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 September 30, 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
October 26, 1998 was 38,731,973.
<PAGE>
SAVILLE SYSTEMS PLC
FORM 10-Q REPORT
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 1998
(unaudited) and December 31, 1997 3
Consolidated Statements of Income for the three months
and for the nine months ended September 30, 1998 and 1997
(unaudited) 4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1998 and 1997 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
<PAGE>
Saville Systems PLC
CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars, except share data amounts)
<TABLE>
Sept. 30 Dec. 31
1998 1997
(unaudited)
- ------------------------------------------------------------------- ----------
<S> <C> <C>
ASSETS
Current
Cash and cash equivalents $ 37,240 $ 55,785
Short-term investments 44,604 13,015
Accounts receivable, less allowance for
doubtful accounts of $1,740 and $1,687, respectively 37,827 22,373
Prepaid expenses and other assets 5,120 3,581
- ------------------------------------------------------------------- ----------
Total current assets 124,791 94,754
Property and equipment, net 12,390 10,621
Other assets, net 6,266 -
- ------------------------------------------------------------------- ----------
Total assets $ 143,447 $ 105,375
- ------------------------------------------------------------------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable 3,256 5,336
Accrued compensation and related benefits 6,263 5,248
Accrued expenses and other liabilities 6,555 3,084
Income taxes payable 7,302 7,167
Deferred revenue 4,358 3,402
Current portion of long-term liabilities 1,114 134
- ------------------------------------------------------------------- ----------
Total current liabilities 28,848 24,371
Long-term liabilities 1,213 336
Minority interest 244 366
- ------------------------------------------------------------------- ----------
Total liabilities 30,305 25,073
- ------------------------------------------------------------------- ----------
Shareholders' equity
Ordinary Shares, nominal value $0.0025 per share
Authorized: 75,000,000
Issued and outstanding: 38,731,115 and 37,504,596 97 94
Deferred Ordinary Shares, nominal value
IR(punt)1.00 per share
Authorized, issued and outstanding: 30,000 48 48
Additional paid-in capital 62,680 37,734
Retained earnings 51,554 42,750
Accumulated other comprehensive income (1,237) (324)
- ------------------------------------------------------------------- ----------
Total shareholders' equity 113,142 80,302
- ------------------------------------------------------------------- ----------
Total liabilities and shareholders' equity $ 143,447 $ 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 Nine months ended
Sept. 30 Sept. 30 Sept. 30 Sept. 30
1998 1997 1998 1997
- ------------------------------------------ --------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C>
REVENUE
Services $ 31,332 $ 22,575 $92,385 $ 59,178
License fees 11,245 6,006 31,125 15,026
- ------------------------------------------ --------------- --------------- -------------- ----------------
Total revenue 42,577 28,581 123,510 74,204
- ------------------------------------------ --------------- --------------- -------------- ----------------
EXPENSES
Cost of services 15,505 10,852 45,616 28,337
Cost of license fees 372 165 922 381
Sales and marketing 2,194 1,600 6,302 4,324
Research and development 5,362 2,805 15,261 6,816
General and administrative 8,851 5,325 23,174 14,147
Charge for purchased in-process research
and development - - 18,808 -
- ------------------------------------------ --------------- --------------- -------------- ----------------
Total expenses 32,284 20,747 110,083 54,005
- ------------------------------------------ --------------- --------------- -------------- ----------------
Income from operations 10,293 7,834 13,427 20,199
Other income, net 837 596 2,191 1,509
- ------------------------------------------ --------------- --------------- -------------- ----------------
Income before income taxes 11,130 8,430 15,618 21,708
Provision for income taxes 2,560 2,096 6,814 5,416
- ------------------------------------------ --------------- --------------- -------------- ----------------
Income before minority interest 8,570 6,334 8,804 16,292
Minority interest share in subsidiaries'
net income - 50 - 165
- ------------------------------------------ --------------- --------------- -------------- ----------------
Net income $ 8,570 $6,284 $ 8,804 $ 16,127
- ------------------------------------------ --------------- --------------- -------------- ----------------
Basic earnings per share $ 0.22 $ 0.17 $ 0.23 $ 0.44
Diluted earnings per share $ 0.21 $ 0.16 $ 0.22 $ 0.41
- ------------------------------------------ --------------- --------------- -------------- ----------------
(in thousands)
Ordinary shares 38,679 36,965 38,352 36,541
Ordinary shares assuming dilution 40,271 39,597 40,795 39,093
- ------------------------------------------ --------------- --------------- -------------- ----------------
</TABLE>
See accompanying notes
<PAGE>
Saville Systems PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands of U.S. dollars)
<TABLE>
Nine months ended
Sept. 30 Sept. 30
1998 1997
- -------------------------------------------------------------------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $8,804 $16,127
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,602 975
Allowance for doubtful accounts 2,762 1,010
Minority interest in net income - 165
(Gain) loss on sale of property and equipment (122) 54
Compensation related to stock transactions 155 60
Deferred taxes (1,477) -
Charge for purchased in-process research
and development 18,808 -
Changes in operating assets and liabilities:
Accounts receivable (18,218) (13,777)
Prepaid expenses and other assets (1,350) (1,592)
Accounts payable (2,374) 2,372
Accrued compensation and related benefits 1,015 2,422
Accrued expenses and other liabilities 2,828 1,939
Income taxes payable 135 2,248
Deferred revenue 956 4,022
- -------------------------------------------------------------------- ----------
Net cash provided by operating activities 14,524 16,025
- -------------------------------------------------------------------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net purchase of property and equipment (3,725) (3,450)
Purchase of other assets (2,089) -
Net purchase of short-term investments (31,589) (21,004)
Purchase of business assets (20,436) -
- -------------------------------------------------------------------- ----------
Net cash used in investing activities (57,839) (24,454)
- -------------------------------------------------------------------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term liabilities (97) -
Advances on operating line of credit 15,100 -
Repayments on operating line of credit (15,100) -
Proceeds from share issuances 24,505 8,059
Share issue costs (418) (140)
Tax benefit on employee stock transactions 653 645
- -------------------------------------------------------------------- ----------
Net cash provided by financing activities 24,643 8,564
- -------------------------------------------------------------------- ----------
Effect of exchange rate changes on cash 127 (6)
- -------------------------------------------------------------------- ----------
Net increase (decrease) in cash and cash equivalents (18,545) 129
Cash and cash equivalents, beginning of period 55,785 34,395
- -------------------------------------------------------------------- ----------
Cash and cash equivalents, end of period $37,240 $34,524
- -------------------------------------------------------------------- ----------
Short-term investments 44,604 22,004
- -------------------------------------------------------------------- ----------
Cash and short-term investments $81,844 $56,528
- -------------------------------------------------------------------- ----------
Supplementary disclosure of cash flow information:
Cash paid for income taxes 7,155 2,600
</TABLE>
See accompanying notes
<PAGE>
Saville Systems PLC
Notes to Consolidated Financial Statements as of September 30, 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 September 30, 1998 and 1997 and the
financial position as of September 30, 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 three and nine month periods ended September 30, 1998 the Company
issued 78,956 Ordinary Shares for approximately $1.1 million and 942,821
Ordinary Shares for approximately $10.5 million, respectively, to officers and
employees pursuant to option exercises and stock issuances under the 1995 Share
Option Plan ("1995 Plan") and the 1996 Employee Share Purchase Plan ("1996
Plan").
During the three months ended June 30, 1998 the Company also issued 283,698
Ordinary Shares to BHA Pty Ltd. for aggregate consideration of approximately
$14.0 million in order to fund, in part, an asset acquisition. See Note 4
"Acquisition and Other Assets".
The following table summarizes the activity in Ordinary Share options under the
1995 and 1996 Plans from December 31, 1997 to September 30, 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 (2,657,201) 2,657,201 36.05
Options exercised - (942,821) 11.09
Options cancelled 179,290 (179,290) 34.20
Balance at September 30, 1998 2,971,497 5,814,525 $23.64
- ----------------------------------------------- --------------- ---------------
</TABLE>
<PAGE>
A summary of Ordinary Share options outstanding as of September 30, 1998 is as
follows:
<TABLE>
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Total Outstanding Range of Weighted Weighted Exercisable at Weighted
Exercise Prices Average Average Sept. 30, 1998 Average
Exercise Price Remaining Exercise Price
Contractual of Exercisable
Life (in years) Options
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
235,528 $1.20 $1.20 1.3 235,528 $ 1.20
1,094,784 4.33-5.00 4.49 6.9 1,021,449 4.45
48,590 7.50-13.69 9.54 7.8 29,256 8.62
1,859,381 14.06-21.50 18.08 8.5 650,634 18.75
296,500 21.75-32.56 30.28 9.2 17,332 28.71
2,143,442 33.50-50.25 38.24 9.3 18,666 33.75
136,300 50.75-55.00 53.05 9.5 - -
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
5,814,525 $1.20-55.00 $23.64 8.2 1,972,865 $ 9.33
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
</TABLE>
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:
(in thousands of U.S. dollars)
<TABLE>
Three months ended Nine months ended
Sept. 30 Sept. 30 Sept. 30 Sept. 30
1998 1997 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $8,570 $6,284 $8,804 $16,127
Foreign currency translation
adjustment, net of NIL tax (421) (4) (913) (30)
-------------------------------------------------
Comprehensive income $8,149 $6,280 $7,891 $16,097
=================================================
</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.
4. Acquisition and Other Assets
During the quarter ended September 30, 1998, the Company did not have any
acquisition activity. However, in April 1998 the Company acquired the net assets
of Australian telecommunications software company BHA Pty Ltd. ("BHA") and its
majority-owned subsidiary BHA Computer Pty Ltd. ("BHAC") for approximately $15.8
million in cash and the settlement of approximately $3.3 million in related bank
debt, as well as approximately $906,000 in acquisition related costs and
expenses including applicable duties and taxes. The Company funded the
acquisition, in part, by the borrowing of approximately $15.1 million from the
Company's working capital line of credit. The entire amount borrowed was repaid
during the quarter ended June 30, 1998, in part, through the issuance of 283,698
of its Ordinary Shares to BHA for aggregate consideration of approximately $14.0
million.
This asset acquisition was accounted for using the purchase method of accounting
and results have been included since the date of acquisition. 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 and
equipment, intellectual property and the benefit of current BHA and BHAC
contracts. The purchase price was allocated based on estimated fair values at
the date of acquisition. The aggregate cost of the acquisition exceeded the
estimated fair value of the acquired net assets by $3.1 million, which is being
amortized on a straight-line basis over the estimated useful life of such assets
of seven years.
Also, during 1998, the Company purchased telecommunications interconnect billing
software technology for resale from a Swedish company for a total of $4.1
million, including acquisition costs.
During the three months ended June 30, 1998 the Company, with the assistance of
an independent appraiser, completed its review of all technology acquired,
including certain in-process research and development and determined that at the
time of the purchase, technological feasibility had not been reached and there
was no alternative future use for these technologies. At that time, further
development was required to integrate the technology into a product for future
sale and accordingly, the Company recorded a one-time charge to its consolidated
results of $18.8 million for in-process research and development.
5. Recently Issued Accounting Standards
The American Institute of Certified Public Accountants (AICPA) has issued
Statements of Position 97-2 "Software Revenue Recognition" ("SOP 97-2") which
was effective for the Company's quarter ended March 31, 1998 and Statement of
Position 98-4 "Deferral of the Effective Date of a Provision of SOP 97-2" ("SOP
98-4") which was effective as of March 31, 1998. The Company's revenue
recognition policies were largely unaffected by SOP 97-2 and SOP 98-4 and are in
accordance with their requirements.
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 provides
guidance on capitalization of the costs incurred for computer software developed
or obtained for internal use. The Company has adopted SOP 98-1 as of January 1,
1998.
Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities" ("SOP
98-5") has also been issued and will be effective for the Company's December 31,
1999 year end. The Company does not expect any significant impact 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.
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" has also been issued and will be effective
for the Company's fiscal quarter ending September 30, 1999. The Company does not
expect any significant impact of this pronouncement on its consolidated
financial statements.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
Saville Systems PLC (the "Company") is a leading provider of customer care and
billing solutions for service providers in the telecommunications market. The
Company offers an innovative convergent billing platform product called Saville
CBP(R) ("CBP") that operates on DB2/400 and Oracle/UNIX platforms for the
telecommunications and energy markets. The Oracle/UNIX-based platform of this
software was introduced to the market in December 1997, with the second version
of this software product released in September 1998. In addition, Saville offers
its customers a full range of professional services. The Company assists a
customer in analyzing the customer's requirements and then designs, develops and
implements a customer care and billing solution. The customer can either license
CBP from Saville or a customer care and billing solution, including CBP, can be
provided by a Company operated service bureau. Saville has also introduced
facilities management services, which allows customers to contract with Saville
to manage the operation of the customized billing software on customer owned
hardware. Additionally, Saville is developing relationships with authorized
integrators to provide implementation services to purchasers of the CBP
products. Saville also assists its customers on an ongoing basis by addressing
their changing business needs through future enhancements and developments to
their customer care and billing solutions.
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 49.0% from $28.6 million in the three months ended
September 30, 1997 to $42.6 million in the three months ended September 30,
1998, and increased 66.4% from $74.2 million in the nine months ended September
30, 1997 to $123.5 million in the nine months ended September 30, 1998 due to
overall increases in services and license fees as described below. While the
Company expects the current growth rate to be tempered by continued
consolidation in the U.S. telecommunications marketplace, weakening credit
markets and a slowdown in global growth, the Company believes that revenue
growth will be strong in 1999.
Services revenue increased 38.8% from $22.6 million in the three months ended
September 30, 1997 to $31.3 million in the three months ended September 30, 1998
and increased 56.1% from $59.2 million in the nine months ended September 30,
1997 to $92.4 million in the nine months ended September 30, 1998. The increase
in both periods was attributable primarily to an increase in consulting and
implementation services provided to new customers as well as continued service
to existing customers. To a lesser extent, increased service bureau revenue due
to new initiatives, as well as the inclusion of revenue from the operations of
the Company's Australian subsidiary since the acquisition of the assets of BHA
and BHAC in April 1998, contributed to the increase.
License fees revenue increased 87.2% from $6.0 million in the three months ended
September 30, 1997 to $11.2 million in the three months ended September 30,
1998, and increased 107.1% from $15.0 million in the nine months ended September
30, 1997 to $31.1 million in the nine months ended September 30, 1998. The
increase in both the quarterly and nine month results was due primarily to the
recognition of license fee revenue on customization projects commencing in late
1997 and in 1998.
Cost of Services
Cost of services increased 42.9% from $10.9 million in the three months ended
September 30, 1997 to $15.5 million in the three months ended September 30,
1998, and increased 61.0% from $28.3 million in the nine months ended September
30, 1997 to $45.6 million in the nine months ended September 30, 1998. As a
percentage of services revenue, cost of services increased from 48.1% and 47.9%
in the three months and nine months ended September 30, 1997 to 49.5% and 49.4%,
respectively, in the same periods in 1998. The overall increase in cost of
services 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. The increase in cost of services as a percentage of
services revenue is due primarily to the training of current personnel on the
UNIX platform, the hiring of additional UNIX-skilled personnel in anticipation
of additional services related to the Company's UNIX-based CBP product, and to a
lesser extent, higher cost of services as a percentage of service revenue at the
Company's Australian subsidiary as a result of the acquisition of BHA and BHAC.
Additionally, computer system costs incurred to support the Company's growing
development and service bureau base contributed to the overall increase in the
cost of services. As the market demands for skilled employees and contractors
increase, the Company expects that the costs to attract, retain and train
personnel will continue to increase. Also, as the Company continues to expand,
it expects the overall costs of services to increase accordingly.
Cost of License Fees
Cost of license fees increased 125.5% from $165,000 in the three months ended
September 30, 1997 to $372,000 in the three months ended September 30, 1998, and
increased 142.0% from $381,000 in the nine months ended September 30, 1997 to
$922,000 in the nine months ended September 30, 1998. This increase was due to
an increase in commission expense resulting primarily from the increase in the
license fees earned by the Company, and to a lesser extent, from an increase in
license fees eligible for commissions in 1998 compared to 1997.
Sales and Marketing
Sales and marketing expenses increased 37.1% from $1.6 million in the three
months ended September 30, 1997 to $2.2 million in the three months ended
September 30, 1998, and increased 45.7% from $4.3 million in the nine months
ended September 30, 1997 to $6.3 million in the nine months ended September 30,
1998. As a percentage of total revenue, sales and marketing expenses decreased
from 5.6% and 5.8% in the three months and nine months ended September 30, 1997
to 5.2% and 5.1%, respectively, in the same periods in 1998. The overall dollar
increase was primarily due to the Company's continued expansion of its sales
force globally, including in North America, Europe, Latin America and Asia
Pacific, the associated expansion of its infrastructure, and to a lesser extent,
the inclusion of the sales and marketing costs in Australia as a result of the
acquisition of the assets of BHA and BHAC. The Company anticipates that the
continued emphasis on its North American and European marketing efforts will
increase its sales and marketing expenses in absolute dollars through the
remainder of 1998 but expects any such expenses to remain at similar levels as a
percentage of total revenue.
Research and Development
Research and development expenses increased 91.2% from $2.8 million in the three
months ended September 30, 1997 to $5.4 million in the three months ended
September 30, 1998, and increased 123.9% from $6.8 million in the nine months
ended September 30, 1997 to $15.3 million in the nine months ended September 30,
1998. As a percentage of total revenue, research and development expenses
increased from 9.8% and 9.2% in the three months and nine months ended September
30, 1997, respectively, to 12.6% and 12.4%, respectively, in the same periods in
1998. Both the overall increase and the increase as a percentage of total
revenue was due to development efforts by the Company on its CBP products for
both the DB2/400 platform and UNIX platform, including the release of the second
version of its UNIX-based product and a scheduled release of its DB2/400 based
product later this year. To a lesser extent, the development of technology
acquired in 1998 contributed to the overall increase in research and development
expenses. The Company intends to continue to invest resources to expand and
enhance its product offerings in the future and therefore expects that research
and development expenses will remain at similar levels throughout the remainder
of 1998.
General and Administrative
General and administrative expenses increased 66.2% from $5.3 million in the
three months ended September 30, 1997 to $8.9 million in the three months ended
September 30, 1998, and increased 63.8% from $14.1 million in the nine months
ended September 30, 1997 to $23.2 in the nine months ended September 30, 1998.
As a percentage of total revenue, general and administrative expenses increased
from 18.6% in the three months ended September 30, 1997 to 20.8% in the same
period in 1998 but decreased from 19.1% in the nine months ended September 30,
1997 to 18.8% in the same period in 1998. The overall increase in costs was
attributable, in part, 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, including the acquisition of
the assets of BHA and BHAC in April 1998. Additional general and administrative
expenses in 1998 were attributable to increased provisions to maintain the
Company's allowance for doubtful accounts based on current and future market
conditions and recent write-offs of certain customer balances.
Charge for Purchased In-Process Research and Development
During the three months ended June 30, 1998 the Company, with the assistance of
an independent appraiser, conducted a review of in-process research and
development purchased with the assets of BHA and BHAC and of the interconnect
billing software technology. The Company determined that at the time of
acquisition for each of these purchases, technological feasibility had not been
reached and the technology had no alternative future use. This resulted in a
one-time charge to the Company's consolidated results of $17.7 million net of a
deferred tax benefit of $1.1 million. Subsequent to these purchases, the Company
continues to invest in research and development efforts in order for each of
these to reach technological feasibility. Any costs incurred since the
acquisition date have been expensed.
Other Income, Net
Other income, net increased 40.4% from $596,000 in the three months ended
September 30, 1997 to $837,000 in the three months ended September 30, 1998, and
increased 45.2% from $1.5 million in the nine months ended September 30, 1997 to
$2.2 million in the nine months ended September 30, 1998. Increased interest
income on larger cash and short-term investment balances accounted for the
majority of the increase in other income, net.
Provision for Income Taxes
The Company recorded a tax provision of $2.1 million and $5.4 million in the
three and nine months ended September 30, 1997 representing effective tax rates
of 24.9% for both periods. Comparatively, tax provisions of $2.6 million and
$7.9 million were recorded in the three and nine months ended September 30, 1998
(before the deferred tax benefit of $1.1 million recognized on the one-time
charge for purchased in-process research and development of $18.8 million.)
These provisions for the 1998 periods represent effective tax rates of 23.0% and
23.2%, respectively. 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 and a 32% tax rate on "non-manufacturing"
income, such as income earned on the Company's Irish cash investments. 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, the United States, the United Kingdom and Australia. There can
be no assurances that the Company will continue to be eligible for the reduced
tax rate for manufacturing income in future periods.
Liquidity and Capital Resources
On a combined basis, cash and cash equivalents and short-term investments
increased $13.0 million from $68.8 million at December 31, 1997 to $81.8 million
at September 30, 1998. During the first nine months of 1998, cash and cash
equivalents decreased $18.5 million to $37.2 million at September 30, 1998,
while short-term investments increased $31.6 million to $44.6 million at
September 30, 1998.
During the nine months ended September 30, 1998, net cash provided by operating
activities was $14.5 million. Net income for the nine month period, excluding
the non-cash effect of the one-time charge for purchased in-process research and
development, offset primarily by an increase in accounts receivable, comprised
the majority of cash provided by operations.
The cash used in investing activities during the nine months ended September 30,
1998 was comprised of $3.7 million to purchase property and equipment, $2.1
million to purchase other assets, $31.6 million invested in short-term
investments and $20.4 million to purchase the assets of BHA and BHAC, including
the repayment of $3.3 million in related bank debt, as well as approximately
$0.9 million in acquisition related costs and expenses.
During the nine months ended September 30, 1998 net cash provided from financing
activities was $24.6 million. This was primarily due to the issue of Ordinary
Shares relating to the asset acquisition of BHA and BHAC and to employees
pursuant to exercises of options under the 1995 Share Option Plan and, to a
lesser extent, to shares issued under the 1996 Employee Share Purchase Plan. The
Company and its subsidiaries have available a $15.0 million multi-currency
operating line of credit (the "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. Total advances drawn on the
Line of Credit during the nine months ended September 30, 1998 were
approximately $15.1 million and were used to fund, in part, the acquisition of
the assets of BHA and BHAC (see Note 4). The entire amount borrowed was repaid
during the quarter ended June 30, 1998 by the Company, in part, through the
issuance of 283,698 of its Ordinary to BHA for aggregate consideration of
approximately $14.0 million.
The Company had capital lease obligations in principal amounts of $0.3 million
as of September 30, 1998 and subsequent to such date has incurred no additional
capital lease obligations. Long-term liabilities include approximately $2.0
million of minimum royalty payments due over the next two years as part of the
purchase of a telecommunications billing software product, of which
approximately $1.0 million is due on January 31, 1999 and is included in the
current portion of long-term liabilities. In addition, the Company expects to
continue to make property and equipment expenditures to support the growth and
worldwide expansion of the Company's business.
The Company believes that existing cash balances, funds generated by operations
and the availability of the 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, Australian dollars, New Zealand dollars and
Swiss Francs. The impact of foreign currency translation has not been material
to the Company's overall operations.
Year 2000 Readiness Disclosure
The Company is currently 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
considers "Year 2000 Ready" to mean that a product, when used in accordance with
its associated documentation, is capable of correctly processing, providing
and/or receiving date data within and between the twentieth and twenty-first
centuries, provided that all non-Saville products (i.e., hardware, software and
firmware) used with such product properly exchange accurate date data with it.
The Company's internal systems include both its information technology ("IT")
and non-IT systems. The Company has initiated an assessment of its material
internal IT systems including its accounting and software development systems
and its non-IT systems including its security systems and building equipment.
The Company expects to complete this assessment in early 1999. To the extent
that the Company is not able to test the technology provided by third-party
vendors, the Company is seeking assurances from such vendors that their systems
are Year 2000 Ready. Although the assessment is still underway, management
currently believes that all material systems will be Year 2000 Ready when
necessary and that the cost to address the issues is not material. The Company
currently does not have a contingency plan in the event of a particular system
not being Year 2000 Ready. Such a plan will be developed if it becomes clear
that the Company is not going to achieve its scheduled objectives.
The Company has designed, tested and continues to test the most current versions
of its products to be Year 2000 Ready. However, a portion of the Company's
currently installed customer base may require upgrade or other remediation to
become Year 2000 Ready. The Company is currently taking inventory of its
existing customers and will assess on a case-by-case basis whether testing,
upgrade or modification for Year 2000 Readiness is required. The Company expects
to complete this assessment in early 1999. The Company's total cost relating to
these activities, and any modifications required thereby, has not been and is
not expected to be material to the Company's financial position, results of
operations, or cash flows. Any such expenditures to date have been, and any such
expenditures in the future are expected to be, treated as normal business
expenses funded out of operating cash flow. The Company believes that its legal
liability for such activities is limited and that any necessary modifications
will be made on a timely basis. There can be, therefore, no assurance that there
will not be increased costs associated with the implementation of any such
activities or required modifications and there can be no assurance that there
will be significant legal liabilities, either of which could have a material
adverse affect to the Company's operations and financial position.
Despite testing by the Company and current and potential customers, the
Company's products and installed base may contain undetected errors or defects
associated with year 2000 date functions. Known or unknown errors or defects in
the Company's IT systems, non-IT systems, products or installed base could
result in delay or loss of revenue, diversion of development resources, damage
to the Company's reputation, or increased service and warranty costs, any of
which could materially adversely affect the Company's business, operating
results, or financial condition. The foregoing assessment represents
management's best estimates at the present time, which could change
significantly in the future. In addition, the Company is aware of the potential
for claims against it and other companies for damages arising from products and
services provided by it and third party suppliers that were not Year 2000 Ready.
Because of the unprecedented nature of such litigation, it is uncertain whether
or to what extent the Company may be affected by any such claims.
Certain Factors That May Affect Future Results
This Quarterly Report contains forward-looking statements that involve a number
of 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 expectations regarding future
growth in revenues, 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 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.
Historically, the Company has been dependent on long-term customer
relationships. To date, a substantial portion of the Company's total revenues
has been derived from a relatively small number of customers, which
concentration 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. The Company's future success depends in large part on its ability
to maintain its current relationships and develop new customer relationships
with successful telecommunications and energy service providers. There can be no
assurance that the Company will be able to develop and maintain such long-term
relationships or that the service providers that are or become customers of the
Company will be successful. In addition, the telecommunications market is
presently experiencing significant merger, consolidation and alliance formation
activity among both established and start-up carriers. A consolidation or
alliance affecting one of the Company's customers could result in such customer
shifting to another billing system, thus decreasing such customer's use of the
Company's services. A significant decrease in business from any of its major
customers or the failure of the Company to compete effectively for new customers
in the telecommunications and energy markets, would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company's quarterly and annual operating results may fluctuate from quarter
to quarter and year to year depending on various factors including new product
development and other expenses, introduction of new products by competitors,
fluctuations in the numbers and types of customer contracts (i.e. service bureau
or license) signed in any given quarter, the hiring of additional staff, pricing
pressures, the effect of acquisitions, the evolving and unpredictable nature of
the markets in which the Company's products and services are sold and general
economic conditions.
The billing and customer care industry is intensely competitive. The Company
competes with both independent providers of systems and services similar to
those offered by the Company and with internal billing departments of existing
telecommunications and energy 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.
The market for the Company's products is characterized by rapid technological
change, frequent new product introductions, evolving industry standards and
changing customer needs. The Company has recently introduced its UNIX-based CBP
for Oracle product and has just released an additional version of this product.
In addition to the resources used for this scheduled release, the Company is
currently devoting significant resources to develop, refine and enhance its
DB2/400-based CBP product and additional customer care and billing technology
acquired in the past nine months. The Company believes that its future success
will depend in large part on its ability to maintain and enhance its current
product and service offerings and to continually develop and introduce new
products and services that will keep pace with technological advances and
satisfy evolving customer requirements. If the Company is unable to develop and
introduce new products and services in a timely manner, or if the Company's new
products, developments and enhancements do not perform or 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. Additionally, credit markets for smaller telecommunications
companies in the U.S. have weakened recently which could adversely affect the
Company's ability to attract and maintain relationships with such companies.
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.
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 BHAC. 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.
The Company regards its software products as proprietary and relies primarily on
a combination of statutory and common law copyright, trademark and trade secret
laws, customer licensing agreements, employee and third-party nondisclosure
agreements and other methods to protect its proprietary rights. These laws and
contractual provisions provide only limited protection of the Company's
proprietary rights. Despite the Company's precautions, it may be possible for a
third party to copy or otherwise obtain and use the Company's technology without
authorization. Furthermore, the laws of certain countries in which the Company
sells its products do not protect the Company's software and intellectual
property rights to the same extent, as do the laws of the United States. If
unauthorized copying or misuse of the Company's products was to occur to any
substantial degree, the Company's business, results or operations and financial
condition could be materially adversely affected.
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, Australian, United Kingdom 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>
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
None
<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: October 30, 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 SEPTEMBER 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S.
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<EXCHANGE-RATE> 1 1
<CASH> 37,240 37,240
<SECURITIES> 44,604 44,604
<RECEIVABLES> 39,567 39,567
<ALLOWANCES> 1,740 1,740
<INVENTORY> 0 0
<CURRENT-ASSETS> 124,791 124,791
<PP&E> 16,823 16,823
<DEPRECIATION> 4,433 4,433
<TOTAL-ASSETS> 143,447 143,447
<CURRENT-LIABILITIES> 28,848 28,848
<BONDS> 0 0
0 0
48 48
<COMMON> 97 97
<OTHER-SE> 112,997 112,997
<TOTAL-LIABILITY-AND-EQUITY> 143,447 143,447
<SALES> 0 0
<TOTAL-REVENUES> 42,577 123,510
<CGS> 0 0
<TOTAL-COSTS> 18,071 52,840
<OTHER-EXPENSES> 11,100 52,026
<LOSS-PROVISION> 2,176 2,762
<INTEREST-EXPENSE> 100 264
<INCOME-PRETAX> 11,130 15,618
<INCOME-TAX> 2,560 6,814
<INCOME-CONTINUING> 8,570 8,804
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 8,570 8,804
<EPS-PRIMARY> 0.22 0.23
<EPS-DILUTED> 0.21 0.22
</TABLE>
