UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1 on Form 10-Q/A
to Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 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. Yes |x| No | |
Number of shares outstanding of the registrant's class of Ordinary Shares as of
July 31, 1998 was 38,652,159.
<PAGE>
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-Q/A amends the Registrant's Quarterly Report on
Form 10-Q, as filed by the Registrant on August 12, 1998 and is being filed to
reflect the restatement of the Registrant's Consolidated Financial Statements.
See "Restatement of Quarterly Financial Statements" in Note 1 of the Notes to
the Consolidated Financial Statements for a discussion of the basis for such
restatement.
<PAGE>
SAVILLE SYSTEMS PLC
AMENDMENT NO. 1 ON FORM 10-Q/A
TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
TABLE OF CONTENTS
PAGE
Part I - Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 1998 4
(unaudited) and December 31, 1997
Consolidated Statements of Income for the three months
and for the six months ended June 30, 1998 and 1997 (unaudited) 5
Consolidated Statements of Cash Flows for the six months ended
June 30, 1998 and 1997 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-20
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
<PAGE>
Saville Systems PLC
CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars, except share data amounts)
<TABLE>
June 30 December 31
1998 1997
(unaudited)
(restated)
- --------------------------------------------------------- ---------- -----------
<S> <C> <C>
ASSETS
Current
Cash and cash equivalents $ 31,880 $ 55,785
Short-term investments 47,611 13,015
Accounts receivable, less allowance for
doubtful accounts of $1,737 and $1,687, respectively 36,799 22,373
Prepaid expenses and other assets 5,540 3,581
- --------------------------------------------------------- ---------- -----------
Total current assets 121,830 94,754
Property and equipment, net 12,835 10,621
Other assets, net 15,114 -
- --------------------------------------------------------- ---------- -----------
Total assets $ 149,779 $ 105,375
- --------------------------------------------------------- ---------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable 5,758 5,336
Accrued compensation and related benefits 7,616 5,248
Accrued expenses and other liabilities 4,595 3,084
Income taxes payable 7,817 7,167
Deferred revenue 9,012 3,402
Current portion of long-term liabilities 1,136 134
- --------------------------------------------------------- ---------- -----------
Total current liabilities 35,934 24,371
Long-term liabilities 1,257 336
Minority interest 240 366
- --------------------------------------------------------- ---------- -----------
Total liabilities 37,431 25,073
- --------------------------------------------------------- ---------- -----------
Shareholders' equity
Ordinary Shares, nominal value $0.0025 per share
Authorized: 75,000,000
Issued and outstanding: 38,652,159 and 37,504,596 97 94
Deferred Ordinary Shares, nominal value
IR(pound)1.00 per share
Authorized, issued and outstanding: 30,000 48 48
Additional paid-in capital 61,521 37,734
Retained earnings 51,982 42,750
Accumulated other comprehensive income (1,300) (324)
- --------------------------------------------------------- ---------- -----------
Total shareholders' equity 112,348 80,302
- --------------------------------------------------------- ---------- -----------
Total liabilities and shareholders' equity $ 149,779 $ 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 Six months ended
June 30 June 30 June 30 June 30
1998 1997 1998 1997
(restated) (restated)
- ------------------------------------ ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
REVENUE
Services $ 31,114 $ 20,088 $ 61,053 $ 36,603
License fees 11,797 5,405 19,880 9,020
- ------------------------------------ ---------- ---------- ---------- ---------
Total revenue 42,911 25,493 80,933 45,623
- ------------------------------------ ---------- ---------- ---------- ---------
EXPENSES
Cost of services 16,063 9,448 30,111 17,485
Cost of license fees 270 128 550 216
Sales and marketing 2,186 1,522 4,108 2,724
Research and development 5,968 2,530 9,899 4,011
General and administrative 8,108 4,913 14,651 8,822
Charge for purchased in-process
research and development 9,168 - 9,168 -
- ------------------------------------ ---------- ---------- ---------- ---------
Total expenses 41,763 18,541 68,487 33,258
- ------------------------------------ ---------- ---------- ---------- ---------
Income from operations 1,148 6,952 12,446 12,365
Other income, net 631 559 1,354 913
- ------------------------------------ ---------- ---------- ---------- ---------
Income before income taxes 1,779 7,511 13,800 13,278
Provision for income taxes 1,743 1,995 4,568 3,320
- ------------------------------------ ---------- ---------- ---------- ---------
Income before minority interest 36 5,516 9,232 9,958
Minority interest share in
subsidiaries' net income - 75 - 115
- ------------------------------------ ---------- ---------- ---------- ---------
Net Income $ 36 $5,441 $9,232 $ 9,843
- ------------------------------------ ---------- ---------- ---------- ---------
Basic earnings per share $ - $ 0.15 $ 0.24 $ 0.27
Diluted earnings per share $ - $ 0.14 $ 0.23 $ 0.25
- ------------------------------------ ---------- ---------- ---------- ---------
(in thousands)
Ordinary shares 38,554 36,449 38,188 36,329
Ordinary shares assuming dilution 41,269 39,131 41,057 38,841
- ------------------------------------ ---------- ---------- ---------- ---------
</TABLE>
See accompanying notes
<PAGE>
Saville Systems PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands of U.S. dollars)
<TABLE>
Six months ended
June 30 June 30
1998 1997
(restated)
- ------------------------------------------------------ ---------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 9,232 $ 9,843
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation of property and equipment 1,170 600
Amortization of other assets 543 -
Allowance for doubtful accounts 585 614
Minority interest in net income - 115
Gain on sale of property and equipment (119) (24)
Compensation related to stock transactions 103 60
Deferred taxes (1,088) -
Charge for purchased in-process research 9,168 -
and development
Changes in operating assets and liabilities:
Accounts receivable (15,023) (8,997)
Prepaid expenses and other assets (1,768) (1,555)
Accounts payable 160 955
Accrued compensation and related benefits 2,367 843
Accrued expenses and other liabilities (339) 2,113
Income taxes payable 651 1,918
Deferred revenue 5,610 7,371
- ------------------------------------------------------ ---------- -------------
Net cash provided by operating activities 11,252 13,856
- ------------------------------------------------------ ---------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net purchase of property and equipment (2,893) (1,525)
Purchase of other assets (2,089) -
Purchase of short-term investments (34,596) (18,059)
Purchase of business assets (19,167) -
- ------------------------------------------------------ ---------- -------------
Net cash used in investing activities (58,745) (19,584)
- ------------------------------------------------------ ---------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term liabilities (64) (43)
Advances on operating line of credit 15,100 -
Repayments on operating line of credit (15,100) -
Proceeds from share issuances 23,356 1,439
Share issue costs (428) (63)
Tax benefit on employee stock transactions 634 645
- ------------------------------------------------------ ---------- -------------
Net cash provided by financing activities 23,498 1,978
- ------------------------------------------------------ ---------- -------------
Effect of exchange rate changes on cash 90 (3)
- ------------------------------------------------------ ---------- -------------
Net decrease in cash and cash equivalents (23,905) (3,753)
Cash and cash equivalents, beginning of period 55,785 34,395
- ------------------------------------------------------ ---------- -------------
Cash and cash equivalents, end of period $ 31,880 $30,642
- ------------------------------------------------------ ---------- -------------
Short-term investments 47,611 19,059
- ------------------------------------------------------ ---------- -------------
Cash and short-term investments $ 79,491 $49,701
- ------------------------------------------------------ ---------- -------------
Supplementary disclosure of cash flow information:
Cash paid for interest 157 -
Cash paid for income taxes 4,043 833
</TABLE>
See accompanying notes
<PAGE>
Saville Systems PLC
Notes to Consolidated Financial Statements as of June 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 June 30, 1998 and 1997 and the
financial position as of June 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.
Restatement of Quarterly Financial Statements
The Company recorded a one-time charge for purchased in-process research and
development ("IPRD") in its operating results for the second quarter of 1998.
This one-time charge was recorded in accordance with U.S. generally accepted
accounting principles and established industry practice at that time, and was
supported by an independent third party valuation. Since that time, however, the
U.S. Securities and Exchange Commission ("SEC") has expressed views on valuation
methods for purchased IPRD, which differ from prior industry practice. As a
result, the Company evaluated the applicability of the SEC's views with respect
to the charge taken in the second quarter of 1998 and voluntarily adjusted its
IPRD charge. The Company originally recorded a one-time charge for IPRD in its
operating results for the second quarter of 1998 in the amount of $18.8 million.
After revaluing the IPRD charge, the Company adjusted the one-time charge to
$9.2 million ($8.4 million net of related tax benefits), representing a
reduction of $9.6 million to be amortized in subsequent periods as goodwill
($6.0 million) and completed technology ($3.6 million). Additional amortization
due to this adjustment was $328,000 for the three and six months ended June 30,
1998. The following tables outline the revisions to previously reported
unaudited Consolidated Financial Statements (in thousands of U.S. Dollars,
except per share data).
Consolidated Balance Sheet:
<TABLE>
June 30, 1998
- ---------------------------------------- ----------------------------------
Previously
reported Restated
- ---------------------------------------- ----------------- ----------------
<S> <C> <C>
Other assets, net $6,675 $ 15,114
Income taxes payable 7,892 7,817
Retained earnings 42,984 51,982
Accumulated other comprehensive income (816) (1,300)
- ---------------------------------------- ----------------- ----------------
</TABLE>
<PAGE>
Consolidated Statements of Income:
<TABLE>
Three months ended Six months ended
June 30, 1998 June 30, 1998
- ---------------------------------------------------------- ---------------
Previously Previously
reported Restated reported Restated
- ------------------------------------------------ --------- --------- --------
<S> <C> <C> <C> <C>
Expenses:
General and administrative $ 7,780 $8,108 $14,323 $14,651
Charge for purchased in-process
research and development 18,808 9,168 18,808 9,168
(Loss) income from operations (8,164) 1,148 3,134 12,446
(Loss) income before income taxes (7,533) 1,779 4,488 13,800
Provision for income taxes 1,429 1,743 4,254 4,568
Net (loss) income (8,962) 36 234 9,232
Basic (loss) earnings per share $ (0.23) $ - $ 0.01 $ 0.24
Diluted (loss) earnings per share $ (0.22) $ - $ 0.01 $ 0.23
- ------------------------------------------------ --------- --------- ---------
</TABLE>
2. Share Capital
During the three and six month periods ended June 30, 1998 the Company issued
148,765 and 863,865 Ordinary Shares, respectively, to officers and employees
pursuant to option exercises for aggregate cash consideration of approximately
$1.4 million and $9.3 million, respectively. 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").
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".
The following table summarizes the activity in Ordinary Share options under the
1995 and 1996 Plans from December 31, 1997 to June 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 (2,236,773) 2,236,773 39.56
Options exercised - (863,865) 10.78
Options cancelled 107,617 (107,617) 30.30
- ------------------------------------ ------------- ------------- --------------
Balance at June 30, 1998 3,320,252 5,544,726 $24.20
- ------------------------------------ ------------- ------------- --------------
</TABLE>
<PAGE>
A summary of Ordinary Share options outstanding as of June 30, 1998 is as
follows:
<TABLE>
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Total Outstanding Range of Weighted Weighted Exercisable at Weighted
Exercise Prices Average Average June 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 1.6 235,528 1.20
1,105,271 4.33-5.00 4.48 7.2 552,266 4.55
40,590 7.50-13.32 8.79 7.6 27,256 8.28
1,584,162 14.06-21.50 18.62 8.6 643,155 18.81
207,000 21.75-32.56 29.51 9.3 8,666 25.44
2,218,875 33.50-50.25 38.23 9.3 - -
153,300 50.25-59.00 53.06 9.8 - -
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
5,544,726 $1.20-59.00 $24.20 8.4 1,466,871 $10.46
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
</TABLE>
Of the options granted in 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 June 30, 1998, approximately
1,647,000 of these options were outstanding.
3. Comprehensive (Loss) 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 Six months ended
June 30 June 30 June 30 June 30
1998 1997 1998 1997
(restated) (restated)
- --------------------------------- ------------------------ ----------- --------
<S> <C> <C> <C> <C>
Net income $ 36 $5,441 $ 9,232 $9,843
Foreign currency translation
adjustment, net of NIL tax (1,007) 7 (976) (26)
------------------------ ----------- --------
Comprehensive (loss) income $ (971) $5,448 $ 8,256 $9,817
======================== =========== ========
</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
On April 3, 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 $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, from the proceeds resulting from the issuance of 283,698 of the
Company's 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. Pro forma results
have not been provided as the impact on revenue and net income are not
considered material to the current and preceding periods. The assets purchased
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 and completed technology and other intangibles.
The purchase price was allocated among tangible and intangible assets based on
estimated fair values at the date of acquisition. The aggregate cost of the
acquisition on the acquisition date exceeded the estimated fair value of the
acquired net assets by $8.9 million, which is being amortized as goodwill on a
straight-line basis over the estimated useful life of such assets of seven
years. The balance remaining in goodwill as of June 30, 1998 is included in
Other Assets. This balance is subject to translation to the reporting currency
of the Company as required by SFAS 52 "Foreign Currency Translation". Any
changes in the balance due to foreign exchange fluctuations are recorded as part
of accumulated other comprehensive income.
Also during 1998, the Company purchased telecommunications interconnect billing
software technology from a Swedish company for a total of $4.1 million,
including acquisition costs. This was paid for by a cash outlay of $2.0 million
with a commitment of at least $2.0 million in minimum royalty payments to be
paid in 1999 and 2000. Minimum royalty payments outstanding as of June 30, 1998
are included in Long-Term Liabilities.
The value assigned to the intangible assets purchased as part of the BHA
acquisition and to the interconnect billing software technology purchased was
determined with the assistance of an independent appraiser based on fair market
value using a risk adjusted discounted cash flow approach. The significant
assumptions that affected the valuations included potential revenues and cost of
completion, as well as the timing of the product releases. In addition, the
selection of an appropriate discount rate was a major factor in the valuation
analysis. The valuation utilized a discount rate of 30% for the BHA acquisition
and 31% for the acquisition of the interconnect billing technology, each
reflecting the difficulties and uncertainties in completing the development
effort, risks related to the viability and potential changes to target markets
and the inherent uncertainty of predicting cash flows in the telecommunications
billing industry.
Acquired incomplete technology from the BHA acquisition, specifically billing
technology (SavilleExpress) and customer care technology (SavilleCare) were
evaluated using a stage of completion approach. The Company, through extensive
interviews and analysis of data concerning the state of the technology and
required development work, estimated the stage-of-completion at the date of
acquiring the products to be approximately 53% for SavilleExpress and 55% for
SavilleCare. Each of the purchased technologies required significant
modifications in order to reach technological feasibility. At the time of
acquisition, additional development of SavilleExpress included, among others,
additional core functionality including tariffing, language support, data fields
to support different currencies, credit limit notification and automatic service
shut-off, as well as revision of all existing software code to be compatible
with different hardware platforms. SavilleCare required substantial effort to
complete the technology and ensure that it was more focused on the
telecommunications industry than the original product design. This included,
among others, ensuring scalability existed as well as full functionality in the
areas of provisioning, call reporting and billing. SavilleExpress and
SavilleCare were completed in August 1998 and January 1999, respectively. Actual
revenue received and costs incurred to complete SavilleCare were not materially
different than estimates made. Also, for SavilleExpress, costs of completion did
not differ significantly from estimates. However, actual revenue received was
less than expected due to a change in market conditions.
Saville IBP had significant functionality deficiencies at the date of
acquisition that had to be corrected as part of further development so that the
product could be commercialized. Specifically, these modifications included,
among others, the addition of a critical application program interface, improved
detailed reporting capability, datawarehousing capability without slowing down
overall information technology systems and scalability for larger
telecommunications operations. Saville IBP was completed in October 1998. Actual
costs to complete and revenue received were not significantly different from
estimates.
Based on this evaluation, the Company assigned fair values to SavilleExpress of
$2.1 million, to SavilleCare of $3.0 million and to Saville IBP of $4.1 million.
These in-process technologies had not reached technological feasibility at the
time of acquisition and had no alternative future use in other research and
development projects or otherwise. Accordingly, the acquired technology was
expensed as in-process research and development for a total charge of $9.2
million to the Company's consolidated results in the second quarter of 1998.
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.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Overview
Saville is a leading provider of customer care and billing solutions for service
providers in the telecommunications market. The Company offers an innovative
convergent billing 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. 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 the solution from
Saville or the solution can be provided by a Company operated service bureau.
Saville has also introduced facilities management services. This service allows
customers to contract with Saville to manage the operation of the customized
billing software on customer owned hardware. 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 68.3% from $25.5 million in the three months ended June
30, 1997 to $42.9 million in the three months ended June 30, 1998, and increased
77.4% from $45.6 million in the six months ended June 30, 1997 to $80.9 million
in the six months ended June 30, 1998 due to overall increases in services and
license fees as described below.
Services revenue increased 54.9% from $20.1 million in the three months ended
June 30, 1997 to $31.1 million in the three months ended June 30, 1998 and
increased 66.8% from $36.6 million in the six months ended June 30, 1997 to
$61.1 million in the six months ended June 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 increases in
projects for existing customers and, to a lesser extent, the inclusion of
revenue from the operations since the acquisition of the assets of BHA and BHAC
in April 1998. As a result of the significant merger and consolidation activity
currently being experienced by the telecommunications industry, including
certain customers of the Company, the Company expects revenue to maintain
current levels in the near term.
License fees revenue increased 118.3% from $5.4 million in the three months
ended June 30, 1997 to $11.8 million in the three months ended June 30, 1998,
and increased 120.4% from $9.0 million in the six months ended June 30, 1997 to
$19.9 million in the six months ended June 30, 1998. The increase in both the
quarterly and six month results was due primarily to the recognition of
additional license fees for the Company's CBP product contracted in both 1997
and 1998 and, to a lesser extent, fees recognized with the execution of an
authorized reseller agreement.
Cost of Services
Cost of services increased 70.0% from $9.4 million in the three months ended
June 30, 1997 to $16.1 million in the three months ended June 30, 1998, and
increased 72.2% from $17.5 million in the six months ended June 30, 1997 to
$30.1 million in the six months ended June 30, 1998. As a percentage of services
revenue, cost of services increased from 47.0% and 47.8% in the three months and
six months ended June 30, 1997 to 51.6% and 49.3%, 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 including those
employees hired as a result of the acquisition of the assets of BHA and BHAC, 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, the use
of more independent contractors to support the Company's 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 110.9% from $128,000 in the three months ended
June 30, 1997 to $270,000 in the three months ended June 30, 1998, and increased
154.6% from $216,000 in the six months ended June 30, 1997 to $550,000 in the
six months ended June 30, 1998. This increase was due to an increase in
commission expense resulting from the increase in the license fees earned by the
Company.
Sales and Marketing
Sales and marketing expenses increased 43.6% from $1.5 million in the three
months ended June 30, 1997 to $2.2 million in the three months ended June 30,
1998, and increased 50.8% from $2.7 million in the six months ended June 30,
1997 to $4.1 million in the six months ended June 30, 1998. As a percentage of
total revenue, sales and marketing expenses decreased from 6.0% in the three
months and six months ended June 30, 1997 to 5.1% in the same periods in 1998.
The overall 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 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 establishment of
new sales offices and 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 and that such expenses will remain at
similar levels to the first half of 1998 as a percentage of total revenue.
Research and Development
Research and development expenses increased 135.9% from $2.5 million in the
three months ended June 30, 1997 to $6.0 million in the three months ended June
30, 1998, and increased 146.8% from $4.0 million in the six months ended June
30, 1997 to $9.9 million in the six months ended June 30, 1998. As a percentage
of total revenue, research and development expenses increased from 9.9% and 8.8%
in the three months and six months ended June 30, 1997, respectively, to 13.9%
and 12.2%, respectively, in the same periods in 1998. Both the overall increase
and the increase as a percentage of total revenue was due to increased
development efforts by the Company on its CBP products for both the DB2/400
platform and UNIX platform, including a scheduled additional release of its
UNIX-based product later this year and the development of acquired technology,
as well as the use of more independent contractors to support these development
activities. 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 to the first half of
1998.
General and Administrative
General and administrative expenses increased 65.0% from $4.9 million in the
three months ended June 30, 1997 to $8.1 million in the three months ended June
30, 1998, and increased 66.1% from $8.8 million in the six months ended June 30,
1997 to $14.7 million in the six months ended June 30, 1998. As a percentage of
total revenue, general and administrative expenses decreased from 19.3% in the
three months and six months ended June 30, 1997 to 18.9% and 18.1%,
respectively, in the same periods in 1998. The overall 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, including the acquisition of the
assets of BHA and BHAC in April 1998 which included, among other costs, the
amortization of goodwill and completed technology.
Charge for Purchased In-Process Research and Development
The charge for purchased in-process research and development is based on the
fair value of acquired technology that had not yet reached technological
feasibility and has no future alternative use. The value assigned to the
intangible assets purchased as part of the BHA acquisition and to the
interconnect billing software technology purchased was determined with the
assistance of an independent appraiser based on fair market value using a risk
adjusted discounted cash flow approach. The significant assumptions that
affected the valuations included potential revenues and cost of completion, as
well as the timing of the product releases. In addition, the selection of an
appropriate discount rate was a major factor in the valuation analysis. The
valuation utilized a discount rate of 30% for the BHA acquisition and 31% for
the acquisition of the interconnect billing technology, each reflecting the
difficulties and uncertainties in completing the development effort, risks
related to the viability and potential changes to target markets and the
inherent uncertainty of predicting cash flows in the telecommunications billing
industry.
Acquired incomplete technology from the BHA acquisition, specifically billing
technology (SavilleExpress) and customer care technology (SavilleCare) were
evaluated using a stage of completion approach. The Company, through extensive
interviews and analysis of data concerning the state of the technology and
required development work, estimated the stage-of-completion at the date of
acquiring the products to be approximately 53% for SavilleExpress and 55% for
SavilleCare. Each of the purchased technologies required significant
modifications in order to reach technological feasibility. At the time of
acquisition, additional development of SavilleExpress included, among others,
additional core functionality including tariffing, language support, data fields
to support different currencies, credit limit notification and automatic service
shut-off, as well as revision of all existing software code to be compatible
with different hardware platforms. SavilleCare required substantial effort to
complete the technology and ensure that it was more focused on the
telecommunications industry than the original product design. This included,
among others, ensuring scalability existed as well as full functionality in the
areas of provisioning, call reporting and billing. SavilleExpress and
SavilleCare were completed in August 1998 and January 1999, respectively. Actual
revenue received and costs incurred to complete SavilleCare were not materially
different than estimates made. Also, for SavilleExpress, costs of completion did
not differ significantly from estimates. However, actual revenue received was
less than expected due to a change in market conditions.
Saville IBP had significant functionality deficiencies at the date of
acquisition that had to be corrected as part of further development so that the
product could be commercialized. Specifically, these modifications included,
among others, the addition of a critical application program interface, improved
detailed reporting capability, datawarehousing capability without slowing down
overall information technology systems and scalability for larger
telecommunications operations. Saville IBP was completed in October 1998. Actual
costs to complete and revenue received were not significantly different from
estimates.
Based on this evaluation, the Company assigned fair values to SavilleExpress of
$2.1 million, to SavilleCare of $3.0 million and to Saville IBP of $4.1 million.
These in-process technologies had not reached technological feasibility at the
time of acquisition and had no alternative future use in other research and
development projects or otherwise. Accordingly, the acquired technology was
expensed as in-process research and development for a total charge of $9.2
million to the Company's consolidated results in the second quarter of 1998.
Other Income and Expenses
Other income and other expenses increased 12.9% from $559,000 in the three
months ended June 30, 1997 to $631,000 in the three months ended June 30, 1998,
and increased 48.3% from $913,000 in the six months ended June 30, 1997 to
$1,354,000 in the six months ended June 30, 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 $2.0 million and $3.3 million in the
three and six months ended June 30, 1997 representing effective tax rates of
26.6% and 25.0%, respectively. Comparatively, tax provisions of $2.5 million and
$5.3 million were recorded in the three and six months ended June 30, 1998
before the deferred tax benefit of $773,000 recognized on the one-time charge
for purchased in-process research and development of $9.2 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 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 $10.7 million from $68.8 million at December 31, 1997 to $79.5 million
at June 30, 1998. This increase was composed of a decrease in cash and cash
equivalents of $23.9 million from $55.8 million at December 31, 1997 to $31.9
million at June 30, 1998 that was more than offset by an increase in short-term
investments of $34.6 million from $13.0 million at December 31, 1997 to $47.6
million at June 30, 1998. This overall increase in cash and short-term
investments was 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, a software product and the assets of BHA and BHAC.
Operating Activities
During the six months ended June 30, 1998, net cash provided by operating
activities was $11.3 million. During this period, the Company received cash of
$5.6 million from deferred revenue from customers offset by a $15.0 million use
of cash as accounts receivable balances grew in relation to increasing revenue.
Investing Activities
The net cash used in investing activities during the six months ended June 30,
1998 was comprised of $2.9 million to purchase property and equipment, $2.1
million to purchase other assets, $34.6 million invested in short-term
investments and $19.2 million to purchase the assets of BHA and BHAC (see Note
4) which included the settlement of $3.3 million in related bank debt as well as
approximately $906,000 in acquisition related costs and expenses. The Company
continues to make property and equipment expenditures to support the growth of
the Company as locations are expanded worldwide and expects to continue to make
property and equipment investments to support its business growth.
Financing Activities
During the three months ended June 30, 1998 net cash provided from financing
activities was $23.5 million. This was primarily due to the issue of Ordinary
Shares in relation to the asset acquisition of BHA and BHAC and to employees
pursuant to exercises of options under the 1995 Share 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. Total advances drawn on this facility during the three
months ended June 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 5). The
entire amount borrowed was repaid during the quarter ended June 30, 1998, in
part, by the Company through the issuance of 283,698 of its Ordinary shares in
relation to the asset acquisition of BHA and BHAC for aggregate consideration of
approximately $14.0 million.
The Company had capital lease obligations in principal amounts of $394,000 as of
June 30, 1998 ($470,000 as of 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, of which $1.0
million is due on January 31, 1999 and is included in the current portion of
long-term liabilities.
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, Australian dollars, New Zealand dollars and
Swiss Francs. The impact of foreign currency translation has not been material
to the Company's overall operations.
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 expectation that revenue will
maintain current levels in the near term, 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 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, with an additional version release of this product scheduled
for later this year. 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 six 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 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.
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 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
current software product releases are 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 that there will not be a delay in, or increased or material costs
associated with, the implementation of any 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.
<PAGE>
SAVILLE SYSTEMS PLC
PART II - OTHER INFORMATION
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 Amendment No. 1 on Form 10-Q/A to Form 10-Q to
be signed on its behalf by the undersigned thereunto duly authorized.
SAVILLE SYSTEMS PLC
(Registrant)
Date: March 15, 1999 By /s/Christopher A. Hanson
------------------------
Christopher A. Hanson
Chief Financial Officer
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
RESTATED FINANCIAL DATA SCHEDULE
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD ENDED JUNE 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 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<EXCHANGE-RATE> 1 1
<CASH> 31,880 31,880
<SECURITIES> 47,611 47,611
<RECEIVABLES> 38,536 38,536
<ALLOWANCES> 1,737 1,737
<INVENTORY> 0 0
<CURRENT-ASSETS> 121,830 121,830
<PP&E> 16,515 16,515
<DEPRECIATION> 3,680 3,680
<TOTAL-ASSETS> 149,779 149,779
<CURRENT-LIABILITIES> 35,934 35,934
<BONDS> 0 0
0 0
48 48
<COMMON> 97 97
<OTHER-SE> 112,203 112,203
<TOTAL-LIABILITY-AND-EQUITY> 149,779 149,779
<SALES> 0 0
<TOTAL-REVENUES> 42,911 80,933
<CGS> 0 0
<TOTAL-COSTS> 18,519 34,769
<OTHER-EXPENSES> 23,014 33,133
<LOSS-PROVISION> 230 585
<INTEREST-EXPENSE> 134 164
<INCOME-PRETAX> 1,779 13,800
<INCOME-TAX> 1,743 4,568
<INCOME-CONTINUING> 36 9,232
<DISCONTINUED> 0 0
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