.
<PAGE>
Saville Systems PLC
Notes to Consolidated Financial Statements at March 31, 1998 (unaudited)
(continued)
7. Recently Issued Accounting Standards (continued)
Statement of position 98-1 "Accounting for Costs of Computer Software Developed
or Obtained for Internal Use" ("SOP 98-1") has also been issued and will be
effective for the Company's December 31, 1999 year end. The Company has not
determined the impact, if any, of this pronouncement on its consolidated
financial statements.
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" which is effective for the Company's
December 31, 1998 year end. No additional disclosure is required for interim
financial statements until the Company's quarter ending March 31, 1999.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The following information should be read in conjunction with the Unaudited
Consolidated Financial Statements and Notes thereto included in Item 1 of this
Quarterly Report and the Audited Consolidated Financial Statements and Notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
Results of Operations
Revenue
Total revenue increased 88.9% from $20.1 million in the three months ended March
31, 1997 to $38.0 million in the three months ended March 31, 1998 due to
overall increases in services and license fees as described below.
Services revenue increased 81.3% from $16.5 million in the three months ended
March 31, 1997 to $29.9 million in the three months ended March 31, 1998. The
increase was attributable primarily to an increase in consulting and
implementation services provided to new customers and, to a lesser extent,
increases in projects for existing customers.
License fees revenue increased 123.6% from $3.6 million in the three months
ended March 31, 1997 to $8.1 million in the three months ended March 31, 1998
due primarily to additional recognition of license fees arrangements for the
Company's convergent billing product called Saville CBPTM (CBP) that were
negotiated in 1997 and on new deals negotiated in 1998 located mostly in the
United States.
Cost of Services
Cost of services increased 74.8% from $8.0 million in the three months ended
March 31, 1997 to $14.0 million in the three months ended March 31, 1998 but
decreased as a percentage of services revenue from 48.7% in the period ended
March 31, 1997 to 46.9% in the same period in 1998. The overall increase in
expenses was primarily due to additional personnel hired to support the growth
of the Company, as well as additional costs incurred to attract and retain
qualified personnel. As the market demands for those skilled employees
increases, the Company expects that the costs to attract and retain personnel
will continue to increase. Also, as the Company continues to expand, it expects
the costs of services to increase accordingly.
Cost of License Fees
Cost of license fees increased 218.2% from $88,000 in the three months ended
March 31, 1997 to $280,000 in the three months ended March 31, 1998. This
increase was due to an increase in commission expense resulting from the
increase in the license fees earned by the Company.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Sales and Marketing
Sales and marketing expenses increased 59.9% from $1.2 million in the three
months ended March 31, 1997 to $1.9 million in the three months ended March 31,
1998. This increase was primarily due to the Company's continued expansion of
its sales force globally, including North America, Europe, Latin America and
Asia Pacific, and the associated expansion of its infrastructure. The Company
anticipates that the establishment of new sales offices and the continued focus
of the North American marketing efforts will increase its sales and marketing
expenses in absolute dollars through the remainder of 1998, but are expected to
remain at similar levels to 1997 as a percentage of total revenue.
Research and Development
Research and development expenses increased 165.4% from $1.5 million in the
three months ended March 31, 1997 to $3.9 million in the three months ended
March 31, 1998 and increased as a percentage of total revenue from 7.4% in the
three months ended March 31, 1997 to 10.3% in the same period in 1998. This
increase was due to increased development efforts by the Company on its CBP
products for both the DB2/400 platform and UNIX platform and on creating
innovative billing and customer care products. The Company intends to continue
to invest resources to expand its product offerings in the future and therefore
expects that research and development expenses will continue to increase during
1998 in absolute dollars but remain at similar levels to 1997 as a percentage of
total revenues.
General and Administrative
General and administrative expenses increased 67.4% from $3.9 million in the
three months ended March 31, 1997 to $6.5 million in the three months ended
March 31, 1998 and decreased as a percentage of total revenue from 19.4% in the
three months ended March 31, 1997 to 17.2% in the same period in 1998. The
additional costs were attributable to additional senior and middle management
and recruiting and infrastructure costs associated with the growth in the
Company's employee base and the expansion of the Company's business.
Other Income and Expenses
Other income and other expenses, increased 104.2% from $354,000 in the three
months ended March 31, 1997 to $723,000 in the three months ended March 31,
1998. Increased interest income on larger cash and short-term investment
balances accounted for the majority of the increase in other income.
Provision for Income Taxes
The Company recorded a tax provision of $1.3 million in the three months ended
March 31, 1997 representing an effective tax rate of 23.0%. Comparatively, a tax
provision of $2.8 million was recorded in the three months ended March 31, 1998
representing an effective tax rate of 23.5%. 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 standard rate of
income tax that applies to non-manufacturing income, such as income earned on
the Company's Irish cash investments, was 32% (36% during 1997). The Company's
effective tax rate reflects the tax relief on manufacturing income subject to
this reduced rate of tax which is below the statutory rates of Ireland, Canada
and the United States. There can be no assurances that the Company will continue
to be eligible for the reduced tax rate for manufacturing income in future
periods.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources
Cash and cash equivalents decreased $11.1 million from $55.8 million at December
31, 1997 to $44.7 million at March 31, 1998. This decrease was attributable to a
$17.9 million increase in short-term investments over the same period. On a
combined basis, therefore, there was a total $6.8 million increase in cash and
short-term investments due primarily to cash provided by operations and net
proceeds received from the issuance of Ordinary Shares offset by the purchase of
property and equipment and a software product.
Operating Activities
During the three months ended March 31, 1998, $3.1 million of cash was provided
by operating activities representing an increase of $3.3 million over the
$177,000 of cash used in the corresponding period in 1997. The major
contributors to this change were the cash provided by a $4.8 million increase in
net income and a $1.0 million increase in accrued expenses and other
liabilities, partially offset by a $1.0 million increase in prepaid expenses and
other assets.
Investing Activities
The net cash used in investing activities during the three months ended March
31, 1998 was comprised of $1.9 million to purchase property and equipment, $2.4
million to purchase other assets and $17.9 million invested in short-term
investments. The Company continues to make property and equipment expenditures
to support the growth of the Company as locations are expanded worldwide. The
Company expects to continue to make property and equipment investments to
support its business growth.
In February 1998, the Company purchased a telecommunications billing software
product for resale for an amount of $2.0 million in cash with a commitment of at
least $2.0 million in royalties to be paid over the next two years. In addition,
the Company incurred acquisition costs of $370,000 as part of the purchase of
the assets of BHA Pty Ltd. ("BHA") and its majority-owned subsidiary BHA
Computer Pty Ltd. ("BHA Computer"), Australian telecommunications software
companies, which occurred in April 1998. The assets were purchased for
approximately $15.8 million in cash, plus the assumption of approximately $3.3
million in net liabilities. The Company funded the acquisition, in part, by the
borrowing of approximately $15.0 million from the Company's working capital line
of credit. The entire outstanding amount was repaid, in part, by the Company
through the sale of 283,698 of its Ordinary Shares to BHA for aggregate
consideration of approximately $14.0 million.
Financing Activities
During the three months ended March 31, 1998 net cash provided from financing
activities was $8.0 million. This was primarily due to the issue of Ordinary
Shares pursuant to exercises of options under the employee stock option plan.
The Company and its subsidiaries have available a $15.0 million multi-currency
operating line of credit from a financial institution that expires on August 31,
1999 and bears interest at rates varying from 0.25% to 1% above the base rate.
This base rate depends on the currency of the funds drawn of the facility and
includes the Canadian U.S. Dollar Base rate, the Canadian Bank Prime rate and
LIBOR and DIBOR rates. No advances were drawn on this facility during the
quarter ended March 31, 1998.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations(continued)
The Company had capital lease obligations in principal amounts of $442,000 as of
March 31, 1998 ($470,000 at December 31, 1997) and subsequent to such date has
incurred no additional capital lease obligations. Long-term liabilities include
$2.0 million of minimum royalty payments due over the next two years as part of
the purchase of a telecommunications billing software product.
As of March 31, 1998 the Company had $30.8 million in net accounts receivable.
The average days sales outstanding ("DSO") at March 31, 1998 was approximately
74 days as compared to approximately 102 at March 31, 1997. 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 believes that existing cash balances, funds generated by operations
and the availability of the Company's line of credit will be sufficient to meet
its anticipated liquidity and working capital requirements for the next twelve
months.
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, Pounds Sterling and Swiss Francs. The impact of foreign
currency translation has not been material to the Company's operations.
Certain Factors That May Affect Future Results
This Quarterly 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 expand its international and North American
sales presence, the Company's plans to continue its research and development
efforts, the Company's expectation that it will continue to make property and
equipment investments in 1998, the Company's plans for strategic acquisitions,
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 for the next twelve months, the possible adverse foreign
currency exposure involved with international expansion, 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 been derived
from a relatively 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 Company'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>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (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 the 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 introduced its UNIX-based CBP for Oracle product,
almost all of the Company's billing and customer care customers run the
Company's software on the DB2/400 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 DB2/400 platform by the telecommunications industry for
billing, the Company would be required to expend substantial capital resources
to develop new software and enhance existing 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 that meet the changing
requirements of new and existing customers. The Company is currently devoting
significant resources to develop, refine and enhance its base software modules
for both its UNIX-based and DB2/400-based products. If the Company were unable,
due to resource, technological or other constraints, to adequately anticipate or
respond to such changes, or if the Company's new products, developments and
enhancements do not gain market acceptance, the Company's business, financial
condition and results of operations would be materially adversely affected.
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. Specifically, the Asia
Pacific region has experienced a recent downturn in economic conditions, the
continuation of which could adversely affect the Company's ability to expand
into this region.
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.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
The Company's strategy includes the acquisition of businesses and technologies
that complement or augment the Company's existing business and products. On
April 3, 1998, the Company completed its acquisition of substantially all of the
assets of BHA and BHA Computer. In addition, the Company purchased an
interconnect telecommunications software product from a Swedish company.
Promising acquisitions are difficult to identify and complete for a number of
reasons, including competition among prospective buyers and the need to obtain
regulatory approvals, including antitrust approvals. There can be no assurance
that the Company will be able to complete future acquisitions or that the
Company will be able to successfully integrate any acquired businesses. In order
to finance such acquisitions, it may be necessary for the Company to raise
additional funds through public or private financing. Any equity or debt
financing, if available at all, may be on terms that are not favorable to the
Company, and in the case of equity offerings, may result in dilution to the
Company's shareholders.
Fluctuations 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.
From time to time, the Company may receive threats of or become involved in
litigation in the ordinary course of its business. In June 1997, the Company
received a letter from a customer purporting to terminate its relationship with
the Company and alleging certain failures to perform by the Company. The
customer alleges damages of $12 million. The Company has denied all of these
allegations and believes that they are without merit. There can be no assurance,
however, as to the outcome of this or any other dispute that may arise.
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
rate that is substantially lower than U.S. tax rates. If the Company could no
longer qualify for this lower 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.
The Company is reviewing its products and operations to ensure that they will
not be adversely affected by year 2000 software failures, which can arise in
time-sensitive software applications that utilize a field of two digits to
define the applicable year. In such applications, a date using "00" as the year
may be recognized as the year 1900 rather than the year 2000. The Company's
released software products are currently year 2000 ready, and therefore the
Company does not believe that it will need to undertake material research and
development efforts in this regard. The Company's review, correction, and
upgrade of its internal systems to ensure year 2000 readiness is ongoing. The
Company believes that any correction or upgrade necessary to make the Company's
major internal systems year 2000 ready will be completed by early 1999 and that
the cost of such actions will not have a material adverse effect on the
Company's results of operations or financial condition. There can be no
assurances, however, that there will not be a delay in, or increased costs
associated with, the implementation of such corrections or upgrades or that the
Company will suffer no material adverse effects from the year 2000 problem,
including due to the lack of readiness on the part of third party suppliers of
goods and services to the Company's operations.
<PAGE>
SAVILLE SYSTEMS PLC
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.0 Financial Data Schedule
(b) Reports on form 8-K
The Company filed a current Report on Form 8-K dated
April 3,1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SAVILLE SYSTEMS PLC
(Registrant)
Date: May 5, 1998 By: /s/ John J. Boyle, III
John J. Boyle, III
Chairman and CEO
Date: May 5, 1998 By: /s/ Christopher A. Hanson
Christopher A. Hanson
Chief Financial Officer
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD ENDED
MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 44,729
<SECURITIES> 30,867
<RECEIVABLES> 32,690
<ALLOWANCES> 1,845
<INVENTORY> 0
<CURRENT-ASSETS> 112,035
<PP&E> 15,447
<DEPRECIATION> 3,116
<TOTAL-ASSETS> 128,791
<CURRENT-LIABILITIES> 29,505
<BONDS> 1,302
0
48
<COMMON> 96
<OTHER-SE> 97,590
<TOTAL-LIABILITY-AND-EQUITY> 128,791
<SALES> 0
<TOTAL-REVENUES> 38,022
<CGS> 0
<TOTAL-COSTS> 16,250
<OTHER-EXPENSES> 9,366
<LOSS-PROVISION> 355
<INTEREST-EXPENSE> 30
<INCOME-PRETAX> 12,021
<INCOME-TAX> 2,825
<INCOME-CONTINUING> 9,196
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