United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
|x| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
| |TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________________ TO _____________
Commission File No. 0-57495
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 from the United States)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section
12(g) of the Act:
American Depository Shares, Representing Ordinary Shares, $0.0025 par value
(Title of Class)
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 | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K.| |
The aggregate market value of voting Common Stock held by non-affiliates of the
registrant was $522,053,616 based on the last reported sale price of the
American Depository Shares on the Nasdaq consolidated transaction reporting
system on March 11, 1999.
Number of shares outstanding of the registrant's Ordinary Shares outstanding as
of March 11, 1999 was 39,101,506.
Documents incorporated by reference:
Proxy Statement for the 1999 Annual Meeting of Shareholders - Part III
PART I
ITEM 1. BUSINESS
GENERAL
Saville Systems PLC (together with its subsidiaries, "Saville" or the "Company")
provides innovative, convergent customer care and billing solutions to service
providers in the global telecommunications and energy industries. Saville offers
products and services designed to enable telecommunications and energy service
providers to bring new service offerings to market quickly, and to bill
accurately and reliably for multiple services on one convergent invoice. The
Company's telecommunications solutions are designed to operate in a
multi-service environment, capable of billing local exchange, long distance,
wireless and data communications services. These systems are designed to support
the discrete service offerings of large service providers, or to serve as the
complete customer care and billing systems of emerging and medium-sized service
providers.
The Company has developed, and continuously refines, its sophisticated
convergent billing platform (CBP(R)) software products in order to meet the
current and evolving billing requirements of its customers. In 1998, the Company
released new versions of CBP for both the UNIX/Oracle(R) and DB2/400 platforms,
with each offering additional billing functionality to both the energy and
telecommunications industries. In addition, in February 1998, the Company
purchased the interconnect telecommunications software technology of Cap Gemini
Sverige A.B., a Swedish company, for approximately $2.0 million in cash and a
commitment of at least $2.0 million in royalties to be paid in 1999 and 2000.
This technology, which has been developed by the Company as its interconnect
billing platform (IBP(TM)) software product, allows telecommunications companies
to bill for carrier-to-carrier transactions.
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 $906,000 in acquisition related costs and expenses including applicable
duties and taxes. The Company funded the acquisition, in part, by borrowing
approximately $15.1 million from the Company's working capital line of credit.
The entire amount borrowed was repaid during 1998, in part from the proceeds
resulting from the issuance by the Company of 283,698 of its Ordinary Shares to
BHA for aggregate consideration to the Company of approximately $14.0 million.
In addition to the billing technology purchased as part of the transaction, the
Company also has enhanced and further developed customer care technology
acquired from BHA. This technology, which the Company released in early 1999 as
SavilleCareTM, allows telecommunications service providers to integrate
SavilleCare's call center desktop with the providers' billing and other business
support systems.
In addition to its software products, the Company offers its customers a full
range of professional services. The Company assists each customer in defining
its requirements and then designs, develops and implements a cost-effective
customer care and billing solution. The Company typically continues to work
closely with its customers after initial implementation, particularly as
customers require additional customized customer care and billing applications
that enable them to offer new features and services, expand into additional
geographic markets or operate with new network technologies and protocols. In
addition, the Company provides ongoing support, maintenance and training related
to the customer's customer care and billing system. The Company also offers its
customers the option of retaining the Company to operate all or part of the
implemented customer care and billing system at a Company-maintained service
bureau or on a facilities management basis.
The Company was incorporated in the Republic of Ireland in June 1993 as Saville
Systems Ireland Limited, a private limited company. On November 9, 1995, the
Company was re-registered as a public limited company and changed its name to
Saville Systems PLC. Unless the context otherwise requires, references to the
"Company" or "Saville" are to Saville Systems PLC and its consolidated
subsidiaries. The Company's principal executive office is located at IDA
Business Park, Dangan, Galway, Ireland, and its telephone number from the United
States is (011) 353-9-152-6611. The address of the Company's North American
headquarters is 1 Van de Graaff Drive, Burlington, MA 01803, and its telephone
number is (781) 270-6500.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Forward-looking statements are made throughout this document. Typically the use
of the words, "believe," "anticipate," "plan," "expect," "seek," "estimate," and
similar expressions identify forward-looking statements. Unless a passage
describes an historical event, the statement should be considered a
forward-looking statement. In keeping with the "Safe Harbor" provision of the
Private Securities Litigation Reform Act of 1995, it should be noted that
forward-looking statements regarding the Company's future expectations and
projections are not guarantees of future performance. They involve risks,
uncertainties, and assumptions, and many of the important factors that will
determine the Company's future results are beyond the Company's ability to
control or predict. Therefore, actual results may differ significantly from
those suggested by forward-looking statements. These risks include those
detailed under the heading "Certain Factors That May Affect Future Results"
immediately following the Management's Discussion and Analysis of Financial
Condition and Results of Operations, which is incorporated in this document by
reference and attached hereto as Appendix B.
INDUSTRY
The Telecommunications Act of 1996 has increased competition in the U.S.
telecommunications services market by allowing local, long distance and cable
companies to offer competing services, provided they meet specified regulatory
benchmarks. Outside of the U.S., privatization and telecommunications
liberalization are resulting in increased international competition and the
emergence of newly authorized telecommunications service providers. Many service
providers are competing by offering multiple services, including combinations of
local exchange, long distance, wireless (cellular, paging, satellite and PCS)
and data communications services, to customers in a single geographic market.
New service-based technologies have substantially increased the complexity and
variety of telecommunications services, as providers seek to compete and
differentiate themselves with enhanced telecommunications service offerings.
These factors have created the need for sophisticated and flexible customer care
and billing solutions. Telecommunications service providers can compete only if
they are able to efficiently and accurately bill their customers for the varied
services and features they provide.
Telecommunications customer care and billing involves end to end customer
management including customer acquisition, service initiation and collecting and
pricing customer telecommunications usage in order to generate residential and
business telephone invoices for local, long distance and wireless service.
Customer care and billing systems typically interact with most aspects of the
telecommunications network and generally incorporate data collection, processing
and invoice generation. The billing function continues to evolve from primarily
a service support function to a revenue enhancement tool used to differentiate
services. The rapid pace of technological change coupled with the emphasis on
time to market for new services and features places significant pressure on the
telecommunications service provider to install and to modify its customer care
and billing system quickly in order to adapt to technological advances. There is
therefore significant demand for software that can perform a variety of
functions in a timely, accurate, cost-effective manner for multiple services.
Established telecommunications service providers have existing billing systems,
many of which are maintained in-house. Frequently, however, these systems were
designed prior to deregulation to provide a single-service billing function.
These older systems generally are difficult to maintain and modify, and often do
not meet the multiple and evolving needs of the telecommunications service
provider. Many of these service providers are therefore seeking to replace or
augment their existing billing systems through sophisticated outsourced customer
care and billing solutions.
Many emerging telecommunications service providers lack customer care and
billing systems. One of the primary challenges that these newer service
providers face is to bring new services to market quickly. They typically focus
their capital resources on developing networking and switching technologies and
on creating marketable services rather than on creating customer care and
billing systems. These providers typically seek external customer care and
billing solutions because efficient, flexible customer care and billing
solutions are often too costly and time consuming to develop internally.
PRODUCTS AND SERVICES
The Company provides advanced customer care and billing solutions that address a
spectrum of billing and customer care functions, ranging from sales support and
order processing through actual invoice calculation and production, as well as
management reporting and marketing analysis. The Company's objective is to be a
market leader in providing customer care and billing solutions to the global
telecommunications and energy industries. Due to the flexibility inherent in the
Company's software products and the expertise of its software development
personnel, the Company is able to develop solutions that allow service providers
to offer a wide variety of services as well as collect, process and bill for
multiple services on a single invoice.
The Company's customer relationships typically begin with the customer directly
licensing the Company's software products, resulting in license fee revenue to
the Company. The Company (or an authorized systems integrator) then provides
system analysis and design, customization and implementation services to the
customer for the licensed software products, primarily on a time and materials
basis. After the system is in operation, the Company continues the relationship
by providing software product upgrades, maintenance, ongoing system management
and system enhancements to accommodate new telecommunications services and
technologies. Instead of licensing the software products from the Company, the
customer can choose to retain the Company to perform all or a substantial part
of the customer's customer care and billing operations in a Company-maintained
DB2/400-based service bureau, resulting in ongoing processing fees. The Company
also offers customers who license its software a facilities management option,
whereby the Company manages the operations of the customer care and billing
solution on customer-owned hardware, on the Company's premises.
Software Products
Saville CBP for DB2/400 and CBP for Oracle. The Company's flagship products, CBP
for DB2/400 and CBP for Oracle are innovative customer care and convergent
billing solutions designed for the telecommunications and energy industries.
Saville CBP provides billing and account management capabilities for a variety
of wireless and wireline services, as well as energy services, providing a
single bill and a single point of contact across multiple levels, service
offerings, languages, currencies and locations. In September 1998, Saville
released a new version of CBP for Oracle that provides certain GSM, competitive
local exchange carrier (CLEC), and web enablement capabilities. In December
1998, Saville released a new version of CBP for DB2/400 which features improved
menu driven installation procedures, expanded tax code compliance for utility
companies, an enhanced user interface and an upgraded knowledge transfer
program.
Saville IBP. The Company's IBP product is based on the interconnect
telecommunications software technology purchased from Cap Gemini Sverige A.B. in
1998. Saville IBP is a billing product that allows carriers to bill one another
for their interconnect, carrier-to-carrier transactions, in an efficient and
secure way. Saville IBP includes functionality that allows telecommunication
carriers to collect, validate, measure and price the actual traffic sent between
carriers and either generate accurate statements to interconnect partners or
validate incoming interconnect charges.
SavilleCare. Released in January 1999, the Company's SavilleCare software
product is based on the customer care technology purchased from BHA in April
1998. SavilleCare, which was specifically developed for the telecommunications
industry, is a fully independent, enterprise-wide customer care solution. The
product offers an organization a single view of each customer on an integrated
call center desktop, enabling one customer service representative (CSR) to be
the sole point of contact between an organization and its customers and to
efficiently provide customer care by working through just one easy to learn
interface. The SavilleCare call center desktop functionality can be integrated
with a telecommunications service provider's billing and other business support
systems.
SavilleExpress. Released in August 1998, the Company's SavilleExpressTM software
product is based on the billing technology purchased from BHA in April 1998.
SavilleExpress is a modular billing system marketed towards smaller service
providers. A provider can choose from a series of pre-configured modules to
support its business as it exists, and may add functional modules in the future
to support its growth. The Company is scheduled to release its SavilleExpress
GSM module to support the Global System for Mobile Communications (GSM) standard
for wireless telecommunications in the first half of 1999.
Services
Saville provides development and enhancement services to its customers primarily
on a time and materials basis. The Company typically begins its relationship
with a customer by assisting the customer in developing a business case
definition and needs analysis and then working with the customer to design,
develop and implement customizations to the Company's software products to meet
those specific customer needs. A customer who licenses the Company's software
products may also enter into a facilities management agreement with the Company,
whereby the Company manages the operations of the customer's billing solution on
customer-owned hardware, at the Company's data center. The Company continues its
relationship with the customer through ongoing development, maintenance,
training, systems analysis and further enhancements of installed systems to
accommodate new products and technologies. The Company also provides users of
its software products technical support via the Company's technical support
facilities in Australia, Canada and the Republic of Ireland. The Company
believes that it is essential to provide a high level of reliable service to
customers in order to solidify customer relationships and to be the vendor of
choice when customers seek new services or system expansions.
Service Bureau
Customers may elect to contract with the Company to operate their DB2/400-based
customer care and billing solution in a Company-maintained service bureau. In a
typical service bureau arrangement, the Company develops the customer's customer
care and billing solution and installs it in the Company's technical data
center. The customer then transmits its customer usage data to the Company, or
the Company obtains the information directly from the switch. In either case,
the Company processes and rates the information using the customer care and
billing system developed for the customer and then transmits the processed and
rated information to a third party or the customer for printing and mailing.
Customers are charged a negotiated fee for utilizing the Company's service
bureau. This fee is typically comprised of a charge per invoice produced and a
charge per call based on the amount and type of information contained in the
bill's call detail records.
CUSTOMERS
The Company provides its software and services to a range of telecommunications
service providers, including those providing local exchange, long distance,
wireless, and audio- and video-conferencing services. The Company's typical
customers are medium-sized telecommunications service providers that require
complete customer care and billing systems, and large service providers that
require the Company's software and services to support new market expansions or
as integral components of larger customer care and billing systems. In addition,
the Company has licensed software products and provided services to a customer
in the energy industry.
During 1998, no customer represented more than 10% of the Company's total
revenue. The Company however is dependent on large and long-term projects that
can cause the Company's revenue and earnings to fluctuate from quarter to
quarter, based on the customers' requirements and the timing of the projects.
Although the Company believes it has good relationships with its largest
customers and has in the past received a substantial portion of its revenue from
repeat business with established customers, none of the Company's major
customers has a significant obligation to purchase additional products or
services. Therefore, there can be no assurance that any of the Company's major
customers will continue its long-term projects or purchase new systems, systems
enhancements and services in amounts similar to previous years. A significant
decrease in business from any of its major customers could have a material
adverse effect on the Company's results of operations and financial condition.
Additionally, the acquisition by a third party of one of the Company's major
customers could result in the loss of that customer and have a material adverse
effect on the Company's results of operations and financial condition.
COMPETITION
The market for customer care and billing systems is highly competitive, and the
Company expects this competition to increase. The Company competes with both
independent providers of customer care and billing systems and services and with
the internal billing departments of telecommunications and energy service
providers. The Company expects that the continued growth of the
telecommunications industry will encourage new competitors to enter the
telecommunications customer care and billing market in the future. The Company
believes that the principal competitive factors in its market include
responsiveness to client needs, timeliness of implementation, quality of
service, price, project management capability and technical expertise. The
Company also believes that its ability to compete depends in part on a number of
competitive factors outside its control, including the development by others of
software that is competitive with the Company's services and products, the price
at which competitors offer comparable services and products, the extent of
competitors' responsiveness to customer needs and the ability of the Company's
competitors to hire, retain and motivate key personnel.
In addition, the Company competes with a number of companies that have
substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition than the Company. For example, in
February 1999, Lucent Technologies, Inc., a telecommunications equipment maker
with substantially greater resources and name recognition than the Company and
with which the Company had entered into several alliance agreements, purchased
Kenan Systems Corp., a customer care and billing software competitor of the
Company. In addition, Amdocs Limited, a customer care and billing software
competitor of the Company with substantially greater resources than the Company
announced an agreement to purchase Architel Systems Corporation, a service
provisioning software company, in order to enhance Amdocs' ability to provide
end-to-end billing solutions for its telecommunications customers. The Company's
competitors, therefore, may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the promotion and sale of their products than can the Company.
PROPRIETARY RIGHTS AND LICENSES
The Company does not currently hold any patents and relies upon a combination of
statutory and common law copyright, trademark and trade secret laws to establish
and maintain its proprietary rights to its products. The Company believes that,
because of the rapid pace of technological change in the telecommunication and
software industries, the legal protections for its products are less significant
factors in the Company's success than the knowledge, ability and experience of
the Company's employees, the frequency of product enhancements and the
timeliness and quality of support services provided by the Company.
The Company generally enters into invention and non-disclosure agreements with
its employees, consultants, clients and potential clients and limits access to,
and distribution of, its proprietary information. Use of the Company's software
products is usually restricted to specified locations and is subject to terms
and conditions prohibiting unauthorized reproduction or transfer of the software
products. The Company also seeks to protect the source code of its software as a
trade secret and as a copyrighted work.
RESEARCH AND DEVELOPMENT
Research and development expenses were $4.2 million, $10.1 million, and $21.4
million in 1996, 1997 and 1998, respectively. During 1998, the Company had two
major platform releases of CBP, providing additional functionality for each
platform. The first was the release of the second version of the Company's UNIX
based product, CBP for Oracle in September 1998 and the second was CBP release
3.5 for DB2/400 in December 1998. In addition, the Company further developed its
SavilleExpress, SavilleCare and Saville IBP product technology purchased during
the year. The Company intends to continue its investment in research and
development efforts and therefore expects that research and development expenses
will remain at similar levels to 1998.
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. The Company has designed, tested and continues to
test the most current versions of its products to ensure that they are Year 2000
ready. The Company does not believe that it will need to undertake material
research and development efforts in this regard.
EMPLOYEES
As of December 31, 1998, the Company employed a total of 1,393 employees
including 38 involved in sales and marketing and related services, 1,194 in
consulting, implementation and client support services and 161 in management,
finance, human resources and administration. None of the Company's employees is
represented by a labor union. The Company has experienced no work stoppages and
believes that its employee relations are good.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the names, ages and positions of the current
executive officers of the Company.
Name Age Position
John J. Boyle, III 52 President, Chief Executive Officer
and Chairman of the Board of Directors
Lawrence S. Barker 46 Executive Vice President, Operations
John J. Kiley 43 Executive Vice President, Global Sales and
Marketing
Andrew L. Campbell 37 Senior Vice President and Chief Technology Officer
Michael Durance 38 Senior Vice President, Australia
Susan J. Ernst 49 Senior Vice President, Global Consulting Services
Eric Fredine 34 Senior Vice President, Global Consulting Services
Christopher A. Hanson 40 Senior Vice President and Chief Financial Officer
Robin Winn 46 Senior Vice President, Human Resources
Mr. Boyle has served as the Company's President and Chief Executive Officer
since August 1994 and as the Company's Chairman of the Board of Directors since
April 1998. From 1981 to August 1994, Mr. Boyle served in various management
positions with CSC Intelicom, a global supplier of information technology, most
recently as Senior Vice President of Work Process/Network Practice.
Mr. Barker has served as Executive Vice President, Operations of the Company
since January 1999, prior to which he served as Senior Vice President,
Operations of the Company since October 1997. From October 1996 to October 1997,
Mr. Barker served as President of Stanford Associates, a provider of
telecommunications consulting services. From 1993 until October 1996, Mr. Barker
was the Division President for Telecommunications at Computer Services
Corporation.
Mr. Kiley has served as Executive Vice President, Global Sales and Marketing of
the Company since January 1999, prior to which he served as Senior Vice
President, Global Sales and Marketing of the Company since October 1995. From
January 1994 to September 1995, Mr. Kiley served as President and Chief
Operating Officer of Performance Software, Inc., a provider of commercial UNIX
server based automated software testing products and services.
Mr. Campbell has served as Senior Vice President and Chief Technology Officer of
the Company since January 1999, prior to which he served as Senior Vice
President, Research and Development of the Company since January 1997. From
February 1990 to December 1996, Mr. Campbell served in various positions with
BHA Computer Pty Ltd, an Australian-based developer of customer care and billing
software acquired by the Company in 1998, most recently as the General Manager
for the company's projects division.
Mr. Durance has served as Senior Vice President of the Company since January
1999, prior to which he served as Managing Director for the Asia Pacific region
of the Company since September 1998 and as Vice President of product management
since September 1996. From November 1994 to September 1996, Mr. Durance held
various positions at Northern Telecom, most recently as Director of
Applications.
Ms. Ernst has served as Senior Vice President, Global Consulting Services of the
Company since July 1998. From September 1991 to April 1998, Ms. Ernst served in
various positions with MCI Systemhouse, most recently as Senior Vice President
and Chief Delivery Officer.
Mr. Fredine has served as Senior Vice President, Global Consulting Services of
the Company since January 1999, prior to which he served as Vice President,
Global Consulting Services of the Company since August 1997 and as
Implementation Manager since February 1997. From January 1996 to January 1997,
Mr. Fredine was a Development Manager at Northern Telecom and from January 1993
to January 1996, he was a Development Manager for Nortel Australia.
Mr. Hanson has served as Saville's Senior Vice President and Chief Financial
Officer since March 1997. From November 1991 to March 1997, Mr. Hanson was in
charge of tax and treasury operations at System Software Associates, Inc. most
recently serving as its Treasurer.
Ms. Winn has served as Senior Vice President, Human Resources of the Company
since April 1998, prior to which she served as Vice President, Human Resources
of the Company since December 1996. From February 1993 to November 1996, Ms.
Winn served as Vice President, Human Resources for Bell Sygma.
Executive officers of the Company are elected by and serve at the discretion of
the Board of Directors. There are no family relationships among any of the
executive officers or directors of the Company.
ITEM 2. PROPERTIES
The Company leases space at its office locations: The Galway office is the
Company's corporate headquarters and is used for sales and marketing, software
development and customer support. The Burlington office is the North American
headquarters and is primarily used for sales and marketing, corporate
development and finance. The Edmonton and Toronto locations are primarily used
for software development, customer support and service bureau operations while
the Australian offices in Brisbane and Sydney are used for sales and marketing,
software development and customer support. The Company and its subsidiaries also
lease additional sales offices in Miami, Florida, Crawthorne, UK, and Wiesbaden,
Germany.
The Company believes that its facilities are adequate for its current needs and
that suitable additional space will be available as required. The following
shows information concerning the Company's significant leased facilities:
Location Square Footage Lease Expiration
Brisbane, Australia 23,210 June 30, 1999
Burlington, Massachusetts 12,417 July 31, 2002
Crowthorne, United Kingdom 3,106 July 7, 2013
Edmonton, Alberta 58,298 June 30, 2001
Edmonton, Alberta 28,583 December 31, 2002
Edmonton, Alberta 29,057 July 31, 2003
Galway, Ireland 4,000 April 1, 2014
Galway, Ireland 21,966 July 1, 2007
Sydney, Australia 3,638 April 2, 2000
Toronto, Ontario 35,269 October 31, 2000
Toronto, Ontario 24,030 January 31, 2005
Toronto, Ontario 42,958 June 30, 2005
Toronto, Ontario 14,400 June 30, 2006
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
MARKET INFORMATION AND HOLDERS
American Depositary Shares ("ADSs") representing the Ordinary Shares of the
Company have been traded on the Nasdaq National Market under the symbol "SAVLY"
since November 16, 1995. Each ADS represents one Ordinary Share of the Company.
Prior to November 16, 1995, neither the ADSs nor the Company's Ordinary Shares
were publicly traded. Neither the ADSs nor the Ordinary Shares of the Company
are traded on any market, foreign or domestic, other than the Nasdaq National
Market. The following table sets forth, for the periods indicated, the high and
low sales prices of the ADSs as reported on the Nasdaq National Market,
retroactively adjusted for a two-for-one stock split in the form of a 100% share
dividend in November 1997.
1998
High Low
First Quarter $53.00 $35.00
Second Quarter 58.00 34.50
Third Quarter 51.25 12.75
Fourth Quarter 23.44 7.50
1997
High Low
First Quarter $21.73 $14.06
Second Quarter 26.25 13.56
Third Quarter 37.88 25.63
Fourth Quarter 41.50 28.00
The depositary for the American Depositary Receipts ("ADRs") representing the
ADSs is the Bank of New York (the "Depositary"), 48 Wall Street, New York, New
York 10286. On March 11, 1999, the Company had approximately 14 holders of
Ordinary Shares of record. The Bank of New York, as Depositary, is the holder of
record of the Ordinary Shares evidenced by ADSs. On March 11, 1999 the closing
price of the Company's ADSs on the Nasdaq National Market was $14.00.
DIVIDENDS
On September 25, 1995, the Company paid a cash dividend of $3.0 million on its
Ordinary Shares, which it determined to pay primarily due to the incurrence of
certain tax liabilities by its majority shareholders as a result of their
ownership interests in the Company and the Company's classification at that time
as a "Controlled Foreign Corporation." Except for such payment, Saville has
never declared or paid any cash dividends on its Ordinary Shares. The Company
currently intends to retain all future earnings to finance future operations and
therefore does not anticipate paying any cash dividends in the foreseeable
future. Moreover, under the Companies Acts of the Republic of Ireland, dividends
may only be paid out of the profits of the Company legally available for
distribution.
TAXATION
The statements of United States and Irish tax laws set out below are based on
the laws, regulations, administrative rulings and practices of the United States
Internal Revenue Service (the "IRS") and the Revenue Commissioners of Ireland in
force and as interpreted by the relevant taxation authorities as of December 31,
1998 and are subject to any changes in United States or Irish law, or in the
interpretation thereof by the relevant taxation authorities, or in the double
taxation conventions between the Republic of Ireland and the United States (the
"Conventions") (the Conventions were ratified in 1997 and 1951) and occurring
after such date.
The following is a general summary of certain Republic of Ireland and United
States federal income tax consequences of the purchase, ownership and
disposition of ADSs evidenced by ADRs to U.S. Holders. For purposes of this
discussion, a "U.S. Holder" means an individual citizen or resident of the
United States for United States federal income tax purposes, corporations, or
partnerships created or organized under the laws of the United States or any
state thereof or the District of Columbia, or estates or trusts which are
residents in the United States for United States Federal Income tax purposes, in
each case who (i) is not also resident of, or ordinarily resident in, the
Republic of Ireland for Irish tax purposes, (ii) is not engaged in trade or
business in the Republic of Ireland through a permanent establishment and (iii)
does not own, directly, indirectly or by attribution, 10% or more of the shares
of the Company (by vote or value). This summary is of a general nature only and
does not discuss all aspects of United States and Irish taxation that may be
relevant to a particular investor. The summary deals only with ADRs held as
capital assets and does not address special classes of purchasers, such as
dealers in securities, U.S. Holders whose functional currency is not the United
States dollar and certain U.S. Holders (including, but not limited to, insurance
companies, tax-exempt organizations, financial institutions and persons subject
to the alternative minimum tax) who may be subject to special rules not
discussed below. In particular the following summary does not address the
adverse tax treatment of U.S. Holders who own, directly, or by attribution, 10%
or more of the Company's outstanding voting stock in the event that the Company
were to be classified as a "Controlled Foreign Corporation" for United States
federal income tax purposes. Although the Company was not classified as a
Controlled Foreign Corporation at December 31, 1998, there can be no assurance
that it will not be a Controlled Foreign Corporation in the future.
OWNERS OF ADSs ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE
UNITED STATES FEDERAL, STATE AND LOCAL TAX CONSEQUENCES, AS WELL AS WITH RESPECT
TO THE TAX CONSEQUENCES IN THE REPUBLIC OF IRELAND AND OTHER JURISDICTIONS, OF
THE OWNERSHIP OF ADSs AND THE ORDINARY SHARES REPRESENTED THEREBY APPLICABLE IN
THEIR PARTICULAR TAX SITUATIONS.
For purposes of the Conventions and the Internal Revenue Code of 1986, as
amended (the "Code"), U.S. Holders will be treated as the owners of the Ordinary
Shares represented by ADSs evidenced by ADRs.
Taxation of Dividends
Republic of Ireland Taxation. The Company does not expect to pay cash dividends
for the foreseeable future. Persons who are neither resident nor ordinarily
resident in the Republic of Ireland at present do not have an Irish income tax
liability on dividends received from Irish resident companies. Although a net
Irish income tax is imposed, the income tax liability of each such person is
restricted to the amount of the Tax Credit attaching to the dividend and, as the
Tax Credit is allowed against the restricted liability, the Irish income tax
liability is fully offset by the Tax Credit. There is no Irish withholding tax
on dividends paid by an Irish resident company.
The Finance Bill 1999, if passed by the Irish parliament, will impose, with some
exceptions, a withholding tax at 24% on dividends paid by Irish resident
companies. The proposed exceptions include dividends paid to residents of tax
treaty countries (the United States is such a country), residents of EU Member
States and companies the principal class of the shares of which is substantially
and regularly traded on a recognized stock exchange in a tax treaty country or
in an EU Member State.
United States Taxation. For United States federal income tax purposes, the gross
amount (i.e., including the amount of Tax Credit) of any dividend paid (to the
extent of the current or accumulated earnings and profits of the Company) will
be included in gross income and treated as foreign source dividend income in the
year the shareholder becomes entitled to such dividend. The dividend will not be
eligible for the dividends-received deduction allowed to United States
corporations. The amount includable in income will be the United States dollar
value of the payment on the date of payment regardless of whether the payment is
in fact converted into United States dollars. Generally, gain or loss (if any)
resulting from currency fluctuations during the period from the date any
dividend is paid to the date such payment is converted into United States
dollars will be treated as ordinary income or loss.
Taxation of Capital Gains
A U.S. Holder is not subject to Irish capital gains tax on the disposal of ADSs
quoted on the Nasdaq National Market. It is the intention of the Company's
management to continue the Company's quotation on the Nasdaq National Market.
Subject to the discussion below under the heading "Passive Foreign Investment
Company Considerations," a U.S. Holder will be liable for United States federal
income tax on such gains to the same extent as on any other gains from sales or
dispositions of shares. A U.S. Holder that is liable for both Irish and U.S. tax
on a gain on the disposal of the ADSs will generally be entitled, subject to
certain limitations and pursuant to the Income Tax Convention, to credit the
amount of Irish capital gains or corporation tax, as the case may be, paid in
respect of such gain against such U.S. Holder's United States federal income tax
liability. Such gain is, however, likely to be considered to be from sources
within the United States, which may effectively limit the amount of foreign tax
credit allowed to the U.S. Holder.
Passive Foreign Investment Company Considerations
The Company will be classified as a passive foreign investment company ("PFIC")
for United States federal income tax purposes if the fair market value of its
passive income-producing assets equals or exceeds 50% of the sum of the market
value of its outstanding stock plus its liabilities. Based on an analysis of its
income, assets and equity during 1998, the Company believes that it is not a
PFIC. While there can be no assurance, the Company expects, based on projections
of its income and assets and the manner in which the Company intends to manage
its business, that it will not be a PFIC. The Company will continue to monitor
its status and will, promptly following the end of each taxable year, notify
shareholders if it believes that it is properly classified as a PFIC for that
taxable year.
U.S. Information Reporting and Backup Withholding
Generally, the amount of dividends paid to U.S. Holders of ADSs, the name and
address of the recipient and the amount, if any, of tax withheld must be
reported annually to the IRS. A similar report is sent to the U.S. Holder.
Backup withholding tax at the rate of 31% will apply to certain payments made to
U.S. Holders who fail to furnish certain identifying information under the
United States information reporting rules. Amounts withheld from payments will
be allowed as a credit against such U.S. Holders' United States federal income
tax liability.
Irish Capital Acquisitions Tax
Irish capital acquisitions tax ("CAT") applies to gifts and inheritances (i)
where the person making the gift or inheritance is domiciled in the Republic of
Ireland at the date of the gift or inheritance or (ii) to the extent that the
property of which the gift or inheritance consists is situated in the Republic
of Ireland at the date of the gift or inheritance. The person by whom CAT is
primarily payable is the person who receives the gift or inheritance. Persons
who are secondarily liable include the donor, an agent, personal representative,
trustee or other person in whose care the property constituting the gift or
inheritance or the income therefrom is placed. All taxable gifts and
inheritances received by an individual since December 2, 1988 are aggregated and
only the excess over a certain tax-free threshold is taxed. The tax-free
threshold is dependent on the relationship between the deceased/donor and
successor/donee and the aggregation of all previous gifts and inheritances. The
tax-free threshold amounts currently range from IR(pound) 12,860 (approximately
$19,088 at December 31, 1998) in the case of persons who are not related to one
another to IR(pound) 25,720 (approximately $38,176 at December 31, 1998) in the
case of gifts and inheritances received from a brother, sister or from a brother
or sister of a parent or from a grandparent to IR(pound) 192,900 (approximately
$286,321 at December 31, 1998) in the case of gifts and inheritances received
from a parent. Gifts and inheritances passing between spouses are exempt from
CAT. CAT is charged at progressive rates ranging in the case of gifts from 15%
to 30% and in the case of inheritances from 20% to 40%. Although ADSs may be
held by persons who are neither domiciled nor resident in the Republic of
Ireland, the underlying Ordinary Shares are deemed to be situated in the
Republic of Ireland because the Company is required to maintain its Ordinary
Share register in the Republic of Ireland. Accordingly, ADSs may be subject to
CAT notwithstanding the fact that the holder may be domiciled and/or resident
outside of the Republic of Ireland. The Convention between the United States and
the Republic of Ireland relating to estate taxes generally provides for CAT paid
on inheritances in the Republic of Ireland to be credited against tax payable in
the United States and for tax paid in the United States to be credited against
tax payable in the Republic of Ireland, based on priority rules set forth in the
Convention, in a case where an ADS is subject to both Irish CAT with respect to
inheritance and U.S. federal estate tax. The Convention does not apply to gifts.
In addition to gift and inheritance taxes, a probate tax of 2% applies to the
value of all assets passing under the will or intestacy of an Irish-domiciled
person other than to the spouse of the deceased. Where the deceased was not
domiciled in the Republic of Ireland, only assets situated in Ireland are liable
for this tax.
United States Gift And Estate Tax
An individual U.S. Holder will be subject to United States gift and estate taxes
with respect to the ADSs in the same manner and to the same extent as with
respect to other types of personal property.
Irish Stamp Duty
Irish stamp duty, which is tax on certain documents, is payable on all transfers
of Ordinary Shares in companies incorporated in the Republic of Ireland wherever
the instrument of transfer may be executed. In the case of a sale, stamp duty
will be charged at the rate of IR(pound)1.00 for every IR(pound)100 (or part
thereof) of the amount of value of the consideration (i.e., purchase price).
Where the consideration for the sale is expressed in a currency other than Irish
pounds, the duty will be charged on the Irish pound equivalent calculated at the
rate of exchange prevailing on the date of the transfer. In the case of a
transfer by way of gift (subject to certain exceptions) or for a consideration
less than the market value of the shares transferred, stamp duty will be charged
at the above rate on such market value. A transfer to the Depositary or
custodian of Ordinary Shares for deposit under the Deposit Agreement in return
for ADRs will be similarly chargeable with stamp duty as will a transfer of
Ordinary Shares from the Depositary or the custodian upon surrender of an ADR
for the purpose of the withdrawal of the underlying Ordinary Shares in
accordance with the terms of the Deposit Agreement, unless, in either case, the
transfer does not relate to a sale or contemplated sale or any other change in
the beneficial ownership of such Ordinary Shares, in which case the transfer
will be chargeable with nominal duty of IR(pound)10.
Transfers of ADRs are exempt from Irish stamp duty as long as the ADSs are
quoted on the Nasdaq National Market or any recognized stock exchange in the
United States.
The person accountable for payment of stamp duty is the transferee or, in the
case of a transfer by way of gift or for a consideration less than the market
value, both parties to the transfer. Stamp duty is normally payable within 30
days after the date of execution of the transfer. Late or inadequate payment of
stamp duty will result in liability to interest, penalties and fines.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is attached hereto as Appendix A and
incorporated herein by this reference.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by this Item is attached hereto as Appendix B and
incorporated herein by this reference.
ITEM 7A. MARKET RISK
The Company is exposed to market risks, which include changes in currency
exchange rates as measured against the U.S. dollar and each other which could
positively or negatively affect results of operations and retained earnings.
As of December 31, 1998, the Company has evaluated its risk and determined that
any exposure to currency exchange is not significant to the Company's overall
consolidated financial results. There can be no assurance that the Company's
exposure will remain at these levels, especially in the event of significant and
sudden fluctuations in the value of local currencies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is attached hereto as Appendix C and
incorporated herein by this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On October 15, 1998, Ernst & Young ("Ernst & Young") informed Saville Systems
PLC (the "Registrant") that it was resigning as the Registrant's independent
auditors and principal accountants. The reason given by Ernst & Young for its
resignation was the existence of certain mutual business opportunities on which
both Ernst & Young and the Registrant desired to collaborate which affected
Ernst & Young's independence with respect to the Registrant. Ernst & Young's
report on Saville's financial statements during the two most recent fiscal years
and all subsequent interim periods preceding the date hereof contained no
adverse opinion or a disclaimer of opinions, and was not qualified as to
uncertainty, audit scope or accounting principles. The decision to accept Ernst
& Young's resignation was made by the Board of Directors of the Registrant.
During the Registrant's two most recent fiscal years and the subsequent interim
periods immediately preceding the date of the resignation of Ernst & Young, the
Registrant had no disagreements with Ernst & Young on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which disagreement(s), if not resolved to the satisfaction of Ernst &
Young, would have caused Ernst & Young to make a reference to the subject matter
of the disagreement in connection with its reports. None of the "reportable
events" listed in Item 304 (a) (1) (ii) of Regulation S-K under the Securities
Exchange Act of 1934 occurred with respect to the Registrant within the last two
fiscal years and the subsequent interim period to the date hereof.
Ernst & Young furnished the Company with a letter addressed to the Commission
stating whether it agrees with the statements set forth above. A copy of this
letter was incorporated by reference to the Company's Current Report on Form 8-K
dated October 15, 1998.
Effective October 22, 1998, the Registrant engaged PricewaterhouseCoopers LLP
("PwC") as its principal accountants and independent auditors to replace Ernst &
Young. The decision to engage PwC was made by the Board of Directors of the
Registrant. During the last two fiscal years and the subsequent interim period
to the date hereof, neither the Registrant nor anyone on its behalf consulted
PwC regarding the application of accounting principles to a specific completed
or contemplated transaction, or the type of audit opinion that might be rendered
on the Registrant's Financial statements, and no written or oral advice
concerning the same was provided to the Registrant that was an important factor
considered by the Registrant in reaching a decision as to any accounting,
auditing or financial reporting issue.
There have been no disagreements on accounting and financial disclosure matters.
PART III
ITEMS 10-13.
The information required for Part III in this Annual Report on Form 10-K is
incorporated by reference from the Company's definitive proxy statement for the
Company's 1999 Annual General Meeting of Shareholders. Such information is
contained in the sections of such proxy statement captioned "Share Ownership of
Certain Beneficial Owners and Management," "Election of Directors," "Board and
Committee Meetings," "Determination of Ordinary Remuneration of Directors,"
"Executive Compensation" and "Compliance with Section 16(a) of the Exchange
Act." Information regarding executive officers of the Company is also furnished
in Part I of this Annual Report on Form 10-K under the heading "Executive
Officers of the Company."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) The following documents are incorporated by reference or included as part
of this Annual Report on Form 10-K.
1. The following financial statements (and related notes) of the Company are
filed as Appendix C
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1998
and 1997
Consolidated Statements of Income for the
Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in
Shareholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. Except for the schedules listed below, all schedules are omitted as the
information required is inapplicable or the information is presented in the
consolidated financial statements or the related notes.
Schedule II - Valuation and Qualifying Accounts
3. The Exhibits listed in the Exhibit Index immediately preceding the Exhibits
are filed as a part of this Annual Report on Form 10-K.
(b) "Changes in Registrant's Certifying Accountant" on Form 8-K, dated October
15, 1998 was filed by the Company on October 22, 1998 pursuant to Item 4 of Form
8-K.
The following trademarks of the Company are mentioned in this Annual Report on
Form 10-K: "Saville Systems", "CBP", each of which is registered, and "IBP",
"SavilleCare" and "SavilleExpress".
<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 12th day of
March 1999.
SAVILLE SYSTEMS PLC
By: /s/John J. Boyle III
John J. Boyle III, Chairman
and Chief Executive Officer
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ John J. Boyle III Chairman, Chief March 12, 1999
- --------------------- Executive Officer and Director
John J. Boyle III (Principal Executive Officer)
/s/ Christopher A. Hanson Chief Financial Officer March 12, 1999
- -------------------- (Principal Financial and
Christopher A. Hanson Accounting Officer)
/s/ Bruce A. Saville Chairman Emeritus March 12, 1999
- --------------------
Bruce A. Saville
/s/ John A. Blanchard III Director March 12, 1999
- -------------------------
John A. Blanchard III
/s/Brian E. Boyle Director March 12, 1999
- -------------------------
Brian E. Boyle
/s/ William F. Cunningham Director March 12, 1999
- -------------------------
William F. Cunningham
/s/Richard A. Licursi Director March 12, 1999
- -------------------------
Richard A. Licursi
/s/Fergus G. McGovern Director March 12, 1999
- -------------------------
Fergus G. McGovern
/s/David P. Mixer Director March 12, 1999
- -------------------------
David P. Mixer
/s/James B. Murray, Jr. Director March 12, 1999
- -----------------------
James B. Murray, Jr.
/s/John W. Sidgmore Director March 12, 1999
- -------------------------
John W. Sidgmore
<PAGE>
SAVILLE SYSTEMS PLC
SCHEDULE II (VALUATION AND QUALIFYING ACCOUNTS)
<TABLE>
Col. A Col. B Col. C Col. D Col. E
- ---------------------- ------------------------------------------- -------------- ---------------
<S> <C> <C> <C> <C>
Additions Deductions
Balance at Charged to
beginning of Charged costs other Balance at end
Description period & expenses accounts of period
- ---------------------- ----------------------------- ------------- -------------- ---------------
$ $ $
Allowance for doubtful
accounts
December 31, 1998 1,687 3,160 (2,904) 1,943
December 31, 1997 756 1,010 (79) 1,687
December 31, 1996 370 386 756
</TABLE>
<PAGE>
Appendix A
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands of US dollars, except per share data)
<TABLE>
Year ended December 31 1998 1997 1996 1995 1994
- ---------------------------------------- ----------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total revenue $167,705 $107,045 $53,920 $30,296 $20,073
Net income 27,052* 23,937 11,569 6,382 5,357
Diluted earnings per share 0.67* 0.61 0.31 0.20 0.17
</TABLE>
<TABLE>
As of December 31 1998 1997 1996 1995 1994
- ---------------------------------------- ----------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total assets $161,645 $105,375 $56,489 $36,031 $9,857
Long-term liabilities, excluding current
portion 1,178 336 - 44 689
</TABLE>
*Financial data for 1998 includes the effects of a one-time charge of $9.2
million ($8.4 million net of related tax benefits) for the purchase of
in-process research and development. Excluding such charge, net income and
diluted earnings per share for the year ended December 31, 1998 were $35,447 and
$0.87, respectively (see Note 5 of the Consolidated Notes to Financial
Statements, December 31, 1998).
<PAGE>
Appendix B
SAVILLE SYSTEMS PLC
Management's Discussion and Analysis of Financial Condition
and Results of Operations
OVERVIEW
Saville Systems PLC (the "Company" or "Saville") is a leading provider of
customer care and billing solutions for service providers in the
telecommunications and energy markets. The Company offers an innovative
convergent billing platform product called Saville CBP(R) ("CBP") that operates
on DB2/400 and Oracle/UNIX platforms. 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 its requirements and then designs, develops and implements
a customer care and billing solution. The customer can either license CBP from
Saville or CBP can be provided via a Company-operated service bureau. Saville
has also introduced facilities management services, which allow customers to
license from Saville and have Saville manage the operation of the software on
customer owned hardware. Additionally, Saville has developed relationships with
authorized integrators to assist it in providing implementation services to
purchasers of CBP products. The Company also assists its customers on an ongoing
basis by addressing their changing business needs through future enhancements
and developments to their existing customer care and billing solutions.
The Company's strategy is to target growth-oriented telecommunications and
energy service providers, leverage its multi-market experience and establish and
maintain long-term relationships with its customers. The implementation of the
Company's strategy has resulted in revenue growth over the preceding year of
78.0%, 98.5% and 56.7% in 1996, 1997 and 1998, respectively. The Company has
been strategically expanding and developing its direct sales force over the past
three years in addition to enhancing its support operations to meet worldwide
demand. This strategy has resulted in continued revenue growth and an increase
of the Company's customer base.
The following information should be read in conjunction with the Audited
Consolidated Financial statements and notes thereto included in Item 8 on Form
10-K for the year ended December 31, 1998.
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
total revenue represented by the items reported in the Company's Consolidated
Statements of Income.
<TABLE>
Percentage of Total Revenue
Year Ended December 31,
- ------------------------------------------- ------------------------------------
1998 1997 1996
- ------------------------------------------- --------- ------------- ------------
<S> <C> <C> <C>
Revenue:
Services 74.4% 79.3% 82.5%
License fees 25.6% 20.7% 17.5%
- ------------------------------------------- --------- ------------- ------------
Total Revenue 100.0% 100.0% 100.0%
- ------------------------------------------- --------- ------------- ------------
Expenses:
Cost of services 36.7% 37.0% 40.9%
Cost of license fees 0.8% 0.5% 0.6%
Sales and marketing 5.2% 5.9% 6.3%
Research and development 12.8% 9.5% 7.7%
General and administrative 19.2% 19.1% 19.9%
Charge for purchased in-process
research and development 5.5% - -
- ------------------------------------------- --------- ------------- ------------
Total Expenses 80.1% 72.0% 75.4%
- ------------------------------------------- --------- ------------- ------------
Income from operations 19.9% 28.0% 24.6%
Other income, net 2.0% 2.0% 2.8%
- ------------------------------------------- --------- ------------- ------------
Income before income taxes 21.9% 30.0% 27.4%
Provision for income taxes 5.8% 7.5% 5.7%
- ------------------------------------------- --------- ------------- ------------
Income before minority interest 16.1% 22.5% 21.7%
Minority interest share in subsidiaries'
net income - 0.2% 0.2%
- ------------------------------------------- --------- ------------- ------------
Net income 16.1% 22.3% 21.5%
- ------------------------------------------- --------- ------------- ------------
</TABLE>
YEARS ENDED DECEMBER 31, 1997 AND 1998
Revenue. The Company earns revenue from services and license fees.
Services revenue is comprised primarily of consulting services and, to a lesser
extent, service bureau processing, facilities management and maintenance fees.
Consulting services consist primarily of systems requirements definition, system
design and analysis, customization and installation services, ongoing system
management, system enhancements, software maintenance and customer training.
Services revenue from consulting services is recognized as the services are
performed, primarily on a time and materials basis and to a lesser extent on a
fixed fee basis over the term of the services provided. Service bureau and
facilities management revenue is earned when a customer contracts with the
Company to operate a customer designed billing system at the Company's premises
on either Company-owned or customer-owned hardware, respectively. Revenue from
maintenance contracts is recognized ratably over the term of the agreement,
generally one year. Services revenue accounted for 82.5%, 79.3% and 74.4% of
total revenue for 1996, 1997 and 1998, respectively. License fees comprise the
remainder of the Company's revenue and are recognized at the time of delivery of
the product to the customer, provided that the Company has no remaining service
obligations, collectibility is considered probable and the fees are fixed and
determinable. Where there are service obligations that are essential to the
functionality of the software delivered, license fees are recorded over the
expected term of the initial customization period. Total revenue increased 56.7%
from $107.0 million in 1997 to $167.7 million in 1998 due to overall increases
in services revenue and license fees, as discussed below.
Services. Services revenue increased 47.0% from $84.9 million in 1997
to $124.7 million in 1998 due primarily to an increase in consulting and
implementation services provided to new customers as well as continued services
to existing customers. To a lesser extent, increased service bureau revenue and
revenue from the operations of the Company's Australian subsidiary since the
acquisition of the net assets of Australian telecommunications software company
BHA Pty Ltd. ("BHA") and its majority owned subsidiary BHA Computer Pty Ltd.
("BHAC") in April 1998, contributed to the increase.
License Fees. License fees revenue increased 93.7% from $22.2 million
in 1997 to $43.0 million in 1998 due primarily to the recognition of license
revenue on new customer projects commencing in late 1997 and in 1998.
Cost of Services. Cost of services is comprised primarily of the
salaries and related benefits of software development, technical, service bureau
and client service personnel. It also includes costs of external contractors,
operating costs of computer equipment, training and travel expenses. Cost of
services expense increased 55.5% from $39.6 million in 1997 to $61.6 million in
1998 and increased as a percentage of services revenue from 46.7% in 1997 to
49.4% 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
incremental costs incurred to attract and retain qualified personnel.
Additionally, computer system costs incurred to support the Company's headcount
growth and service bureau initiative contributed to the overall increase in the
cost of services. The increase in cost of services as a percentage of services
revenue was 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 products, and to a
lesser extent, higher cost of services as a percentage of services revenue at
the Company's Australian subsidiary as a result of the acquisition of the assets
of BHA and BHAC. 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 consists of the commission
expense on new license fees earned by the Company. Cost of license fees expense
increased 119.2% from $579,000 in 1997 to $1.3 million in 1998 due to an
increase in commission expenses 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 as compared to 1997.
Sales and Marketing. Sales and marketing expenses consist of the
salaries, sales commissions and benefits of those employees performing these
duties as well as the related travel, marketing and promotional expenses. Sales
and marketing expenses increased 38.3% from $6.3 million in 1997 to $8.7 million
in 1998 but decreased as a percentage of total revenue from 5.9% in 1997 to 5.2%
in 1998. The overall dollar increase was primarily due to the Company's
continued expansion of its sales force globally, including North America,
Europe, Latin America and Asia Pacific, the associated expansion of its
infrastructure, and to a lesser extent, the incremental sales and marketing
costs 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 in 1999 but expects any such expense to remain at similar levels as a
percentage of revenue.
Research and Development. Research and development expenses are
comprised of the salaries and related benefits of the employees and external
contractors involved in product software development, as well as computer,
travel and related expenses. Research and development expenses increased 110.8%
from $10.1 million in 1997 to $21.4 million in 1998 and increased as a
percentage of revenue from 9.5% in 1997 to 12.8% 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 an additional release of its DB2/400 based product. To a
lesser extent, the further development of technology acquired in 1998, including
Saville Express, Saville Care and Saville IBP, 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 in 1999.
General and Administrative. General and administrative expenses consist
mainly of the salaries and related benefits of management and administrative
personnel, related travel expenses, and general office administration expenses
(rent and occupancy, telephone and other office supply costs) of the Company. It
also includes recruitment expenses, professional fees, depreciation and
amortization, and provision for doubtful collections. General and administrative
expenses increased 57.5% from $20.4 million in 1997 to $32.2 million in 1998 and
increased marginally as a percentage of revenue from 19.1% in 1997 to 19.2% 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 BHA acquisition 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 as well as current year amortization of goodwill arising on the
acquisition of the assets of BHA and amortization of acquired completed
technology. The Company expects that in 1999 general and administrative expenses
will remain at levels consistent with 1998 to support the continued growth of
the Company and to properly assess risks associated with the Company's customers
based on market conditions.
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 based on fair market value using a risk
adjusted discounted cashflow approach with the assistance of an independent
appraiser. The significant assumptions that affected the valuations included
potential revenue 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
telecommunication 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 1998.
Other income, net. Other income, net of other expenses, increased 56.2%
from $2.2 million in 1997 to $3.4 million in 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 earns a significant portion of
its taxable income in the Republic of Ireland of which its "manufacturing
income" qualifies for a reduced tax rate of 10% which is substantially lower
than statutory rates in Ireland, Canada, the United States, the United Kingdom
and Australia. The Company anticipates that it will continue to benefit from
this tax treatment, although the extent of the benefit could vary from period to
period, and there can be no assurance that the Company's tax situation will not
change. The Irish Minister of Finance announced in December 1998 that the
present standard Irish tax rate will be reduced to 28% as of January 1, 1999 and
will be reduced gradually to a tax rate of 12.5% for taxation years ending after
2002. Under the announced plan, the tax rate on manufacturing income will remain
at 10% until the tax relief program is due to terminate in 2010, at which time
the tax rate would increase to be equal to the standard rate of 12.5%. If the
Company should no longer qualify for this lower tax rate or if tax laws were
rescinded or changed, the Company's net income would be materially adversely
affected. The Company recorded a tax provision of $8.0 million in 1997
representing an effective tax rate of 24.8%. Comparatively, a provision of $10.5
million was recorded in 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). This provision represents an effective tax rate of
22.9%. The Company's effective tax rate is largely dependent on the proportion
of the Company's income earned in different tax jurisdictions.
YEARS ENDED DECEMBER 31, 1996 AND 1997
Revenue. Total revenue increased 98.5% from $53.9 million in 1996 to
$107.0 million in 1997 due to overall increases in services revenue and license
fees,as discussed below.
Services. Services revenue increased 90.8% from $44.5 million in 1996
to $84.9 million in 1997 due to expansion of the Company's customer base and
increases in projects for existing customers. Consulting services increased
97.8% from 1996 to 1997, and service bureau revenue increased 25.1% over the
same period. The increase in services revenue in 1997 was primarily due to the
increase in consulting and implementation services provided to new customers.
Approximately 54% of the services revenue reported during the year ended
December 31, 1997 was derived from services to customers existing in the
previous year compared to 69% in the year ended December 31, 1996.
License Fees. License fees revenue increased 135.0% from $9.4 million
in 1996 to $22.2 million in 1997 due primarily to additional license fees
arrangements for CBP that were negotiated during 1997. The Company introduced
the concept of convergent customer care and billing products in 1996 and the
market acceptance of this concept created opportunities for the Company in 1997.
Cost of Services. Cost of services expense increased $17.5 million from
$22.1 million in 1996 to $39.6 million in 1997 but decreased as a percentage of
services revenue from 49.6% in 1996 to 46.7% in 1997. To support the growth of
the Company's business, increased expenditures were required in 1997 for
additional personnel and hardware infrastructure.
Cost of License Fees. Cost of license fees expense increased 71.8% from
$337,000 in 1996 to $579,000 in 1997 due to an increase in commission expenses
resulting from the increase in the license fees earned by the Company.
Sales and Marketing. Sales and marketing expenses increased 85.4% from
$3.4 million in 1996 to $6.3 million in 1997 but decreased as a percentage of
total revenue from 6.3% in 1996 to 5.9% in 1997. The increase in sales and
marketing expense in 1997 resulted from the expansion of the North American
sales force and the associated expansion of infrastructure. In addition, the
Company established new sales offices in 1997 to strengthen its sales presence
in Europe, Latin America and Asia Pacific and created new alliances to further
expand the Company's market coverage in those areas.
Research and Development. Research and development expenses increased
143.3% from $4.2 million in 1996 to $10.1 million in 1997 and increased as a
percentage of revenue from 7.7% in 1996 to 9.5% in 1997. This increase was due
to development efforts by the Company in creating new and enhanced billing and
customer care products. During the year, the Company had two major platform
releases. The first was in July 1997 for CBP on the DB2/400 platform and the
second was the release of the Company's UNIX based product, CBP for Oracle(TM).
General and Administrative. General and administrative expenses
increased 91.0% from $10.7 million in 1996 to $20.4 million in 1997 and
decreased as a percentage of revenue from 19.9% in 1996 to 19.1% in 1997,
respectively. The increase in general and administrative expenses was
attributable to the additional costs of building infrastructure during 1997 to
support the growth in the Company's employee base and the expansion of the
Company's business. Significant areas of increased spending included additional
senior and middle management, and recruiting and infrastructure costs related to
an increased number of employees.
Other income, net. Other income, net of other expenses, increased 44.5%
from $1.5 million in 1996 to $2.2 million in 1997. Increased interest income on
increased 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
$3.1 million in 1996 representing an effective tax rate of 20.7% compared to a
provision of $8.0 million in 1997 representing an effective tax rate of 24.8%.
The Company's effective tax rate is largely dependent on the proportion of the
Company's income earned in different tax jurisdictions. The Company is currently
eligible for a 10% tax rate on "manufacturing" income earned in the Republic of
Ireland. The standard rate of income tax that applies to non-manufacturing
income, such as income earned on the Company's cash investments, was 36% (38%
during 1996). The Company's effective tax rate reflects the tax relief on Irish
manufacturing income subject to this reduced rate of tax, which is below the
statutory rates in Ireland, Canada and the United States.
QUARTERLY INFORMATION
The following tables present selected unaudited consolidated financial
information for the Company's last eight quarters, as well as the percentage of
the Company's total revenue represented by each item. In the opinion of the
Company's management, this unaudited information reflects all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly
this information when read in conjunction with the Consolidated Financial
Statements and Notes thereto appearing elsewhere in this report. The Company's
operating results for any quarter are not necessarily indicative of results for
any future period.
<TABLE>
Quarter Ended
- ------------------------------- ----------------------------------------------------------------------------------------
(in thousands of U.S. dollars March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
except per share data) 1997 1997 1997 1997 1998 1998 1998 1998
- ------------------------------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue
Services $16,515 $20,088 $22,575 $25,678 $29,939 $31,114 $31,332 $32,345
License fees 3,615 5,405 6,006 7,163 8,083 11,797 11,245 11,850
- ------------------------------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
Total Revenue 20,130 25,493 28,581 32,841 38,022 42,911 42,577 44,195
- ------------------------------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
Expenses
Cost of services 8,037 9,448 10,852 11,266 14,048 16,063 15,505 15,972
Cost of license fees 88 128 165 198 280 270 372 347
Sales and marketing 1,202 1,522 1,600 1,942 1,922 2,186 2,194 2,366
Research and development 1,481 2,530 2,805 3,330 3,931 5,968 5,362 6,128
General and administrative 3,909 4,913 5,325 6,297 6,543 8,108 9,373 8,170
Charge for purchased
in-process research
& development - - - - - 9,168 - -
- ------------------------------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
Total Expenses 14,717 18,541 20,747 23,033 26,724 41,763 32,806 32,983
- ------------------------------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
Income from operations 5,413 6,952 7,834 9,808 11,298 1,148 9,771 11,212
Other income, net 354 559 596 645 723 631 837 1,173
- ------------------------------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
Income before income taxes 5,767 7,511 8,430 10,453 12,021 1,779 10,608 12,385
Provision for income taxes 1,325 1,995 2,096 2,573 2,825 1,743 2,440 2,733
- ------------------------------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
Income before minority
Interest 4,442 5,516 6,334 7,880 9,196 36 8,168 9,652
Minority interest share
in subsidiaries' net 40 75 50 70 - - - -
income
- ------------------------------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
Net income $4,402 $5,441 $6,284 $7,810 $9,196 $ 36 $8,168 9,652
- ------------------------------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
Basic earnings per share $0.12 $0.15 $0.17 $0.21 $0.24 $0.00 $0.21 $0.25
Diluted earnings per $0.11 $0.14 $0.16 $0.20 $0.23 $0.00 $0.20 $0.24
share
- ------------------------------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
(in thousands)
36,209 36,449 36,965 37,356 37,822 38,554 38,679 38,827
Ordinary Shares
Ordinary Shares 38,551 39,131 39,597 40,012 40,845 41,269 40,271 39,794
assuming dilution
- ------------------------------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
</TABLE>
<PAGE>
<TABLE>
Quarter Ended
- ------------------------------- ----------------------------------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
(percentage of total revenue) 1997 1997 1997 1997 1998 1998 1998 1998
- ------------------------------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue
Services 82.0% 78.8% 79.0% 78.2% 78.7% 72.5% 73.6% 73.2%
License fees 18.0% 21.2% 21.0% 21.8% 21.3% 27.5% 26.4% 26.8%
- ------------------------------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
Total Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
- ------------------------------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
Expenses
Cost of services 39.9% 37.1% 38.0% 34.3% 36.9% 37.4% 36.4% 36.1%
Cost of license fees 0.4% 0.5% 0.6% 0.6% 0.7% 0.6% 0.9% 0.8%
Sales and marketing 6.0% 6.0% 5.6% 5.9% 5.1% 5.1% 5.2% 5.3%
Research and development 7.4% 9.9% 9.8% 10.1% 10.3% 13.9% 12.6% 13.9%
General and administrative 19.4% 19.3% 18.6% 19.2% 17.2% 18.9% 22.0% 18.5%
Charge for purchased
in-process research
& development - - - - - 21.4% - -
- ------------------------------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
Total Expenses 73.1% 72.8% 72.6% 70.1% 70.2% 97.3% 77.1% 74.6%
- ------------------------------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
Income from operations 26.9% 27.2% 27.4% 29.9% 29.7% 2.7% 22.9% 25.4%
Other income, net 1.8% 2.2% 2.1% 2.0% 1.9% 1.5% 2.0% 2.6%
- ------------------------------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
Income before income taxes 28.7% 29.4% 29.5% 31.9% 31.6% 4.2% 24.9% 28.0%
Provision for income taxes 6.6% 7.8% 7.3% 7.8% 7.4% 4.1% 5.7% 6.2%
- ------------------------------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
Income before minority
interest 22.1% 21.6% 22.2% 24.1% 24.2% 0.1% 19.2% 21.8%
Minority interest share
in subsidiaries' net 0.2% 0.3% 0.2% 0.2% - - - -
income
- ------------------------------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
Net income 21.9% 21.3% 22.0% 23.9% 24.2% 0.1% 19.2% 21.8%
- ------------------------------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
</TABLE>
The Company's quarterly operating results have in the past and may in the future
vary significantly. Factors that may influence the quarterly results could
include items such as, but are not limited to, increased competition, the size
and timing of significant client projects and license fees, cancellations of
significant projects by customers, changes in operating expenses, changes in
Company strategy, personnel changes, foreign currency exchange rates, and
general economic factors.
The Company's expense levels are based, in part, on its expectations as to
future revenue. If revenue levels are below expectations, operating results are
likely to be adversely affected. Net income may be disproportionately affected
by a reduction in revenue because a proportionately smaller amount of the
Company's expenses varies with its revenue. As a result, the Company believes
that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indicators of future
performance.
LIQUIDITY AND CAPITAL RESOURCES
On a combined basis, cash and cash equivalents and short-term investments
increased $19.0 million from $68.8 million at December 31, 1997 to $87.8 million
at December 31, 1998. During the year, cash and cash equivalents decreased $15.5
million to $40.3 million at December 31, 1998, while short-term investments
increased $34.5 million to $47.5 million at December 31, 1998.
Operating Activities. During the year ended December 31, 1998, net cash
provided by operating activities was $20.8 million. Net income, 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.
Investing Activities. The cash used in investing activities during the
year ended December 31, 1998 was comprised of $4.6 million of net purchases of
property and equipment, $2.0 million to purchase in-process technology, $34.5
million of net purchases of short-term investments and $21.0 million to purchase
the assets of BHA and BHAC, including the repayment of $3.3 million in related
bank debt, as well as $906,000 in acquisition related costs and expenses. The
Company expects to continue to make property and equipment investments to
support the growth and expansion of the Company's business and for further
development of its internal software programs.
Financing Activities. During the year ended December 31, 1998, net cash
provided from financing activities was $25.7 million. This was primarily due to
the issuance of Ordinary Shares to acquire the assets 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, 2000 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, the bank's London Interbank Offer Rate (LIBOR) and
the bank's Dublin Interbank Offer Rate (DIBOR). Total advances drawn on the Line
of Credit during the year ended December 31, 1998 were approximately $22.3
million and were used to fund, in part, the acquisition of the assets of BHA and
BHAC in April 1998. The $15.1 million borrowed as part of the funding of the
acquisition was repaid by the Company, 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. No advances were outstanding on
this facility as of December 31, 1998.
The Company had capital lease obligations in principal amounts of $312,000 as of
December 31, 1998 and subsequent to such date has incurred no additional capital
lease obligations. Liabilities include approximately $2.0 million of minimum
royalty payments due over the next two years as part of the purchase of
in-process technology, of which approximately $1.0 million was due and paid in
1999 and is included in the current portion of long-term liabilities.
During 1998, irrevocable standby letters of credit were issued to a customer to
serve as performance bonds associated with the completion of the Company's
contract. These letters of credit totaled approximately $854,000 and $493,000
and expire on January 31, 1999 and July 30, 1999, respectively, and reduce those
funds available for use by the Company under the Line of Credit. Before the
customer can draw on these letters, the Company must be provided with sixty days
prior written notice. No such notice had been received by the Company as of
December 31, 1998.
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 at least 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 customers 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.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European Union
established fixed conversion rates between their existing currencies (legacy
currencies) and one common currency, the Euro. The Euro now trades on currency
exchanges and may be used in business transactions. Beginning in January 2002,
new Euro-denominated bills and coins will be issued and legacy currencies will
be withdrawn from circulation. The Company has begun to identify and ensure that
all Euro conversion compliance issues are addressed during this transition
period ending in 2001. The Company does not expect the effect of the Euro
conversion on its business operations to be significant since the Company's
international sales are predominately invoiced and paid in U.S. currency and the
cost of modification to internal systems is not expected to be significant.
Therefore, based on current information, the Company does not expect that the
Euro conversion will have a material adverse impact on its business or financial
condition.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement of Financial
Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). SFAS 133 will be effective for the Company's fiscal year ending
December 31, 2000. The Company has not determined the impact, if any, of this
pronouncement on its consolidated financial statements.
The American Institute of Certified Public Accountants (AICPA) has issued
Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities" ("SOP
98-5") which 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.
Statement of Position of 98-9 "Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions" ("SOP 98-9") has also been
issued by the AICPA. Effective December 15, 1998, SOP 98-9 amends SOP 98-4,
Deferral of the Effective Date of a Provision of SOP 97-2, and Software Revenue
Recognition, to extend the deferral of the application of certain passages of
SOP 97-2 provided by SOP 98-4 through fiscal years beginning on or before March
15, 1999. All other provisions of SOP 98-9 are effective for transactions
entered into in fiscal years beginning after March 15, 1999. The Company's
current revenue recognition policies are expected to remain largely unaffected.
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" 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 security systems, building equipment and
utilities. The Company expects to complete this assessment in the first half of
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 which the Company uses
will be Year 2000 Ready when necessary and that the cost to ensure that those
systems are Year 2000 Ready will not be material. It should be noted, however,
that the Company depends on timely and uninterrupted interactions with its
vendors and its customers, through the use of banking systems, commercial
airline travel, telecommunications via long-distance and local service
providers, and local utilities, including power. To the extent that Year 2000
Ready alternatives are not readily available at the time, any interruption
caused by a lack of Year 2000 Readiness on the part of such vendors could have a
material adverse effect on the Company's business, operating results and
financial condition.
The Company has designed, tested and continues to test the most current versions
of its products to ensure that they are 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 assessing 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 the first half of 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 exposure to legal liability for any such Year 2000 Readiness failures is
limited and that it will be able to make any necessary modifications on a timely
basis. There can be, however, 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 not be significant
legal liabilities, either of which could have a material adverse effect on the
Company's business, operating results and financial condition.
Despite testing by the Company and current and potential customers, the
Company's new and installed products and the IT and non-IT systems used by the
Company 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, or products could result in delay or loss of revenue, diversion
of development resources, damage to the Company's reputation, and increased
service and warranty costs, any of which could materially adversely affect the
Company's business, operating results, or financial condition. 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.
The Company believes that the most likely worst case scenario related to Year
2000 risks is a material business interruption that leads to client
dissatisfaction and the termination of a project or projects by dissatisfied
clients. Such an interruption in services could occur due to a breakdown in any
number of the Company's IT or non-IT Systems, or the systems of third parties.
The Company currently does not have a contingency plan in the event a particular
system or vendor is not Year 2000 Ready. Such a plan will be developed if it
becomes clear that the Company is not going to achieve its scheduled objectives
in respect of Year 2000 Readiness. There can be no assurance that unexpected
Year 2000 Readiness problems of the Company or its vendors, customers and
service providers will not materially adversely affect the Company's business,
operating results and financial condition. The foregoing assessment represents
management's best estimates at the present time, which could change
significantly in the future.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Annual 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
revenue, the Company's plans to expand its product lines and international 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 1999, 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, the Company's expectation that the result of Euro conversion will not
have a material adverse effect, 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 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
and to date, a substantial portion of the Company's total revenue has been
derived from relatively large software development projects, which can cause the
Company's revenue and earnings to fluctuate from quarter to quarter, based on
their customers' requirements and the timing of the projects. 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,
including obtaining references from such existing customers, or that emerging
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 any 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 products
and services as well as the cancellation of any projects underway. A significant
decrease in business from any of its major customers or the failure of the
Company to compete effectively for new customers or projects 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. For example,
in February 1999, Lucent Technologies, Inc., a telecommunications equipment
maker with substantially greater resources and name recognition than the Company
and with which the Company had entered into several alliance agreements
purchased Kenan Systems Corp., a customer care and billing software competitor
of the Company. In addition, Amdocs Limited, a customer care and billing
software competitor of the Company with substantially greater resources than the
Company announced an agreement to purchase Architel Systems Corporation, a
service provisioning software company, in order to enhance Amdocs' ability to
provide end-to-end billing solutions for its telecommunications customers. 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 currently offers both DB2/400-based and
UNIX-based CBP products and is devoting significant resources to develop, refine
and enhance these CBP products, as well as its other customer care and billing
technology. 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, or if there should be a
rapid shift from the telecommunications industry's use of either DB2/400 or UNIX
as a standard platform for billing, 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
Latin America and Asia Pacific regions have experienced a 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, while competition has
increased, all of which could adversely affect the Company's ongoing projects
for such customers, as well as 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,
as well as to attract and retain qualified personnel, including highly-sought
UNIX software development personnel. 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 the net assets of BHA
Pty Ltd, an Australian telecommunications software company, and its
majority-owned subsidiary, BHA Computer Pty Ltd. In addition, in early 1998, 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>
Appendix C
SAVILLE SYSTEMS PLC
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for the years ended December 31, 1998, 1997
and 1996
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996
Notes to Consolidated Financial Statements
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Saville Systems PLC
In our opinion, the accompanying consolidated balance sheet as of
December 31, 1998 and the related consolidated statements of income, of changes
in shareholders' equity and of cash flows present fairly, in all material
respects, the financial position of Saville Systems PLC and its subsidiaries
(the "Company") at December 31, 1998, and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles in the United States. In addition, in our opinion, the
financial statement schedule listed in the index appearing under item 14(a)(2)
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above. The financial statements of the Company as of
December 31, 1997 and for each of the two years in the period then ended were
audited by other independent accountants whose report dated January 22, 1998
(except for Comprehensive Income and Note 15 as to which the date is March 12,
1999) expressed an unqualified opinion on those statements.
PricewaterhouseCoopers LLP (signed)
Dublin, Ireland
March 2, 1999
<PAGE>
Saville Systems PLC
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars, except share data)
<TABLE>
As of December 31
----------------------
1998 1997
- -------------------------------------------------------- ----------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents [note 3] $ 40,330 $ 55,785
Short-term investments [note 3] 47,492 13,015
Accounts receivable, less allowance for doubtful
accounts of $1,943 and $1,687, respectively 43,729 22,373
Prepaid expenses and other assets 4,471 3,581
- -------------------------------------------------------- ----------- ----------
Total current assets 136,022 94,754
Property and equipment, net [note 4] 12,277 10,621
Other assets, net [note 6] 13,346 -
- -------------------------------------------------------- ----------- ----------
Total assets $161,645 $105,375
- -------------------------------------------------------- ----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable 5,377 5,336
Accrued compensation and related benefits 7,128 5,248
Accrued expenses and other liabilities 4,644 3,084
Income taxes payable 8,804 7,167
Deferred revenue 947 3,402
Current portion of long-term liabilities 1,116 134
- -------------------------------------------------------- ----------- ----------
Total current liabilities 28,016 24,371
Long-term liabilities [note 7] 1,178 336
Minority interest [note 9] 361 366
- -------------------------------------------------------- ----------- ----------
Total liabilities 29,555 25,073
- -------------------------------------------------------- ----------- ----------
Commitments and Contingencies [note 8]
Shareholders' Equity: [note 9]
Ordinary Shares, nominal value $0.0025 per share
Authorized: 75,000,000
Issued and outstanding: 38,938,488 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 [note 9] 63,766 37,734
Retained earnings 69,802 42,750
Accumulated other comprehensive income (1,623) (324)
- -------------------------------------------------------- ----------- ----------
Total shareholders' equity 132,090 80,302
- -------------------------------------------------------- ----------- ----------
Total liabilities and shareholders' equity $161,645 $105,375
- -------------------------------------------------------- ----------- ----------
</TABLE>
See accompanying notes
<PAGE>
Saville Systems PLC
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of U.S. dollars, except share and per share data)
<TABLE>
Years ended December 31
------------------------------------
1998 1997 1996
- ------------------------------------------------------- ------------ -----------
<S> <C> <C> <C>
REVENUE
Services $124,730 $ 84,856 $44,478
License fees 42,975 22,189 9,442
- ------------------------------------------------------- ------------ -----------
Total revenue 167,705 107,045 53,920
- ------------------------------------------------------- ------------ -----------
EXPENSES
Cost of services 61,588 39,603 22,058
Cost of license fees 1,269 579 337
Sales and marketing 8,668 6,266 3,379
Research and development 21,389 10,146 4,171
General and administrative 32,194 20,444 10,705
Charge for purchased in-process research
and development 9,168 - -
- ------------------------------------------------------- ------------ -----------
Total expenses 134,276 77,038 40,650
- ------------------------------------------------------- ------------ -----------
Income from operations 33,429 30,007 13,270
Other income, net [note 12] 3,364 2,154 1,491
- ------------------------------------------------------- ------------ -----------
Income before income taxes 36,793 32,161 14,761
Provision for income taxes [note 13] 9,741 7,989 3,052
- ------------------------------------------------------- ------------ -----------
Income before minority interest 27,052 24,172 11,709
Minority interest share in subsidiaries'
net income - 235 140
- ------------------------------------------------------- ------------ -----------
Net income $ 27,052 $23,937 $11,569
- ------------------------------------------------------- ------------ -----------
Basic earnings per share [note 14] $0.70 $0.65 $0.32
Diluted earnings per share [note 14] $0.67 $0.61 $0.31
- ------------------------------------------------------- ------------ -----------
(in thousands)
Ordinary shares 38,471 36,745 35,458
Ordinary shares assuming dilution 40,545 39,323 37,897
- ------------------------------------------------------- ------------ -----------
</TABLE>
See accompanying notes
<PAGE>
Saville Systems PLC
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands of U.S. dollars, except number of shares)
<TABLE>
Share Capital Additional Retained Accumulated Total
paid-in earnings other shareholders'
Shares Amounts capital comprehensive equity
income
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------- ------------ ---------- ----------- ------------ -------------- -------------
Balance at December 31, 1995 35,182,812 $136 $23,592 $ 7,244 $ (48) $ 30,924
- ----------------------------------------- ------------ ---------- ----------- ------------ -------------- -------------
Ordinary Shares issued 1,010,330 2 4,739 4,741
Reduction in minority interest 37 37
Repayment of note receivable 100 100
Public offering costs (735) (735)
Comprehensive income
Net income 11,569 11,569
Foreign currency translation
adjustments,net of tax (25) (25)
-------------
Total comprehensive income 11,544
- ----------------------------------------- ------------ ---------- ----------- ------------ -------------- -------------
Balance at December 31, 1996 36,193,142 138 27,733 18,813 (73) 46,611
- ----------------------------------------- ------------ ---------- ----------- ------------ -------------- -------------
Ordinary Shares issued 1,311,454 4 9,069 9,073
Reduction in minority interest 189 189
Share issue costs (277) (277)
Tax benefit of employee stock
transactions 873 873
Restricted share issuance and
related compensation 30,000 1,031 1,031
Unearned compensation on restricted
share issuance (945) (945)
Compensation related to stock options 61 61
Comprehensive income
Net income 23,937 23,937
Foreign currency translation
adjustments, net of tax (251) (251)
-------------
Total comprehensive income 23,686
- ----------------------------------------- ------------ ---------- ----------- ------------ -------------- -------------
Balance at December 31, 1997 37,534,596 142 37,734 42,750 (324) 80,302
- ----------------------------------------- ------------ ---------- ----------- ------------ -------------- -------------
Ordinary Shares issued 1,403,892 3 25,538 25,541
Reduction in minority interest 5 5
Share issue costs (522) (522)
Tax benefit of employee stock
transactions 805 805
Recognition of compensation on
restricted share issuance 206 206
Comprehensive income
Net income 27,052 27,052
Foreign currency translation
adjustments, net of tax (1,299) (1,299)
-------------
Total comprehensive income 25,753
- ----------------------------------------- ------------ ---------- ----------- ------------ -------------- -------------
Balance at December 31, 1998 38,938,488 $145 $63,766 $69,802 $(1,623) $132,090
- ----------------------------------------- ------------ ---------- ----------- ------------ -------------- -------------
</TABLE>
See accompanying notes
<PAGE>
Saville Systems PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
<TABLE>
Years ended December 31
--------------------------
1998 1997 1996
- ------------------------------------------------- ---------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $27,052 $23,937 $11,569
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of property and equipment 2,939 1,487 782
Amortization of other assets 2,228 - -
Allowance for doubtful accounts 3,160 1,010 386
Minority interest in net income - 235 140
(Gain) Loss on sale of property and equipment (90) 90 -
Compensation related to stock transactions 206 147 -
Deferred taxes (1,114) - -
Charge for purchased in-process research
and development 9,168 - -
Changes in operating assets and liabilities:
Accounts receivable (24,514) (8,072) (7,521)
Prepaid expenses and other assets (702) (2,075) (461)
Long term receivable - - 741
Accounts payable (109) 3,349 632
Accrued compensation and related benefits 1,880 2,544 1,177
Accrued royalties - - (663)
Income taxes payable 1,637 4,257 1,682
Deferred revenue (2,455) 1,982 1,420
Accrued expenses and other liabilities 1,560 1,897 474
- ------------------------------------------------- ---------- --------- ---------
Net cash provided by operating activities 20,846 30,788 10,358
- ------------------------------------------------- ---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (5,763) (7,537) (2,723)
Proceeds on sale of property and equipment 1,146 136 -
Purchase of other assets (1,973) - -
Net purchase of short-term investments (34,477) (12,015) (1,000)
Payment for acquired assets (21,012) - -
- ------------------------------------------------- ---------- --------- ---------
Net cash used in investing activities (62,079) (19,416) (3,723)
- ------------------------------------------------- ---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in long-term liabilities - 470 -
Principal payments on capital lease obligations (129) (43) (54)
Advances on operating line of credit 22,296 - -
Repayments on operating line of credit (22,296) - -
Proceeds from share issuance 25,541 9,073 4,841
Share issue costs (522) (277) (735)
Tax benefit on employee stock transactions 805 873 -
- ------------------------------------------------- ---------- --------- ---------
Net cash provided by financing activities 25,695 10,096 4,052
- ------------------------------------------------- ---------- --------- ---------
Effect of exchange rate changes on cash 83 (78) (14)
- ------------------------------------------------- ---------- --------- ---------
Net (decrease) increase in cash and cash
equivalents (15,455) 21,390 10,673
Cash and cash equivalents, beginning of year $55,785 34,395 23,722
- ------------------------------------------------- ---------- --------- ---------
Cash and cash equivalents, end of year 40,330 $55,785 $34,395
- ------------------------------------------------- ---------- --------- ---------
Short-term investments 47,492 13,015 1,000
- ------------------------------------------------- ---------- --------- ---------
Cash and short-term investments $87,822 $68,800 $35,395
- ------------------------------------------------- ---------- --------- ---------
</TABLE>
See accompanying notes
<PAGE>
SAVILLE SYSTEMS PLC
Consolidated Notes to Financial Statements, December 31, 1998
1. ORGANIZATION
Saville Systems PLC (the "Company") is a public limited company
incorporated under the laws of the Republic of Ireland in 1993. These
consolidated financial statements include the results of the Company and its
subsidiaries since their inception. These subsidiaries include Saville Systems
Canada, Ltd. and Saville Systems Inc. which are majority owned by the Company
with the exception of a minority interest holding as of December 31, 1998 of
approximately 2% (4% and 7% as of December 31, 1997 and 1996 respectively).
These statements also include the results of the Company's wholly owned
subsidiaries Saville C.I. Limited and Saville Systems (UK) Limited incorporated
in 1997 and Saville Systems Aust. Pty Ltd incorporated in 1998.
The Company's principal line of business is the provision of convergent
customer care and billing solutions to its customers in the global
telecommunications and energy industries. The Company either licenses the use of
its software to customers throughout the world or operates its software for
certain customers under a service bureau arrangement. The Company's principal
markets are currently located in the United States, Europe, Canada, Asia Pacific
and Latin America.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Principles
The consolidated financial statements have been prepared by management in
accordance with accounting principles generally accepted in the United States.
Principles of Consolidation
These consolidated financial statements include the accounts of the Company
and its subsidiaries. All intercompany accounts and transactions have been
eliminated in consolidation.
Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting periods.
Actual results could differ from those estimates.
Cash and short-term investments
Cash equivalents include those investments that are readily convertible to
known amounts of cash, with maturities at the date purchased of three months or
less.
Short-term investments held by the Company and its subsidiaries are
classified as held-to-maturity as the Company has the intent and ability to hold
those investments to maturity. They are stated at cost with corresponding
premiums or discounts amortized over the life of the investment.
Property and equipment
Property and equipment are recorded at cost. Costs incurred for the
purchase and development of internal use software have been recorded at cost in
accordance with Statement of Position 98-1 (SOP 98-1) which has been early
adopted by the Company. Depreciation is computed on a declining balance basis of
20% for furniture and equipment, on a straight-line basis over three to four
years for computer equipment and software, and over the remaining lease term for
leasehold improvements.
When assets are sold or retired, the related costs and accumulated
depreciation are removed from the accounts and any resulting gain or loss is
reflected in operations. Maintenance and repairs are expensed as incurred.
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Leases
Leases are recorded as capital or operating leases. Any lease where
substantially all of the benefits and risks related to the ownership of the
leased asset are transferred to the lessee, as defined by Statement of Financial
Accounting Standards (SFAS) No.13 "Accounting for Leases" is accounted for as if
the asset were acquired and as if the obligation were assumed as of the date of
lease. All other leases are recorded as operating leases whereby the related
costs are charged to income on a straight-line basis over the term of the lease.
Intangible Assets
Intangible assets are recorded at cost less accumulated amortization.
Amortization is computed using the straight-line method over the estimated
useful life of the assets of three to seven years.
Revenue recognition
In 1998, the Company adopted SOP 97-2 "Software Revenue Recognition" and
SOP 98-4 "Deferral of the Effective Date of a Provision of SOP 97-2", which did
not significantly affect existing revenue recognition policies.
Revenue from services consists of fees for systems requirements definition,
system design and analysis, customization and installation services, ongoing
system management, system enhancements, service bureau processing, facilities
management and maintenance fees. Services revenue is recognized as the services
are performed, primarily on a time and materials basis and to a lesser extent on
a fixed fee basis over the term of the services provided. Revenue from
maintenance contracts is recognized ratably over the term of the agreement,
generally one year.
Revenue from the licensing of software rights is recognized at the time of
delivery of the product to the customer, provided that the Company has no
remaining service obligations, collectibility is considered probable and the
fees are fixed and determinable. Where there are service obligations that are
essential to the functionality of the software installed, license fees are
recorded over the expected term of the initial customization period.
Deferred revenue relates primarily to license fee and maintenance
revenue, which has been paid by the customers prior to the recognition of
revenue.
Software development costs
Software development costs, principally the design and development of
customer care and billing software, are expensed as incurred unless they qualify
for capitalization, as defined by SFAS No. 86, "Accounting for the Cost of
Computer Software to be Sold, Leased or Otherwise Marketed". Capitalized costs
are amortized over the economic life of the software release. Software
development costs have not been capitalized by the Company with the exception of
specific purchased research and development, as the development costs incurred
subsequent to establishing technological feasibility of the related software
have not been material.
Purchased research and development costs that have reached technological
feasibility and have an alternative future use are capitalized and amortized
over the expected useful life of the technology. Any costs which do not meet
these criteria are recorded as a charge to current period earnings.
Stock options
The Company records compensation expense relating to stock based
compensation to employees in accordance with Accounting Principles Board Opinion
(APB) No. 25 "Accounting for Stock Issued to Employees" and related
interpretations. Pro forma footnote disclosures, which comply with the SFAS No.
123 "Accounting for Stock Based Compensation", are provided in note 9.
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Foreign currency translation
The Company uses the United States dollar as the unit of measurement of its
financial statements, as a significant portion of the Company's operating and
financing activities are transacted in United States dollars. The functional
currencies of the Company's subsidiaries are their local currencies. The effects
of fluctuations in currency exchange rates have not been significant to the
Company's consolidated results.
The balance sheets of the Company's foreign subsidiaries are translated at
year-end rates of exchange and results of operations are translated at weighted
average rates of exchange for the fiscal period reported. Translation
adjustments resulting from this process are recorded in shareholders' equity as
an adjustment to accumulated other comprehensive income.
Earnings per share
Basic and diluted earnings per share are computed in accordance with SFAS
No. 128 "Earnings per Share." Basic earnings per share exclude any dilutive
effects of stock options. In the calculation of diluted earnings per share,
Ordinary Shares assuming dilution includes the effect of dilutive share
equivalents from stock options using the average market price for the period.
Comprehensive income
Other comprehensive income refers to revenue, expenses, gains and losses
that under generally accepted accounting principles are included in
comprehensive income, but are excluded from net income as these amounts are
recorded directly as an adjustment to shareholders' equity. The Company's other
comprehensive income is primarily comprised of foreign currency translation
adjustments which arise from the earnings of the Company's non-Irish foreign
subsidiaries. These earnings are reinvested with no plan for repatriation and
therefore, there is no tax effect on this component of other comprehensive
income.
Segment Information
During 1998, the Company adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information". SFAS 131 supercedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise", replacing the
"industry segment" approach with the "management" approach. The management
approach designates the internal reporting that is used by management for making
operating decisions and assessing performance as the source of the Company's
reportable segments. SFAS 131 also requires disclosures about products and
services, geographic areas and major customers. The adoption of SFAS 131 did not
affect results of operations or the financial position of the Company [note 15].
Reclassifications
Certain reclassifications have been made to amounts in the financial
statements of 1997 in order to conform to current presentation.
3. CASH AND SHORT-TERM INVESTMENTS
Total cash and cash equivalents were $40.3 million and $55.8 million as of
December 31, 1998 and 1997, respectively, which included approximately $23.0
million and $41.9 million, respectively, of money market funds, commercial paper
investments, and corporate and U.S. government agency notes held by the Company.
Short-term investments of approximately $47.5 million, and $13.0 million as
of December 31, 1998 and 1997, respectively, are composed of corporate notes
(1998 - $14.5 million; 1997 - $11.0 million) and U.S. government agency notes
(1998 - $33.0 million; 1997 - $2.0 million ). Interest rates on these deposits
range from 5% to 6% and total accrued interest of $664,000 and $287,000 at
December 31, 1998 and 1997 respectively, is included in prepaid expenses and
other assets.
<PAGE>
3. CASH AND SHORT-TERM INVESTMENTS (CONTINUED)
All cash equivalents and investments held by the Company are carried at
amortized cost, which approximates fair value, and mature within three months
and one year, respectively.
Supplemental Cash Flow Information
<TABLE>
Years Ended December 31
- ------------------------------------------------ -------- --------- ---------
1998 1997 1996
- ------------------------------------------------ -------- --------- ---------
<S> <C> <C> <C>
Cash Transactions:
Cash paid for interest 228 48 15
Cash paid for income taxes 7,996 2,889 1,504
Non-Cash Transactions:
Technology acquired by long-term liabilities 1,982 - -
- ------------------------------------------------ -------- --------- ---------
</TABLE>
4. PROPERTY AND EQUIPMENT
<TABLE>
As of December 31
- ---------------------------------------- ------------------------------
1998 1997
- ---------------------------------------- --------------- --------------
<S> <C> <C>
Furniture and equipment $ 6,425 $5,168
Computer equipment and software 5,261 3,920
Leasehold improvements 5,897 4,279
- ---------------------------------------- --------------- --------------
Total cost 17,583 13,367
Less accumulated depreciation 5,306 2,746
- ---------------------------------------- --------------- --------------
Net book value $12,277 $10,621
- ---------------------------------------- --------------- --------------
</TABLE>
Computer equipment and software includes $804,000 (1997 - $1.8 million) of
assets under development to be depreciated when put in use. Of this, $324,000
(1997 - $470,000) is computer software under capital lease. As of December 31,
1998, total computer software under capital lease in use and being depreciated
was $162,000 (1997 - Nil) with accumulated amortization of $29,000 (1997 Nil).
5. 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 year, 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.
<PAGE>
5. ACQUISITION (CONTINUED)
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 December 31, 1998 is
included in Other Assets (see Note 6). 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 December 31,
1998 are included in Long-Term Liabilities (see note 7).
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.
<PAGE>
5. ACQUISITION (CONTINUED)
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 1998.
6. OTHER ASSETS
<TABLE>
As of December 31
- -------------------------------------- -------------------------------
1998 1997
- -------------------------------------- --------------- ---------------
<S> <C> <C>
Goodwill $ 8,479 -
Completed technology 5,984 -
- -------------------------------------- --------------- ---------------
Total cost 14,463 -
Less accumulated amortization 2,214 -
- -------------------------------------- --------------- ---------------
Net book value 12,249 -
Deferred tax assets 1,097 -
- -------------------------------------- --------------- ---------------
Total other assets $13,346 -
- -------------------------------------- --------------- ---------------
</TABLE>
7. LONG-TERM LIABILITIES
Line of Credit
During 1997, the Company obtained a multi-currency operating line of credit
of $15.0 million from a financial institution. This line of credit was available
to the Company and its subsidiaries for a two-year period ending August 31,
1999. Subsequent to December 31, 1998, the company extended the availability of
this line of credit to August 31, 2000. Interest is charged at rates varying
from 0.25% to 1% above the base rate. This base rate depends on the currency of
the funds drawn on the facility and includes the Canadian U.S. Dollar Base rate,
the Canadian Bank Prime rate, the bank's London Interbank Offer Rate (LIBOR) and
the bank's Dublin Interbank Offer Rate (DIBOR).
A standby fee of 0.25% per annum is payable on the daily unused portion of
the facility. This fee totaled $50,000 and $13,000 for the years ended December
31, 1998 and 1997, respectively.
The credit arrangement contains financial covenants relating to minimum net
worth and leverage ratios. The line of credit is unsecured. However, if the
Company does not maintain compliance with the covenants, the financial
institution has the right to register security over any outstanding balances.
The Company was in compliance with these covenants at December 31, 1998 and
1997. No advances were outstanding on this facility as of December 31, 1998 and
1997.
<PAGE>
7. LONG-TERM LIABILITIES (CONTINUED)
Letters of Credit
During 1998, irrevocable standby letters of credit were issued to a
customer to serve as a performance bond associated with the completion of the
Company's contract. As of December 31, 1998 letters of credit totaling
approximately $854,000 and $493,000 were outstanding and expire on January 31,
1999 and July 30, 1999 respectively. Before the customer can draw on these
letters, the Company must be provided with sixty days prior written notice. No
such notice had been received by the Company as of December 31, 1998. Subsequent
to December 31, 1998 a letter of credit was also issued to one of the Company's
lessors in the amount of approximately $162,000 which is due to expire September
30, 2000. Funds available under the line of credit are reduced by letters of
credit outstanding.
Capital Lease
The Company has obligations under a capital lease for $312,000 (1997 -
$470,000) payable in nine quarterly payments of principal and interest of
$37,000. The lease is denominated in Canadian dollars and bears interest at
5.4%. Principal payments of $134,000, $141,000, and $37,000 are due in the years
1999, 2000 and 2001, respectively.
Minimum Royalty Payments
As part of the purchase of telecommunications interconnect billing
software technology, the Company incurred a commitment of at least $2.0 million
in royalties to be paid in 1999 and 2000. The balance of minimum royalty
payments as of December 31, 1998 was approximately $2.0 million of which
$982,000 is due in 1999 and is included in the current portion of long-term
liabilities.
8. COMMITMENTS AND CONTINGENCIES
The Company is committed to make operating lease payments on premises, computer
hardware and software, and equipment under agreements, which expire over the
next ten years as follows:
<TABLE>
- ---------------------------------------------------------------------------
<S> <C> <C>
1999 $11,299
2000 7,897
2001 3,223
2002 2,054
2003 1,532
Thereafter 2,899
- ---------------------------------------------------------------------------
Total $28,904
- ---------------------------------------------------------------------------
</TABLE>
Subsequent to December 31, 1998, the Company has committed to additional
lease payments totaling $15.7 million until 2010.
Total rental expense was approximately $10.5 million, $6.0 million, and
$3.6 million, for the years ended December 31, 1998, 1997 and 1996,
respectively.
9. SHAREHOLDERS' EQUITY
Authorized share capital
Upon incorporation, the Company's authorized share capital comprised
100,000 Ordinary Shares. In connection with a restructuring of the Company in
1995, authorized share capital was increased to 40,000,000 Ordinary Shares.
During 1997 the shareholders authorized an amendment to the Company's
Memorandum and Articles of Association to increase the number of authorized
Ordinary Shares from 40,000,000 to 75,000,000.
Issued share capital
An analysis of the number of shares issued and outstanding, adjusted
retroactively for each share dividend, for the three-year period ended December
31, 1998 is as follows:
o During the year ended December 31, 1996, the Company issued 810,330
Ordinary Shares to officers and employees for cash consideration of
approximately $2.1 million and conducted a second public offering issuing
200,000 Ordinary Shares for total gross proceeds to the Company of
$2.6 million.
o On November 17, 1997 the Company issued a two-for-one share dividend for
each share outstanding to all shareholders of record on November 7, 1997.
The dividend was approved by a vote of shareholders at an Extraordinary
General Meeting held on October 23, 1997.
o During the year ended December 31, 1997, the Company issued 1,311,454
Ordinary Shares to officers and employees for cash consideration of
approximately $9.1 million and 30,000 restricted Ordinary Shares to an
officer at par value.
o During the year ended December 31, 1998, the Company issued 1,120,194
Ordinary Shares to officers and employees for cash consideration of
approximately $11.5 million and 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 5).
Additional paid-in capital
During 1996, a note receivable of $100,000 was repaid in full. This note
was issued in 1995 to an officer of the Company as consideration for the
issuance of shares. Upon repayment, this amount has been reflected as additional
paid-in capital.
During 1997 and 1998, the Company recorded the effect of tax deductions
available to its subsidiary Saville Systems Inc. (Saville U.S.) for stock
options exercised by employees in the United States. The benefits of this
deduction for tax of $873,000 and $805,000, respectively, are recorded as
additional paid-in capital in Saville U.S.
During 1997, the Company issued 30,000 restricted Ordinary Shares to an
officer of the Company at par value. These shares are subject to vesting
provisions, which restrict the holder's ability to sell such shares over a
five-year period. In connection with this issuance, the Company recorded
approximately $1.0 million as additional paid-in capital, based on the
difference between the par value and fair value of the shares at the measurement
date. Of this amount, the Company recorded compensation expense of $206,000 and
$86,000 in 1998 and 1997, respectively. The remaining unearned compensation of
$739,000 is recorded as an offset to additional paid-in capital as of December
31, 1998 ($945,000 as of December 31, 1997) and will be recognized over the
remaining vesting period of the shares.
Dividends
Shareholders are entitled to receive dividends as may be recommended by the
Board of Directors of the Company and approved by the shareholders, which will
be declared and paid in United States dollars. Under Irish Company law,
dividends are payable only out of profits available for distribution, where
profits are determined in accordance with accounting principles generally
accepted in the Republic of Ireland. The amount available for distribution to
shareholders includes only the retained earnings of the Company, and not that of
its subsidiaries, calculated in accordance with accounting principles generally
accepted in the Republic of Ireland which amounted to approximately $46.5
million, as of December 31, 1998 ($35.3 million as of December 31, 1997). No
cash dividends were declared during the years ended December 31, 1998, 1997 and
1996.
<PAGE>
9. SHAREHOLDERS' EQUITY (CONTINUED)
Minority interest
The minority interest shareholder entered into a share restriction and
contribution agreement which prohibits the minority shareholder from
transferring any securities of the Company, unless a proportionate number of
subsidiary shares are contributed to the Company. The minority shareholder must
contribute all of its shares in the Subsidiaries no later than September 1,
2005.
10. STOCK BASED COMPENSATION
The 1995 Share Option Plan provides for the grant of stock options to
employees, officers, directors, consultants and advisors of the Company. These
options generally expire ten years from the date of grant and vest over periods
of one to five years. The shareholders authorized an amendment to the Company's
1995 Share Option Plan during 1997 to increase the number of shares authorized
to be granted under the plan from 5,960,000 to 10,000,000.
The 1996 Employee Share Purchase Plan, approved by the Board of Directors
during 1996, provides for the grant of stock upon exercise of options to certain
officers and employees of the Company. The total number of shares authorized to
be granted was 614,000. The options are exercisable six months after grant, at
the lower of 85% of market value at the beginning or end of the six-month
period, through accumulations of payroll deductions of up to 10% of each
participant's regular base pay. No participant may be granted an option to
purchase shares that are valued in excess of $12,500 as determined on the first
day of the applicable offering period.
The following table summarizes the activity in options to December 31,
1998:
<TABLE>
Number of Ordinary Shares
- ---------------------------------- ----------------- --------------- ----------
Available for Outstanding Weighted average
grant exercise price
per share
- ---------------------------------- -------------- ------------- -----------
<S> <C> <C> <C>
Balance at December 31, 1995 3,592,348 3,604,278 $3.22
- ---------------------------------- -------------- ------------- -----------
Options granted (182,176) 182,176 13.50
Options exercised - (810,330) 2.65
Options cancelled 49,290 (49,290) 4.33
- ---------------------------------- -------------- ------------- -----------
Balance at December 31, 1996 3,459,462 2,926,834 $3.99
- ---------------------------------- -------------- ------------- -----------
Ordinary Shares authorized 4,040,000 - -
Options granted (2,756,500) 2,756,500 20.74
Options exercised - (1,263,371) 6.77
Options cancelled 228,948 (228,948) 15.17
- ---------------------------------- -------------- ------------- -----------
Balance at December 31, 1997 4,971,910 4,191,015 $13.56
- ---------------------------------- -------------- ------------- -----------
Options granted (2,629,005) 2,629,005 36.27
Options exercised - (1,020,700) 9.10
Options cancelled 240,571 (240,571) 36.30
- ---------------------------------- -------------- ------------- -----------
Balance at December 31, 1998 2,583,476 5,558,749 $24.14
- ---------------------------------- -------------- ------------- -----------
</TABLE>
Compensation expense of $73,000 was recorded in 1996 which related to
options granted in 1994 and 1995 at exercise prices below estimated fair market
value at the date of grant.
<PAGE>
10. STOCK BASED COMPENSATION (CONTINUED)
During 1997, 20,000 options having an exercise price of $17.22 were
granted below estimated fair market value at the date of grant. These options
were vested upon grant and compensation expense of $61,000 was recorded in that
year.
A summary of options outstanding as of December 31, 1998 is as follows:
<TABLE>
- ------------------ ----------------- ----------------- ----------------- ----------------- -----------------
Total outstanding Range of Weighted Weighted Exercisable as Weighted
exercise prices average average of December 31, average
exercise price remaining 1998 exercise price
contractual of exercisable
life (in years) options
- ------------------ ----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
214,716 $ 1.20 $1.20 1.1 214,716 $ 1.20
910,223 4.33-5.00 4.47 6.5 910,223 4.47
78,090 7.50-13.69 10.33 8.4 29,256 8.62
1,858,312 14.06-21.50 18.15 7.9 662,306 18.78
283,166 21.75-32.56 30.47 8.8 67,664 29.66
2,079,442 33.50-50.25 38.24 8.6 65,998 34.84
134,800 50.75-55.00 53.05 9.2 - -
5,558,749 $ 1.20-55.00 $24.14 7.7 1,950,163 $10.93
- ------------------ ----------------- ----------------- ----------------- ----------------- -----------------
</TABLE>
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee share options under the fair value method of that Statement.
The fair value for employee options granted during this year was estimated at
the date of grant using a Black-Scholes option pricing model with the following
assumptions:
<TABLE>
Years Ended December 31
1998 1997 1996
- ------------------------------------ ------------- -------------- -------------
<S> <C> <C> <C>
Risk free interest rate 5.14% 6.10% 5.98%
Volatility 57.2% 57.5% 68.9%
Dividend yield 0.00% 0.00% 0.00%
Expected life in years 4.8 5.2 4.0
- ------------------------------------ ------------- -------------- -------------
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period, which includes
actual accelerated vesting entitlements during the year. The weighted average
fair value of options granted during 1998 was $18.78 (1997 - $11.64, 1996 -
$6.66).
The Company's pro forma information follows (in thousands except for
earnings per share information):
<TABLE>
Years ended December 31
1998 1997 1996
- ----------------------------------------- ------------ ----------- ------------
<S> <C> <C> <C>
Pro forma net income $2,710 $9,623 $10,028
- ----------------------------------------- ------------ ----------- ------------
Pro forma basic earnings per share $ 0.07 $ 0.26 $ 0.28
- ----------------------------------------- ------------ ----------- ------------
Pro forma diluted earnings per share $ 0.07 $ 0.25 $ 0.27
- ----------------------------------------- ------------ ----------- ------------
</TABLE>
The effect on net income and earnings per share may not be indicative of
the effects in future years as options vest over several years and the Company
continues to grant stock options to new employees.
11. DEFINED CONTRIBUTION PLANS
During 1998, the Company initiated defined contribution plans for its
employees at two of its subsidiaries. These plans allow employees to contribute
3% of their salary, while Company contributions are 2% of participants'
salaries. Total contributions by the Company for the year were approximately
$113,000, which were included in operating expenses.
12. OTHER INCOME
<TABLE>
Years ended December 31
- ------------------------------------------ ------------------------------------
1998 1997 1996
- ------------------------------------------ ------------ ---------- ------------
<S> <C> <C> <C>
Interest income $3,975 $2,541 $1,563
Interest on long-term liabilities (44) - (5)
Other interest expense (184) (61) (10)
Foreign currency exchange losses, net (412) (206) (107)
Other 29 (120) 50
- ------------------------------------------ ------------ ---------- ------------
$3,364 $2,154 $1,491
- ------------------------------------------ ------------ ---------- ------------
</TABLE>
13. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
Years ended December 31
- ----------------------------------- --------------------------------------
1998 1997 1996
- ----------------------------------- ------------- ------------ -----------
<S> <C> <C> <C>
Current:
Ireland $4,714 $3,579 $1,628
Foreign 5,800 4,410 1,424
Deferred:
Ireland (773) - -
- ----------------------------------- ------------- ------------ -----------
$9,741 $7,989 $3,052
- ----------------------------------- ------------- ------------ -----------
</TABLE>
Pretax income from foreign operations amounted to approximately $12.1
million, $8.7 million, and $3.1 million, for the years ended December 31, 1998,
1997 and 1996, respectively. Deferred taxes result primarily from completed
technology which is not currently deductible for tax purposes. These costs are
capitalized for tax purposes and amortized in the future.
<PAGE>
13. INCOME TAXES (CONTINUED)
The effective income tax rate differed from the statutory federal income
tax rate due to:
<TABLE>
Years ended December 31
- --------------------------------------------- ----------------------------------
1998 1997 1996
- --------------------------------------------- ----------- ----------- ----------
<S> <C> <C> <C>
Statutory Irish federal income tax rate 32.0% 36.5% 38.0%
Computed tax provision $11,774 $11,739 $ 5,609
Tax relief on Irish manufacturing operations (4,403) (4,830) (2,833)
Foreign tax rate differences 1,514 983 240
Change in valuation allowance in - - 120
respect of subsidiary losses
Purchased in-process research and development 742 - -
Other 114 97 (84)
- --------------------------------------------- ----------- ----------- ----------
$9,741 $ 7,989 $ 3,052
- --------------------------------------------- ----------- ----------- ----------
Per share effect of the tax relief on Irish
manufacturing operations on a diluted basis $ 0.11 $ 0.12 $ 0.07
- --------------------------------------------- ----------- ----------- ----------
</TABLE>
The Company has significant operations and generates a substantial portion of
its taxable income in the Republic of Ireland, and under an incentive tax
program due to terminate in 2010, is taxed on its "manufacturing income" at a
10% rate. The Irish standard rate was reduced from 38% to 36% effective April 1,
1997 and was further reduced to 32% effective January 1, 1998. This rate will
continue to decrease over the period January 1, 1999 to January 1, 2003 at which
time the rate will be 12.5%.
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $15.1 million at December 31, 1998 ($6.7 million at December 31,
1997). Those earnings are considered to be indefinitely reinvested and,
accordingly, no provision for withholding taxes has been provided thereon. Upon
distribution of those earnings in the form of dividends or otherwise, the
Company would be subject to withholding taxes payable of approximately $1.6
million ($802,000 at December 31, 1997) to various foreign governments.
14. EARNINGS PER SHARE
<TABLE>
Years Ended December 31
- -------------------------------------------- --------- -------- ---------
1998 1997 1996
- -------------------------------------------- --------- -------- ---------
<S> <C> <C> <C>
Numerator:
Net income $27,052 $23,937 $11,569
Denominator:
Denominator for basic earnings per share -
Weighted average shares outstanding 38,471 36,745 35,458
- -------------------------------------------- --------- -------- ---------
Effect of dilutive securities:
Stock options 2,074 2,578 2,439
- -------------------------------------------- --------- -------- ---------
Denominator for diluted earnings per share 40,545 39,323 37,897
Basic earnings per share $0.70 $0.65 $0.32
Diluted earnings per share $0.67 $0.61 $0.31
- -------------------------------------------- --------- -------- ---------
</TABLE>
<PAGE>
14. EARNINGS PER SHARE (CONTINUED)
Options to purchase 4,059,261, 205,500 and 20,000 shares were outstanding
as of December 31, 1998, 1997 and 1996, respectively, but were not included in
the computation of diluted earnings per share because the exercise price of the
options was greater than the average market price of the common shares and
therefore would be anti-dilutive.
15. SEGMENT INFORMATION
The Company operates in a single business segment which offers similar
products and services. The Company's products are similar in nature, providing
customer care and billing solutions software for service providers in the
telecommunications and energy industries. The Company distributes its products
throughout the world through a direct sales force.
The following is a summary of operations by geographic area. Revenue from
external customers is based on selling location and long-lived assets are based
on physical location.
<TABLE>
United
Ireland Canada States Other Consolidated
- ------------------------------ ---------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998
Revenue from external
Customers $36,008 $9,956 $109,945 $11,796 $167,705
Long lived assets 1,615 8,747 1,081 834 12,277
- ------------------------------ ---------- -------- --------- ---------- --------
Year ended December 31, 1997
Revenue from external
Customers $38,425 $ 6,344 $62,276 - $107,045
Long lived assets 2,410 7,097 1,114 - 10,621
- ------------------------------ ---------- -------- --------- ---------- --------
Year ended December 31, 1996
Revenue from external
Customers $22,313 $ 7,009 $24,598 - $53,920
Long lived assets 466 3,505 304 - 4,275
- ------------------------------ ---------- -------- --------- ---------- --------
</TABLE>
16. SALES TO MAJOR CUSTOMERS AND CONCENTRATION OF
CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of trade accounts receivables,
cash and cash equivalents and short-term investments. Concentration of trade
accounts receivables is decreasing as a result of the diversification of the
Company's revenue and product base. The Company performs ongoing credit
evaluations of its customers and ensures any uncollectible customer accounts are
appropriately provided for. The Company normally does not require collateral.
The Company invests its excess cash in U.S. treasury securities, corporate
debt securities, money market funds of major financial institutions and high
grade commercial paper that are subject to minimal credit and market risk.
<PAGE>
16. SALES TO MAJOR CUSTOMERS AND CONCENTRATION OF
CREDIT RISK (CONTINUED)
During the year ended December 31, 1998, there were no customers of the
Company that individually represented greater than 10% of the total revenue.
During the year ended December 31, 1997, two customers of the Company
individually represented 23% and 13% of the total revenue, respectively. The
aggregate accounts receivable balance as of December 31, 1997 for these
customers was approximately $5.4 million.
During the year ended December 31, 1996, three customers individually
represented 35%, 12% and 11% of the total revenue, respectively. The aggregate
accounts receivable balance as of December 31, 1996 for these customers was
approximately $6.1 million.
17. GOVERNMENT ASSISTANCE
The Company is eligible for government assistance in certain jurisdictions
for certain expenditures incurred. The Company accrues and offsets these
eligible grants against the related costs. The amounts included in income were
$952,000, $1,045,000 and $390,000 for the years ended December 31, 1998, 1997
and 1996, respectively.
The conditions of these grants require that the Company maintain in
shareholders' equity an amount equal to the amount of the grants received. The
cumulative amount subject to this restriction at December 31, 1998 is
approximately $1.7 million ($891,000 as of December 31, 1997, $243,000 as of
December 31, 1996).
<PAGE>
SAVILLE SYSTEMS PLC
FORM 10-K REPORT
FOR THE YEAR ENDED DECEMBER 31, 1998
INDEX TO EXHIBITS
Exhibit No. Description
*2.1 Stock Restriction and Contribution Agreement between Invoice Systems
(Canada),Inc. and the Registrant, dated as of September 27, 1995.
***2.2 Amended and Restated Contribution Agreement between the Registrant,
2916746 Canada, Inc. and Columbia Saville Ireland Investors, L.P.,
dated as of November 22, 1995.
^3.1 Memorandum of Association of the Registrant
^3.2 Articles of Association of the Registrant
*4.1 Specimen Certificate for Ordinary Shares, $0.0025 par value, of the
Registrant.
*4.2 Deposit Agreement among the Registrant, The Bank of
New York, as Depositary, and the holders from time
to time of American Depositary Shares issued
thereunder (including as an exhibit the form of
American Depositary Receipt).
*10.1 1995 Share Option Plan
++10.2 Amendment to the 1995 Share Option Plan
**10.3 1996 Employee Share Purchase Plan
^10.4 Employment Agreement between the Registrant and John J. Boyle, III,
dated as of August 1, 1997.
^10.5 Stock Restriction Agreement between the Registrant and John J. Boyle
III,dated as of December 1, 1997.
^10.6 Letter Agreement for credit facilities between The Bank of Nova
Scotia and Saville Systems PLC, Saville Systems Canada, Ltd. and
Saville Systems, Inc. , dated as of September 4, 1997.
*10.7 Lease Agreement between Barbican Properties Inc. and Saville Systems
Canada, Ltd. made as of May 1, 1995.
*10.8 Letter Agreement between Barbican Properties Inc. and Saville Systems
Canada, Ltd. dated July 19, 1995.
*10.9 Indenture between Orfus Investments and Saville Systems Canada, Ltd.
dated November 25, 1995.
<PAGE>
*10.10 Lease between Clybaun Construction Limited, Saville Systems Ireland
Limited, Saville Systems Canada, Ltd. and Anglo Irish Bank
Corporation PLC, dated April 27, 1994.
*10.11 Deed between Saville Systems Ireland Limited and Clybaun
Construction Limited, dated April 27, 1994.
*10.12 Agreement between Saville Systems Ireland Limited, Saville Systems
Canada, Ltd. and Industrial Development Agency (Ireland), dated
June 9, 1995.
*10.13+ Intellectual Property Purchase Agreement between the Registrant and
Saville Systems Canada, Ltd. made as of July 1, 1993.
*10.14 Lease Agreement between Saville Systems Canada, Ltd. and Orfus
Investments, dated April 25, 1996.
*10.15 Indemnity Agreement between the Company and Orfus Investments,
dated April 25, 1996.
+++10.16 Lease Agreement between Saville Systems PLC and Clybaun
Construction Limited dated May 26, 1997.
^10.17 Lease Agreement between Mass Mutual and Saville Systems U.S., Inc.
dated as of May 15, 1997.
^10.18 Lease Agreement between Penreal Property Fund Ltd. and Saville
Systems Canada, Ltd., dated as of June 13, 1997.
^10.19 Lease Agreement between 715864 Alberta Ltd. and Saville Systems
Canada, Ltd., dated as of July 17, 1997.
10.20 Lease between T A Fisher & Sons Limited, Saville Systems (UK)
Limited, Saville Systems PLC and Wellington Park Management
Limited, dated as of September 8, 1998.
10.21 Agreement for Lease between T A Fisher & Sons Limited and Saville
Systems (UK) Limited dated as of September 8, 1998.
^^16.1 Letter Re: Change in Certifying Accountant.
21.1 List of Subsidiaries
23.1 Consent of Independent Accountants.
23.2 Consent of Ernst & Young
27.1 Financial Data Schedule for the year ended December 31, 1998.
^^99.1 Resignation Letter of Ernst & Young
99.2 Report of Independent Accountants for years ended December 31, 1997
and 1996.
- -----------------------------------------------------------------------------
* Incorporated herein by reference to the Company's Registration Statement on
Form S-1, as amended (File No. 33-97576).
** Incorporated herein by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995.
*** Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended (File No. 333-01499)
+ Confidential treatment granted as to certain portions, which are omitted and
filed separately with the Commission.
++ Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1997.
+++ Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1997.
^ Incorporated by reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.
^^ Incorporated by reference to the Company's Current Report on Form 8-K dated
October 15, 1998.
Exhibit 10.20
DATED 8th September 1998
LEASE
Relating to land and office buildings
forming Unit No 35(8A) at
Wellington Business Park
Dukes Ride, Crowthorne
Berkshire
BETWEEN
T A FISHER & SONS LIMITED(1)
-and-
SAVILLE SYSTEMS (UK) LIMITED(2)
-and-
SAVILLE SYSTEMS PLC(3)
-and-
WELLINGTON PARK MANAGEMENT LIMITED(4)
PARK NELSON
1 Bell Yard
London WC2A 2JP
Tel:0171 404 4191
Tel:0171 405 4266
Ref. JRB SEW 30220.425
<PAGE>
LEASE: DATED 8th September 1998
1. PARTICULARS
1.1 The Landlord: T.A. FISHER & SONS LIMITED (Company Number 02582252) whose
registered office is at Windmill House Victoria Road Mortimer near Reading RG7
3DF
1.2 The Tenant: SAVILLE SYSTEMS (UK) LIMITED (Company Number 03487972) whose
registered office is at 60 Bishopsgate, Hazilwood House, London EC2N 4AJ
1.3.The Management Company: WELLINGTON PARK MANAGEMENT LIMITED whose registered
office is also at Victoria Road aforesaid
1.4 The Estate: The Landlord's Development known as Wellington Business Park
Dukes Ride Crowthorne Berkshire which is for identification purposes only shown
edged blue on Plan No. 1 hereto annexed the freehold interest in which is in
part owned by the Landlord and in part owned by the Management Company
1.5 The Premises: The building erected on the Estate and forming Unit No. 35
within Group C of the said Development more particularly described in the 1st
Schedule hereto
1.6 The Registered Transfers: Transfers respectively dated 31st December 1990,
4th July 1992 and 29th June 1994, 26th April 1995, 27th March 1996, 28th May
1997 and 2nd July 1998 all of which are made between the Landlord (1) and the
Management Company (2) and are transfers of those parts of the Estate which are
intended to become Common Parts for the benefit of all occupiers of the Estate
1.7 Term: Fifteen years from 8th September 1998
1.8 Rent Commencement: 31st December 1998
1.9 Initial Rent: (pound)63,750 per annum
1.10 Review Date: The 8th day of September in the year 2003 and 8th day of
September in the year 2008 and 8th day of September in the year 2013.
1.11 Interest Rate: Four per cent above the Base Rate of Lloyds Bank Plc or its
successors in business from time to time
1.12 Decorating Years: (a) External: in every 3rd and in the last year of the
Term (b) Internal: in the 5th and the last year of the Term
1.13 Insurance Rent: Such sums as shall from time to time be payable by the
Landlord as a premium or premiums for the insurances effected or to be effected
in pursuance of Clause 7 hereof
1.14 Service Charge: The sums payable in accordance with clauses 2.2 and 4(c)
hereof in respect of the gross internal area of the Premises (currently 328.48
square metres)
1.15 Permitted User: The use specified in paragraph 2.1 of the 4th Schedule or
such other use as the Landlord may permit under paragraph 2.2 of that Schedule
1.16 Guarantor: Saville Systems Plc and any other Guarantor under the terms of
this Lease.
2. DEFINITIONS
2.1 The terms defined in this clause and in the Particulars shall where the
context so admits for all purposes of this Lease have the meanings specified
here or in the Registered Transfers
2.2 "Rent" means the rent ascertained in accordance with the 3rd schedule and
Insurance Rent means the sum payable in accordance with clause 7.3 and Service
Charge means the yearly sum (due quarterly in advance) which is payable in
respect of the Premises by virtue of the Registered Transfers subject to the
proviso contained in paragraph 1.14 of the Particulars and the term "Rent" does
not include the Insurance Rent or Service Charge but the term "Rents" includes
Rent Insurance Rent and Service Charge
2.3 "Pipes" means pipes sewers drains mains ducts conduits gutters watercourses
wire cables channels subways flues and all other conducting media including any
fixings louvres cowls and other covers
2.4 "Interest" means interest on the sums in question during the period from the
date on which the payment is due to the date of receiving payment in cleared
funds, both before and after any judgment, at the Interest Rate then prevailing
or should the Base Rate referred to in clause 1.11 cease to exist, such other
rate of interest as is most closely comparable with the Interest Rate to be
agreed between the parties or in default of agreement to be determined by a
person appointed by the President of the Law Society (acting as an expert and
not as an arbitrator)
2.5 "the Planning Acts" means the Town and Country Planning Act 1990 and all
statutes regulations and orders included by virtue of clause 3.12
2.6 "Insured Risk" means the risks described in Clause 7.1(1)(a) hereof and any
other risk against which the Landlord shall have covenanted to insure hereunder
or at the time of the damage or destruction in question have effected insurance
2.7 "the Operational Covenants" means the covenants set out in the 4th Schedule
2.8 "the 1954 Act" means Part II of the Landlord and Tenant Act 1954
2.9 "neighbouring property" means any land or buildings (whether already or
hereafter to be erected and whether belonging to the Landlord or otherwise)
contiguous adjacent adjoining opposite or near to the Premises
2.10 "the Surveyor" means such professionally qualified Surveyor as the Landlord
may from time to time reasonably and properly nominate as the Surveyor in
respect of matters relating to the Premises (who may be a person employed by or
otherwise connected with the Landlord)
2.11 "Development" has the meaning given by Section 55 of the Town and Country
Planning Act 1990
2.12 "the Adjoining Premises" means those premises adjoining the Premises and
coloured yellow on the plan annexed
2.13 This lease is a new tenancy within the meaning of section 1 of the Landlord
and Tenant (Covenants) Act 1995
3. INTERPRETATION
3.1 The expressions "the Landlord" and "the Tenant" wherever the context so
admits include their respective successors in title
3.2 Where the Landlord or
the Tenant or any guarantor for the time being are two or more individuals the
terms "the Landlord" "the Tenant" and "the Guarantor" include the plural number
and obligations expressed or implied to be made by or with such party are deemed
to be made by or with such individuals jointly and severally and where the
context so permits such references shall also apply to any one or more members
of such association of individuals
3.3 Words importing the one gender include
both other genders and words importing the singular include the plural and vice
versa
3.4 The expression "the Term" includes any period of holding over or
extension or continuance thereof whether by statute or common law and elsewhere
in this Lease the said expression includes such period where the context so
admits
3.5 References to "the last year of the Term" include the final year of
the Term if the same shall determine otherwise than by effluxion of the time and
references to "the expiration of the Term" include such sooner determination of
the Term
3.6 References to any right of the Landlord to have access to the
Premises shall be construed as extending to the Landlord's agents professional
advisers contractors workmen and others so authorised
3.7 References to "the Premises" in the absence of any provision to the contrary
include each and every part thereof together with the appurtenances thereto and
all additions alterations and improvements thereto and all Landlords fixtures
and fitting and plant machinery and equipment belonging to the Landlord which
are now or hereafter in or about the same
3.8 Any covenants by the Tenant not to do an act or thing shall be deemed to
include an obligation not knowingly to permit such act or thing to be done and
to use its reasonable endeavours to prevent such act or thing being done by a
third party
3.9 Whenever the consent or approval of the Landlord is required or requested in
relation to this Lease, such provisions shall be construed as also requiring the
consent or approval of any mortgagee of the Premises where the same shall be
required (Provided that the Landlord shall use its best endeavours to obtain the
decision of such mortgagee without unreasonable delay)
3.10 References to "consent of the Landlord" or words to similar effect mean a
consent in writing signed by or on behalf of the Landlord and to "approved" and
"authorised" or words to similar effect mean (as the case may be) approved or
authorised in writing by or on behalf of the Landlord
3.11 The terms "the parties" or "party" shall mean the Landlord and/or the
Tenant (as defined in Clause 3.1 hereof)
3.12 Any reference to a specific statute includes any statutory extension or
modification or reenactment of such statute and any regulations or orders made
thereunder any general reference to "statute" or "statutes" includes any
regulations or orders made thereunder
3.13 The paragraph headings and marginal notes do not form part of this Lease
and shall not be taken into account in its construction or interpretation
4. DEMISE
The Landlord DEMISES to the Tenant the Premises TOGETHER with (and so far as
appropriate the Management Company grants and affirms) the rights specified in
Part 1 of the 2nd Schedule but EXCEPTING AND RESERVING to the Landlord the
rights specified in Part 2 of the 2nd Schedule TO HOLD the Premises unto the
Tenant for the Term SUBJECT TO the matters contained or referred to in the
documents specified in the 5th Schedule insofar as such matters affect the
Premises YIELDING AND PAYING to the Landlord:-
(a) the Rent, payable without any deduction by equal quarterly payments in
advance on the usual quarter days in every year, and proportionately for any
period of less than a year, the first such payment being a proportionate sum in
respect of the period from and including the Rent Commencement Date to and
including the day before the quarter day next thereafter to be paid on the Rent
Commencement Date, and
(b) by way of further rent, the Insurance Rent payable within 7 days of written
demand in accordance with clause 7.3
(c) by way of further rent, the Service Charge (the first such payment to be a
fair and reasonable estimate by the Surveyor of the proportion due from and
including the date hereof or the date on which the Tenant took possession of the
Premises (whichever first occurred) until and including the quarter day next
thereafter to be paid forthwith)
5. THE TENANT COVENANTS with the Landlord:-
Rent
5.1.1 To pay the Rents on the days and in the manner set out in clause 4
5.1.2 If so required in writing by the Landlord to make such payments by
Banker's Order or Credit Transfer to any Bank in Great Britain and account that
the Landlord may from time to time nominate in writing AND in the event of delay
to pay interest thereon in accordance with Clause 5.17.1
Outgoings and VAT
5.2 To pay and to indemnify the Landlord against:
(a) all rates (including uniform business rates) taxes assessments duties
charges impositions outgoings and obligations whatsoever which are now or during
the Term shall be charged assessed or imposed upon the Premises or upon the
owner or occupier of them whether parliamentary parochial or otherwise and
whether or not of a capital or non-recurring nature (and even though of a wholly
novel character) but excluding any payable by the Landlord in respect of the
receipt of Rents or other payment made by the Tenant under this Lease or any
payable by the Landlord which was occasioned by any Development or by any
disposition in dealing with or ownership of the Landlord's reversionary interest
in the Premises the Estate or the receipt of Rents in respect thereof
(b) Value Added Tax (or any tax of a similar nature that may be substituted for
it or levied in addition to it) properly chargeable (whether as the result of an
election by the Landlord or otherwise) in respect of any Rents or other payment
made by the Tenant under any of the provisions of or in connection with this
Lease or (insofar as the Landlord cannot recoup the same as an input credit)
incurred by the Landlord upon any payment made by the Landlord where the Tenant
agrees to reimburse the Landlord for such payment
5.2.2. In the event of the Premises or any separately rateable portion thereof
having been unoccupied for a period immediately prior to the expiration of the
Term to pay to the relevant rating authority a sum equal to the amount of rates
and any surcharge on the Premises or portion thereof payable to the rating
authority pursuant to Section 17 and 17(A) of the General Rate Act 1967 in
respect of a period equal to the said period of unoccupancy or six months
whichever shall be the less
Electricity, Gas and Other Services consumed
5.3 To pay to the suppliers and to indemnify the Landlord against all charges
for electricity gas and other services consumed or used at the Premises
(including meter rents) during the Term
Repair and Redecoration
5.4.1 To keep the whole of the Premises and all appurtenances and additions
thereto including (but not limited to) all roofs foundations structural and non
structural walls and partitions and any Pipes exclusively serving the same and
all plate and other glass and all plant and machinery and all fixtures and
fittings therein in good and substantial repair and in good decorative condition
and clean throughout the Term and if necessary for the purpose of carrying out
such repair (but not further or otherwise) then to rebuild renew or replace the
Premises or any part thereof and if the same affects the structure or exterior
of the Premises the Tenant will (unless the Landlord otherwise reasonably
requires) renew or replace the same in accordance with plans elevations sections
and specifications previously approved in writing by the Landlord (such approval
not to be unreasonably withheld or delayed) and in any event with good and
substantial materials and in a good and workmanlike manner (damage by any of the
Insured Risks excepted save to the extent that the insurance effected by the
Landlord shall be vitiated by any act or omission of the Tenant or anyone at the
Premises expressly or by implication with the Tenant's authority) and to keep
any part of the Premises which shall not be built upon in a clean and tidy
condition PROVIDED THAT if the Tenant is unable to perform the aforementioined
covenants (despite using its reasonable endeavours so to do) since there are
affected matters which extend to the Adjoining Premises and in respect of which
the tenant or otherwise the occupier or proprietor from time to time of the
Adjoining Premises fails to co-operate with the Tenant and/or the landlord
and/or the Management Company to achieve fulfilment of the aforesaid covenants
then in those circumstances it shall be deemed that the Tenant is not in breach
of its covenants in that regard
5.4.2. To replace from time to time in good and workmanlike manner and with good
quality materials the Landlord's fixtures, fittings and appurtenances in the
Premises which become beyond repair at any time during or immediately prior to
the expiration of the Term
5.4.3 So far as reasonably possible to keep all Pipes in the Premises protected
from frost where appropriate and keep the same cleansed and maintained free from
obstruction
5.4.4 Once in the year 2000 and every three years thereafter and also in the
last three months of the Term howsoever determined (but not more than once in
any one year period) to paint with two coats of good quality paint or otherwise
cover with an appropriate protective and decorative finish all such parts of the
outside of the Premises as are usually or ought to be so painted or covered. All
such works to be carried out in a good and workmanlike manner with good quality
materials and colour to be previously approved in writing by the Landlord (such
approval not to be unreasonably refused or delayed)
5.4.5 Once in the year 2002 and every five years thereafter and also in the last
three months of the Term howsoever determined (but not more than once in any one
year period) to paint with good quality paint or otherwise cover with an
appropriate protective and decorative finish all such parts of the inside of the
Premises as are usually or ought to be so painted or covered. All such works to
be carried out in a good and workmanlike manner with good quality materials and
in the last year of the Term of a design material and colour to be previously
approved in writing by the Landlord (such approval not to be unreasonably
refused or delayed)
Alterations and Additions or Rebuilding
5.5.1 Not to commit or knowingly permit or suffer waste (including ameliorating
waste), on or at the Premises
5.5.2 Not to build erect construct or place any new or additional building or
structure on the Premises including (without prejudice to the generality of the
foregoing) any hut shed garage cycle shelter store caravan house on wheels or
any temporary or movable building or structure
5.5.3 Not at any time during the Term to make any structural alterations or
additions to the Premises whether internally or externally and not to cut injure
maim or remove any of the walls beams columns or other structural parts of the
Premises or make any change in or to the existing design or appearance of the
Premises whether externally or internally PROVIDED that the Tenant may from time
to time with the consent of the Landlord (which shall not be unreasonably
withheld or delayed) and subject to all necessary planning and Building
Regulation approval and Fire Officer's consent having been first obtained and
produced to the Landlord carry out non-structural alterations which are not
hereby expressly prohibited including (but not limited to) the installation and
removal of internal partitions which do not materially adversely affect the
operation or effectiveness of any air conditioning or heating systems within the
Premises
5.5.4 To remove any additions alterations or improvements made to the Premises
at the expiration of the Term if so reasonably requested by the Landlord in
writing prior to the expiration of the Term and to make good any part or parts
of the Premises which may be damaged by such removal
5.5.5. Not to cut injure or remove nor, except in accordance with clauses 5.5.3
and 5.5.4, make any connection with the Pipes serving the Premises either
exclusively or in conjunction with other premises
5.5.6 To make connection with those Pipes that serve the Premises only in
accordance with the standards laid down from time to time by the relevant supply
authority and no appliance other than that for which the installation is
designed shall be connected to it
Statutory Obligations
5.6.1. At all times during the Term at the Tenant's own expense to observe and
comply in all material respects with the provisions and requirements of any and
every enactment (which expression in this covenant includes as well any and
every Act of Parliament already or hereafter to be passed as any and every
notice direction order regulation bye-law rule and condition already or
hereafter to be made under or in pursuance of or deriving effect from any such
Act) or prescribed or required by a public local or other authority so far as
they relate to or affect the Premises or the lessee thereof or any additions or
improvements thereto or the user thereof for any purposes or the employment
therein of any person or persons or any fixtures machinery plant or chattels for
the time being affixed thereto or being thereupon or used for the purposes
thereof
5.6.2 Save in respect of the construction of the building on the Premises
undertaken by the Landlord to execute as soon as reasonably practicable all
works and provide and maintain all arrangements which by or under any enactment
or by any Government Department Local Authority or other Public Authority or
duly authorised officer or court of competent jurisdiction acting under or in
pursuance of any enactment are or may be directed or required to be executed
provided or maintained at any time during the Term upon or in respect of the
Premises or any additions or improvements thereto or in respect of any user
thereof or employment therein of any person or persons or fixtures machinery
plant or chattels and whether by the landlord or tenant thereof
5.6.3 To indemnify the Landlord at all times during the Term against all proper
and reasonable costs charges and expenses of or incidental to the execution of
any works or the provision or maintenance of any arrangements so directed or
required as aforesaid in respect of the Premises and not at any time during the
Term to do or omit or suffer to be done or omitted in or about the Premises any
act or thing by reason of which the Landlord may under any enactment incur or
have imposed upon it or become liable to pay any penalty damages compensation
costs charges or expenses
5.6.4 To pay to the Landlord within 7 days of a written demand a due and fair
proportion (to be determined by the Surveyor acting reasonably in all the
circumstances) of all proper and reasonable costs charges and expenses
(including Surveyors' Architects' and other professional advisers' fees)
properly and reasonably incurred by the Landlord of or incidental to complying
with all provisions and requirements of any and every enactment prescribed or
required by any public local or other authority in relation to the Premises
Access of Landlord and Notice to Repair
5.7.1 To permit the Landlord at all reasonable times by prior appointment (save
in the case of emergency) to enter upon the Premises for the purpose of:
(a) ascertaining that the covenants and conditions of this Lease on the part of
the Tenant have been observed and performed, and
(b) viewing the state of repair and condition of the Premises, and
(c) giving to the Tenant (or leaving upon the Premises) a written notice
specifying any repairs cleaning maintenance or painting that the Tenant has
failed to execute in breach of the terms hereof and to request the Tenant
expeditiously to execute the same
5.7.2 If within three months of the service of such a notice the Tenant shall
not have commenced and be proceeding diligently with the execution of the work
referred to in the notice to permit the Landlord to enter the Premises to
execute such work as may be reasonably necessary to comply with the notice and
to pay to the Landlord the cost of so doing and all expenses reasonably and
properly incurred by the Landlord (including legal costs and surveyor's fees)
within fourteen days of a written demand subject to the Landlord and/or its
agents doing as little damage to the Premises as is reasonably possible and
forthwith making good any damage so caused
Alienation
5.8.1 The Tenant will not assign transfer underlet or part with or share the
possession or occupation of the whole or any part of the Premises in any way
whatsoever except only that the Tenant may with the written consent of the
Landlord (which consent shall not unreasonably be withheld or delayed and shall
if granted be by deed of licence containing the covenants referred to in
paragraph 5.8.2 of this sub-clause and such other provisions as the Landlord may
reasonably require):
(i) assign the Premises as a whole or
(ii) underlet the Premises as a whole (or a complete floor of the Premises) at
the open market rack rent reasonably obtainable therefor or the rent payable
under this Lease (pro rata in the case of an underletting of a complete floor of
the Premises) whichever shall be the higher and without taking any fine or
premium and being subject to rent reviews not less frequently than as provided
for in this Lease and in any event at the same times as herein provided and
provided that any subletting shall be outside the security of tenure provisions
of the Section 24-28 Landlord & Tenant Act 1954 and be protected by a Court
Order to that effect and PROVIDED THAT:-
the Landlord may withhold its consent to an application by the Tenant for
licence to assign in accordance with this lease if the conditions and criteria
set out in this proviso (which conditions are specified for the purposes of
section 19(1A) of the Landlord and Tenant Act 1927) are not met that:
(1) at the time of the assignment there are no arrears of rent or other monies
due to the Landlord under the terms of the Lease; and
(2) the Tenant making the application for Consent to Assign shall enter into an
Authorised Guarantee Agreement in favour of the Landlord in such form as the
Landlord shall reasonably require; and
(3) in the reasonable opinion of the Landlord the proposed assignee is of
sufficient financial standing to enable it to comply with the Tenant's covenants
in the Lease
5.8.2 Notwithstanding the preceding sub-clauses the Tenant may share occupation
of the Demised Premises with another company or companies which are members of
the same group (as such expression is defined by Section 42 of the Landlord and
Tenant Act 1954) as the Tenant or which have common shareholders with the Tenant
Provided Always that such sharing of occupation is in a manner which does not
transfer or create any tenancy or other legal estate or interest whatsoever
enforceable against the Landlord
5.8.3 The Tenant will not assign transfer or underlet part with or share the
possession or occupation of the Premises otherwise than in accordance with the
foregoing paragraphs of this sub-clause and after first obtaining the consent of
the Landlord in accordance with clause 5.8.1 by deed of licence as aforesaid
prepared by the Landlord's solicitors in such manner that:
(i) in the case of an assignment the intended assignee will (jointly and
severally if there be more than one intended assignee) covenant directly with
the Landlord to pay the Rents hereby reserved and to perform and observe the
covenants and conditions on the part of the Tenant herein contained (including
this present covenant) in the same manner as if such covenants and conditions
were therein repeated in extenso and
(ii) in the case of an underlease the intended underlessee will (jointly and
severally if there be more than one intended underlessee) covenant directly with
the Landlord to observe and perform the covenants and conditions by the Tenant
herein contained in so far as they relate to the premises underlet (except the
covenants to pay the Rents reserved and to yield up the Premises at the
expiration of the Term but in all other respects so far as they are capable of
being observed and performed by an underlessee) including similar covenants not
to further underlet or part with or share the possession or occupation of the
Premises and not to assign the whole of the same without such consent as
aforesaid
5.8.4 In any application to the Landlord for written consent under sub-clause
5.8.1 (i) and (ii) the Tenant shall supply such details of the proposed assignee
or under-lessee as the Landlord shall reasonably require (including where
available a copy of its latest audited accounts or other information reasonably
satisfactory to the Landlord) and shall if so required in the case of a proposed
assignment to a private company offer the guarantee of persons or parties whose
names and addresses shall also be supplied with corresponding information as to
the financial position of such persons or parties and the Tenant shall also in
connection with any such application as aforesaid procure that the proposed
assignee or underlessee (as the case may be) provide two references including a
Banker's reference in respect of the proposed assignee or such alternative
security as shall be reasonably acceptable to the Landlord
5.8.5 Within one calendar month next after the making thereof without any demand
from the Landlord the Tenant will produce for registration by the Landlord's
solicitors a certified true copy of all assignments mortgages charges transfers
underleases tenancy agreements probates of wills letters of administration
assents and other dispositions which during the Term shall be made in respect of
the Premises or any part thereof or any estate or interest therein howsoever
remote or inferior and will leave the same with the Landlord for that purpose
and will pay the Landlord's solicitors reasonable and proper fees for the
registration of every such document
5.8.6 The Tenant will from time to time on written demand during the Term
furnish the Landlord with such particulars of all derivative interests of or in
the Premises or any part thereof howsoever remote or inferior including
particulars of the rent or rents payable in respect of such derivative interests
and such further particulars as the Landlord may reasonably require in respect
thereof
5.8.7 The Tenant will not without the previous consent in writing of the
Landlord (which consent shall not be unreasonably withheld or delayed) grant any
consent or approval, under or any variation or release or amendment to any
underlease nor exercise any power to extend the same
5.8.8 The Tenant will enforce the performance and observance by every such
underlessee of the Premises all covenants to be imposed in accordance with the
provisions hereof and shall not at any time either expressly or by implication
waive any breach thereof by any such underlessee or assignee of such underlessee
or a guarantor for the same
Nuisance etc. and Residential Restrictions
5.9.1 Not to do (or permit or suffer to remain upon the Premises) anything which
may be or become or cause a nuisance injury or damage to the Landlord or its
tenants or the occupiers of adjacent or neighbouring premises or to the
neighbourhood or any public local or other authorities
5.9.2 Not to use the Premises for a sale by auction or for any dangerous noxious
noisy or offensive trade or business nor for any illegal or immoral act or
purpose
5.9.3 Not to allow any person to sleep on any part of the Premises or to use the
Premises or any part thereof for residential purposes or keep any animal fish
reptile or bird thereon
5.9.4 If the Landlord shall abate any nuisance which the Tenant is under duty to
abate the Tenant shall pay all costs charges and expenses reasonably and
properly incurred in abating such nuisance and executing all such works as may
be necessary for abating such nuisance whether or not required in obedience to a
notice served by any local or other authority or by any other person entitled to
require the nuisance to be abated
Landlord's Costs
5.10 To pay to the Landlord all costs fees charges disbursements and expenses
(including without prejudice to the generality of the foregoing those payable to
Counsel Solicitors Architects Surveyors Engineers Consultants and Bailiffs)
properly and reasonably incurred by the Landlord in relation to :
(a) every application made by the Tenant for a consent or licence required or
made necessary by the provisions of this Lease whether the same be granted or
refused (unless the consent or licence is unreasonably refused or withheld) or
proffered subject to any lawful qualification or condition or whether the
application be withdrawn
(b) any proceedings or contemplated proceedings relating to the Premises
(including the preparation and service of a notice) under Section 146 or 147 of
the Law of Property Act 1925 notwithstanding that forfeiture is avoided
otherwise than by relief granted by the Court
(c) the recovery or attempted recovery of arrears of Rent or other sums properly
due from the Tenant, and (d) any steps taken in preparation and service of a
Schedule of Dilapidations during or within three months after the expiration of
the Term
Planning Acts
5.11.1 To comply with the provisions and requirements of the Planning Acts,
whether as to the Permitted User or otherwise, and to indemnify and keep
indemnified the Landlord against all liability whatsoever including costs and
expenses reasonably and properly incurred by the Landlord in respect of any
contravention by the Tenant
5.11.2 At the expense of the Tenant to obtain all planning permissions and to
serve all such notices as may be required for the carrying out of any operations
or user of the Premises by the Tenant which may constitute Development provided
that no application for planning permission shall be made without the previous
consent of the Landlord such consent not to be unreasonably withheld or delayed
in any case where the application for any implementation of such planning
permission will not create or give rise to any tax or other fiscal liability for
the Landlord or where the Tenant provides an indemnity against such liability to
the satisfaction of the Landlord or will not materially adversely affect in any
way the remainder of the Estate or the Landlord's reversionary interest in the
Premises
5.11.3 Subject only to any statutory direction to the contrary to pay and
satisfy any charge or levy that may hereafter be imposed under the Planning Acts
in respect of the carrying out or maintenance of any such operations or the
commencement or continuance of any such user
5.11.4 Notwithstanding any consent which may be granted by the Landlord under
this Lease not to carry out or make any alteration or addition to the Premises
or any change of use thereof until:-
(a) all necessary notices under the Planning Acts have been served and copies
produced to the Landlord
(b) all necessary permissions under the Planning Acts have been obtained and
produced to the Landlord and
(c) the Landlord has acknowledged that every necessary planning permission
is acceptable to it (such acknowledgement not to be unreasonably withheld or
delayed)
the Landlord being entitled to refuse to acknowledge its acceptance of a
planning permission on the grounds that any condition contained in it, or
anything omitted from it, or the period referred to in it, would be materially
prejudicial to the Landlord's reversionary interest in the Premises whether
during or following the expiration of the Term
5.11.5 Unless the Landlord shall otherwise direct to carry out and complete
before the expiration of the Term:- (a) any works stipulated to be carried out
to the Premises by a date subsequent to such expiration as a condition of any
planning permission granted for any Development and begun by the Tenant before
the expiration of the Term and (b) any Development begun by the Tenant upon the
Premises in respect of which the Landlord shall or may be
or become liable for any charge or levy under the Planning Acts or otherwise
5.11.6 In any case where a planning permission is granted subject to conditions
and if the Landlord reasonably so requires to provide security for the
compliance with such conditions and not to implement the planning permission
until the security has been provided
Plans Documents and Information and Forwarding Notices
5.12.1 If called upon so to do to produce to the Landlord or the Surveyor all
plans documents and other evidence as the Landlord may reasonably require in
order to satisfy itself that the provisions of this Lease have been complied
with
5.12.2 If lawfully called upon so to do to furnish to the Landlord the Surveyor
or any person acting as the Independent Expert under the 3rd Schedule such
information as may reasonably and lawfully be requested in writing in relation
to any pending or intended step under the 1954 Act or the implementation of the
provisions of the 3rd Schedule
5.12.3 Within fourteen days of the receipt of notice of the same to give full
particulars to the Landlord of any permission direction notice or order or
proposal for the same relevant to the Premises or to the use or condition
thereof (including (without limitation) any proposal for alteration of the
Valuation List under the General Rate Act 1967) made given or issued to the
Tenant or the occupier of the Premises by a Government Department Local or
Public Authority and if so required by the Landlord to produce such permission
notice order or proposal to the Landlord and also without delay to take all
reasonable or necessary steps to comply therewith and also at the request of the
Landlord to make or join with the Landlord in making such objections or
representations against or in respect of any such notice valuation order or
proposal as aforesaid as the Landlord shall reasonably deem expedient providing
that to do so would not be substantially disadvantageous to the Tenant
Indemnities
5.13 To be responsible for and during the Term to keep the Landlord fully
indemnified against all damages losses reasonable costs expenses actions demands
proceedings claims and liabilities made against or suffered or incurred by the
Landlord arising directly or indirectly out of:-
(a) any act omission or negligence of the Tenant or any persons at the
Premises with the Tenant's authority or
(b) any breach or non observance by the Tenant of the covenants
conditions or other provisions of this Lease
(c) the carrying out of any works on the Premises or any part thereof
or any change in the use made of the Premises or any part thereof
Re-letting Boards
5.14 To permit the Landlord at any time by prior agreed appointment (which
shall not be unreasonably denied) during the last six months of the
Term to enter upon the Premises and affix and retain upon any
reasonable part of the Premises so as not to cause undue inconvenience
to the Tenant a notice for re-letting the same and during such period
to permit persons with written authority of the Landlord or its agent
at reasonable times of the day by prior agreed appointment to view the
Premises but only if accompanied by the Landlord's duly authorised
representative
Rights of Light and Encroachments
5.15.1 Not to stop-up darken or obstruct any windows or light
belonging to the Premises
5.15.2 Not to permit any new window light opening doorway path passage
drain or other encroachment or easement to be made or acquired to the
detriment of the Premises and if the same or any of them shall be made
or acquired or attempted to be made or acquired to give notice to the
Landlord as soon as possible after the Tenant becomes aware of the
same and at the request and cost of the Landlord to adopt such means
as it may reasonably require or deem proper for preventing any such
encroachment or the acquisition of any such easement
Yield Up
5.16 At the expiration of the Term to yield up the Premises in repair
and in accordance with the terms of this Lease and the outline
specification attached hereto (SAVE THAT the carpeting shall be in
good and serviceable condition only) to give up all keys of the
Premises to the Landlord and to remove all lettering and signs erected
by the Tenant in upon or near the Premises and forthwith to make good
any damage caused by such removal
Interest on Arrears
5.17.1 If the Tenant shall fail to pay all or any part of the Rents or
any other sum due under this Lease within fourteen days of the same
becoming due (whether formally demanded or not) the Tenant shall pay
the Landlord Interest on the Rents or other sum in accordance with
clause 2.4 hereof and such Interest shall be deemed to be Rent due to
the Landlord
5.17.2 Nothing in the preceding clause shall entitle the Tenant to
withhold or delay any payment of the Rents or any other sum due under
this Lease after the date upon which it falls due or in any way
prejudice affect or derogate from the rights of the Landlord in
relation to the said non-payment including (but without prejudice to
the generality of the foregoing) under the proviso for re-entry
contained in this Lease
Notices
5.18.1 Where there has been an underletting of the Premises to give written
notice of the details of the result of every rent review to the Landlord within
fourteen days of the determination thereof
5.18.2 To ensure that at all times the Landlord or their agents and the local
police force have written notice of the name, home address and home telephone
number of a keyholder of the Premises
Sale of Reversion etc.
5.19 To permit upon reasonable notice at any time during the Term prospective
purchasers of or dealers in or agents instructed in connection with the sale of
the Landlord's reversion or of any interest superior to the Term to view the
Premises by prior agreed appointment (which shall not be unreasonably denied)
without interruption providing the same are authorised in writing by the
Landlord or its agents and cause as little inconvenience as reasonably possible
to the Tenant's trade or business
Defective Premises
5.20 As soon as possible after becoming aware of the same to give notice to the
Landlord of any defect in the Premises which might give rise to an obligation
upon the Landlord to do or refrain from doing any act or thing in order to
comply with the provisions of this Lease or the duty of care imposed on the
Landlord pursuant to the Defective Premises Act 1972 or otherwise and to keep
the Landlord fully indemnified from and against all loss or liability claims or
demands arising from any failure to give such notice and at all times to display
and maintain all notices which the Landlord may from time to time reasonably
require to be displayed at the Premises
Landlord's rights
5.21 To permit the Landlord at all times during the Term to exercise without
interruption or interference any of the rights granted or reserved to it by
virtue of the provisions of this Lease
Operational Covenants
5.22 To observe and perform the Operational Covenants
Freehold Title etc.
5.23 To observe and perform all the obligations (other than those arising under
any registered charge or similar encumbrance) referred to in the Charges
Register forming part of the Registered Titles described in the 5th Schedule
hereto insofar as the same relate to or affect the Premises and to keep the
Landlord and the Management Company fully indemnified against all losses costs
claims demands or liabilities arising out of any future breach or
non-performance thereof by the Tenant its servants agents or visitors
5.24 To observe and perform all the obligations on the part of the Landlord
arising under all the other deeds and documents mentioned in the 5th Schedule
hereto (including conditions attached to any planning consent except those which
are the responsibility of the Landlord as Developer) insofar as the same relate
to or affect the Premises and to keep the Landlord indemnified as aforesaid
6. THE LANDLORD'S COVENANTS with the Tenant
6.1 To permit the Tenant peaceably and quietly to hold and enjoy the Premises
without any lawful interruption or disturbance from or by the Landlord or any
person claiming under or in trust for the Landlord
6.2 To perform the covenants on the part of the Management Company in the event
of the Management Company failing to do so or in the event that the Management
Company fails to exist for whatever reason
6.3 At the request of the Tenant and at the expense of the Tenant to enforce the
covenants entered into by the Tenant of the Adjoining Premises in respect of the
partition wall the roof the foundations and the gutters as they affect the
partition wall and the Premises
7. INSURANCE
7.1 The Landlord and the Tenant HEREBY MUTUALLY COVENANT with each other and
agree as follows :-
(1) that the Landlord will at all times during the Term (save to the
extent that such insurance shall be vitiated or the insurance monies
shall be irrecoverable in whole or in part by reason of any act
neglect default or omission of the Tenant or its servants agents or
licensees) insure and keep insured with such insurance office or
underwriters of good repute as the Landlord shall from time to time
reasonably select
(a) the Premises against loss or damage by fire storm tempest
earthquake lightning explosion riot civil commotion malicious damage
subsidence heave landslip and impact by vehicles and by aircraft and
articles dropped therefrom flood damage bursting and overflowing of
water pipes and tanks and such other risks (whether or not in the
nature of the foregoing) as either the Landlord or the Tenant may from
time to time reasonably require to insure against for such sums as the
Landlord shall from time to time reasonably consider sufficient to
cover the full reinstatement cost of the Premises including the cost
of demolition and site clearance (subject to normal excesses) together
with professional fees (including architects' and surveyors' fees) and
three years' loss of rent and Value Added Tax on those amounts to the
extent applicable and to the extent that the Landlord may not be able
to recover that Value Added Tax from H.M. Customs and Excise
(b) any plant in the Premises comprising boilers connected piping and
radiators hot water storage vessels and motors and pumps associated
with boiler plant and any other plant which the Landlord may
reasonably require to be included against the risks of breakdown
accidental damage explosion or collapse as may be appropriate to the
class of plant and such other risks as the Landlord or the Tenant may
from time to time reasonably decide to insure against and for such sum
as the Landlord shall from time to time reasonably consider sufficient
(subject to normal excesses) such insurance to provide for periodical
inspection to be arranged by the insurers
(c) the Landlord against any public liability or third party risks
relating to the Premises as the Landlord shall from time to time
reasonably require
(2) PROVIDED ALWAYS that the sum insured under either paragraph (a) or
paragraph (b) of this sub-clause shall not be less than any amount
notified by the Tenant to the Landlord under sub-clause 7.2 of this
clause
7.2. That the Tenant may from time to time by notice in writing sent by
registered post or recorded delivery to the Landlord at the Landlord's
registered office require the Landlord to increase the amount for which the
Premises or the plant referred to in sub-clause 7.1(1)(b) of this clause (if
any) are insured and that the Landlord will within ten days after the date upon
which such notice is actually received in the Landlord's registered office
effect such increase accordingly
7.3 The Tenant shall pay the Insurance Rent on the date hereof for the period
from and including the Rent Commencement Date to the day before the next policy
renewal date and thereafter the Tenant shall pay the Insurance Rent within 7
days of written demand (which may be made not more than seven days in advance of
the next following policy renewal date)
7.4 That in the case of destruction or damage of the Premises from any Insured
Risk or the failure of any plant referred to in sub-clause 7.1(1)(b) of this
clause (from whatsoever cause) the Landlord and the Tenant shall apply all
monies received by virtue of any insurance (except monies received for fees and
loss of rent) as far as the same shall extend in so reinstating restoring and
rebuilding the Premises and/or the plant (as the case may be) and in case the
same shall be insufficient for that purpose as a direct result of the Landlord's
own act neglect or default the Landlord shall make up that deficiency out of its
own resources and if such deficiency is a direct result of the Tenant's own act
neglect or default then the Tenant shall make up that deficiency out of its own
resources
7.5 Without prejudice to the generality of the foregoing it is agreed that the
Tenant will make up out of its own monies any reduction or shortfall in the
insurance monies as a direct result of the faulty repair or maintenance of the
Premises or the plant (as the case may be) by the Tenant or any breach of the
Tenant's covenants herein contained
7.6 The Tenant will at its own expense comply with all such requirements as may
from time to time reasonably be made by the insurers as a condition of the
continuation or renewal of any relevant insurance relating to the Premises
7.7 In the event of the Premises or any part thereof at any time during the Term
being damaged or destroyed by whatever cause so as to be unfit for occupation
and use either in whole or part or incapable of reasonable access then the Rents
hereby reserved or a fair proportion thereof according to the nature and extent
of the damage sustained shall (unless payment of the policy monies shall be
withheld in whole or in part by reason of any act default or neglect of the
Tenant or its servants agents or licensees) be suspended until the Premises
shall again be rendered fit for occupation and use or until the expiration of
the period of the Landlord's insurance against loss of rent (whichever shall be
the earlier) and in case of any difference between the Landlord and the Tenant
as to the amount or period of such suspension as aforesaid the same shall be
referred to the sole arbitration of an arbitrator to be nominated upon the
application of either the Landlord or the Tenant by the President or failing him
the most senior officer available of the Royal Institution of Chartered
Surveyors
7.8 In the event of the Premises or any part thereof at any time during the Term
being damaged or destroyed by whatever cause so as to be unfit for occupation or
use then the Tenant may upon one month's prior written notice determine this
lease
7.9 (a) That if any competent authority shall lawfully refuse permission for or
otherwise lawfully prevent any rebuilding or reinstatement of the Premises or
the same shall be otherwise frustrated or prove impossible or impracticable all
relevant insurance monies (so far as unapplied as aforesaid) shall (subject and
without prejudice to the rights of any other interested parties) be held upon
trust for the Landlord absolutely
(b) If the Premises shall not have been reinstated so that they are
fit for occupation and use within 33 months of the date of damage or
destruction then either party may within 3 months thereafter by
serving 3 months notice determine this Lease
7.10 If at any time and so long as the Landlord is itself an insurance company
or a company in the same group of companies as an insurance company the Landlord
shall (but without prejudice to the generality of its powers under the foregoing
provisions of this clause) be entitled subject to such insurance company being
of good repute to effect or keep on foot in its own office or in the office of
any other company in such group any policy of insurance which the Landlord is
under the provisions of this Lease required or authorised to effect or keep on
foot and the premiums charged by the Landlord or such other company for
effecting or keeping on foot such insurance shall for the purpose of any
covenant by the Tenant to pay or contribute towards the cost of insurance be
deemed to have been paid by the Landlord on the first day of the period of
insurance to which the relevant premium relates
7.11 The Landlord shall be deemed to have fulfilled its responsibility under
this Lease as to insurance notwithstanding that the insurance for the time being
in force is subject to exclusions excesses and conditions which are usually
required by the insurers and which cannot be omitted on reasonable terms and
(without prejudice to the generality of the foregoing) the Landlord shall not be
responsible for effecting any insurance under the provisions hereinbefore
contained against a peril which is for the time being uninsurable or which can
only be insured at a premium which in the reasonable view of the Landlord is
excessive and which the Tenant agrees is excessive (such agreement not to be
unreasonably withheld)
7.12 The Tenant covenants with the Landlord:-
(a) to comply with all the reasonable requirements and recommendations
of the insurers
(b) not to do or omit anything that could cause any policy of
insurance on the Premises to become void or voidable wholly or in part
nor (unless the Tenant shall have previously notified the Landlord and
have agreed to pay the increased premium) anything whereby additional
insurance premiums may become payable
(c) not to store or bring onto the Premises any article substance or
liquid of a specially combustible inflammable or explosive nature and
to comply with the requirements and recommendations of the fire
authority and the reasonable requirements of the Landlord as to fire
precautions relating to the Premises
(d) to give notice to the Landlord forthwith upon the happening of any
event which might materially affect any insurance policy relating to
the Premises
(e) to pay to the Landlord within 7 days of written demand the
reasonable and proper cost of any independent valuation of the
Premises required by the Insurers for Insurance purposes (but not more
than once in any three years unless there are reasonable grounds for
so doing)
(f) if at any time the Tenant shall be entitled to the benefit of any
insurance on the Premises which is not effected or maintained in
pursuance of any obligation herein contained to apply all monies
received by virtue of such insurance in making good the loss or damage
in respect of which the same shall have been received
7.13 The Landlord covenants with the Tenant in relation to the policy of
insurance effected by the Landlord pursuant to Clause 7.1 to:
(a) produce to the Tenant on demand a copy of the policy and the last
premium renewal receipt
(b) procure that the interest of the Tenant and any mortgagee is noted
or endorsed on the policy
(c) produce to the Tenant on demand written confirmation from the
insurers that they have agreed to waive all rights of subrogation
against the Tenant
8. THE MANAGEMENT COMPANY covenants with the Tenant:-
8.1 To observe and perform the Restrictive Covenants (defined in the Registered
Transfers insofar as they relate to the Transferred Property)
8.2 To observe and perform the Management Covenants (as defined in the
Registered Transfers) such observance and performance to be carried out at all
times in a manner which it reasonably considers to be in the interest of good
estate management and in the interest of the Estate as a whole
9. PROVISOS
Re-entry
9.1 If at any time during the Term:
(a) the Rents (or any of them or any part thereof) shall be in arrear
and unpaid for 21 days after becoming payable (whether formally
demanded or not), or
(b) there shall be any material breach non-performance or
non-observance by the Tenant of any of the covenants and conditions on
the part of the Tenant contained in this Lease, or
(c) the Tenant being an individual (or being more than one individual any one or
more of them) becomes bankrupt or (being a company) enters into liquidation
whether compulsory or voluntary (save for the purpose of amalgamation or
reconstruction of a solvent company) or has a receiver appointed of its
undertaking or (in either case) enters into an arrangement or composition for
the benefit of its creditors the Landlord may at any time thereafter (and
notwithstanding the waiver of any previous right of re-entry) re-enter the
Premises of any part thereof in the name of the whole and thereupon the Term
shall absolutely cease and determine but without prejudice to any rights or
remedies which may then have accrued to either party against the other in
respect of any antecedent breach (including the breach in relation to which
re-entry is made) of any of the covenants and conditions contained in this Lease
Floor Area
9.2 For all purposes in relation to this Lease the Net or Gross Internal Area of
the Premises are to be measured in accordance with the R.I.C.S. Code of
Measuring Practice Second Edition January 1987 (which includes space occupied by
heating apparatus) or any subsequent amendment or substitution thereof
Effect of Waiver
9.3.1. Each of the Tenant's covenants shall remain in full force both at law and
in equity notwithstanding that the Landlord shall have waived or released
temporarily any such covenant or waived or released temporarily or permanently
revocably or irrevocably a similar covenant or similar covenants affecting other
adjoining or neighbouring premises belonging to the Landlord
9.3.2. Notwithstanding the acceptance of or demand for rent by the Landlord or
any agent of the Landlord with knowledge of a breach of any of the covenants on
the part of the Tenant herein contained the Landlord's right to forfeit this
Lease on the ground of such breach shall remain in force and the Tenant shall
not in any proceedings for forfeiture be entitled to rely upon any such
acceptance or demand as aforesaid as a defence
Rights Easements etc.
9.4 The operation of Section 62 of the Law of Property Act 1925 shall be
excluded from this Lease and the only rights granted to the Tenant are those
expressly set out or referred to in this Lease and the Tenant shall not during
the Term (whether by virtue of this Lease or otherwise) acquire or become
entitled by any means whatsoever to, any other easement from or over or
affecting the remainder of the Estate or any other land or premises now or at
any time hereafter belonging to the Landlord and not comprised in this Lease
Representations
9.5 The Tenant acknowledges that this Lease has not been entered into in
reliance wholly or partly on any statement or representation made by or on
behalf of the Landlord except any such statement or representation that is
expressly set out in this Lease or has been made by the Landlord's Solicitors to
the Tenant's Solicitors in writing
Licences etc. Under Hand
9.6 Whilst the Landlord is a limited company or other corporation all licences
consents approvals and notices required or permitted to be given by the Landlord
shall be deemed sufficient if given under the hand of a Director the Secretary
or other duly authorised officer of the Landlord
Tenant's Property
9.7 If after the Tenant has vacated the Premises on the expiry or sooner
determination of the Term any property of the Tenant remains in or on the
Premises and the Tenant fails to remove it within seven days after being
requested in writing by the Landlord so to do or if after using its best
endeavours the Landlord is unable to make such a request to the Tenant within
fourteen days from the first attempt so made by the Landlord:
(a) the Landlord may as the agent of the Tenant sell such property provided that
the Tenant will indemnify the Landlord against any liability incurred by it to
any third party whose property shall have been sold by the Landlord in the bona
fide mistaken belief (which shall be presumed unless the contrary be proved)
that such property belonged to the Tenant
(b) if the Landlord having made reasonable efforts is unable to locate the
Tenant the Landlord shall be entitled to retain the said proceeds of sale
absolutely unless the Tenant shall claim the same within six months of the date
upon which the Tenant vacated the Premises, and
(c) the Tenant shall indemnify the Landlord against any damage occasioned to the
premises or any adjacent or neighbouring premises of the Landlord and any proper
actions claims proceedings costs expenses and demands made against the Landlord
which are directly caused by or related to the presence of the property in or on
the Premises
Service of Notices
9.8 The provisions of section 196 Law of Property Act 1925 as amended by the
Recorded Delivery Service Act 1962 shall apply to the giving and service of all
notices and documents under or in connection with this Lease except that Section
196 shall be deemed to be amended as follows :
the final words of Section 196 (4)"......... and that service.... be delivered"
shall be deleted and there shall be substituted; "...... and that service shall
be deemed to be made on the third Working Day after the registered letter has
been posted, "Working Day" meaning any day from Monday to Friday (inclusive)
other than Christmas Day Good Friday and any statutory bank holiday"
9.9 This Lease shall be SUPPLEMENTAL to the Registered Transfers and in
particular the definitions of all words and phrases therein contained shall
wherever the context so permits in relation to the Schedules hereto also apply
to this Lease as if the same had been repeated herein in extenso
Option to Break
9.10 If the Tenant shall desire to determine the term hereby granted at the
expiration of ten years hereof namely the 7th day of September 1998 and shall
give effect to the Landlord not less than six months previous notice in writing
of such desire then immediately on the expiration of ten years namely the 7th
day of September 2008 the present demise and everything herein contained shall
cease and be void but without prejudice to the rights and remedies of any
antecedent claim for breach of covenant PROVIDED ALWAYS THAT the Tenant shall
pay an additional three months rent to the Landlord on the expiration date
namely the 7th day of September 2008
10. The Guarantor covenants with the Landlord in the terms of the provisions of
the Sixth Schedule of this Lease
IN WITNESS whereof the parties have duly executed this Instrument as a Deed the
day and year first before written
FIRST SCHEDULE
The Premises
"The Premises" means ALL THAT land (including 14 car parking spaces) and the
building erected thereon having a gross internal area of 328.48 square metres or
thereabouts comprising Unit Number 35(8A) within Group "C" on the Estate the
extent of which is for identification purposes only shown edged red on the Plan
No. 2 hereto annexed TOGETHER with the benefit of any rights but SUBJECT to all
exceptions and reservations covenants conditions agreements and declarations
contained or mentioned in the Landlord's said Registered Title BK260648 insofar
as they relate to or affect the Premises and including:-
(a) all additions and improvements to the Premises
(b) all the Landlord's fixtures and fittings and fixtures of every kind now in
or upon or which shall from time to time be in or upon the Premises (whether
originally affixed or fastened to or upon the same or otherwise) except any such
fixtures installed by the Tenant which can be removed from the Premises without
defacing the same and
(c) any Pipes that exclusively serve the Premises but excluding the pipes and
any conduits
(d) the roof only to the extent that it covers the Premises
(e) the foundations only to the extent of the premises
(f) the gutters only to the extent that they hang from the Premises
(g) the fall of the wall partitioning the Premises from the Adjoining Premises
SECOND SCHEDULE
Part 1 - Rights Granted
The rights as incident or appurtenant to the occupation of the Premises hereby
granted by the Landlord in the following terms:-
(a) The benefit of the Subjective Easements reserved out of the Registered
Transfers so far as the same can relate to or are capable of benefiting the
Premises
(b) The benefit of all rights and easements reserved out of any previous or
future lease of or transfer of the title to any of the units so far as the same
can relate to or are capable of benefiting the Premises
(c) The supply of Services through the Conducting Media now or within the
Perpetuity Period laid or to be laid in under or over any part of the remainder
of the Estate now belonging to the Landlord (hereinafter referred to as "the
Rest of the Development") and intended to serve the Premises and/or any other
land
(d) The right to enter upon the Estate (but not any buildings erected thereon)
without thereby causing any material interference or disturbance with the use
and enjoyment of the same in order to deal with the Premises and any Conducting
Media in on or over the same
(e) All rights of support now subsisting from the Rest of the Development (to
the extent that such support now exists) and all existing or intended rights to
the overhang of eaves gutters downspouts and similar services and all (if any)
intended rights to maintain foundations within or under the Rest of the
Development
(f) A right of way at all times and for all purposes with or without vehicles
over and along the roadways on the Estate and to give access to Duke's Ride
PROVIDED that the person or persons exercising any of the rights of entry
hereinbefore granted shall cause as little damage and interference as reasonably
possible and make good all physical damage thereby occasioned as soon as
practically possible
SECOND SCHEDULE
Part 2 - Exceptions and Reservations
Exceptions and Reservations out of this demise as incident or appurtenant to the
ownership and occupation of the remainder of the Estate and each and every part
thereof in the following terms:-
(a) The Supply of Services through the Conducting Media now or within the
Perpetuity Period laid or to be laid in or under or over the Premises and
intended to serve the remainder of the Estate and/or other land whether jointly
or exclusively
(b) the right to enter upon the Premises (but not any buildings erected thereon)
without thereby causing any material interference or disturbance with the use
and enjoyment of the same by the Tenant in order to Deal With any part of the
Units and/or the Conducting Media and/or the remainder of the Estate PROVIDED
that the person or persons exercising any rights of entry hereinbefore reserved
shall cause as little damage and interference to the Premises as possible and
make good all physical damage thereby occasioned to the Tenant's reasonable
satisfaction as soon as practically possible
(c) All rights of support now subsisting from the Premises (to the extent that
such support now exists) for the benefit of the remainder of the Estate and any
buildings roads or other structures now or hereafter to be erected or
constructed thereon within the Perpetuity Period and all existing or intended
rights to the overhang of eaves gutters downspouts and similar services and all
(if any) intended rights to maintain foundations within or under the Premises
(d) For the Landlord (as developer) or its successors in title the right to
enter upon the Premises for the purpose of carrying out and completing the
construction of any of the other units on the remainder of the Estate PROVIDED
that the person or persons exercising any rights of entry hereinbefore reserved
shall cause as little damage and interference to the Premises as possible and
make good all physical damage thereby occasioned to the Tenant's reasonable
satisfaction as soon as practically possible
THIRD SCHEDULE
Rent Review
1.1 The terms defined in this paragraph shall for all purposes of this Schedule
have the meanings specified
1.2 "Review Period" means the period between the Review Date specified in
paragraph 1.10 of the Particulars of this Lease and the expiry of the Term;
1.3 "the Assumptions" mean the following assumptions at the Review Date:
(a) that no work has been carried out on the Premises by or with the actual or
tacit consent of the Tenant its sub-tenants or their predecessors in title
during the Term which had diminished the rental value of the Premises and if the
Premises have been destroyed or damaged that they have been fully restored,
(b) that the Premises are available to let by a willing Landlord to a willing
tenant without a premium but with vacant possession and subject to the
provisions of this Lease (other than the amount of the Rent but including the
provisions for rent review at similar intervals as those in this Lease) for a
term of ten years and subject also to the provisions of the 1954 Act, and
(c) that the covenants contained in this Lease on the part of the Tenant and the
Landlord have been fully performed and observed;
(d) that the Premises are fitted out in accordance with an office specification
attached hereto and fully completed with good quality carpets. For the avoidance
of doubt the carpets are a Landlords fixture
1.4 "the Disregarded Matters" mean:
(a) any effect on rent of the fact that the Tenant, its sub-tenant or their
respective predecessors in title have been in occupation of the Premises,
(b) any goodwill attached to the Premises by reason of the carrying on at the
Premises of the business of the Tenant its sub-tenants, or their predecessors in
title in their respective businesses,
(c) any increase in rental value of the Premises attributable to the existence
at the relevant Review Date of any improvement to the Premises (including
without prejudice to the generality of the foregoing the fitting out works
carried out by the Tenant to the ground floor of the Premises at the
commencement of the Term) which has been carried out with consent where required
otherwise than in pursuance of an obligation to the Landlord or its predecessors
in title (other than pursuant to Clause 5.6.1 to 5.6.4 of this Lease) by the
Tenant its sub-tenants or their respective predecessors in title during the Term
or during any period of occupation prior thereto arising out of any agreement to
grant such term
(d) any rent free period at the commencement of the Lease
1.5 "the Revised Rent" means the open market rental value of the Premises
current at the Review Date taking into account the Assumptions and disregarding
the Disregarded Matters
1.6 "the President" means the respective President for the time being of either
(a) the Royal Institution of Chartered Surveyors or (b) the Incorporated Society
of Valuers and Auctioneers or the respective successors in title to each such
body, the duly appointed deputy of such President, or any person authorised by
such President to make appointments on his behalf
1.7 "the Independent Expert" means a person (being a Surveyor who customarily
practices in regard to property which is substantially similar in type and
nature to the Premises and who is acquainted with the market in the area in
which the Premises are situate) appointed by agreement between the parties or in
default of agreement within fourteen days of one party giving notice to the
other of its nomination or nominations then nominated by the President on the
application of either party or both of them jointly made not earlier than six
months before the Review Date or at any time thereafter (Provided that if there
shall be any dispute or difference as to which President has made the nomination
then the first in time shall apply and if it is not clear as to which is the
first in time then the Landlord's application shall prevail)
2. The Rent shall be:
(a) until the Review Date the Initial Rent specified in paragraph 1.9 of the
Particulars of this Lease, and
(b) during the Review Period, a rent equal to the Rent payable under this Lease
immediately prior thereto or the Revised Rent whichever shall be the greater
3. The Revised Rent for the Review Period may be agreed in writing at any time
between the parties or (in the absence of agreement) determined not earlier than
the Review Date by the Independent Expert
4.The Independent Expert shall be requested to:-
(a) act as an expert and not as an arbitrator
(b) take into account any written submission received by him (and also sent to
the other party) within 20 days of his appointment and also that other party's
written comments thereon received by him within 45 days of his appointment
(c) not have to hear oral submissions
(d) determine the Revised Rent in accordance with his own independent judgement
(e) make an award as to liability for the cost of such reference which shall be
final and binding upon the parties
(f) be discharged if he shall die unduly delay or become unwilling unfit or
incapable of acting and if for these or any other reason the President shall
upon the application of either party by notice in writing elect in his absolute
discretion to discharge him and appoint another Independent Expert in his place
5. When the Revised Rent shall have been ascertained in accordance with this
Schedule, memoranda thereof shall be signed by or on behalf of the parties and
annexed to this Lease and its counterpart and the parties shall bear their own
costs in respect of this
6. If the Revised Rent payable on and from the Review Date has not been
ascertained by the Review Date Rent shall continue to be payable at the rate
previously payable (such payments being on account of the Rent for the Review
Period) and within 14 days of the Revised Rent being ascertained (that is to say
the date when the same has been agreed between the parties or the date of the
Independent Expert's award) the Tenant shall pay to the Landlord any shortfall
between (a) what would have been paid on the Review Date and on any subsequent
Rent payment days had the Revised Rent been determined on the Review Date and
(b) the payments made by the Tenant on account (together with Interest on such
shortfall at 3% below the Interest Rate for the period from the date upon which
every such instalment was due up to the date of payment of the said shortfall)
7. If at the Review Date there shall be in force a statute which shall prevent
restrict or modify the Landlord's right to review the Rent in accordance with
this Lease and/or to recover any increase in the Rent the Landlord shall when
such restriction or modification is removed relaxed or modified be entitled (but
without prejudice to its rights (if any) to recover any Rent the payment of
which has only been deferred by law) on giving not less than one months notice
in writing to the Tenant at any time within 6 months (time being of the essence
of the contract) of the restriction or modification being removed relaxed or
modified to proceed with any review of the Rent which may have been prevented or
further to review the Rent in respect of any review where the Landlord's right
was restricted or modified and the date specified in the said notice shall be
deemed for the purposes hereof to be the Review Date and the Landlord shall be
entitled to recover any resulting increase in Rent with effect from the earliest
date then permitted by Law
FOURTH SCHEDULE
The Operational Covenants
1. Repair etc. and Decoration
1.1 To clean the windows and other glass in the exterior of the Premises both
internally and externally throughout the Term when reasonably necessary
1.2 To maintain the carpets and other floor coverings in the Premises in a clean
condition and to replace them as often as may be necessary including carpets of
a suitable colour and quality for office use in the Premises
1.3 To keep the Premises sufficiently supplied and equipped with all fire
fighting and extinguishing appliances from time to time required by law or by
the Local or other competent Authority or reasonably required by the Landlord or
the insurers and to maintain the same to their reasonable satisfaction and such
appliances shall be open to inspection and also not to obstruct or permit or
suffer to be obstructed the access to or means of working such appliances or the
means of escape from the Premises in the case of fire
2. User
2.1 Not to use the Premises except for the purpose of high quality offices
and/or other premises comprised within Class B1(a) of the Town and Country
Planning (Use Classes) Order 1987
2.2 Not to use the Premises for any other purpose without the Landlord's consent
such consent not to be unreasonably withheld (but subject nevertheless to Clause
5.11.4 hereof)
2.3 The Tenant hereby acknowledges and admits that notwithstanding the
provisions hereof as to the use of the Premises the Landlord does not thereby or
in any way give or make any representation or warranty that any such use is a
permitted use within the provisions of legislation relating to Town and Country
Planning nor shall any consent in writing which the Landlord may hereafter give
to any change of use be taken as including any such representation or warranty
and that notwithstanding that any such use as aforesaid is not a permitted use
within such provisions as aforesaid the Tenant shall remain fully bound and
liable to the Landlord in respect of the obligations undertaken by the Tenant by
virtue of this Lease without any compensation recompense or relief of any kind
2.4 Not to use the car parking spaces forming part of the Premises for any
purpose other than the parking during the Tenant's normal business hours of
private and light industrial motor vehicles
3. Aerial Signs and Advertisements
3.1 Not without the consent of the Landlord (such consent not to be unreasonably
withheld or delayed) to erect any pole mast or wire (whether in connection with
telegraphic telephonic radio or television communication or otherwise) upon any
part of the outside of the Premises
3.2 Not without the consent of the Landlord to affix or to exhibit on the
outside of the Premises or to or through any window of the Premises any placard
sign notice fascia board or advertisement except the approved sign referred to
in paragraph 3.3. of this Schedule
3.3 At all times to display and maintain a suitable sign showing the Tenant's
trading name and business (and in the event of any approved sub letting of part
of the Premises a similar sign relating to that sub lessee) of a size design and
materials and in a position (within the recessed panel in the brickwork of the
Premises) previously approved in writing by the Landlord (such approval not to
be unreasonably withheld or delayed)
3.4 In respect of any matter so approved by the Landlord pursuant to this clause
the Tenant will comply with any reasonable direction given by the Landlord's
Insurers as to the insurance of anything so annexed or affixed to the exterior
of the Premises and will reimburse to the Landlord within 7 days of written
demand being made any additional insurance premium payable by the Landlord
therefor and pending any such insurance will keep the Landlord fully indemnified
against all claims or liabilities in any way relating to such annexation or
affixation and the Tenant will not stand or place or deposit any goods articles
or things for display sale or otherwise outside any part of the Premises
4. Keep Tidy
4.1 Not to cause any land roads passage or pavement abutting on the Premises to
become obstructed untidy or in a dirty condition and not to carry out any works
or other operations outside the building upon the Premises
4.2 Not to bring or keep or suffer to be brought or kept stored (except in an
authorised bin store which the Tenant is hereby granted the right to use)
stacked or laid out upon any land within the Premises or the curtilage thereto
any materials equipment plant bins crates cartons boxes or receptacles for waste
or any other item which is or might become untidy unclean unsightly or in any
way detrimental to the amenity of the area generally
4.3 Not to deposit or permit to be deposited any waste rubbish or refuse on any
part of the land within the Premises or the curtilage thereto and to place or
deposit all waste rubbish or refuse only in suitable receptacles and within the
area set aside for the purpose and to arrange for the removal of all waste
materials and rubbish which the local authority shall not dispose of
5. Roof and Floor Weighting
5.1 Not without the consent in writing of the Landlord (such consent not to be
unreasonably withheld or delayed) to:
(a) suspend any weight from the portal frames stanchions or purlins of the
Premises or use the same for the storage of goods or place any weight on them
unless the same are suitably strengthened, or
(b) have on the Premises any safes machinery goods or other articles which shall
be unduly noisy or which may strain or damage the Premises or cause dangerous
vibrations
5.2 On any application by the Tenant for the Landlord's consent under paragraph
5.1 the Tenant shall make available to the Landlord a report by the Tenant's
expert in relation to the floor loading proposed by the Tenant
6. Unloading and Parking and Obstruction of Access
6.1 Not to unload any goods or materials from vehicles and convey the same into
the Premises except through the approved entrance or entrances provided for the
purpose and not to cause congestion of the adjoining areas or inconvenience to
any other user of them
6.2 No road forecourt passageway or other area leading to or giving access to
the Premises shall be damaged or obstructed or used in such manner as to cause
in the reasonable opinion of the Landlord any nuisance damage or annoyance and
to comply with any reasonable directions and regulations of the Management
Company made from time to time with regard to the use thereof
7. Electricity Supply
Not to cause allow or suffer the electricity supply to the Premises to become
overloaded
8. Discharge into Pipes
Not to discharge into any of the Pipes serving the Premises or any other
property any oil grease or other deleterious matter or any substance which is a
source of danger to the drainage system of the Premises or such other property
or part thereof and not to cause or permit any excessive discharge which shall
create or contribute to an overload of the system
9. Prohibited Uses
9.1 Not to use the Premises for any business connected with the Motor Trade or
for any public meeting exhibition or entertainment or as a hotel club or
amusement arcade or permit any musical instrument radio television or other
sound emitting equipment to be operated so as to be audible from outside the
Premises
9.2 Not to engage in any works or other operations or permit or store on the
Property any goods or other articles which may by reason of smell infection or
radioactivity affect any other goods or articles (of whatever kind and however
sensitive) elsewhere upon the Estate or generate an excessive degree of noise
and/or dust which may constitute a breach of the planning consent
FIFTH SCHEDULE
(a) Title numbered BK260648 in H M Land Registry
(b) Title numbered BK291692 in H M Land Registry (relating to the Common Parts)
(c) The Registered Transfers
(d) The Outline Planning Consent Number 622867 issued by Bracknell Forest
Borough Council on 7th October 1997.
SIXTH SCHEDULE
Guarantee provisions
1. That the Tenant will at all times during the Term pay the Rents and all other
sums covenanted to be paid by the Tenant at the respective times and in the
manner appointed for payment thereof and also will duly perform and observe and
keep the several covenants stipulations and conditions on the part of the Tenant
to be performed and observed and kept and that the Guarantor will pay and make
good to the Landlord all losses costs and expenses sustained by the Landlord
through the default of the Tenant in respect of any of the before-mentioned
matters PROVIDED ALWAYS that any neglect or forbearance of the Landlord in
endeavouring to obtain payment of the Rents and other sums as and when the same
shall become due or any delay on the part of the Landlord to take any steps to
enforce performance or observance of the said several covenants stipulations and
conditions shall not release or in any way lessen or affect the liability of the
Guarantor under the guarantee on the part of the Guarantor hereinbefore
contained
2. That if the Tenant being an individual shall become bankrupt or if the Tenant
for the time being is a company and shall enter into liquidation and the
Tenant's trustee in bankruptcy or the Liquidator of the Tenant shall disclaim
this Lease and if the Landlord shall within three months after such disclaimer
by notice require the Guarantor or the Guarantor's personal representatives or
assigns to accept a lease of the Premises for a term commensurate with the
residue which if there had been no disclaimer would have remained of the Term at
the same Rents and under the like covenants conditions provisions agreements and
declarations as are reserved by and contained in this Lease (the said new lease
and the rights and liabilities thereunder to take effect from the date of the
said disclaimer) then and in such case the Guarantor or the Guarantor's personal
representatives or assigns shall accept such lease accordingly and execute a
counterpart thereof and pay the Landlord's solicitors' costs and disbursements
of and incidental thereto
3. This guarantee shall enure for the benefit of the successors and assigns of
the Landlord under this Lease without the necessity for any assignment of the
benefit thereof
4. This guarantee is also to take effect immediately on the assignment of the
Lease to the Tenant under clause 5.8 hereof and is to remain in force so long as
and to the extent that the Tenant is not released by law from liability for the
Tenant's covenants in the Lease
5. In the context of these guarantee provisions reference to the Tenant are to
the assignee only (in its capacity as Tenant) with respect to whom his guarantee
is given
THE COMMON SEAL of
T A FISHER & SONS LIMITED was hereunto affixed in the presence of:-
Director /s/J. Fisher
Secretary /s/M. Stewart
THE COMMON SEAL of
WELLINGTON PARK
MANAGEMENT LIMITED
was hereunto affixed in the presence
of:-
Director /s/J. Fisher
Secretary /s/M. Stewart
EXECUTED AS A DEED by
SAVILLE SYSTEMS (UK)
LIMITED by
Director /s/Christopher A. Hanson
Secretary /s/Lisa Miller
EXECUTED AS A DEED by
SAVILLE SYSTEMS PLC by
Director /s/John J. Boyle, III
Secretary /s/Lisa Miller
<PAGE>
OUTLINE OFFICE SPECIFICATION
UNITS 35 - 38 WELLINGTON BUSINESS PARK
DUKES RIDE
CROWTHORNE
BERKSHIRE.
Approximate Schedule of Accommodation m2 (ft2)
Unit Nett
Int.
35 289 (3106)
36 289 (3106)
37 317 (3407)
38* 317 (3407)
The Buildings: Generally comprise the construction of a two storey office unit
with traditional brick elevations; in-situ concrete ground floor slab; pre-cast
concrete first floor and stairs; structural steel frame; pitched roof covered
with BSC Colourcoat HP 200 (or equal) plastic coated steel sheeting; double
glazed windows and doors; raised particle access floors; air conditioning;
mechanical, electrical and sanitary installations; floor, wall and ceiling
finishes.
*Unit 38 shell construction @ Ground Floor.
1. Foundations
Concrete bases, strips, ground beams and the like including all necessary
reinforcement will be formed in excavations, designed and inspected by the
appointed Engineer, to the approval of the Local Authority Building Inspector.
2. Ground Floor Slab
Reinforced concrete ground-bearing slab. Floor finish to office areas to
comprise proprietary raised access floor system. Floor finish elsewhere to
comprise min. 75 mm sand/cement screed.
3. Structural Frame
Structural Steel framing with columns, beams and rafters together with design
wind bracing and all secondary steel to the Engineer's design. All exposed steel
to conform to Building Regulations with regard to fire protection. All steelwork
to be shotblast clean to BS 4232 with one coat of red oxide primer and exposed
steelwork subsequently decorated on completion.
4. Suspended Floor & Staircase
First floor construction to comprise Pre-Cast Concrete slabs or block and beam
construction. Microfloor or similar raised access floor system; 38 x 600 x 600mm
medium office grade panels.
5. Roof Structure/Coverings
Profiled sheet metal roofing system comprising 0.7mm Colorcoat HP200 steel outer
sheet, or similar, self-finished steel lining sheet, 80mm Mineral Fibre
Insulation to meet Building Regulation requirements.
6. External Walls
Generally comprising 105mm facing brick; 80mm part insulated cavity; 140mm
medium density concrete blockwork (fair-faced internally to Unit 38 ground
floor). Stainless steel cavity wall ties.
GRP white numbered canopy fixed to front elevation above main entrance door.
Soldier course brick strings to include special bricks at window heads and/or
cills.
Mortar generally to be 1:1:6 with colouring agent to face brickwork; 1:3 cement
mortar below d.p.c. level.
7. Windows and External/Internal Doors
Polyester-powder colour coated aluminium doors and window frames (excluding fire
exit doors to rear elevation) with sealed double glazed window units and
toughened glass to doors, letter plate to mid-rail.
MDF painted window cills internally with profile metal cills externally.
Fire exit doors to rear elevation to be external quality ply-faced in softwood
frame with weather-board and water-bar fitted with "escape ironmongery".
Internal doors generally 40mm Koto veneered flush doors pre-finished with
wrought softwood linings. Appropriate ironmongery to Fire Officer approval.
8. Internal Walls/Partitions
215mm party walls comprising 2 leaves of 100mm dense concrete blockwork.
Partitions/walls to be 100mm medium density blockwork, generally plastered and
finished with emulsion paint. Unit 38 ground floor window reveals to be rendered
to stainless steel stop-bead on inside edge.
Glazed ceramic wall tiles 150 x 150mm to W.C. cistern casings and splashbacks to
kitchen worktop.
9. Floor and Ceiling Finishes
Carpet tile finish (or P.C. allowance) to ground and first floor office areas
and stairway/entrance lobby areas. Polyflor or similar vinyl sheet to ground and
first floor W.C. and kitchen areas.
Ceilings to all office areas, stairways etc. to comprise mineral fibre suspended
ceiling tiles in lay-in grid to achieve class 1 spread of flame.
10. Kitchen Area
First floor kitchen area with single stainless steel sink unit with combined
floor unit. Full length worktop with power socket provision for appliances.
11. Air Conditioning
Comfort cooling and heating via heat pump design comprising 3 No. ducted type
units per floor positioned within the ceiling void. Insulated flexible ductwork
connected to each unit to serve 4-way blow diffusers evenly spaced within
ceiling grid.
External condensing units fitted to rear elevation external wall.
12. Mechanical and Electrical Installations
Main switch gear: 3-phase and neutral switch fuse with 8-way TPN distribution
board with MCB's.
Office areas to be fitted with 1200 x 600mm recessed fluorescent fittings with
Category 2 louvers. Ancillary areas including ground floor disabled W.C./lobby
to be surface type fittings.
Emergency lighting to be of the self-contained type either separate or integral
to the luminaire.
Fire Alarm system provided complete with manual point, bell sounders and smoke
detectors.
Power installation, telephone and computer outlets and wiring by occupier.
Heating to ancillary areas and hot water provided by room-sealed gas-fired
combination boiler with fan-assisted flue. W.C. areas equipped with all
necessary sanitary fittings Caradon Twyford Avalone or Celtic W.C. pans.
Ventilation: mechanical extract systems to W.C. areas controlled by light switch
with over-run timer.
13. Rainwater Disposal
Pressed steel fascias and gutters, square or circular pvc down-pipes and
fittings.
14. Service Supplies
The developer will provide incoming gas, electricity, water and BT supplies to
the buildings.
Electricity supply will be 3 Phase and neutral supply.
Gas supply to semi-concealed meter box terminating with consumer control valve.
Water supply 20mm connection of metered water main.
BT supply provided with ducted entry point.
15. External Works Generally
Drainage - Surface water and foul water drainage installed in accordance with
Architects design and to Local Authority requirements.
Estate Roadway and Parking Areas - Estate roadway and parking areas finished in
black macadam. Circulation areas finished in concrete block paviors.
External Lighting - external lighting to be provided via bollards and lamp
columns serviced from landlords meter cabinet and distribution board. External
lighting provided above main entrance door. Emergency lighting in accordance
with Building Regulation requirements.
Landscaping - A detailed landscaping scheme will be implemented to Local
Planning Authority approval.
Refuse Disposal - A communal timber bin store enclosure will be provided to
Local Authority requirements.
Type of materials, products and workmanship shall be in accordance with the
relevant provisions of current Planning and Building Regulation Requirements,
BSI documents and Codes of Practice.
These particulars do not form part of any contract and they may be subject to
correction and modification as availability of materials and goods and other
considerations demand.
<PAGE>
Exhibit 10.21
DATED 8th September 1998
AGREEMENT FOR LEASE
Relating to land and buildings
forming Unit No.35 (8A) at
Wellington Business Park
Dukes Ride
Crowthorne
Berkshire
between
T A FISHER & SONS LIMITED
and
SAVILLE SYSTEMS (UK) LIMITED
PARK NELSON
1 Bell Yard
London WC2A 2JP
Tel: 0171 404 4191
Fax: 0171 405 4266
Ref: JRB SEW 30220 424
<PAGE>
THIS AGREEMENT FOR LEASE is made the 8th day of September One thousand nine
hundred and ninety eight BETWEEN T A FISHER & SONS LIMITED (Company Number
02582252) whose registered office is at Windmill House Victoria Road Mortimer
near Reading RG7 3DF ("the Landlord") (1) SAVILLE SYSTEMS (UK) LIMITED (Company
Number 03487972) whose registered office is at 60 Bishopsgate, Hazilwood House,
London EC2N 4AJ ("the Tenant") (2)
WHEREBY IT IS AGREED as follows:
1. (a) The Landlord shall grant and the Tenant shall accept a lease ("the
Lease") for a term of FIFTEEN YEARS (subject to provisions therein for
determination) from the Completion Date herein in respect of the property ("the
Property") described in the Schedule hereto such Lease to be in the form of the
approved draft lease annexed hereto (b) The annual exclusive rent (exclusive of
Value Added Tax) shall be in the sum of SIXTY THREE THOUSAND SEVEN HUNDRED AND
FIFTY POUNDS ((pound)63,750.00) subject to review as provided in the Lease
2. The Tenant shall deliver a duly executed counterpart of the Lease to the
Landlord's Solicitor within 5 working days after the document is delivered to
the Tenant's Solicitors
3. The Lease shall be granted subject to and where applicable with the benefit
of:-
(a) The covenants agreements conditions and other terms to be contained or
referred to in the said approved draft lease
(b) All matters other than registered Charges or similar financial incumbrances
contained or referred to in the Charges Register and all notes in the Property
Register of (i) the freehold title to the Property under title number BK260648
registered at HM Land Registry as at 21st January 1998 and (ii) the freehold
title to the Common Parts of the Estate under title number BK291692 at HM Land
Registry as at 21st January 1998
(c) The matters contained or referred to in the Registered Transfers mentioned
in the said approved draft lease
(d) All easements granted or to be granted to statutory authorities for the
supply of services to the Estate or any part thereof and
(e) The provisions and conditions of the planning permission for the development
of the Estate granted by the Bracknell Forest Borough Council on the 7th October
1997.
4.1 The Landlord shall at its own expense complete the construction of the
building intended to be erected upon the Property and also all remaining works
to the roads footpaths car parks landscaped areas and service media serving the
Property ("the Works") in an expeditious and good and workmanlike manner all in
accordance with the drawings and specifications which are available for
inspection at the Landlord's offices and the Tenant shall be deemed to have
inspected and approved the same whether or not such inspection has taken place
4.2 The Landlord shall be responsible for rectification prior to completion of
snagging items as advised by the Tenant to the Landlord or its Solicitors
5. The Landlord shall not be required to grant the Lease otherwise than to the
Tenant named herein
6. Title shall be deduced in accordance with Section 110 of the Land
Registration Act 1925 The Landlord's Charge Certificate is on deposit at HM Land
Registry under deposit number BK260648/D/G/010950 D and the Land Certificate
relating to the Common Parts is on deposit under reference BK291692/D/F.070320D
and the Landlord shall ensure that the same shall remain on deposit to enable
the Tenant to register this Agreement if it so wishes.
7. This Agreement shall remain in full force and effect after completion of the
Lease in respect of any matters covenants or conditions which shall not have
been done observed or performed prior thereto and all representations and
obligations of the parties hereto (except for any obligations fully performed on
or before such completion) shall continue in full force and effect
notwithstanding the completion of the Lease
8. Completion shall take place at the offices of the Lessor's solicitors on the
8th day of September 1998
9. The Property is let subject to the National Conditions of Sale 20th Edition
("the Conditions") so far as the same are applicable to an agreement for lease
by private treaty and are not varied by or inconsistent with this Agreement
PROVIDED that:(i) "Designated Bank" shall mean any of the London Clearing Banks
and (ii) the prescribed rate of interest shall be four per centum per annum
above Lloyds Bank Plc Base Rate from time to time in force
10. (a) The expressions "the Landlord" and "the Tenant" wherever the context so
admits include their respective successors in title
(b) Where the Landlord the Tenant for the time being are two or more individuals
the terms "the Landlord" "the Tenant" include the plural number and obligations
expressed or implied to be made by or with such party are deemed to be made by
or with such individuals jointly and severally and where the context so permits
such references shall also apply to any one or more members of such association
of individuals.
(c) Wherever the context so permits all references herein to the singular member
shall include the plural and vice versa and all references to the masculine
gender shall include the feminine and neuter and vice versa
11. Omitted
12. The Landlord shall procure that the Tenant shall have upon completion the
benefit of all professional warranties relating to the construction of the
Property and in particular shall procure that warranties are given by:-
1. The Halson Mackley Partnership
2. The Baldock Quick Partnership
3. Collier and Catley Limited
in the form of those annexed
13. The Landlord upon actual completion and as a condition of completion shall
enter a Deed of Indemnity in the form of that set forth in the Appendix hereto
14. The Tenant shall only be required to complete the Lease if the Landlord can
hand over consent to the letting by Midland Bank plc or such other mortgagee
from time to time and if the same is not forthcoming within one month of the
Completion Date the contract shall be treated as at an end and the Landlord
shall be liable to the Tenant in damages
IN WITNESS the respective parties hereto have duly executed this Agreement as a
Deed the day and year first before written
THE SCHEDULE
Unit Number 35 in Group "C" of the Landlord's Estate known as Wellington
Business Park Crowthorne Berkshire the title to which is registered with
Absolute Title at HM Land Registry under Title Number BK260648 and which
property is more particularly described in the approved draft Lease and for the
purpose of identification only delineated on the plans thereto annexed
SIGNED for and on behalf of
T A FISHER & SONS
LIMITED
Director /s/J. Fisher
SIGNED for and on behalf of SAVILLE
SYSTEMS (UK) LIMITED
/s/Kingsley Napley Solicitors with the authority of Saville Systems (UK) Limited
<PAGE>
DEED OF INDEMNITY dated 8th September 1998
BETWEEN:
(1) T A FISHER & SONS LIMITED (Company Number 02582252) and whose registered
office is at Windmill House Victoria Road Mortimer near Reading RG7 3DF ("the
Landlord"); and
(2) SAVILLE SYSTEMS (UK) LIMITED (Company Number 03487972) whose registered
office is at 60 Bishopsgate Hasilwood House London EC2N 4AJ ("the Tenant"); and
(3) SAVILLE SYSTEMS PLC ("the Guarantor")
In this Deed the following expressions shall where the context so admits have
the meanings ascribed to them:-
"the Agreements and Deeds" shall mean the following documents:
(a) Section 52 Agreement dated 26 June 1987 between Bracknell District Council
(1) Royal County of Berkshire (2) The Wellington College (3) and Higgs and Hill
Homes Limited (4)
(b) Section 52 Agreement dated 24 October 1987 between the Bracknell District
Council (1) Royal County of Berkshire (2) and The Wellington College (3)
(c) Section 38 Agreement dated 21 August 1989 between TA Fisher & Sons Limited
(1) E T Trust Limited (2) and Royal County of Berkshire (3)
(d) Section 52 Agreement dated 30 August 1989 between Bracknell Forest Borough
Council (1) and T A Fisher & Sons Limited (2)
(e) Section 38 Agreement dated 14 August 1991 between T A Fisher (Holdings)
Limited (1) Commercial Bank Trust Plc (2) and Royal County of Berkshire (3)
"the Premises" shall mean all those premises situate at
and known as Unit 35 (8A) at Wellington
Business Park Dukes Ride Crowthorne
Berkshire
"the Charge" shall mean a specific financial
charge registered in the Land Charges
Register at Bracknell Forest Borough Council
dated 20 March 1992 with registration date
of 21 April 1992 where the amount of the
charge is (pound)1,401.00 plus interest at
4.5%. Description of charge: Agreement
Supplemental to Principal Agreement dated 30
August 1989 pursuant to Section 106 of Town
and Country Planning Act 1990.
"the Lease" shall mean a lease dated the date hereof of
the Premises and made between the
landlord and the Tenant
WHEREAS
(A) The Landlord is the registered proprietor of the freehold land on the south
side of Dukes Ride Bracknell as the same is registered at HM Land Registry with
title absolute under Title Number BK260648
(B) The Landlord has agreed to grant to the Tenant the Lease
(C) The Landlord's freehold interest from which is granted the Lease is affected
by the Agreements and Deeds and the Charge and the Landlord for itself and its
successors in title has agreed to indemnify the Tenant against the affects
thereof
(D) This Deed is supplemental to the Lease
(E) The parties have agreed that the Lease shall take effect subject to the
provisions of this Deed
(F) References to the Landlord and the Tenant shall include their respective
successors in title
THIS DEED WITNESSES as follows:-
1. The Lease shall take effect subject to and as varied by this Deed as if the
provisions hereof were set out in extenso therein
2. For the avoidance of doubt it is hereby agreed and declared that save as
otherwise herein expressly provided the obligations of the Landlord hereunder
and the other provisions hereof shall run with and bind the reversionary estate
immediately expectant on the term granted by the Lease with the intent that the
successors in title of the Landlord shall be bound by and be entitled to the
benefit of the provisions hereof
3. The Landlord hereby covenants with the Tenant that the Landlord shall do all
such acts and things as may be necessary to procure that the provisions of this
Deed shall bind its successors in title
4. The Guarantor agrees to the entering into of this Deed
5. The Landlord hereby covenants with the Tenant for itself and its successors
and for the benefit of the Tenant and its successors that the Landlord will at
all times hereafter save harmless and keep indemnified the Tenant from and
against all proceedings costs claims expenses and liabilities whatsoever in
respect of the Agreements and Deeds and the Charge
IN WITNESS WHEREOF the parties have executed this Deed the day and year first
before written
EXECUTED as a deed by
T A FISHER & SONS LIMITED /s/J. Fisher
Director
EXECUTED as a deed by
SAVILLE SYSTEMS (UK) LIMITED /s/Christopher A. Hanson
Director
/s/John J. Boyle, III
Director/Secretary
EXECUTED as a deed by
SAVILLE SYSTEMS PLC /s/John J. Boyle, III
Director
/s/Lisa Miller
Director/Secretary
Exhibit 21.1
SUBSIDIARIES
NAME OF SUBSIDIARY JURISDICTION
Saville Systems Canada, Ltd. Canada
Saville Systems, Inc. United States
Saville Systems (UK) Limited United Kingdom
Saville C.I. Limited Jersey, Channel Islands
Saville Systems Aust. Pty Ltd Australia
2916746 Canada Inc. Canada
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-80607 and 333-39149) of Saville Systems PLC of
our report dated March 2, 1999, appearing on page 32 of this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Dublin, Ireland
March 15, 1999
Exhibit 23.2
CONSENT OF ERNST & YOUNG
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-80607 and 333-39149) pertaining to the 1995 Share Option Plan
and the 1996 Employee Share Purchase Plan of Saville Systems PLC and in the
related Prospectuses of our reports dated January 22, 1998 (except for
Comprehensive Income and Note 15 as to which the date is March 12, 1999) with
respect to the consolidated financial statements of Saville Systems PLC and the
related financial statement schedule as of December 31, 1997 and for the years
ended December 31, 1996 and 1997 incorporated by reference in this Annual Report
(Form 10-K) for the year ended December 31, 1998.
/s/Ernst & Young
Ernst & Young
Galway, Ireland
March 12, 1999
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 40,330
<SECURITIES> 47,492
<RECEIVABLES> 45,672
<ALLOWANCES> 1,943
<INVENTORY> 0
<CURRENT-ASSETS> 136,022
<PP&E> 17,583
<DEPRECIATION> 5,306
<TOTAL-ASSETS> 161,645
<CURRENT-LIABILITIES> 28,016
<BONDS> 1,178
0
48
<COMMON> 97
<OTHER-SE> 131,945
<TOTAL-LIABILITY-AND-EQUITY> 161,645
<SALES> 0
<TOTAL-REVENUES> 167,705
<CGS> 0
<TOTAL-COSTS> 71,525
<OTHER-EXPENSES> 59,591
<LOSS-PROVISION> 3,160
<INTEREST-EXPENSE> 228
<INCOME-PRETAX> 36,793
<INCOME-TAX> 9,741
<INCOME-CONTINUING> 27,052
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,052
<EPS-PRIMARY> 0.70
<EPS-DILUTED> 0.67
</TABLE>
Exhibit 99.2
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of
Saville Systems PLC
We have audited the accompanying consolidated balance sheet of Saville Systems
PLC and its subsidiaries as of December 31, 1997, and the related statements of
income, changes in shareholders' equity and cash flows for the years ended
December 31, 1997 and 1996. Our audits also included the financial statements
schedule listed in the Index at Item 14(a) for the years ended December 31, 1997
and 1996. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Saville Systems PLC
and its subsidiaries at December 31, 1997, and the results of its operations and
its cash flows for the years ended December 31, 1997 and 1996, in conformity
with accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule for the years ended December
31, 1997 and 1996, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
/s/Ernst & Young
Ernst & Young
Galway, Ireland
January 22, 1998
(Except for Comprehensive Income and Note 15 as to which the date is
March 12, 1999)
