UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 0-21874
Berkeley Technology Limited
(Exact name of registrant as specified in its charter)
______________________
Jersey, Channel Islands Not applicable
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
Minden House, 6 Minden Place
St. Helier, Jersey JE2 4WQ
Channel Islands
(Address of principal executive offices, including zip code)
011 44 (1534) 607700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
American Depositary Shares, each representing ten Ordinary Shares of
$0.05 par value per share
Ordinary Shares of $0.05 par value per share *
*Not for trading, but only in connection with the registration of American
Depositary Shares, pursuant to the requirements of the Securities and Exchange
Commission.
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
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 (ss.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated
filer[X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the closing sale price of the Ordinary Shares on June
30, 2005 as reported on the London Stock Exchange (using an exchange rate of
(pound)1.00 = $1.79) was $4,675,526. Ordinary Shares held by each current
executive officer and director and by each person who is known by the registrant
to own 10% or more of the outstanding Ordinary Shares have been excluded
from this computation in that such persons may be deemed to be affiliates of the
registrant. This determination is not necessarily conclusive that these persons
are affiliates of the registrant.
As of March 30, 2006, the registrant had outstanding 64,439,073 Ordinary
Shares, $0.05 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive proxy statement for its Annual General Meeting
of Shareholders to be held on August 31, 2006, is incorporated by reference in
Part III of this Form 10-K.
TABLE OF CONTENTS
PART I Page
Item 1. Business......................................................................................... 1
Item 1A. Risk Factors..................................................................................... 4
Item 1B. Unresolved Staff Comments........................................................................ 5
Item 2. Properties....................................................................................... 5
Item 3. Legal Proceedings................................................................................ 5
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 6
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities......................................................................... 6
Item 6. Selected Financial Data.......................................................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....................................... 20
Item 8. Financial Statements and Supplementary Data...................................................... 22
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. 60
Item 9A. Controls and Procedures.......................................................................... 60
PART III
Item 10. Directors and Executive Officers of the Registrant............................................... 60
Item 11. Executive Compensation........................................................................... 61
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.......................................................................... 61
Item 13. Certain Relationships and Related Transactions................................................... 61
Item 14. Principal Accountant Fees and Services........................................................... 61
PART IV
Item 15. Exhibits and Financial Statement Schedules ...................................................... 62
Signatures ................................................................................................. 72
Exhibit Index............................................................................................... 73
As used herein, the terms "registrant," "Company," "we," "us" and "our"
refer to Berkeley Technology Limited. Except as the context otherwise requires,
the term "Group" refers collectively to the registrant and its subsidiaries.
Forward-Looking Statements and Factors That May Affect Future Results
Statements contained in this Annual Report on Form 10-K that are not
historical facts, including, but not limited to, statements found in Item 1
"Business," Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Item 7A "Quantitative and Qualitative Disclosures
About Market Risk," are forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Such forward-looking statements are based on current expectations, estimates,
forecasts and projections about the industries in which we operate, management's
current beliefs and assumptions made by management. Words such as "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates," "goals,"
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions that are
difficult to predict. Future outcomes and results may differ materially from
what is expressed or forecasted in such forward-looking statements. We undertake
no obligation to update any forward-looking statements, whether as a result of
new information, future developments or otherwise.
PART I
Item 1. BUSINESS
OVERVIEW
We are a financial services company based in Jersey, Channel Islands, with
an office in San Francisco, specializing in venture capital and consulting
primarily in the telecommunications industry. We represent Silicon Valley
telecommunications equipment companies in dealing with large incumbent European
and Japanese telecommunications companies. Our objective is to use consulting
revenues and expense reimbursements to finance the development of large
telecommunications company relationships, which could eventually lead to equity
based transactions, with fees or direct investment opportunities for the Group.
We are also considering the possibility of new venture funds in partnership with
international sources of capital.
The impact of poor equity and bond market conditions in 2001 and 2002
resulted in a significant contraction of our operations and capital base. We
continue to service the policyholders of London Pacific Assurance Limited
("LPAL") in Jersey, but new policies have not been sold since July 2002 to avoid
the capital requirements related to the sale of new policies.
The Company was incorporated in 1985 in Jersey, Channel Islands and is
listed on the London Stock Exchange ("LSE"). Our Ordinary Shares currently trade
under the symbol "BEK.L." American Depositary Receipts ("ADRs") representing our
Ordinary Shares began trading in the U.S. market in 1992. Our ADRs currently
trade on the Over-the-Counter ("OTC") Bulletin Board under the symbol
"BKLYY.PK." Each ADR represents ten Ordinary Shares.
BUSINESS SEGMENTS
We currently have two business segments that we operate through our
subsidiaries: venture capital and consulting, and life insurance and annuities.
Our principal operating subsidiaries, by business segment and location, are set
forth below:
Principal Subsidiaries Business Segment Location
- ------------------------------------------ ------------------------------ ------------------
Berkeley International Capital Corporation Venture capital and consulting San Francisco, California
Berkeley International Capital Limited Venture capital Guernsey, Channel Islands
London Pacific Assurance Limited Life insurance and annuities Jersey, Channel Islands
1
See Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations by Business Segment" and Note 17
to the Consolidated Financial Statements in Item 8 of this Form 10-K for a
summary of our financial information by business segment and geographical
location.
Venture Capital and Consulting
Berkeley International Capital Corporation ("BICC") and Berkeley
International Capital Limited ("BICL") comprise our venture capital and
consulting business. In past years, our venture capital and consulting
subsidiaries focused primarily on U.S. high technology companies, with
investments generally ranging from $5 million to $25 million.
After the impact of equity and bond losses in 2001 and 2002 on our
operations and capital base, we have not made any further venture capital
investments. Our current venture capital strategy is focused on identifying
opportunities where we can assist private technology companies in locating
investment capital. In select situations, we may also invest our own capital.
Our consulting activities are continuing to grow as we add new clients who
engage us to assist them with their European and Asian business strategies.
Berkeley International Capital Corporation
BICC is primarily responsible for our activities in the venture capital and
consulting areas. Currently, this involves working with North American
technology companies that are looking to grow their businesses or to expand
their investor base overseas, primarily in Europe and Japan. We advise on
overseas operations, assist in locating partners, customers and investment
capital, and occasionally will take principal positions where the case is
compelling and the timeframe for realization could be relatively short.
Typically, BICC seeks a retainer (monthly or upfront depending on the
nature of the assignment) from its North American technology company clients for
its consulting work, and a "success fee" upon the successful conclusion of its
assignment. The consulting work may involve assistance in the preparation of a
business plan; market research; strategy development; identification of
customers and/or investor prospects; introductory meetings with prospective
customers or investors; and assistance in the implementation of the chosen
strategy or transaction.
BICC currently provides its services to four clients, and is in discussions
with additional prospects. As an example of its work, BICC was engaged by a
North American telecommunications equipment company to develop a business
strategy for penetration of the European and Japanese markets. This engagement
involved detailed market and prospect research and meetings with potential
clients that may lead to substantial business for the client company. Another
example of BICC's work is an engagement involving the preparation of a business
plan, reviewing financing structures and introducing investors who could finance
a European sales and customer support initiative for a U.S. telecommunications
equipment company.
BICC has a long history and experience in both the U.S. technology industry
and the overseas investment and business markets. It is well positioned to
benefit from the globalization forces that are at work in the industry and that
are challenging so many young technology companies. It can also provide overseas
investors and businesses with the access they desire to U.S. businesses,
technologies and potential sources of funding.
Over the past 26 years, BICC arranged over $1.9 billion of placements in
the private capital markets. Placements were typically arranged in later stage
technology companies, which were near alpha test of their product and needed to
scale up their engineering, marketing and sales infrastructure. Within this
strategy, BICC has been able to identify many promising young technology
companies that have grown in prominence in their fields and gone on to
successful public offerings or acquisition transactions. Many of the companies
are headquartered in close proximity to BICC's offices which allows for easier
access to the companies' management. Most of these companies specialize in
telecommunications (both central office and customer premises), data
communications, software, semiconductors and knowledge learning. These
placements included investments in 3Com, Acuson, Adaptec, Altera, America
Online, Atmel, Cadence Design Systems,
2
Cirrus Logic, Cypress Semiconductor, Flextronics, IDT, Linear Technology, LSI
Logic, Nellcor, Oracle, PMC Sierra and Packeteer, Inc.
Of the private technology investments arranged by BICC, one investment,
Alacritech, Inc., is currently held by LPAL.
Berkeley International Capital Limited
BICL, formed in 1988 and based in Guernsey, Channel Islands, takes
principal positions in connection with private equity transactions arranged by
its sister company, BICC. These private equity positions may become listed
equity securities pursuant to IPOs or in connection with the acquisition of the
private issuing company by a listed company. As of December 31, 2003, BICL held
$3.4 million of such positions in listed equity securities. During 2004, BICL
sold all of its listed equity securities.
Competition
Our venture capital and consulting business faces competition primarily
from commercial banks, investment banks, venture capital firms, insurance
companies, hedge funds and consulting firms, many of which have substantially
greater financial resources. The marketplace for venture capital and consulting
is highly competitive, and demand for services is also influenced by economic
and stock market conditions. The pool of capital seeking opportunities to invest
in later stage technology companies has contracted over the last several years,
but we believe demand continues for high value technology companies.
Life Insurance and Annuities
Formed in 1999, our Jersey, Channel Islands insurance subsidiary, LPAL, has
principally been engaged in marketing and servicing investment oriented
insurance products. LPAL sold Sterling, U.S. dollar and Euro guaranteed return
bonds in its home market of Jersey, Channel Islands, and in the U.K., Guernsey,
Isle of Man and other permitted jurisdictions. The products guarantee both
capital and yield for the duration of the investment period, which are typically
three or five years. From LPAL's start of operations in the first quarter of
2000 through the end of June 2002, LPAL generated premiums totaling $135.0
million. LPAL generated sales directly to the public and through financial
intermediaries in the Channel Islands, U.K., Isle of Man and other international
locations.
On July 2, 2002, we announced that LPAL would discontinue writing new
policies effective immediately. The decision to discontinue the issuance of
policies was made to avoid the increased capital requirements created by
additional policyholder liabilities. Subsequent to this announcement, LPAL
policy surrenders increased substantially. The number of policyholders fell from
2,603 at June 30, 2002 to 925 at December 31, 2002. The primary financial impact
of the high level of surrenders was the reduction in the level of capital
required to support the policyholder liabilities. The number of policyholders
continued to decline to 347 at December 31, 2005; however, much of the decline
during 2003, 2004 and 2005 was attributable to policy maturities rather than
policy surrenders.
We have no plans currently for LPAL to write new policies.
LPAL's strategy for its investment portfolio has been to at least match the
level of policyholder liabilities with corporate bonds and cash. At December 31,
2005, policyholder liabilities totaled $13.6 million and the market value of
LPAL's corporate bonds, cash and accrued interest totaled $23.7 million. In
addition, LPAL's portfolio included private equities valued at $0.8 million at
December 31, 2005.
REGULATION
London Pacific Assurance Limited
LPAL is regulated by the Jersey Financial Services Commission ("JFSC").
Under Article 6 of the Insurance Business (Jersey) Law 1996, LPAL is permitted
to conduct long-term insurance business. LPAL is
3
required to submit annual audited financial statements (prepared under United
States generally accepted accounting principles as permitted by regulation), and
an audited annual filing to the JFSC in the format consistent with that required
by the Financial Services Authority in the United Kingdom. The annual filing
submitted by LPAL must be accompanied by a Certificate from the Appointed
Actuary that based on sufficiently prudent assumptions, assets are sufficient to
cover all liabilities. The annual filing contains a report from the Appointed
Actuary on the matching of investments to liabilities.
The JFSC sets out the conditions with which LPAL must comply and determines
the reporting requirements and the frequency of reporting. These conditions
require that: (i) LPAL must hold, at all times, approved assets at least equal
to the long-term insurance fund plus the required minimum solvency margin, (ii)
the margin of solvency must be the greater of (pound)50,000 or 2.5% of the value
of the long-term business fund, and (iii) assets equal to not less than 90% of
liabilities must be placed with approved independent custodians. As of December
31, 2005, LPAL met all of these conditions.
LPAL is also required under the insurance laws to appoint an actuary. The
actuary must be qualified as defined under the laws and is required to supervise
the long-term insurance fund. No transfers, except in satisfaction of long-term
insurance business liabilities, including dividends, are permitted from the
long-term insurance fund without written consent from the actuary.
Group
Our Chief Financial Officer and in-house attorney are responsible for
managing our subsidiaries' compliance with applicable regulatory requirements.
Although the scope of regulation and form of supervision to which our
subsidiaries are subject, as described above, may vary from jurisdiction to
jurisdiction, the applicable laws and regulations often are complex and
generally grant broad discretion to supervisory authorities in adopting
regulations and supervising regulated activities. Our continuing ability to
engage in businesses in the jurisdictions in which our subsidiaries currently
operate is dependent upon compliance with the rules and regulations promulgated
from time to time by the appropriate authorities in each of these jurisdictions.
The burden of such regulation weighs equally upon all companies carrying on
activities similar to those of our subsidiaries, and we do not consider such
regulations to adversely affect the competitive position of our subsidiaries.
EMPLOYEES
As of December 31, 2005, we had 9 employees. The breakdown by business
segment is as follows: venture capital and consulting, 4; life insurance and
annuities, 2; and corporate, 3.
None of our employees are covered by a collective bargaining agreement and
we have not experienced any work stoppages.
Item 1A. RISK FACTORS
Ability to Rebuild Our Venture Capital and Consulting Business
There is a risk that we will not be able to rebuild our venture capital and
consulting business significantly over the next two to three years. Our
objective is to use consulting revenues and expense reimbursements to finance
the development of large telecommunications company relationships which will
eventually lead to equity based transactions, with fees or direct investment
opportunities for our Group. There is also the possibility of new venture funds
raised in partnership with international sources of capital leading to
management fees and carried interests. However, the venture capital and
consulting market is highly competitive with significantly larger participants,
and thus there is no assurance that we will be successful in our strategy.
4
Lack of Profitable Operations in Recent Years
There is a risk that we will not be able to return to profitability after a
period of operating losses in recent years. We are earning consulting revenues
and investment income, and we have reduced operating costs considerably.
However, operating losses in future periods will continue to erode our available
capital base.
Lack of Liquidity for Our Shares and ADRs
The Company's ADRs are not traded on a major stock exchange. Our ADRs can
be bought or sold on the OTC Bulletin Board, but liquidity is extremely limited.
Our Ordinary Shares are listed on the London Stock Exchange, but liquidity is
also limited. Due to this lack of liquidity, there is a risk that our shares or
ADRs cannot be sold without an adverse affect on the price.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
We currently operate from two offices located in Jersey (Channel Islands)
and San Francisco, California, consisting of approximately 3,000 and 3,800
square feet, respectively. We lease both offices. These leases expire in
September 2010 and October 2006, respectively. Our life insurance and annuities
segment operations, as well as our head office corporate activities, are carried
out in the Jersey office. Our venture capital and consulting operations, as well
as our U.S. corporate activities, are carried out in the San Francisco office.
The Jersey office is too large for our current level of business and staffing,
and we are currently evaluating sublease options.
See Note 11 to the Consolidated Financial Statements in Item 8 of this Form
10-K for further information regarding our leases.
Item 3. LEGAL PROCEEDINGS
On February 17, 2005, SunGard Business Systems Inc. ("SunGard") filed a
lawsuit in the U.S. District Court in Philadelphia against the Company and
certain of its subsidiaries. SunGard's complaint alleged losses in an amount
equal to at least $7.2 million resulting from alleged breaches of
representations and warranties contained in the May 2003 agreement governing the
sale to SunGard of London Pacific Advisors, our financial advisory services
business.
On April 27, 2005, we filed a lawsuit against SunGard and certain of its
affiliates in California Superior Court in San Francisco ("the Court") accusing
SunGard of wrongful conduct and seeking payment of $1.0 million of the initial
purchase consideration which is currently held in an escrow account, up to $8.0
million in additional earnout payments, and further damages for SunGard's prior
wrongful actions. We are also asking the Court to award us compensatory,
exemplary and punitive damages.
We also filed a motion to dismiss, for lack of subject matter jurisdiction,
SunGard's lawsuit against us in Pennsylvania. SunGard then voluntarily dismissed
its federal action against us and filed a new complaint in the court of Common
Pleas, Chester County, Pennsylvania. This new complaint alleges essentially the
same claims against the same parties that were contained in SunGard's federal
action. Based upon substantial document discovery and deposition testimony
already completed, and ongoing consultation with our legal advisors, we believe
that there is no merit to SunGard's claims against us, and we will continue to
vigorously defend ourselves.
5
On June 3, 2005, SunGard filed a motion to dismiss or stay our California
Superior Court action on jurisdictional grounds. On July 26, 2005, the
California court denied SunGard's motion. On August 25, 2005, SunGard appealed
that decision. Its appeal was summarily denied by the California court of
appeals on September 22, 2005. In response, on October 12, 2005, SunGard filed a
motion seeking to dismiss 13 of the 14 claims contained in our California
complaint. On January 3, 2006, the Court heard this motion and dismissed three
of our claims, and allowed us to amend six of our remaining claims. On January
6, 2006, we lodged an 11-count amended complaint which amended and supplemented
our claims based upon the substantial document discovery we have now received
from SunGard. SunGard responded by filing another motion, this time to dismiss
nine of our 11 claims. SunGard also sought to seal our amended complaint from
public view. On March 1, 2006, the Court heard SunGard's motions and dismissed
four of our 11 claims. The Court then ordered SunGard to answer our seven
remaining claims within 20 days of its March 14, 2006 order. The Court also
denied SunGard's motion to seal our amended complaint.
On June 10, 2005, we filed a petition to dismiss SunGard's complaint in the
Pennsylvania court. That motion has not yet been heard.
Costs relating to the above matters are recognized in our statement of
operations as they are incurred.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to our shareholders during the quarter ended
December 31, 2005.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
The principal trading market for our Ordinary Shares is the LSE, under the
symbol "BEK.L," on which such shares have been listed since February 1985. ADSs,
each representing ten Ordinary Shares, are evidenced by ADRs for which The Bank
of New York is the Depositary. Our ADSs have traded in the United States from
September 1992 through August 1993 on the OTC Bulletin Board, from September
1993 through November 1999 on The Nasdaq Stock MarketSM under the symbol "LPGL,"
from November 1999 through July 3, 2002 on the New York Stock Exchange ("NYSE")
under the symbol "LDP," from July 12, 2002 through June 15, 2003 on the OTC
Bulletin Board under the symbol "LDPGY.PK" and since June 16, 2003 on the OTC
Bulletin Board under the symbol "BKLYY.PK." As of December 31, 2005, there were
64,439,073 Ordinary Shares outstanding of which 13,107,960, or 20.3%, were
represented by 1,310,796 ADSs. ADS holders may exercise their voting rights
through the ADR Depositary.
In June 2002, we completed a one-for-ten reverse split of our ADSs. On June
24, 2002, every ten of our ADSs issued and outstanding were converted and
reclassified into one post-split ADS. Consequently, effective from the opening
of business on June 24, 2002, each ADS is equal to ten Ordinary Shares.
Fractional new ADSs were sold by the Depositary Bank and paid in cash to the ADR
holders. This ADS split did not affect our Ordinary Shares listed on the LSE.
On July 9, 2002, trading of our ADRs was suspended and the securities were
withdrawn from listing and registration on the NYSE due to a fall in price below
the minimum permitted by the NYSE. As a result of the delisting, the liquidity
of our common stock and its price were adversely affected. These actions may
limit our ability to raise additional capital in the future, and there is no
assurance that a significant trading market for the ADRs will develop. If an
active trading market does not develop, ADR holders may be unable to sell their
ADRs.
6
Subsequent to the delisting, the ability of ADR holders to buy and sell is
limited to trading on the OTC Bulletin Board. Shares traded on the OTC market
generally experience lower trading volume than those traded on the organized
exchanges. The trading volume of the ADRs has decreased substantially since the
NYSE delisting and the transfer of the ADRs to the OTC Bulletin Board.
The following table shows, for the quarters indicated, the reported highest
and lowest middle market quotations (which represent an average of bid and asked
prices) for our Ordinary Shares on the LSE, based on its Daily Official List,
and the high and low trade price information of the ADSs as obtained from the
OTC Bulletin Board:
LSE OTC Bulletin Board
Pounds Per U.S. Dollars
Ordinary Share Per ADS
----------------------- ----------------------
High Low High Low
--------- --------- --------- ---------
2004:
First quarter................................................. 0.15 0.14 2.60 2.00
Second quarter................................................ 0.15 0.14 2.55 2.25
Third quarter................................................. 0.14 0.11 2.60 2.05
Fourth quarter................................................ 0.13 0.10 2.10 1.70
2005:
First quarter................................................. 0.11 0.09 1.95 1.50
Second quarter................................................ 0.10 0.08 1.65 1.40
Third quarter................................................. 0.10 0.07 1.50 1.20
Fourth quarter................................................ 0.09 0.06 1.25 0.70
Holders
As of February 28, 2006, we had approximately 1,425 Ordinary shareholders
of record and 62 ADS holders of record. Because many Ordinary Shares and ADSs
are held by brokers and various institutions on behalf of other holders, we are
unable to estimate the total number of beneficial holders represented by these
holders of record.
Dividends
Until 2002, we paid dividends on our Ordinary Shares in every year since we
became listed on the LSE in 1985. Dividends on our Ordinary Shares were paid
twice a year. In view of our requirement to conserve cash in order to meet the
operating needs and growth opportunities of the business, we did not pay an
interim or final dividend for 2004 or an interim dividend for 2005. Our Board of
Directors will not be recommending a final dividend for the year 2005.
Holders of ADSs are entitled to receive dividends paid, if any, on our
Ordinary Shares through the ADR Depositary.
Under current practice, holders of ADSs who are residents of the United
States for tax purposes receive the net dividend (the gross dividend less the
associated Jersey income tax). See "Taxation - Taxation of Dividends" below.
Currently, Jersey does not have exchange control restrictions on the
payment of dividends on the Ordinary Shares or on the conduct of the Group's
operations. See Note 8 to the Consolidated Financial Statements in Item 8 of
this Form 10-K for details regarding regulatory restrictions on dividends.
7
TAXATION
The following summary of certain Jersey and U.S. tax consequences regarding
share ownership is based on law and published practice as of February 28, 2006,
and is subject to any changes in Jersey and U.S. law or published practice or in
the establishment of any double taxation convention between Jersey and the U.S.
occurring after that date. The summary is not a complete analysis or listing of
all the possible tax consequences and does not address the tax implications for
special classes of holders, such as banks, insurance companies and dealers in
securities. The summary also does not address U.S. state income tax
consequences. Owners of Ordinary Shares and ADSs should consult their own tax
advisors as to the tax consequences of such ownership.
There is no double tax treaty or similar convention between the U.S. and
Jersey. For the purposes of the U.S. Internal Revenue Code of 1986, as amended,
it is assumed that beneficial owners of ADSs, in accordance with the terms of
the Deposit Agreement, will be treated as the owners of the underlying Ordinary
Shares represented by the ADSs.
Taxation of Dividends
Dividends are declared gross in U.S. dollars. Dividends paid by the Company
are treated as having suffered Jersey income tax at the standard rate (currently
20%) on the gross amount thereof.
Charities, superannuation funds and certain assurance companies in the
U.K., together with individual investors who are not resident in Jersey, may be
entitled to a full or partial repayment of the Jersey income tax credit suffered
on distributions, on submission of a claim to the Jersey Comptroller of Income
Tax. Shareholders who are unsure of their tax position should consult their tax
advisor.
Generally, the net dividend paid to a holder or owner who is a U.S.
citizen, a U.S. resident, a U.S. domestic corporation or a trust or estate whose
income is subject to U.S. federal income taxation regardless of source (a "U.S.
holder") will be included in gross income and treated as foreign source dividend
income for U.S. federal income tax purposes to the extent payment is made out of
the Company's current or accumulated earnings and profits as determined under
U.S. federal income tax principles. Such dividends generally will not be
eligible for the "dividends received" deduction permitted to be taken by U.S.
corporations.
However, special rules apply for purposes of determining the dividend
income and potential foreign tax credits available to a U.S. corporation that
controls 10% or more of the Company's voting stock. Any such shareholder should
consult its tax advisor with respect to the U.S. interest in the Company.
Taxation of Capital Gains
Currently, there are no Jersey taxes levied on capital gains. A U.S. holder
that sells or exchanges an ADR or Ordinary Share will generally recognize a gain
or loss for U.S. federal income tax purposes, in an amount equal to the
difference between the amount realized and the holder's tax basis in either the
ADS represented by the ADR or the Ordinary Share. Such a gain or loss will
generally be a capital gain or loss if the ADR or the Ordinary Share was a
capital asset in the hands of the U.S. holder and will generally be a long-term
capital gain or loss if the ADR or Ordinary Share was held for more than one
year (including, in the case of an ADR, the period during which the Ordinary
Shares surrendered in exchange therefore were held). In general, the long-term
capital gain of a non-corporate U.S. holder is subject to a maximum tax rate of
20% if the ADRs or Ordinary Shares were sold before May 6, 2003. Under certain
conditions, an 18% capital gains tax rate is available if the holder made a
certain election for shares held on December 31, 2000. If the ADRs or Ordinary
Shares were sold after May 5, 2003, the maximum tax rate is 15%.
Backup Withholding Tax
A U.S. holder may be subject to U.S. backup withholding tax (currently at a
rate of 30%) with respect to dividends received or gross proceeds from the sale
of ADRs or Ordinary Shares unless the holder provides a taxpayer identification
number and certain certifications or otherwise establishes an exemption from
backup
8
withholding. Certain classes of persons, such as corporations, are exempt from
backup withholding. Backup withholding is not an additional tax; the amount
withheld may be credited against the holder's U.S. federal income tax liability,
and a refund of any excess may be obtained from the U.S. Internal Revenue
Service.
Estate and Gift Tax
No death, estate, gift, inheritance or capital transfer taxes are levied in
Jersey.
Stamp Duty and Stamp Duty Reserve Tax
No U.K. stamp duty should be payable on any transfer of an Ordinary Share,
or of an ADS, provided it is executed and retained outside the U.K. Therefore, a
transfer of an ADS in the United States would not ordinarily give rise to a U.K.
stamp duty charge.
An instrument transferring Ordinary Shares, or an ADS, could be subject to
U.K. stamp duty if its execution relates to anything done or to be done in the
U.K. For example, a U.K. stamp duty may apply if such instrument is executed in
the U.K. or is brought into the U.K. after execution. If the transfer is on a
sale then the rate of stamp duty will be 0.5% of the consideration given. This
charge is rounded up to the nearest (pound)5. Gifts and other transfers which
are neither sales, nor made in contemplation of a sale, are not subject to this
charge. Instead, they will either be exempt or subject to a fixed duty of
(pound)5 per transfer.
A transfer from the Depositary to an ADS holder of the underlying Ordinary
Shares may be subject to a fixed stamp duty of (pound)5 if the instrument of
transfer relates to anything done or to be done in the U.K. For example, a fixed
stamp duty of (pound)5 may apply if such transfer is executed in the U.K. or is
to be brought into the U.K. after execution. A transfer of Ordinary Shares from
the Depositary directly to a purchaser on behalf of an ADS holder may be subject
to a stamp duty at a rate of 0.5% of the consideration (rounded up to the
nearest (pound)5) if execution of the instrument of transfer relates to anything
done or to be done in the U.K.; for example, if such transfer is executed in the
U.K. or is to be brought into the U.K. after execution.
U.K. stamp duty reserve tax may not be payable on an agreement to transfer
the Ordinary Shares or ADSs.
EQUITY COMPENSATION PLANS
Information regarding our equity compensation plans is presented in Item 12
of this Form 10-K.
WARRANTS
On November 11, 2002, we agreed to grant 1,933,172 warrants to subscribe
for our Ordinary Shares to Bank of Scotland in connection with the extension of
our credit facility (which was fully repaid and terminated in June 2003). The
warrants were granted on February 14, 2003 and have an exercise price of
(pound)0.1143 (based on the average of the closing prices of the Ordinary Shares
over the trading days from November 1, 2002 through November 11, 2002), which
was higher than the market price of (pound)0.09 on November 11, 2002. These
warrants are exercisable at any time prior to February 14, 2010.
9
Item 6. SELECTED FINANCIAL DATA
The following is a summary of selected financial data for the Group. This
data should be read in conjunction with the audited consolidated financial
statements, and the notes thereto, presented in Item 8 "Financial Statements and
Supplementary Data" of this Form 10-K. ADS amounts have been restated to reflect
the one-for-ten reverse split in June 2002.
Years Ended/As of December 31,
----------------------------------------------------------
2005 2004 2003 2002 (2) 2001 (2)
---------- ---------- ---------- ---------- ----------
(In thousands, except per share and ADS data)
Operating Results
Revenues from continuing operations, including net realized
and change in net unrealized investment gains and losses $ 2,093 $ (5,759) $ 9,198 $ (33,337) $ (194,376)
Income (loss) from continuing operations before income
taxes................................................ (3,235) (11,851) 1,047 (54,478) (221,033)
Income tax expense (benefit) on continuing operations... 12 290 (42) 1,291 2,107
Income (loss) from discontinued operations.............. - - 9,965 (154,678) (180,194)
Income tax expense (benefit) on discontinued operations. - - 38 (4,943) (58,550)
Net income (loss)....................................... (3,247) (12,141) 11,016 (205,504) (344,784)
Basic earnings (loss) per share:
Continuing operations................................ (0.06) (0.24) 0.02 (1.10) (4.38)
Discontinued operations.............................. - - 0.20 (2.95) (2.38)
---------- ---------- ---------- ---------- ----------
Total basic earnings (loss) per share................... (0.06) (0.24) 0.22 (4.05) (6.76)
Diluted earnings (loss) per share:
Continuing operations................................ (0.06) (0.24) 0.02 (1.10) (4.38)
Discontinued operations.............................. - - 0.20 (2.95) (2.38)
---------- ---------- ---------- ---------- ----------
Total diluted earnings (loss) per share................. (0.06) (0.24) 0.22 (4.05) (6.76)
Basic earnings (loss) per ADS:
Continuing operations................................ (0.64) (2.39) 0.21 (10.99) (43.77)
Discontinued operations.............................. - - 1.96 (29.50) (23.85)
---------- ---------- ---------- ---------- ----------
Total basic earnings (loss) per ADS..................... (0.64) (2.39) 2.17 (40.49) (67.62)
Diluted earnings (loss) per ADS:
Continuing operations................................ (0.64) (2.39) 0.21 (10.99) (43.77)
Discontinued operations.............................. - - 1.94 (29.50) (23.85)
---------- ---------- ---------- ---------- ----------
Total diluted earnings (loss) per ADS................... (0.64) (2.39) 2.15 (40.49) (67.62)
Financial Position
Cash and total investments (continuing operations)...... 32,840 43,279 61,944 69,378 262,058
Total assets............................................ 33,803 44,707 63,513 80,217 2,539,126
Bank debt............................................... - - - 9,314 36,874
Guarantees under bank facility.......................... - - - 10,590 -
Shareholders' equity.................................... 19,603 22,893 34,897 21,486 221,653
Book value per share (1)................................ 0.39 0.45 0.69 0.42 4.37
Book value per ADS (1).................................. 3.85 4.51 6.88 4.23 43.68
Ordinary Share and ADS Data
Ordinary Shares outstanding as of December 31........... 64,439 64,439 64,439 64,439 64,439
Weighted-average shares used in:
Basic earnings per share calculation................. 50,917 50,754 50,754 50,753 50,984
Diluted earnings per share calculation............... 50,917 50,754 51,188 50,753 50,984
Total dividends per share relating to the year (gross).. $ - $ - $ - $ - $ 0.16
Total dividends per ADS relating to the year............ $ - $ - $ - $ - $ 1.28
Market price per share on December 31................... (pound)0.06 (pound)0.11 (pound)0.14(pound)0.055 (pound)2.60
Market price per ADS on December 31..................... $ 0.70 $ 1.70 $ 2.51 $ 0.50 $ 39.60
Market capitalization as of December 31................. $ 6,706 $ 13,115 $ 16,148 $ 5,706 $ 244,611
<FN>
(1) Based on the net asset value of the Group after deducting the cost of the shares held by the employee benefit trusts, and on
the number of shares outstanding excluding the shares held by the employee benefit trusts.
(2) Reclassifications have been made related to discontinued operations. The Group's financial advisory services and asset
management businesses were sold in 2003, and the Group's U.S. life insurance company was deconsolidated in 2002.
</FN>
10
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the audited
consolidated financial statements, and the notes thereto, presented in Item 8
"Financial Statements and Supplementary Data" of this Form 10-K. The
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States. This item should also be
read in conjunction with the "Forward-Looking Statements and Factors That May
Affect Future Results" which are set forth below and in our other filings with
the SEC.
Forward-Looking Statements and Factors That May Affect Future Results
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this Form 10-K contain
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking statements are based on
current expectations, estimates, forecasts and projections about the industries
in which we operate, management's current beliefs and assumptions made by
management. Words such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates," "goals," variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions that are difficult to predict. Future outcomes and
results may differ materially from what is expressed or forecasted in such
forward-looking statements. We undertake no obligation to update any
forward-looking statements, whether as a result of new information, future
developments or otherwise.
Factors that could cause or contribute to deviations from the
forward-looking statements include those discussed in this section, elsewhere in
this Form 10-K and in our other filings with the SEC. The factors include, but
are not limited to, (i) the risks described in Item 7A "Quantitative and
Qualitative Disclosures About Market Risk," (ii) variations in demand for our
products and services, (iii) the success of our new products and services, (iv)
significant changes in net cash flows in or out of our businesses, (v)
fluctuations in the performance of debt and equity markets worldwide, (vi) the
enactment of adverse state, federal or foreign regulation or changes in
government policy or regulation (including accounting standards) affecting our
operations, (vii) the effect of economic conditions and interest rates in the
U.S., the U.K. or internationally, (viii) the ability of our subsidiaries to
compete in their respective businesses, (ix) our ability to attract and retain
key personnel, and (x) actions by governmental authorities that regulate our
businesses, including insurance commissions.
11
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
Income before income taxes for our reportable operating segments, based on
management's internal reporting structure, is as follows:
Years Ended December 31,
----------------------------------
2005 2004 2003
---------- ---------- ----------
(In thousands)
Income (loss) from continuing operations before income taxes
by operating segment:
Venture capital and consulting .............................................. $ (584) $ (1,365) $ 3,571
Life insurance and annuities ................................................ (701) (8,091) 1,577
---------- ---------- ----------
(1,285) (9,456) 5,148
Reconciliation of segment amounts to consolidated amounts:
Interest and other fee income................................................ 366 125 53
Corporate expenses........................................................... (2,312) (2,415) (3,478)
Interest expense............................................................. (4) (105) (676)
---------- ---------- ----------
Consolidated income (loss) from continuing operations before
income taxes............................................................... $ (3,235) $ (11,851) $ 1,047
---------- ---------- ----------
---------- ---------- ----------
Business segment data contained in Note 17 to the Consolidated Financial
Statements in Item 8 of this Form 10-K should be read in conjunction with this
discussion. A detailed discussion of the results for each reportable segment
follows.
Venture Capital and Consulting
Certain information regarding our venture capital and consulting segment's
results of operations is as follows:
Years Ended December 31,
----------------------------------
2005 2004 2003
---------- ---------- ----------
(In thousands)
Revenues and net investment gains (losses):
Consulting fees.............................................................. $ 536 $ 490 $ -
Net realized investment gains (losses)....................................... - 2,010 (2,107)
Change in net unrealized investment gains and losses on
trading securities........................................................ (1) (2,625) 6,794
---------- ---------- ----------
Total revenues and net investment gains (losses)............................. 535 (125) 4,687
Operating expenses........................................................... 1,119 1,240 1,116
---------- ---------- ----------
Income (loss) from continuing operations before income taxes................. $ (584) $ (1,365) $ 3,571
---------- ---------- ----------
---------- ---------- ----------
2005 compared to 2004
In 2005, the venture capital and consulting segment contributed a loss
before income taxes of $0.6 million to our overall loss from continuing
operations before income taxes, compared to a loss before taxes of $1.4 million
in 2004. The loss for 2005 was attributable to an excess of operating expenses
over consulting fee income. The 2004 results were attributable to net realized
and unrealized investment losses on listed equity securities of $0.6 million, in
addition to a $0.8 million excess of operating expenses over consulting fee
income.
12
Operating expenses in 2005 were $1.1 million, compared to $1.2 million in
2004. The $0.1 million decrease was attributable primarily to a reduction in
staff costs and facility expenses. The decrease reflects our overall efforts to
reduce operating costs.
2004 compared to 2003
In 2004, the venture capital and consulting segment contributed a loss
before income taxes of $1.4 million to our overall loss from continuing
operations before income taxes, compared to income before taxes of $3.6 million
in 2003. The 2003 results were attributable primarily to net realized and
unrealized investment gains and losses on listed equity securities. During 2004,
we began earning fee income by advising a small number of North American
technology companies. Consulting fees of $490,000 were earned; however, this
income did not cover all of the operating expenses of the segment.
The change in net unrealized gains and losses in the listed equity trading
portfolio during 2004 was a loss of $2.6 million, which was partially offset by
net realized gains of $2.0 million. The trading portfolio decreased from $3.4
million as of December 31, 2003 to $0.1 million as of December 31, 2004. We sold
most of our trading positions during 2004, which resulted in net realized gains
of $1.9 million based on an aggregate original cost of $0.8 million. All
intersegmental investment gains and losses have been eliminated in our
consolidated statements of operations.
Operating expenses in 2004 were $1.2 million, compared to $1.1 million in
2003. The $0.1 million increase was attributable primarily to additional staff
costs, reflecting the additional resources required to redevelop our venture
capital and consulting business.
Life Insurance and Annuities
Certain information regarding our life insurance and annuities segment's
results of operations is as follows:
Years Ended December 31,
----------------------------------
2005 2004 2003
---------- ---------- ----------
(In thousands)
Revenues and net investment gains (losses):
Investment income............................................................ $ 1,213 $ 1,295 $ 1,834
Insurance policy charges..................................................... 4 4 6
Net realized investment gains (losses)....................................... (43) 1,273 (38,329)
Change in net unrealized investment gains and losses on
trading securities........................................................ 18 (8,331) 40,947
---------- ---------- ----------
Total revenues and net investment gains (losses)............................. 1,192 (5,759) 4,458
Expenses:
Amounts credited on insurance policyholder accounts.......................... 980 1,358 1,922
General and administrative expenses.......................................... 913 974 959
---------- ---------- ----------
Total expenses............................................................... 1,893 2,332 2,881
---------- ---------- ----------
Income (loss) from continuing operations before income taxes................. $ (701) $ (8,091) $ 1,577
---------- ---------- ----------
---------- ---------- ----------
As previously disclosed in our 2002 through 2004 Annual Reports on Form
10-K, on July 2, 2002, we announced that LPAL would discontinue writing new
policies effective immediately. The decision to discontinue the issuance of new
policies was made to avoid the increased capital requirements created by
additional policyholder liabilities. Subsequent to this announcement, LPAL
policy surrenders increased substantially. Approximately 90% of LPAL's $140.2
million in policyholder liabilities as of June 30, 2002 have been surrendered or
have matured as of December 31, 2005. Policyholder liabilities as of December
31, 2005
13
were $13.6 million. Almost all of the surrenders since June 30, 2002 occurred in
the second half of 2002; most of the decrease in policyholder liabilities since
the end of 2002 is attributable to policy maturities.
LPAL now focuses on managing the remaining block of policyholder
liabilities. There are no plans currently to write new policies.
2005 compared to 2004
In 2005, LPAL contributed a loss before income taxes of $0.7 million to our
overall loss from continuing operations before income taxes, compared to a loss
before income taxes of $8.1 million in 2004
The spread between investment income and amounts credited to policyholders
improved during 2005 compared to 2004, from negative $63,000 in 2004 to positive
$233,000 in 2005. Interest and dividend income on investments totaled $1.2
million in 2005, compared with $1.3 million in 2004. This $0.1 million decrease
was primarily due to the decline in the level of LPAL's corporate bond
investments, which was consistent with the decline in policyholder liabilities
since December 31, 2004. Amounts credited on policyholder accounts decreased by
$0.4 million in 2005 to $1.0 million, compared to $1.4 million in 2004. This
decrease was primarily due to policy maturities since December 31, 2004. The
average rate credited to policyholders was 5.7% in 2005, compared with 5.6% in
2004.
Net investment losses totaled $25,000 in 2005, compared with net investment
losses of $7.1 million in 2004. During 2004, LPAL held significant levels of
listed equity securities, causing LPAL's results to be impacted by equity market
volatility. By the end of January 2005, LPAL sold all of its listed equity
securities and as such, LPAL's equity market risk has been reduced
significantly.
Total invested assets decreased to $24.7 million as of December 31, 2005,
compared to $33.1 million as of December 31, 2004, primarily due to policyholder
benefits paid of $6.7 million. On total average invested assets in 2005, the
average net return, including both realized and unrealized investment gains and
losses, was 4.2%, compared with -15.3% in 2004.
Policyholder liabilities as of December 31, 2005 were $13.6 million of
which $10.6 million is scheduled to mature during 2006. LPAL expects to meet
these maturities primarily by using the proceeds from maturing bonds which are
estimated to be $13.7 million during 2006, and estimated interest income to be
received during 2006 of $1.1 million. In the absence of significant redemptions,
policyholder liabilities are projected to be approximately $3.0 million at the
end of 2006.
Included in general and administrative expenses for 2005 are $0.3 million
of employee severance costs. In order to reduce operating costs and to conserve
cash, and in light of the decrease in the size of LPAL's operations, LPAL
reduced its staff in January 2005. Excluding the $0.3 million of employee
severance costs, general and administrative expenses for 2005 were $0.6 million,
compared with $1.0 million for 2004. This $0.4 million decrease is primarily due
to lower staff costs.
2004 compared to 2003
In 2004, LPAL contributed a loss before income taxes of $8.1 million to our
overall loss from continuing operations before income taxes, compared to income
before income taxes of $1.6 million in 2003. Net realized investment gains in
2004 were $1.3 million compared to net realized investment losses of $38.3
million in 2003. The loss from the change in net unrealized investment gains and
losses was $8.3 million in 2004, compared to a gain of $40.9 million in 2003. In
2004, the spread between investment income and amounts credited to policyholders
increased by $25,000, and general and administrative expenses remained flat at
$1.0 million, each as compared to 2003.
LPAL did not generate any premiums during 2004 or 2003. LPAL discontinued
selling new policies on July 2, 2002 as mentioned above.
14
Interest and dividend income on investments was $1.3 million in 2004,
compared with $1.8 million in 2003. This $0.5 million decrease was primarily due
to the decline in the level of LPAL's corporate bond investments, which was
consistent with the decline in policyholder liabilities since December 31, 2003.
Net investment losses totaled $7.1 million in 2004, compared to net
investment gains of $2.6 million in 2003. Net investment losses in 2004 were
comprised of net realized investment gains of $1.3 million and $8.3 million in
losses from the change in net realized gains and losses on the listed equity
securities held in the trading portfolio. The trading portfolio decreased from
$13.5 million as of December 31, 2003 to $0.5 million as of December 31, 2004.
LPAL sold its remaining Packeteer, Inc. holding during 2004, which resulted in
net realized gains of $4.9 million based on an aggregate original cost of $4.4
million. These realized gains were partially offset by other-than-temporary
impairment charges on one private equity security holding totaling $3.4 million
and one of LPAL's trading positions was acquired by a larger listed company, in
exchange for $0.3 million of stock in the acquiring company, which resulted in a
realized loss of $0.3 million based on an original cost of $0.6 million.
Total invested assets decreased to $33.1 million as of December 31, 2004,
compared to $47.9 million as of December 31, 2003, primarily due to policyholder
benefits paid of $9.8 million and net investment losses of $7.1 million during
2004. On total average invested assets in 2004, the average net return,
including both realized and unrealized investment gains and losses, was -15.3%,
compared with 8.9% in 2003.
Amounts credited on policyholder accounts decreased by $0.5 million in 2004
to $1.4 million, compared to $1.9 million in 2003. This decrease was primarily
due to policy maturities since December 31, 2003. The average rate credited to
policyholders was 5.6% in 2004, compared with 5.9% in 2003.
Corporate and Other
2005 compared to 2004
Corporate expenses decreased by $0.1 million to $2.3 million in 2005, as
compared to $2.4 million for 2004. This decrease was primarily due to lower
staff costs, facilities expense, professional services fees, shareholder
reporting costs and corporate insurance costs, which were partially offset by
legal fees associated with the legal proceedings described in Note 11 to the
Consolidated Financial Statements in Item 8 of this Form 10-K.
2004 compared to 2003
Corporate expenses decreased by $1.1 million to $2.4 million in 2004, as
compared to $3.5 million for 2003. This decrease was primarily due to lower
facilities costs, professional services fees and insurance costs.
Since we fully repaid and terminated our bank facility during June 2003, we
did not incur any borrowing costs in 2004, compared to $0.7 million in 2003.
However, we did pay $0.1 million in interest during 2004 related to an
additional California tax liability for tax years 1998 and 1999.
Consolidated Income (Loss) from Continuing Operations Before Income Taxes
2005 compared to 2004
Our consolidated loss from continuing operations before income taxes was
$3.2 million in 2005, compared to a loss of $11.9 million in 2004. This change
was primarily due to net realized and unrealized investment losses of $26,000 in
2005, compared to net realized and unrealized investment losses of $7.7 million
in 2004.
Due to the sales of almost all of our listed equity securities during 2004,
our results are no longer significantly impacted by equity market volatility.
15
We continue to pursue opportunities to grow the business in the future,
however, there is no guarantee that we will be successful in redeveloping our
venture capital and consulting operations.
2004 compared to 2003
Our consolidated loss from continuing operations before income taxes was
$11.9 million in 2004, compared to income from continuing operations before
income taxes of $1.0 million in 2003. This change was primarily due to net
realized and unrealized investment losses of $7.7 million in 2004, compared to
net realized and unrealized investment gains of $7.3 million in 2003. During
both years, we held significant levels of listed equity securities and our
results were significantly impacted by equity market volatility.
Income Taxes
We are subject to taxation on our income in all countries in which we
operate based upon the taxable income arising in each country. However, realized
gains on certain investments are exempt from Jersey and Guernsey taxation. We
are subject to income tax in Jersey at a rate of 20%. In the United States, we
are subject to both federal and California taxes at rates up to 34% and 8.84%,
respectively.
2005 compared to 2004 (continuing operations)
The $12,000 tax expense for 2005 is comprised of our minimum California
taxes and other state taxes. Other than these taxes, no other tax expense or
benefits are applicable to our Group for this period. Losses were contributed by
our Jersey and Guernsey operations, for which no tax benefits will be realized.
Losses were also contributed by our U.S subsidiaries during 2005; we did not
recognize any U.S. tax benefits due to the 100% valuation allowances that we
have provided for all deferred tax assets.
2004 compared to 2003 (continuing operations)
The $0.3 million tax expense for 2004 is primarily an additional California
tax liability related to tax years 1998 and 1999 which we paid in 2004. Other
than these taxes and $7,000 of other tax expense, primarily minimum California
taxes, no other tax expense or benefits are applicable to our Group for this
period. Losses were contributed by our Jersey and Guernsey operations, primarily
consisting of net realized and unrealized investment losses for which no tax
benefits will be realized. Losses were also contributed by our U.S subsidiaries
during 2004; however, we did not recognize any U.S. tax benefits due to the 100%
valuation allowances that we have provided for all deferred tax assets.
2003 (disposal of discontinued operations)
We recorded $36,000 of income tax expense on book gains totaling $11.7
million from the sales of Berkeley Capital Management ("BCM") and LPA during
2003. Income taxes based on statutory tax rates applied to the taxable gains on
these sales were approximately $4.9 million. However, due to net operating
losses in the U.S. tax groups in the current and prior years, and capital loss
carryovers from prior years, we were able to offset all of the taxes related to
the gains on the sale of BCM and LPA, except for a small amount of federal
alternative minimum tax.
Discontinued Operations
There were no results to report for discontinued operations for 2004 or
2005, as we completed the sales of BCM and LPA in the second quarter of 2003.
Our consolidated statement of operations for 2003 includes the results of
discontinued operations for the first four months of 2003, in the case of BCM,
and for the first five months of 2003, in the case of LPA. It also includes the
gain on sale of both BCM and LPA totaling $11.7 million. For further information
see Note 2 to the Consolidated Financial Statements in Item 8 of this Form 10-K.
16
CRITICAL ACCOUNTING POLICIES
Management has identified those accounting policies that are most important
to the accurate portrayal of our financial condition and results of operations
and that require management's most complex or subjective judgments, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain. These most critical accounting policies pertain to our
investments, life insurance policy liabilities and contingent liabilities. These
critical accounting policies are described below.
Determination of Fair Values of Investments
When a quoted market price is available for a security, we use this price
in the determination of fair value. If a quoted market price is not available
for a security, management estimates the security's fair value based on
valuation methodologies as described below.
We hold investments in privately held equity securities, primarily
convertible preferred stock in venture capital companies doing business in
various segments of technology industries. Venture capital investing entails
making investments in companies that are developing products or services for
large emerging markets with the belief that these investments will yield
superior returns if these companies are successful. These investments are
normally held for a number of years. When we make these investments, most of the
companies are still developing the products they intend to bring to market or
are in the early stages of product sales. Venture capital companies are net
consumers of cash and often dependent upon additional financing to execute their
business plans. These investments involve substantial risk and the companies
generally lack meaningful historical financial results used in traditional
valuation models. The process of pricing these securities range from fierce
competitive bidding between financial institutions to existing investors
negotiating prices with the company without outside investor validation.
Investments in convertible preferred stock come with rights that vary
dramatically both from company to company and between rounds of financing within
the same company. These rights, such as anti-dilution, redemption, liquidation
preferences and participation, bear directly on the price an investor is willing
to pay for a security. The returns on these investments are generally realized
through an initial public offering of the company's shares or, more commonly,
through the company's acquisition by a public company.
One of the factors affecting fair value is the amount of time before a
company requires additional financing to support its operations. Management
believes that companies that are financed to the estimated point of operational
profitability or for a period greater than one year will most likely return
value to the investor through an acquisition between a willing buyer and seller,
as the company does not need to seek financing from an opportunistic investor or
insider in an adverse investment environment. If a particular company needs
capital in the near term, management considers a range of factors in its fair
value analysis, including our ability to recover our investment through
surviving liquidation preferences. Management's valuation methodologies also
include fundamental analysis that evaluates the investee company's progress in
developing products, building intellectual property portfolios and securing
customer relationships, as well as overall industry conditions, conditions in
and prospects for the investee's geographic region, and overall equity market
conditions. This is combined with analysis of comparable acquisition
transactions and values to determine if the security's liquidation preferences
will ensure full recovery of our investment in a likely acquisition outcome. In
its valuation analysis, management also considers the most recent transaction in
a company's shares.
The determination of fair values of investments requires the application of
significant judgment. It is possible that the factors evaluated by management
and fair values will change in subsequent periods, especially with respect to
our privately held equity securities in technology companies, resulting in
material impairment charges in future periods.
Other-than-temporary Impairments
Management performs an ongoing review of all investments in the portfolio
to determine if there are any declines in fair value that are
other-than-temporary.
17
Since our listed equity securities are classified as trading securities,
impairment adjustments are not required as any change in the market value of
these securities between reporting periods is included in earnings.
In relation to our equity securities that do not have a readily
determinable fair value and are classified as available-for-sale, factors
considered in impairment reviews include: (i) the length of time and extent to
which estimated fair values have been below cost and the reasons for the
decline, (ii) the investee's recent financial performance and condition,
earnings trends and future prospects, (iii) the market condition of either the
investee's geographic area or industry as a whole, and (iv) concerns regarding
the investee's ability to continue as a going concern (such as the inability to
obtain additional financing). If the evidence supports that a decline in fair
value is other-than-temporary, then the investment is reduced to its estimated
fair value, which becomes its new cost basis, and a realized loss is reflected
in earnings.
We determine that a fixed maturity security is impaired when it is probable
that we will not be able to collect amounts due (principal and interest)
according to the security's contractual terms. We make this determination by
considering all available facts and circumstances, including our intent and
ability to continue to hold the investment to maturity. The factors we consider
include: (i) the length of time and extent to which the market values have been
below amortized cost and the reasons for the decline, (ii) the issuer's recent
financial performance and condition, earnings trends and future prospects in the
near to mid-term, (iii) changes in the issuer's debt rating and/or regulatory
actions or other events that may effect the issuer's operations, (iv) the market
condition of either the issuer's geographic area or industry as a whole, and (v)
factors that raise doubt about the issuer's ability to continue as a going
concern. If the evidence supports that a decline in fair value is
other-than-temporary, then the fixed maturity security is written down to its
quoted market value, if such a value is available. If a readily determinable
fair value does not exist, then the fixed maturity security is written down to
management's estimate of its fair value, which is based on the valuation
methodologies described above. Write-downs are recorded as realized losses and
included in earnings.
The evaluations for other-than-temporary impairments require the
application of significant judgment. It is possible that the impairment factors
evaluated by management and fair values will change in subsequent periods,
especially with respect to privately held equity securities in technology
companies, resulting in material impairment charges in future periods.
Life Insurance Policy Liabilities
We account for life insurance policy liabilities in accordance with
Statement of Financial Accounting Standards No. 97, "Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains
and Losses from the Sale of Investments." We account for life insurance policy
liabilities for deferred annuities as investment-type insurance products and we
record these liabilities at accumulated value (premiums received, plus accrued
interest to the balance sheet date, less withdrawals and assessed fees).
Contingent Liabilities
As discussed in Note 11 to the Consolidated Financial Statements in Item 8
of this Form 10-K, we are involved in various matters that may or may not result
in a loss to the Group. We account for contingent liabilities in accordance with
Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies." As such, in situations where we believe that a loss is probable
and where we can reasonably estimate the amount of the loss, we will recognize
that estimated loss in our financial statements. Because of the uncertainties
that exist, we cannot predict the outcome of the pending matters with certainty.
Actual results may differ from our estimates, and the ultimate outcome of these
matters could have a significant impact on our results of operations and
financial position.
18
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 1 to the Consolidated Financial Statements in Item 8 of this Form
10-K for a summary of recently issued accounting pronouncements.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents decreased during 2005 by $9.5 million from
$19.5 million as of December 31, 2004 to $10.0 million as of December 31, 2005.
This decrease in cash and cash equivalents primarily resulted from $6.7 million,
$1.7 million and $0.5 million of cash used in financing activities, investing
activities and operating activities, respectively. Cash used in financing
activities related to insurance policyholder benefits paid by LPAL. Cash used in
investing activities primarily related to the purchase of fixed maturity
securities by the Group and LPAL, partially offset by the maturity of fixed
maturity securities held by LPAL and the Group. Cash used in operating
activities primarily resulted from the $3.2 million operating loss for 2005,
partially offset by the sale of trading securities. As of December 31, 2005, our
cash and cash equivalents, excluding the amount held by LPAL, amounted to $0.5
million, a decrease of $9.3 million from December 31, 2004. We purchased $8.5
million in corporate bonds and U.S. government agency securities during the
first quarter of 2005 in order to increase our yields on our liquid resources.
Of these securities, $1.4 million matured during 2005, and all of the remaining
securities matured on or before February 1, 2006. Excluding LPAL's investments,
we also held $0.1 million of listed equity securities which could be sold within
a short period of time as of December 31, 2005, compared to $0.1 million as of
December 31, 2004 and $3.4 million as of December 31, 2003.
The $9.5 million of cash and cash equivalents held by LPAL, as well as the
$14.7 million of investments held by LPAL, are not currently available to fund
the operations or commitments of the Company or its other subsidiaries.
Shareholders' equity decreased during 2005 by $3.3 million from $22.9
million at December 31, 2004 to $19.6 million as of December 31, 2005, primarily
due to the net loss for the period of $3.2 million. As of December 31, 2005 and
2004, $62.6 million and $63.6 million, respectively, of our Ordinary Shares, at
cost, held by the employee benefit trusts have been netted against shareholders'
equity.
As discussed above in "Results of Operations by Business Segment - Life
Insurance and Annuities," LPAL discontinued issuing new policies in July 2002.
During 2005, LPAL continued to service its existing policyholders. During this
period, policy surrenders totaled $0.2 million and policy maturities totaled
$6.5 million. Policyholder liabilities were $13.6 million as of December 31,
2005, compared to $21.2 million as of December 31, 2004. We do not expect
significant surrender activity during 2006; however, approximately $10.6 million
of policyholder liabilities are scheduled to mature during this period. LPAL has
sufficient liquid resources to fund these maturities. As of December 31, 2005,
LPAL had cash of $9.5 million, accrued interest receivable of $0.4 million and
corporate bonds of $13.8 million.
In prior periods, LPAL held listed equity securities at levels such that
fluctuations in the market value of these listed equity securities could have
had a significant impact on LPAL's statutory capital level. Following the sale
of LPAL's remaining Packeteer, Inc. common stock holding during 2004, and the
sale of LPAL's remaining $0.5 million of listed equity holdings in January 2005,
fluctuations in the market value of LPAL's listed equity securities will no
longer have an impact on LPAL's required statutory capital level.
As of December 31, 2005, we had no bank borrowings, guarantee obligations,
material commitments outstanding for capital expenditures or additional funding
for private equity portfolio companies.
As of December 31, 2005, we had $0.5 million of cash and cash equivalents
and $7.0 million in short-term bonds, excluding cash and bonds held by our life
insurance and annuities segment. We believe that this cash balance and the
proceeds in early 2006 from our bond maturities are sufficient to fund our
operations (venture capital and consulting and corporate activities) over at
least the next 12 months. As discussed in Note 11 to the Consolidated Financial
Statements in Item 8 of this Form 10-K, we are involved in certain legal
19
proceedings for which we have incurred and will incur attorneys' fees and other
costs. The amount of such future fees and costs is currently unknown, though we
believe that our cash and liquid resources are sufficient to cover these costs,
in addition to our normal operating expenses, over at least the next 12 months.
As of December 31, 2005, we had $1.0 million of cash held in escrow related
to our sale of LPA to SunGard as discussed in Note 4 to the Consolidated
Financial Statements in Item 8 of this Form 10-K. Due to the legal proceedings
described in Note 11 to the Consolidated Financial Statements in Item 8 of this
Form 10-K, the release of the escrow amount is currently uncertain. We have not
made any reserve against this $1.0 million held in escrow.
In order to reduce operating costs and to conserve cash, and in light of
the decrease in the size and complexity of our continuing operations, we reduced
staffing levels in early 2005. Due to employee severance costs, the impact of
these staff cost reductions will not be fully realized on an annual basis until
2006. In addition, we have implemented or are in the process of implementing
other cost reductions.
CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS
The following table aggregates our expected contractual obligations and
commitments subsequent to December 31, 2005.
2007 - 2009 - Beyond
Contractual obligations (1) 2006 2008 2010 2010 Total
- ------------------------------------- ----------- ----------- ----------- ----------- -----------
(In thousands)
Deferred annuity policy maturities........... $10,752 $ 2,922 $ 128 $ - $13,802
Capital lease commitments.................... - - - - -
Operating lease commitments (2).............. 221 230 173 - 624
----------- ----------- ----------- ----------- -----------
Total contractual cash obligations........... $10,973 $ 3,152 $ 301 $ - $14,426
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
<FN>
(1) Does not include other commitments for the purchase of goods and services which in the aggregate are immaterial.
(2) Includes commitments related to our Jersey office lease which expires in September 2010. We are currently evaluating
sublease options for which no commitment has been entered into as of the date of filing of this Form 10-K.
</FN>
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The nature of our businesses exposes us to market risk. Market risk is the
risk of loss that may occur when changes in interest rates and public equity
prices adversely affect the value of invested assets.
Interest Rate Risk
LPAL is subject to risk from interest rate fluctuations when payments due
to policyholders are not matched in respect of amount and duration with income
from investments. LPAL attempts to minimize this risk by ensuring that payments
and income are matched as closely as possible while also maximizing investment
returns. LPAL has not used derivative financial instruments as part of its
investment strategy.
For LPAL's business, the amount of policyholder liabilities is unaffected
by changes in interest rates. Given the existing policy and bond maturity
profiles, and that bonds will generally be held to maturity and early policy
redemptions are protected by a market value adjustment and surrender penalty,
the bonds and policies carry minimal interest rate risk. Interest income earned
on excess cash in LPAL is expected to yield less than $0.2 million during 2006,
therefore movements in market interest rates should not have a material impact
on our consolidated results.
20
Equity Price Risk
We are exposed to equity price risk on our holdings of listed equity
securities. Changes in the level or volatility of equity prices affect the value
of our listed equity securities. These changes in turn directly affect our
consolidated net income because our holdings of listed equity securities are
marked to market, with changes in their market value recognized in the statement
of operations for the period in which the changes occur. These listed equity
securities represent investments that were originally made as private equity
investments in high technology companies that subsequently completed an initial
public offering. The performance of these listed equity securities can be highly
volatile; however, we monitor them and seek to sell them over a period of time.
Prior to September 30, 2004, we held levels of listed equity securities
which exposed us to significant equity price risk and resulting volatility in
our reported earnings. Subsequent to the sale of our remaining holding in
Packeteer, Inc. common stock on September 30, 2004, the market value of our
listed equity trading portfolio was only $0.6 million as of December 31, 2004.
During January 2005, we sold $0.5 million of the listed equity securities that
we held as of December 31, 2004. As of December 31, 2005, we held only $84,000
of listed equity securities. At this level, there is a greatly reduced equity
price risk and fluctuations in the market value of our remaining listed equity
securities should not have a material impact on our earnings in future periods.
As of December 31, 2005, we held $0.8 million in private corporate equity
securities of technology companies for which liquid markets do not exist.
Private equity prices do not fluctuate directly with public equity markets, but
significant market movements may trigger a review for other-than-temporary
adjustment of the carrying values of our private equity securities. The risks
inherent in these private equity investments relate primarily to the viability
of the investee companies. We try to mitigate these risks in various ways,
including performing extensive due diligence prior to making an investment, and
regularly reviewing the progress of the investee companies.
For additional information relating to our financial risk profile, see Note
12 to the Consolidated Financial Statements in Item 8 of this Form 10-K.
21
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm..................................................... 23
Consolidated Balance Sheets as of December 31, 2005 and 2004................................................ 24
Consolidated Statements of Operations for the Years Ended
December 31, 2005, 2004 and 2003............................................................................ 25
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2005, 2004 and 2003............................................................................ 27
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended
December 31, 2005, 2004 and 2003............................................................................ 29
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2005, 2004 and 2003............................................................................ 30
Notes to Consolidated Financial Statements.................................................................. 31
22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders of
Berkeley Technology Limited
Jersey, Channel Islands
We have audited the accompanying consolidated balance sheets of Berkeley
Technology Limited (the "Company") as of December 31, 2005 and 2004 and the
related consolidated statements of operations, changes in shareholders' equity,
cash flows, and comprehensive income for each of the three years in the period
ended December 31, 2005. We have also audited the schedules on pages 66 to 71 in
Item 15 (the "Schedules"). These financial statements and the Schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and the Schedules based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also 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, 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 Berkeley
Technology Limited at December 31, 2005 and 2004, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2005, in conformity with accounting principles generally accepted
in the United States of America.
Also, in our opinion, the Schedules present fairly in all material
respects, the information set forth therein.
/s/ BDO Seidman, LLP
San Francisco, California
March 3, 2006
23
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 31,
----------------------
2005 2004
---------- ----------
ASSETS
Investments (principally of life insurance subsidiary):
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $13,809 and $21,341
as of December 31, 2005 and 2004, respectively)............................ $ 13,829 $ 21,377
Held-to-maturity, at amortized cost (fair value: $6,982 and $0 as of
December 31, 2005 and 2004, respectively).................................. 7,011 -
Equity securities:
Trading, at fair value (cost: $102 and $586 as of December 31,
2005 and 2004, respectively)............................................... 84 552
Available-for-sale, at estimated fair value (cost: $850 as of
December 31, 2005 and 2004)................................................ 850 850
---------- ----------
Total investments................................................................. 21,774(1) 22,779
Cash and cash equivalents......................................................... 10,039(1) 19,495
Cash held in escrow............................................................... 1,027 1,005
Accrued investment income......................................................... 609 737
Property and equipment, net....................................................... 43 70
Other assets...................................................................... 311 621
---------- ----------
Total assets...................................................................... $ 33,803 $ 44,707
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Life insurance policy liabilities................................................. $ 13,573 $ 21,229
Accounts payable and accruals..................................................... 627 585
---------- ----------
Total liabilities................................................................. 14,200 21,814
---------- ----------
Commitments and contingencies (See Note 11)
Shareholders' equity:
Ordinary shares, $0.05 par value per share: 86,400,000 shares authorized;
64,439,073 shares issued and outstanding as of December 31, 2005
and 2004....................................................................... 3,222 3,222
Additional paid-in capital........................................................ 67,660 68,615
Retained earnings................................................................. 11,682 14,929
Employee benefit trusts, at cost (13,522,381 and 13,684,881 shares as of
December 31, 2005 and 2004, respectively)...................................... (62,598) (63,571)
Accumulated other comprehensive loss.............................................. (363) (302)
---------- ----------
Total shareholders' equity........................................................ 19,603 22,893
---------- ----------
Total liabilities and shareholders' equity........................................ $ 33,803 $ 44,707
---------- ----------
---------- ----------
<FN>
(1) Includes $14,673 of investments and $9,505 of cash and cash equivalents in the Company's insurance subsidiary (London
Pacific Assurance Limited ("LPAL")) which are not currently available to fund the operations or commitments of the Company
or its other subsidiaries.
</FN>
See accompanying Notes which are an integral part of these Consolidated
Financial Statements.
24
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share and ADS amounts)
Years Ended December 31,
----------------------------------
2005 2004 2003
---------- ---------- ----------
Revenues:
Investment income............................................................ $ 1,562 $ 1,397 $ 1,887
Insurance policy charges..................................................... 4 4 6
Consulting and other fee income.............................................. 553 513 -
Net realized investment gains (losses)....................................... (43) 4,700 (15,312)
Change in net unrealized investment gains and losses on trading
securities................................................................ 17 (12,373) 22,617
---------- ---------- ----------
2,093 (5,759) 9,198
Expenses:
Amounts credited on insurance policyholder accounts.......................... 980 1,358 1,922
Operating expenses........................................................... 4,344 4,629 5,553
Interest expense............................................................. 4 105 676
---------- ---------- ----------
5,328 6,092 8,151
---------- ---------- ----------
Income (loss) from continuing operations before income taxes................. (3,235) (11,851) 1,047
Income tax expense (benefit)................................................. 12 290 (42)
---------- ---------- ----------
Income (loss) from continuing operations..................................... (3,247) (12,141) 1,089
Discontinued operations:
Loss from discontinued operations, net of income
tax expense of $0, $0 and $2, respectively................................ - - (1,758)
Income on disposal of discontinued operations, net of income
tax expense of $0, $0 and $36, respectively............................... - - 11,685
---------- ---------- ----------
Income on discontinued operations............................................ - - 9,927
---------- ---------- ----------
Net income (loss)............................................................ $ (3,247) $ (12,141) $ 11,016
---------- ---------- ----------
---------- ---------- ----------
See accompanying Notes which are an integral part of these Consolidated
Financial Statements.
25
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
(In thousands, except per share and ADS amounts)
Years Ended December 31,
----------------------------------
2005 2004 2003
---------- ---------- ----------
Basic earnings (loss) per share and ADS:
Basic earnings (loss) per share:
Continuing operations........................................................ $ (0.06) $ (0.24) $ 0.02
Discontinued operations...................................................... - - 0.20
---------- ---------- ----------
$ (0.06) $ (0.24) $ 0.22
---------- ---------- ----------
---------- ---------- ----------
Basic earnings (loss) per ADS:
Continuing operations........................................................ $ (0.64) $ (2.39) $ 0.21
Discontinued operations...................................................... - - 1.96
---------- ---------- ----------
$ (0.64) $ (2.39) $ 2.17
---------- ---------- ----------
---------- ---------- ----------
Diluted earnings (loss) per share and ADS:
Diluted earnings (loss) per share:
Continuing operations........................................................ $ (0.06) $ (0.24) $ 0.02
Discontinued operations...................................................... - - 0.20
---------- ---------- ----------
$ (0.06) $ (0.24) $ 0.22
---------- ---------- ----------
---------- ---------- ----------
Diluted earnings (loss) per ADS:
Continuing operations........................................................ $ (0.64) $ (2.39) $ 0.21
Discontinued operations...................................................... - - 1.94
---------- ---------- ----------
$ (0.64) $ (2.39) $ 2.15
---------- ---------- ----------
---------- ---------- ----------
See accompanying Notes which are an integral part of these Consolidated
Financial Statements.
26
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
----------------------------------
2005 2004 2003
---------- ---------- ----------
Cash flows from continuing operating activities:
Net income (loss)............................................................ $ (3,247) $ (12,141) $ 1,089
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization................................................ 36 53 79
Amounts credited on insurance policyholder accounts.......................... 980 1,358 1,922
Net realized investment losses (gains)....................................... 43 (4,700) 15,312
Change in net unrealized investment gains and losses
on trading securities..................................................... (17) 12,373 (22,617)
Net amortization of investment premiums and discounts........................ 656 572 313
Net changes in operating assets and liabilities:
Trading equity securities................................................. 441 12,009 11,879
Accrued investment income ................................................ 128 189 (26)
Other assets.............................................................. 310 (112) 733
Life insurance policy liabilities......................................... (4) (4) (6)
Accounts payable, accruals and other liabilities.......................... 193 174 (804)
Income taxes payable...................................................... 7 17 (26)
Other operating cash flows................................................... (22) (6) 223
---------- ---------- ----------
Net cash provided by (used in) continuing operations......................... (496) 9,782 8,071
---------- ---------- ----------
Capital paid in to discontinued operations................................... - - (523)
---------- ---------- ----------
Net cash used in discontinued operations..................................... - - (523)
---------- ---------- ----------
Net cash provided by (used in) operating activities.......................... (496) 9,782 7,548
---------- ---------- ----------
Cash flows from investing activities:
Payment of guarantee obligations............................................. - - (10,836)
Purchases of held-to-maturity fixed maturity securities...................... (8,510) - -
Purchases of available-for-sale fixed maturity securities.................... (5,121) - (17,096)
Purchases of available-for-sale equity securities............................ - (15) -
Proceeds from maturity of held-to-maturity fixed maturity securities......... 1,350 - -
Proceeds from sale and maturity of available-for-sale fixed
maturity securities....................................................... 10,611 5,060 24,595
Proceeds from sale of available-for-sale equity securities................... - 75 9
Proceeds from disposal of discontinued operations............................ - - 16,148
Capital expenditures......................................................... (9) (5) (4)
---------- ---------- ----------
Net cash provided by (used in) investing activities ......................... (1,679) 5,115 12,816
---------- ---------- ----------
See accompanying Notes which are an integral part of these Consolidated
Financial Statements.
27
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
Years Ended December 31,
----------------------------------
2005 2004 2003
---------- ---------- ----------
Cash flows from financing activities:
Insurance policyholder benefits paid......................................... (6,749) (9,824) (12,330)
Proceeds from disposal of shares by the employee benefit trusts.............. 18 - -
Repayments of notes payable.................................................. - - (9,314)
---------- ---------- ----------
Net cash used in financing activities........................................ (6,731) (9,824) (21,644)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents......................... (8,906) 5,073 (1,280)
Cash and cash equivalents at beginning of year (1)........................... 19,495 14,408 15,308
Foreign currency translation adjustment...................................... (550) 14 380
---------- ---------- ----------
Cash and cash equivalents at end of year (1), (2)............................ $ 10,039 $ 19,495 $ 14,408
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosure of cash flow information: (1)
Cash paid (received) during the year for:
Interest..................................................................... $ 4 $ 105 $ 501
Income taxes (net of amounts recovered)...................................... $ 5 $ 274 $ (51)
Supplemental disclosure of non-cash investing activities:
Exchange of available-for-sale equity securities for trading equity
securities................................................................ $ - $ 98 $ 3
<FN>
(1) Amounts reflect continuing operations only. Does not include $1,027 of cash held in escrow as of December 31, 2005.
(2) The amount for December 31, 2005 includes $9,505 in the Company's insurance subsidiary (LPAL) which is not currently available
to fund the operations or commitments of the Company or its other subsidiaries.
</FN>
See accompanying Notes which are an integral part of these Consolidated
Financial Statements.
28
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except per share and ADS amounts)
Accumulated
Other
Ordinary Shares Additional Employee Compre- Total
-------------------- Paid-in Retained Benefit hensive Shareholders'
Number Amount Capital Earnings Trusts Loss Equity
--------- --------- --------- --------- --------- --------- ----------
Balance as of January 1, 2003 64,439 $ 3,222 $ 68,394 $ 16,054 $ (63,571) $ (2,613) $ 21,486
Net income...................... - - - 11,016 - - 11,016
Change in net unrealized
gains and losses on
available-for-sale securities - - - - - 1,886 1,886
Foreign currency translation
adjustment................... - - - - - 288 288
Warrants issued to bank......... - - 221 - - - 221
--------- --------- --------- --------- --------- --------- ---------
Balance as of
December 31, 2003............ 64,439 $ 3,222 $ 68,615 $ 27,070 $ (63,571) $ (439) $ 34,897
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net loss........................ - $ - $ - $ (12,141) $ - $ - $ (12,141)
Change in net unrealized
gains and losses on
available-for-sale securities - - - - - 46 46
Foreign currency translation
adjustment................... - - - - - 91 91
--------- --------- --------- --------- --------- --------- ---------
Balance as of
December 31, 2004............ 64,439 $ 3,222 $ 68,615 $ 14,929 $ (63,571) $ (302) $ 22,893
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net loss........................ - $ - $ - $ (3,247) $ - $ - $ (3,247)
Change in net unrealized
gains and losses on
available-for-sale securities - - - - - (16) (16)
Foreign currency translation
adjustment................... - - - - - (45) (45)
Exercise of employee share
options, including income
tax effect................... - - (955) - 973 - 18
--------- --------- --------- --------- --------- --------- ---------
Balance as of
December 31, 2005............ 64,439 $ 3,222 $ 67,660 $ 11,682 $ (62,598) $ (363) $ 19,603
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
See accompanying Notes which are an integral part of these Consolidated
Financial Statements.
29
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Years Ended December 31,
----------------------------------
2005 2004 2003
---------- ---------- ----------
Net income (loss)............................................................ $ (3,247) $ (12,141) $ 11,016
Other comprehensive income (loss), net of deferred income taxes:
Foreign currency translation adjustments, net of income taxes of $0.......... (45) 91 288
Change in net unrealized gains and losses related to continuing operations:
Unrealized holding gains and losses on available-for-sale securities...... (44) 64 54
Reclassification adjustment for gains and losses included in
net income (loss)....................................................... 28 (18) 1,832
Deferred income taxes..................................................... - - -
---------- ---------- ----------
Other comprehensive income (loss)............................................ (61) 137 2,174
---------- ---------- ----------
Comprehensive income (loss).................................................. $ (3,308) $ (12,004) $ 13,190
---------- ---------- ----------
---------- ---------- ----------
See accompanying Notes which are an integral part of these Consolidated
Financial Statements.
30
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
As used herein, the terms "registrant" and "Company" refer to Berkeley
Technology Limited. Except as the context otherwise requires, the term "Group"
refers collectively to the registrant and its subsidiaries.
Note 1. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared by
the Company in conformity with United States generally accepted accounting
principles ("U.S. GAAP"). These consolidated financial statements include the
accounts of the Company, its subsidiaries, the Employee Share Option Trust
("ESOT") and the Agent Loyalty Opportunity Trust ("ALOT"). Significant
subsidiaries included in the continuing operations of the Group and discussed in
this document include London Pacific Assurance Limited ("LPAL") and Berkeley
International Capital Corporation ("BICC"). All intercompany transactions and
balances have been eliminated in consolidation.
The consolidated balance sheet is presented in an unclassified format as
the majority of the Group's assets relate to its life insurance and annuities
business. The Group's other business is venture capital and consulting.
The Company is incorporated under the laws of Jersey, Channel Islands. Its
Ordinary Shares are traded on the London Stock Exchange and in the U.S. on the
OTC Bulletin Board in the form of American Depositary Shares ("ADSs"), which are
evidenced by American Depositary Receipts ("ADRs"). Each ADS represents ten
Ordinary Shares. Pursuant to the regulations of the U.S. Securities and Exchange
Commission ("SEC"), the Company is considered a U.S. domestic registrant and
must file financial statements prepared under U.S. GAAP.
Cash and Cash Equivalents
The Group considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents.
Investments
The Group's investments consist of fixed maturity and equity securities.
Fixed maturity securities are classified as either available-for-sale or
held-to-maturity, and equity securities are classified as either trading or
available-for-sale. The investments are accounted for as follows:
i) available-for-sale securities are recorded at fair value, with changes
in unrealized gains and losses excluded from net income, but reported
net of applicable income taxes as a separate component of accumulated
other comprehensive income;
ii) held-to-maturity securities are recorded at amortized cost unless
these securities become other-than-temporarily impaired; and
iii) trading securities are recorded at fair value with changes in
unrealized gains and losses included in net income.
When a quoted market price is available for a security, the Group uses this
price to determine fair value. If a quoted market price is not available for a
security, management estimates the security's fair value based on appropriate
valuation methodologies. Management's valuation methodologies include
fundamental analysis
31
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
that evaluates the investee company's progress in developing products, building
intellectual property portfolios and securing customer relationships, as well as
overall industry conditions, conditions in and prospects for the investee's
geographic region, overall equity market conditions, and the level of financing
already secured and available. This is combined with analysis of comparable
acquisition transactions and values to determine if the security's liquidation
preferences will ensure full recovery of the Group's investment in a likely
acquisition outcome. In its valuation analysis, management also considers the
most recent transaction in a company's shares.
Amortization of premiums and accretion of discounts on fixed maturity
securities are reflected in earnings over the contractual terms of the
investments in a manner that produces a constant effective yield. Realized gains
and losses on securities are included in net income using the specific
identification method. Any other-than-temporary declines in the fair value of
available-for-sale or held-to-maturity securities, below the cost or amortized
cost basis, are recognized as realized losses in the consolidated statements of
operations. The cost basis of such securities is adjusted to reflect the
write-down recorded.
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost less
accumulated depreciation. Depreciation is calculated on a straight-line basis at
rates sufficient to write-off such assets over their estimated useful lives on
the following basis:
Furniture and equipment - five years
Computer equipment, including software - three to five years
Leasehold improvements - life of lease
Assets held under capital leases are included in property, equipment and
leasehold improvements and are depreciated over their estimated useful lives.
The future obligations under these leases are included in accounts payable and
accruals. Interest paid on capital leases is charged to the statement of
operations over the periods of the leases.
Life Insurance Policy Liabilities, Revenues and Expenses
Life insurance policy liabilities, premium revenues and related expenses
are accounted for in accordance with Statement of Financial Accounting Standards
No. 97, "Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sale of
Investments," as follows:
i) Life insurance policy liabilities for deferred annuities are accounted
for as investment-type insurance products and are recorded at accumulated value
(premiums received, plus accrued interest to the balance sheet date, less
withdrawals and assessed fees).
ii) Revenues for investment-type insurance products consist of charges
assessed against policy account values for surrenders.
iii) Benefits for investment-type insurance products are charged to expense
when incurred and reflect the claim amounts in excess of the policy account
balance. Expenses for investment-type products include the interest credited to
the policy account balance.
32
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenue Recognition
Interest income is accounted for on an accrual basis. Dividends are
accounted for when declared.
Listed equity securities received as a result of an acquisition of one of
the Group's investee companies by a publicly traded company that are held in
escrow by an escrow agent, are recognized in the financial statements when the
transaction is completed. Reductions are made to the number of shares of listed
equity securities held in escrow that are carried in the financial statements as
claims are made by the acquiring company against the escrow, or if evidence
exists that a claim is probable.
Fees relating to venture capital activities are recognized in income when
the investment transaction is completed. Fees for consulting services are
recognized in income on an accrual basis, based upon when services are
performed.
Stock Based Compensation
The Company accounts for stock based compensation issued to employees in
accordance with Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees," and related interpretations which
recognizes compensation expense based upon the intrinsic value of the stock
options as of the date of grant. The Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 123 ("SFAS
123"), "Accounting for Stock Based Compensation," which encourages, but does not
require, companies to recognize compensation expense for grants of stock options
based on their fair value. The Company has elected, as permitted by SFAS 123, to
adopt the disclosure requirement of SFAS 123 and to continue to account for
stock based compensation under APB 25.
Had compensation expense for the Company's ESOT activity been determined
based upon the fair value method in accordance with SFAS 123, the Company's
consolidated net income (loss) and earnings (loss) per share and ADS would have
been decreased or increased to the pro forma amounts as reflected below:
Years Ended December 31,
----------------------------------
2005 2004 2003
---------- ---------- ----------
(In thousands, except per share
and ADS amounts)
Net income (loss) as reported................................................ $ (3,247) $ (12,141) $ 11,016
Add: Stock based employee compensation expense included in
reported income (loss), net of related tax effects........................ - - -
Deduct: Total stock based employee compensation expense determined
under fair value based methods for all awards, net of related tax effects. (39) (190) (145)
---------- ---------- ----------
Pro forma net income (loss).................................................. $ (3,286) $ (12,331) $ 10,871
---------- ---------- ----------
---------- ---------- ----------
Basic earnings (loss) per share:
As reported.................................................................. (0.06) (0.24) 0.22
Pro forma.................................................................... (0.06) (0.24) 0.21
Basic earnings (loss) per ADS:
As reported.................................................................. (0.64) (2.39) 2.17
Pro forma.................................................................... (0.65) (2.43) 2.14
33
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31,
----------------------------------
2005 2004 2003
---------- ---------- ----------
(In thousands, except per share
and ADS amounts)
Diluted earnings (loss) per share:
As reported.................................................................. (0.06) (0.24) 0.22
Pro forma.................................................................... (0.06) (0.24) 0.21
Diluted earnings (loss) per ADS:
As reported.................................................................. (0.64) (2.39) 2.15
Pro forma.................................................................... (0.65) (2.43) 2.12
Weighted-average fair value of options granted
at market price during year............................................... 0.06 - -
Weighted-average fair value of options granted
at less than market price during year..................................... - - -
The pro forma disclosures shown above were calculated for all options
granted after December 31, 1994 using a Black-Scholes option pricing model with
the following assumptions:
2005 2004 (1) 2003 (1)
---------- ---------- ----------
Expected dividend yield (2).................................................. - - -
Expected stock price volatility.............................................. 34% - -
Risk-free interest rate...................................................... 3.89% - -
Weighted-average expected life (in years).................................... 6.25 - -
<FN>
(1) No grants were made in 2003 and 2004.
(2) Future dividends were not assumed, as dividends have not been paid since 2001.
</FN>
Income Taxes
The Group accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." Under SFAS 109, the Group recognizes taxes payable or refundable for the
current year, and deferred tax assets and liabilities due to temporary
differences in the basis of assets and liabilities between amounts recorded for
financial statement and tax purposes.
The Group provides a valuation allowance for deferred income tax assets if
it is more likely than not that some portion of the deferred income tax asset
will not be realized. The Group includes in income any increase or decrease in a
valuation allowance that results from a change in circumstances that causes a
change in judgment about the realization of the related deferred income tax
asset.
The Group includes in additional paid-in capital the tax benefit on share
options exercised during the period to the extent that such exercises result in
a permanent difference between financial statement and tax basis compensation
expense.
Earnings Per Share and ADS
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share." This
statement requires the presentation of basic and diluted earnings per share.
Basic earnings per share is calculated by dividing net income or loss by the
weighted-average number of Ordinary Shares outstanding during the applicable
period, excluding shares held
34
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
by the ESOT and the ALOT which are regarded as treasury stock for the purposes
of this calculation. The Company has issued employee share options, which are
considered potential common stock under SFAS 128. The Company has also issued
Ordinary Share warrants to the Bank of Scotland in connection with the Company's
bank facility (now terminated), which are also considered potential common stock
under SFAS 128. Diluted earnings per share is calculated by dividing net income
by the weighted-average number of Ordinary Shares outstanding during the
applicable period as adjusted for these potentially dilutive options and
warrants which are determined based on the "Treasury Stock Method."
Foreign Currencies
The Group uses the (pound) sterling as the functional currency for LPAL and
the U.S. dollar as the functional currency for the Company and all other
significant subsidiaries. Foreign exchange gains and losses resulting from the
remeasurement of foreign currency assets and liabilities into an entity's
functional currency are included in other operating expense in the consolidated
statements of operations. For entities using a (pound) sterling functional
currency, assets and liabilities denominated in foreign currencies are
translated into U.S. dollars at the prevailing exchange rates at the balance
sheet date and income and expense items are translated to U.S. dollars at
average exchange rates in effect during the period. The resulting translation
adjustment is shown as a separate component of other comprehensive income in
shareholders' equity. Foreign currency transaction gains and losses are recorded
in the results of operations, and were not material in all periods presented.
Comprehensive Income
Comprehensive income consists of net income; changes in unrealized gains
and losses on available-for-sale securities, net of income taxes; and foreign
currency translation gains or losses arising on the translation of the Group's
non-U.S. dollar based subsidiaries.
Recently Issued Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123 (revised 2004) ("SFAS
123R"), "Share-Based Payment." SFAS 123R is a revision of SFAS 123 and
supersedes APB 25. Among other items, SFAS 123R eliminates the use of APB 25 and
the intrinsic value method of accounting, and requires companies to recognize
the cost of employee services received in exchange for awards of equity
instruments, based on the grant date fair value of those awards, in the
financial statements. SFAS 123R permits companies to adopt its requirements
using either a "modified prospective" method, or a "modified retrospective"
method. Under the "modified prospective" method, compensation cost is recognized
in the financial statements beginning with the effective date, based on the
requirements of SFAS 123R for all share-based payments granted after that date,
and based on the requirements of SFAS 123 for all unvested awards granted prior
to the effective date of SFAS 123R. Under the "modified retrospective" method,
the requirements are the same as under the "modified prospective" method, but
also permits entities to restate financial statements of previous periods based
on proforma disclosures made in accordance with SFAS 123. On April 14, 2005, the
SEC approved a new rule that delays the effective date of SFAS 123R. Under the
SEC's rule, SFAS 123R is now effective for the Company beginning January 1,
2006. The Company will adopt the "modified prospective" method and expects that
the impact on its operating results will not be material.
In May 2005, the FASB issued Statement of Financial Accounting Standards
No. 154 ("SFAS 154"), "Accounting Changes and Error Corrections." This new
standard replaces APB Opinion No. 20, "Accounting Changes in Interim Financial
Statements," and Statement of Financial Accounting Standards No. 3, "Reporting
Accounting Changes in Interim Financial Statements," and represents another step
in the FASB's goal to
35
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
converge its standards with those issued by the International Accounting
Standards Board. Among other changes, SFAS 154 requires that a voluntary change
in accounting principle be applied retrospectively with all prior period
financial statements presented on the new accounting principle, unless it is
impracticable to do so. SFAS 154 also provides that (1) a change in method of
depreciating or amortizing a long-lived nonfinancial asset be accounted for as a
change in estimate (prospectively) that was effected by a change in accounting
principle, and (2) correction of errors in previously issued financial
statements should be termed a "restatement." The new standard is effective for
accounting changes and correction of errors made in fiscal years beginning after
December 15, 2005. Management does not expect the adoption of SFAS 154 to have a
material effect on the consolidated financial statements. As of December 31,
2005, this pronouncement had no impact on the consolidated financial statements.
Emerging Issues Task Force Issue No. 03-1 ("EITF 03-1"), "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments," was
issued and is effective March 31, 2004. EITF 03-1 provides guidance for
determining the meaning of "other-than-temporarily impaired" and its application
to certain debt and equity securities within the scope of Statement of Financial
Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments
in Debt and Equity Securities," and investments accounted for under the cost
method. The guidance requires that investments which have declined in value due
to credit concerns or solely due to changes in interest rates must be recorded
as other-than-temporarily impaired unless the Company can assert and demonstrate
its intention to hold the security for a period of time sufficient to allow for
a recovery of fair value up to or beyond the cost of the investment which might
mean maturity. This issue also requires disclosures assessing the ability and
intent to hold investments in instances in which an investor determines that an
investment with a fair value less than cost is not other-than-temporarily
impaired. On September 30, 2004, the FASB decided to delay the effective date
for the measurement and recognition guidance contained in EITF 03-1. This delay
does not suspend the requirement to recognize other-than-temporary impairments
as required by existing authoritative literature. The disclosure guidance in
EITF 03-1 was not delayed. Management continues to closely monitor the effect of
implementing EITF 03-1, but does not believe the Group has any
"other-than-temporarily impaired" securities at December 31, 2005. As of that
date, 65% of the Group's $20.8 million in fixed maturity securities will mature
by March 31, 2006 and it is management's intent to hold these securities to
maturity.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of these consolidated financial statements as well as
the reported amount of revenues and expenses during this reporting period.
Actual results could differ from these estimates. Certain estimates such as fair
value and actuarial assumptions have a significant impact on the gains and
losses recorded on investments and balance of life insurance policy liabilities.
Note 2. Discontinued Operations
(a) Berkeley Capital Management
The Group entered into a definitive agreement to sell substantially all of
the assets and operations of its subsidiary, Berkeley Capital Management
("BCM"), on March 7, 2003, and on May 7, 2003 completed the sale. In connection
therewith, the results of operations of BCM for 2003 up to completion of the
sale have been reported in discontinued operations.
36
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of BCM's pre-tax operating results for the year ended December
31, 2003 is shown below.
Year Ended
December 31,
2003 (1)
------------
(In thousands)
Revenues:
Asset management fees.............................................................................. $ 1,369
------------
Total revenues..................................................................................... 1,369
Operating expenses................................................................................. 1,403
------------
Loss before income taxes........................................................................... $ (34)
------------
------------
<FN>
(1) Partial year up to sale completion.
</FN>
The $7,949,000 gain on sale of discontinued operations, net of tax of $0,
was recorded in the second quarter of 2003 and reported in the Group's Form 10-Q
for that quarter.
Previously, BCM was included in the Group's asset management business
segment.
(b) London Pacific Advisors
On May 9, 2003, the Group entered into a definitive agreement to sell all
of the outstanding stock of its subsidiaries, London Pacific Advisory Services,
Inc., London Pacific Securities, Inc. and LPA Insurance Agency, Inc., together
with the associated assets of the advisory business held within London Pacific
Technologies, Inc. and LP Advisors, Inc. (collectively, "LPA"). On June 5, 2003,
the Group completed the sale. In connection therewith, the results of operations
of LPA for 2003 up to completion of the sale have been reported as discontinued
operations.
A summary of LPA's pre-tax operating results for the year ended December
31, 2003 is shown below.
Year Ended
December 31,
2003 (1)
------------
(In thousands)
Revenues:
Investment income.................................................................................. $ 4
Gross financial advisory services fees............................................................. 5,820
Payments due to independent advisors............................................................... (3,477)
-------------
Total net revenues................................................................................. 2,347
Expenses........................................................................................... 4,069
------------
Loss before income taxes........................................................................... $ (1,722)
------------
------------
<FN>
(1) Partial year up to sale completion.
</FN>
37
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The $3,772,000 gain on sale of discontinued operations, and tax expense on
the gain of $36,000, were recorded in the second quarter of 2003 and reported in
the Group's Form 10-Q for that quarter.
Previously, LPA was included in the Group's financial advisory services
business segment.
Note 3. Investments
Summary Cost and Fair Value Information
Fixed Maturity Securities
An analysis of fixed maturity securities is as follows:
December 31,
------------------------------------------------------------------------------------
2005 2004
---------------------------------------- -----------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
-------- -------- --------- --------- --------- --------- -------- ---------
(In thousands)
Available-for-Sale:
Non-U.S. corporate
debt securities......... $ 8,500 $ 38 $ - $ 8,538 $ 19,117 $ 65 $ (29) $ 19,153
Corporate debt securities.. 5,309 - (18) 5,291 2,224 1 (1) 2,224
-------- -------- --------- --------- --------- --------- -------- ---------
13,809 38 (18) 13,829 21,341 66 (30) 21,377
-------- -------- --------- --------- --------- --------- -------- ---------
Held-to-Maturity:
Corporate debt securities.. 7,011 - (29) 6,982 - - - -
-------- -------- --------- --------- --------- --------- -------- --------
7,011 - (29) 6,982 - - - -
-------- -------- --------- --------- --------- --------- -------- --------
Total fixed maturity securities $ 20,820 $ 38 $ (47) $ 20,811 $ 21,341 $ 66 $ (30) $ 21,377
-------- -------- --------- --------- --------- --------- -------- --------
-------- -------- --------- --------- --------- --------- -------- --------
As of December 31, 2005, there were no non-income producing fixed maturity
securities for the twelve months preceding December 31, 2005.
38
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Contractual Maturities
The amortized cost and estimated fair value of fixed maturity securities as
of December 31, 2005 by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities as certain issuers have the
right to call and certain borrowers have the right to prepay obligations without
penalty.
Available-for-Sale Held-to-Maturity
----------------------------- ------------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
------------- ------------- ------------ ------------
(In thousands)
Due in one year or less........................... $ 13,809 $ 13,829 $ 7,011 $ 6,982
Due after one year through five years............. - - - -
------------ ------------ ------------ ------------
$ 13,809 $ 13,829 $ 7,011 $ 6,982
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Equity Securities
Equity securities are comprised of available-for-sale and trading
securities. An analysis of equity securities is as follows:
December 31,
------------------------------------------------------------------------------------
2005 2004
---------------------------------------- -----------------------------------------
Gross Gross Estimated Gross Gross Estimated
Unrealized Unrealized Fair Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
-------- -------- --------- --------- --------- --------- -------- ---------
(In thousands)
Private corporate equity
securities.............. $ 850 $ - $ - $ 850 $ 850 $ - $ - $ 850
-------- -------- --------- --------- --------- --------- -------- --------
Total available-for-sale
equity securities....... 850 - - 850 850 - - 850
Trading securities......... 102 7 (25) 84 586 20 (54) 552
-------- -------- --------- --------- --------- --------- -------- --------
Total equity securities.... $ 952 $ 7 $ (25) $ 934 $ 1,436 $ 20 $ (54) $ 1,402
-------- -------- --------- --------- --------- --------- -------- --------
-------- -------- --------- --------- --------- --------- -------- --------
Trading securities are carried at fair value with changes in net unrealized
gains and losses of $17,000, $(12,373,000) and $22,617,000 included in the
income and losses for the years ended December 31, 2005, 2004 and 2003,
respectively.
Investment Concentration and Risk
As of December 31, 2005, fixed maturity securities held by the Group
included investments in Ford Motor Credit ("FMC") of $6,007,000 and General
Motors Acceptance Corp. ("GMAC") of $5,995,000. These two corporate issuers each
represented more than 10% of shareholders' equity as of December 31, 2005.
However, the FMC and GMAC bonds matured on February 1, 2006 and January 15,
2006, respectively, and the Group received repayment of principal in full and
all interest due on these bonds.
39
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2005, the Company's Jersey based life insurance
subsidiary, LPAL, owned 66% of the Group's $20.8 million in fixed maturity
securities, 99% of the Group's $0.9 million in available-for-sale private equity
securities, and none of the Group's $84,000 in trading securities. LPAL is a
regulated insurance company, and as such it must meet stringent capital adequacy
requirements and it may not make any distributions without the consent of LPAL's
independent actuary. LPAL'S investments are therefore not currently available to
fund the operations or commitments of the Company or its other subsidiaries.
Fixed maturity securities considered less than investment grade (excluding
split-rated securities) approximated 30.2% and 1.4% of total fixed maturity
securities as of December 31, 2005 and 2004, respectively. On May 5, 2005, one
of the two major credit rating agencies in the U.S. downgraded the long-term
credit ratings of FMC and GMAC to less than investment grade. On August 24,
2005, the other major credit rating agency in the U.S. downgraded the long-term
credit rating of GMAC to less than investment grade. As discussed above, the
Group's FMC and GMAC holdings, which total $12.0 million in aggregate,
representing 57.6% of the Group's total fixed maturity securities as of December
31, 2005, have matured in early 2006. Both holdings were repaid in full at
maturity of these bonds.
Net Unrealized Gains (Losses) on Available-for-Sale Securities
Net unrealized gains on fixed maturity securities classified as
available-for-sale as of December 31, 2005 and 2004 totaled $20,000 and $36,000,
respectively. There were no related income taxes.
There were no net unrealized losses on equity securities classified as
available-for-sale as of December 31, 2005 or 2004.
Changes in net unrealized gains and losses on available-for-sale securities
included in other comprehensive income for the years ended December 31, 2003,
2004 and 2005 were as follows:
Net Unrealized Gains (Losses)
----------------------------------
Fixed
Maturity Equity
Securities Securities Total
---------- ---------- ----------
(In thousands)
Net unrealized losses on available-for-sale securities as of December 31, 2002 $ (146) $ (1,750) $ (1,896)
Changes during the year ended December 31, 2003:
Unrealized holding gains and losses on available-for-sale securities...... 54 - 54
Reclassification adjustment for gains and losses included in net income... 82 1,750 1,832
---------- ---------- ----------
Net unrealized losses on available-for-sale securities as of December 31, 2003 (10) - (10)
Changes during the year ended December 31, 2004:
Unrealized holding gains and losses on available-for-sale securities...... 64 - 64
Reclassification adjustment for gains and losses included in net loss..... (18) - (18)
---------- ---------- ----------
Net unrealized gains on available-for-sale securities as of December 31, 2004 36 - 36
Changes during the year ended December 31, 2005:
Unrealized holding gains and losses on available-for-sale securities...... (44) - (44)
Reclassification adjustment for gains and losses included in net loss..... 28 - 28
---------- ---------- ----------
Net unrealized gains on available-for-sale securities as of December 31, 2005 $ 20 $ - $ 20
---------- ---------- ----------
---------- ---------- ----------
40
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net Investment Income
The details of investment income, net of investment expenses, are as
follows:
Years Ended December 31,
----------------------------------
2005 2004 2003
---------- ---------- ----------
(In thousands)
Interest on fixed maturity securities........................................ $ 1,217 $ 1,131 $ 1,611
Interest on cash and cash equivalents........................................ 347 268 280
---------- ---------- ----------
Gross investment income...................................................... 1,564 1,399 1,891
Investment expenses.......................................................... (2) (2) (4)
---------- ---------- ----------
1,562 1,397 1,887
Amounts credited on insurance policyholder accounts.......................... (980) (1,358) (1,922)
---------- ---------- ----------
Net investment income (loss)................................................. $ 582 $ 39 $ (35)
---------- ---------- ----------
---------- ---------- ----------
Investment expenses included costs of investment administration, primarily
custodial fees.
Realized Gains and Losses
Information about gross and net realized gains and losses on securities
transactions is as follows:
Years Ended December 31,
----------------------------------
2005 2004 2003
---------- ---------- ----------
(In thousands)
Realized gains (losses) on securities transactions:
Fixed maturities, available-for-sale:
Gross gains............................................................... $ - $ - $ 43
Gross losses ............................................................. - - (286)
---------- ---------- ----------
Net realized losses on fixed maturities, available-for-sale.................. - - (243)
---------- ---------- ----------
Equity securities, trading:
Gross gains............................................................... 22 8,219 4,874
Gross losses.............................................................. (65) (265) (15,237)
---------- ---------- ----------
Net realized gains (losses) on equity securities, trading.................... (43) 7,954 (10,363)
---------- ---------- ----------
Equity securities, available-for-sale:
Gross gains............................................................... - 121 9
Gross losses.............................................................. - (3,375) (4,715)
---------- ---------- ----------
Net realized losses on equity securities, available-for-sale................. - (3,254) (4,706)
---------- ---------- ----------
Net realized investment gains (losses) on securities transactions............ $ (43) $ 4,700 $ (15,312)
---------- ---------- ----------
---------- ---------- ----------
During 2004, the Group's management determined that one private equity
investment in a technology company was other-than-temporarily impaired and
consequently recorded a realized loss of $3.4 million in the
41
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
consolidated statement of operations. During 2003, the Group recorded realized
losses totaling $4.7 million in the consolidated statement of operations on
three private equity investments in technology companies that the Group's
management determined were other-than-temporarily impaired. There were no
impairments recorded in 2005.
Note 4. Cash Held in Escrow
Cash held in escrow consists of the proceeds from the sale of LPA to
SunGard Business Systems Inc. ("SunGard") on June 5, 2003 which were held back
to cover any of the Group's indemnity obligations within the 18 month period
following the close of the transaction. Funds were due to be released with
accrued interest in December 2004, less any amounts related to indemnification
matters as set out in the sale and purchase agreement. The Company was made
aware on March 8, 2005 of SunGard's complaint with respect to alleged losses in
an amount equal to at least $7.2 million resulting from, among other things,
alleged breaches of representations and warranties contained in the sale and
purchase agreement. SunGard is also seeking indemnification from the Company.
After consultation with its legal advisors, the Group's management believes that
this claim is without merit, and the Group is defending the matter vigorously.
Due to this indemnification claim by SunGard, the $1.0 million in cash held in
escrow was not released to the Group in December 2004 as scheduled. The Company
has not made any reserve against the $1.0 million in escrow.
For further information regarding these legal proceedings, see Note 11
"Commitments and Contingencies" below.
Note 5. Property and Equipment
Property and equipment are carried at cost and consisted of the following:
December 31,
----------------------
2005 2004
---------- ----------
(In thousands)
Property, equipment and leasehold improvements.................................... $ 745 $ 743
Accumulated depreciation.......................................................... (702) (673)
---------- ----------
Property and equipment, net....................................................... $ 43 $ 70
---------- ----------
---------- ----------
Note 6. Other Assets
An analysis of other assets is as follows:
December 31,
----------------------
2005 2004
---------- ----------
(In thousands)
Prepayments....................................................................... $ 202 $ 422
Receivables:
Fee income receivable.......................................................... 84 175
Other receivables.............................................................. 25 24
---------- ----------
Total other assets................................................................ $ 311 $ 621
---------- ----------
---------- ----------
42
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7. Life Insurance Policy Liabilities
An analysis of life insurance policy liabilities is as follows:
December 31,
----------------------
2005 2004
---------- ----------
(In thousands)
Deferred annuities - policyholder contract deposits............................... $ 13,322 $ 21,091
Other policy claims and benefits.................................................. 251 138
---------- ----------
$ 13,573 $ 21,229
---------- ----------
---------- ----------
The liability for future policy benefits and policyholder contract deposits
was determined based on the following assumptions:
Interest Rate Assumptions
Guaranteed reset rates were 3.0% for seven year annuity products issued in
2002. For three and five year annuity products, credited interest rates
generally ranged from 4.20% to 7.40% in 2005, 3.75% to 7.40% in 2004, and from
3.30% to 7.40% in 2003.
Mortality Assumptions
Assumed mortality rates were based on standard tables commonly used in the
U.K. life insurance industry, namely the AM80 table for male lives and the AF80
table for female lives.
Withdrawal Assumptions
Withdrawal charges on deferred annuities generally ranged from 1% to 7%,
grading to zero over a period of up to 7 years.
Note 8. Statutory Financial Information and Restrictions
LPAL is regulated by the Jersey Financial Services Commission ("JFSC") and
under Article 6 of the Insurance Business (Jersey) Law 1996 is permitted to
conduct long-term insurance business. The JFSC requires LPAL to submit annual
audited financial statements (prepared under U.S. GAAP which is permitted), and
an audited annual filing in the format consistent with that required by the
Financial Services Authority in the United Kingdom. The annual filing submitted
by LPAL to the JFSC must be accompanied by a Certificate from the Appointed
Actuary that based on sufficiently prudent assumptions, assets are sufficient to
cover all liabilities. The annual filing contains a report from the Appointed
Actuary on the matching of investments to liabilities.
The JFSC sets out the conditions with which LPAL must comply and determines
the reporting requirements and the frequency of reporting. These conditions
require that: (i) LPAL must hold, at all times, approved assets at least equal
to the long-term insurance fund plus the required minimum solvency margin, (ii)
the margin of solvency must be the greater of (pound)50,000 or 2.5% of the value
of the long-term business fund, and (iii) assets equal to not less than 90% of
liabilities must be placed with approved independent custodians. As of December
31, 2005, LPAL met all of these conditions.
43
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
LPAL is also required under the insurance laws to appoint an actuary. The
actuary must be qualified as defined under Jersey law and is required to
supervise the long-term insurance fund. No transfers, except in satisfaction of
long-term insurance business liabilities, including dividends, are permitted
from the long-term insurance fund without written consent from the actuary.
Note 9. Income Taxes
The Group is subject to taxation on its income in all countries in which it
operates based upon the taxable income arising in each country. However,
realized gains on certain investments are exempt from Jersey and Guernsey
taxation. This and other tax benefits which may not recur have reduced the tax
charge in 2005, 2004 and 2003.
The Group is subject to income tax in Jersey at a rate of 20%. In the
United States, the Group is subject to both federal and California taxes at
rates up to 34% and 8.84%, respectively.
A breakdown of the Group's book income (loss) from continuing operations
before income taxes by tax jurisdiction follows:
Years Ended December 31,
----------------------------------
2005 2004 2003
---------- ---------- ----------
(In thousands)
Income (loss) from continuing operations before income taxes:
Jersey, Guernsey and United Kingdom.......................................... $ (1,878) $ (11,049) $ 2,570
United States................................................................ (1,357) (802) (1,523)
---------- ---------- ----------
Total income (loss) from continuing operations before income taxes........... $ (3,235) $ (11,851) $ 1,047
---------- ---------- ----------
---------- ---------- ----------
The provision for income taxes differs from the amount computed by applying
the Jersey, Channel Islands statutory income tax rate of 20% to income (loss)
from continuing operations before income taxes. The sources and tax effects of
the difference are as follows:
Years Ended December 31,
----------------------------------
2005 2004 2003
---------- ---------- ----------
(In thousands)
Income tax expense (benefit) computed at Jersey statutory income tax
rate of 20%............................................................... $ (647) $ (2,370) $ 209
Realized and unrealized investment losses (gains) not subject to taxation
in Jersey................................................................. 5 1,412 (474)
Other losses not deductible in Jersey........................................ 359 619 896
Losses not deductible (income not taxable) in Guernsey....................... (22) 144 (962)
Tax benefit on losses at higher than 20% statutory Jersey rate:
Net loss on continuing operations in the U.S.............................. (310) (183) (348)
Adjustment of prior years' provisions........................................ 11 (308) (33)
Increase in valuation allowance.............................................. 582 941 47,962
Less: valuation allowance related to discontinued operations................. - - (52,238)
Utilization of U.S. capital loss carryforwards for which a full valuation
allowance had been provided in prior years................................ - - 4,100
Other........................................................................ 34 35 846
---------- ---------- ----------
Actual tax expense (benefit) for continuing operations ...................... $ 12 $ 290 $ (42)
---------- ---------- ----------
---------- ---------- ----------
44
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of the actual tax expense (benefit) for continuing
operations are as follows:
Years Ended December 31,
----------------------------------
2005 2004 2003
---------- ---------- ----------
(In thousands)
Jersey, Guernsey and United Kingdom:
Current tax benefit....................................................... $ - $ - $ (33)
Deferred tax expense...................................................... - - -
United States:
Current tax expense (benefit)............................................. 12 290 (9)
Deferred tax expense...................................................... - - -
---------- ---------- ----------
Total actual tax expense (benefit)........................................... $ 12 $ 290 $ (42)
---------- ---------- ----------
---------- ---------- ----------
The components of the actual tax expense for discontinued operations are as
follows:
Years Ended December 31,
----------------------------------
2005 2004 2003
---------- ---------- ----------
(In thousands)
United States:
Current tax expense....................................................... $ - $ - $ 38
Deferred tax expense...................................................... - - -
---------- ---------- ----------
$ - $ - $ 38
---------- ---------- ----------
---------- ---------- ----------
The Group recognizes assets and liabilities for the deferred tax
consequences of temporary differences between the tax basis of assets and
liabilities and their reported amounts in the financial statements. These
temporary differences will result in taxable or deductible amounts in future
years when the reported amounts of assets and liabilities are recovered or
settled. The deferred income tax assets are reviewed periodically for
recoverability and valuation allowances are provided as necessary. Deferred
income tax assets and liabilities are disclosed net in the consolidated
financial statements when they arise within the same tax jurisdiction and tax
return.
45
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets and deferred income tax liabilities
are presented below. As of both December 31, 2004 and December 31, 2005, full
valuation allowances were provided on the net deferred tax assets of both U.S.
tax groups due to the uncertainty of generating future taxable income or capital
gains to benefit from the deferred tax assets.
December 31,
----------------------
2005 2004
---------- ----------
(In thousands)
U.S. subsidiaries:
Deferred income tax assets:
Net operating loss carryforwards.................................................. $ 9,645 $ 9,061
Capital loss carryforwards........................................................ 67,283 67,283
Unrealized losses on investments.................................................. 8 7
Deferred compensation............................................................. 4 7
Other assets...................................................................... 2 2
Valuation allowance............................................................... (76,905) (76,323)
---------- ----------
Deferred income tax assets, net of valuation allowance............................ 37 37
Deferred income tax liabilities:
Deferred capital gains............................................................ (36) (36)
Depreciation, amortization and other.............................................. (1) (1)
---------- ----------
(37) (37)
---------- ----------
Net deferred income tax assets - U.S. subsidiaries................................ $ - $ -
---------- ----------
---------- ----------
As of December 31, 2005, the U.S. subsidiaries of continuing operations had
pre-tax federal net operating loss carryforwards of approximately $24.1 million
expiring as follows: approximately $1.3 million in 2011, and approximately $22.8
million from 2020 to 2025. These subsidiaries have California net operating loss
carryforwards of approximately $16.2 million expiring from 2012 to 2015. In
addition, these subsidiaries have federal capital loss carryforwards of $157.3
million ($156.0 million for California purposes) that expire in 2007. The Group
has recorded a full valuation allowance for the deferred tax assets arising from
these carryforward amounts as of December 31, 2005, due to the uncertainty of
generating future taxable income or capital gains to benefit from the deferred
tax assets.
Note 10. Shareholders' Equity
The Company has authorized 86,400,000 Ordinary Shares with a par value of
$0.05 per share. As of December 31, 2005 and 2004, there were 64,439,073
Ordinary Shares issued and outstanding.
No dividends were declared and paid in 2003, 2004 or 2005.
Accumulated other comprehensive income (loss) consists of two components,
foreign currency translation adjustments and net unrealized gains and losses on
available-for-sale securities. Accumulated foreign currency translation
adjustments were $(383,000), $(338,000) and $(429,000) as of December 31, 2005,
2004 and 2003, respectively. The net unrealized gains (losses) on
available-for-sale securities after deferred income taxes were $20,000, $36,000
and $(10,000) as of December 31, 2005, 2004 and 2003, respectively. None of
these amounts related to discontinued operations.
46
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Group has two share incentive plans as described in Note 13 "Share
Incentive Plans." Under the terms of these plans, shares of the Company may be
purchased in the open market and held in trust. These shares are owned by the
employee benefit trusts, which are subsidiaries of the Company for financial
reporting purposes.
Changes in the number of shares held by The London Pacific Group 1990
Employee Share Option Trust ("ESOT") and the Agent Loyalty Opportunity Trust
("ALOT") were as follows:
Years Ended December 31,
----------------------------------------------------------------------------
2005 2004 2003
----------------------- ----------------------- ------------------------
ESOT ALOT ESOT ALOT ESOT ALOT
---------- ---------- ---------- ---------- ---------- ----------
(In thousands)
Shares held as of January 1........... 13,247 438 13,247 438 13,247 438
Purchased............................. - - - - - -
Exercised............................. (163) - - - - -
---------- ---------- ---------- ---------- ---------- ----------
Shares held as of December 31......... 13,084(1) 438 13,247(1) 438 13,247(1) 438
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
<FN>
(1) 834,000 shares are held in ADR form.
</FN>
Warrants
On November 11, 2002, the Company agreed to grant 1,933,172 warrants to
subscribe for the Company's Ordinary Shares to Bank of Scotland in connection
with the extension of the Group's credit facility (which was fully repaid and
terminated in June 2003). The warrants were granted on February 14, 2003 and
have an exercise price of (pound)0.1143 (based on the average of the closing
prices of the Ordinary Shares over the trading days from November 1, 2002
through November 11, 2002), which was higher than the market price of
(pound)0.09 on November 11, 2002. These warrants are exercisable at any time
prior to February 14, 2010 and their fair value was determined to be $251,125,
based on a risk-free rate of 2.80%, volatility of 179% and a dividend yield of
zero. The Company recognized $30,625 of expense relating to these warrants in
2002. The balance of $220,500 was recognized as an expense in 2003, with the
corresponding entries to additional paid-in capital.
Note 11. Commitments and Contingencies
Lease Commitments
The Group leases office space under operating leases. Total rent expense on
operating leases in the continuing operations was $230,000, $288,000 and
$407,000 for the years ended December 31, 2005, 2004 and 2003, respectively. The
Group had no capital leases as of December 31, 2005.
47
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Future minimum lease payments required under non-cancellable operating
leases with terms of one year or more, as of December 31, 2005, were as follows:
Operating
Leases(1)
------------
(In thousands)
2006............................................................................................... $ 221
2007............................................................................................... 115
2008............................................................................................... 115
2009............................................................................................... 115
2010............................................................................................... 58
2011 and thereafter ............................................................................... -
------------
Total.............................................................................................. $ 624
------------
------------
<FN>
(1) Includes commitments related to the Group's Jersey office lease which expires in September 2010. The Group is currently
evaluating sublease options for which no commitment has been entered into as of March 30, 2006.
</FN>
Commitments eliminated following the disposals of BCM and LPA during 2003
(as described in Note 2 "Discontinued Operations") for operating and capital
lease commitments were approximately $1.9 million and $0.1 million,
respectively.
Guarantees
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others - an interpretation of FASB
Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34." The
following is a summary of the Company's agreements that the Company has
determined are within the scope of FIN 45.
Under its Memorandum and Articles of Association, the Company has agreed to
indemnify its officers and directors for certain events or occurrences arising
as a result of the officer or director serving in such capacity. The maximum
potential amount of future payments the Company could be required to make under
these indemnification agreements is unlimited. However, the Company maintains
directors and officers liability insurance that limits the Company's exposure
and enables it to recover a portion of any future amounts paid. As a result of
its insurance coverage, the Company believes the estimated fair value of these
indemnification agreements is minimal and has no liabilities recorded for these
agreements as of December 31, 2005.
The Company enters into indemnification provisions under its agreements
with other companies in its ordinary course of business, typically with business
partners, clients and landlords. Under these provisions, the Company generally
indemnifies and holds harmless the indemnified party for losses suffered or
incurred by the indemnified party as a result of the Company's activities. These
indemnification provisions sometimes include indemnifications relating to
representations made by the Company with regard to intellectual property rights.
These indemnification provisions generally survive termination of the underlying
agreement. The maximum potential amount of future payments the Company could be
required to make under these indemnification provisions is unlimited. The
Company believes the estimated fair value of these agreements is minimal.
Accordingly, the Company has no liabilities recorded for these agreements as of
December 31, 2005.
48
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Contingencies
As previously disclosed in the Company's 2002 to 2004 audited consolidated
financial statements, and notes thereto, included in the Company's Annual Report
on Form 10-K for each of those years, the Company's primary insurance company,
London Pacific Life & Annuity Company ("LPLA"), in August 2002 was placed under
regulatory control and rehabilitation based on LPLA's statutory capital and
surplus as of June 30, 2002. On July 9, 2004, a court order was issued approving
a plan of liquidation for LPLA and also approving exchange agreements which give
policyholders the option of exchanging their existing policies for new policies
in another insurance company. In the course of the administration of LPLA in
rehabilitation, the North Carolina Department of Insurance ("NCDOI") requested
information concerning the history of a limited number of investments in
securities of portfolio companies during November 2002. These portfolio
investments have been associated with LPLA for more than seven years, and
involve intercompany transfers. The history of their investment performance and
ownership is complex. The Company has complied with these requests. The Company
is not able at this time to predict what conclusions the NCDOI will reach after
evaluation of this information.
On February 17, 2005, SunGard filed a lawsuit in the U.S. District Court in
Philadelphia against the Company and certain of its subsidiaries. SunGard's
complaint alleged losses in an amount equal to at least $7.2 million resulting
from alleged breaches of representations and warranties contained in the May
2003 agreement governing the sale to SunGard of London Pacific Advisors, the
Group's financial advisory services business.
On April 27, 2005, the Group filed a lawsuit against SunGard and certain of
its affiliates in California Superior Court in San Francisco ("the Court")
accusing SunGard of wrongful conduct and seeking payment of $1.0 million of the
initial purchase consideration which is currently held in an escrow account, up
to $8.0 million in additional earnout payments, and further damages for
SunGard's prior wrongful actions. The Group is also asking the Court to award
the Group compensatory, exemplary and punitive damages.
The Group also filed a motion to dismiss, for lack of subject matter
jurisdiction, SunGard's lawsuit against the Group in Pennsylvania. SunGard then
voluntarily dismissed its federal action against the Group and filed a new
complaint in the court of Common Pleas, Chester County, Pennsylvania. This new
complaint alleges essentially the same claims against the same parties that were
contained in SunGard's federal action. Based upon substantial document discovery
and deposition testimony already completed, and ongoing consultation with the
Group's legal advisors, the Group believes that there is no merit to SunGard's
claims against the Group, and the Group will continue to vigorously defend
itself. As such, the Group's management does not believe that any provision for
this contingent liability in the Group's financial statements as of December 31,
2005 is warranted.
On June 3, 2005, SunGard filed a motion to dismiss or stay the Group's
California Superior Court action on jurisdictional grounds. On July 26, 2005,
the California court denied SunGard's motion. On August 25, 2005, SunGard
appealed that decision. Its appeal was summarily denied by the California court
of appeals on September 22, 2005. In response, on October 12, 2005, SunGard
filed a motion seeking to dismiss 13 of the 14 claims contained in the Group's
California complaint. On January 3, 2006, the Court heard this motion and
dismissed three of the Group's claims and allowed the Group to amend six of its
remaining claims. On January 6, 2006, the Group lodged an 11-count amended
complaint which amended and supplemented the Group's claims based upon the
substantial document discovery it has now received from SunGard. SunGard
responded by filing another motion, this time to dismiss nine of the Group's 11
claims. SunGard also sought to seal the Group's amended complaint from public
view. On March 1, 2006, the Court heard SunGard's motions and dismissed four of
the Group's 11 claims. The Court then ordered SunGard to answer the Group's
seven remaining claims within 20 days of its March 14, 2006 order. The Court
also denied SunGard's motion to seal the Group's amended complaint.
49
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On June 10, 2005, the Group filed a petition to dismiss SunGard's complaint
in the Pennsylvania court. That motion has not yet been heard.
Costs relating to the above matters are recognized in the Group's statement
of operations as they are incurred.
Note 12. Fair Value of Financial Instruments
Substantially all financial instruments used in the Group's trading and
investing activities are carried at fair value or amounts that approximate fair
value. Fair value is based generally on listed market prices or broker-dealer
price quotations. To the extent that prices are not readily available, estimated
fair value is based on valuation methodologies performed by management, which
evaluate company, industry, geographical and overall equity market factors that
would influence the security's fair value.
With the exception of the fixed maturity securities classified as
held-to-maturity, which are held at amortized cost, the carrying values of the
Group's financial assets are equal to estimated fair value. (The Group did not
hold any fixed maturity securities classified as held-to-maturity as of December
31, 2004.)
Considerable judgment is required in interpreting market data used to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that could be realized in a
current market exchange. The use of different market assumptions or estimation
methodologies may have a material effect on the estimated fair value amounts.
The carrying values and estimated fair values of the Group's financial
instruments were as follows:
December 31,
----------------------------------------------
2005 2004
---------------------- ----------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
---------- ---------- ---------- ----------
(In thousands)
Financial assets:
Cash and cash equivalents........................ $ 10,039 $ 10,039 $ 19,495 $ 19,495
Cash held in escrow.............................. 1,027 1,027 1,005 1,005
Investments:
Fixed maturities:
Available-for-sale........................ 13,829 13,829 21,377 21,377
Held-to-maturity.......................... 7,011 6,982 - -
Equity securities:
Trading................................... 84 84 552 552
Available-for-sale........................ 850 850 850 850
Financial liabilities:
Life insurance policy liabilities................ 13,573 13,432 21,229 20,982
50
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following methods and assumptions were used by the Group in estimating
the fair value of the financial instruments presented:
Cash, Cash Equivalents and Cash Held in Escrow: The carrying amounts reported in
the consolidated balance sheet for these instruments approximated fair value.
Fixed Maturity Securities: Fair values for actively traded fixed maturity
securities classified as available-for-sale and held-to-maturity were generally
based upon quoted market prices. Fair values for private corporate debt
securities were based on the results of valuation methodologies performed by
management.
Equity Securities:
a) Trading Securities: Fair values for equity securities classified as trading
were based on quoted market prices.
b) Available-for-Sale Securities: Fair values for equity securities classified
as available-for-sale were based upon the results of management's valuation
methodologies, including analysis of company, industry, geographical and overall
equity market factors which influence fair value.
Life Insurance Policy Liabilities: The balance sheet caption "life insurance
policy liabilities" includes investment-type insurance contracts (i.e., deferred
annuities). The estimated fair values of deferred annuity policies were based on
their account values after deduction of surrender charges.
Note 13. Share Incentive Plans
The Group has two share incentive plans for employees, agents and directors
of Berkeley Technology Limited and its subsidiaries that provide for the
issuance of share options and stock appreciation rights.
Employee Share Option Trust
The London Pacific Group 1990 Employee Share Option Trust ("ESOT"), which
was approved by shareholders in 1990, provides for the granting of share options
to employees and directors. The objectives of this plan include retaining the
best personnel and providing for additional performance incentives. Options are
generally granted with an exercise price equal to the fair market value of the
underlying shares at the date of grant. Such grants to employees are generally
exercisable in four equal annual installments beginning one year from the date
of grant, subject to employment continuation, and expire seven or ten years from
the date of grant. Such grants to directors are fully vested on the date of
grant and expire seven or ten years from the date of the grant.
The ESOT may purchase shares of the Company in the open market, funded each
year by a loan from the Company or its subsidiaries. While the loan is limited
up to an annual maximum of 5% of the consolidated net assets of the Group, the
ESOT is not limited as to the number of options that may be granted. The loan is
secured by the shares held in the trust, is interest free, and is eliminated in
the consolidated financial statements. The ESOT has waived its entitlement to
dividends on any shares held. See Note 10 "Shareholders' Equity" for a summary
of the share activity within the ESOT.
Share option activity for the years ended December 31, 2005, 2004 and 2003
was as follows:
51
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2005 2004 2003
-------------------- -------------------- ------------------
Weighted- Weighted- Weighted-
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
(Options in thousands) Options Price Options Price Options Price
--------- --------- --------- --------- -------- --------
Outstanding as of January 1...................... 6,940 $ 3.00 8,945 $ 3.10 13,575 $ 3.10
Granted.......................................... 1,000 0.15 - - - -
Exercised........................................ (163) 0.11 - - - -
Forfeited........................................ (808) 1.46 (2,005) 3.46 (2,517) 3.12
Expired.......................................... (684) 3.39 - - (2,113) 3.09
--------- --------- --------- --------- -------- --------
Outstanding as of December 31.................... 6,285 $ 2.77 6,940 $ 3.00 8,945 $ 3.10
--------- --------- --------- --------- -------- --------
--------- --------- --------- --------- -------- --------
2005 2004 2003
-------------------- -------------------- ------------------
Weighted- Weighted- Weighted-
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
(Options in thousands) Options Price Options Price Options Price
--------- --------- --------- --------- -------- --------
Options exercisable as of December 31............ 4,881 $ 3.52 5,685 $ 3.57 7,046 $ 3.82
--------- --------- --------- --------- -------- --------
--------- --------- --------- --------- -------- --------
The Group accounts for stock based compensation using the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees."
See Note 1 "Summary of Significant Accounting Policies" for a
reconciliation of net income (loss) as reported and as adjusted under SFAS 123.
Summary information about the Group's share options outstanding as of
December 31, 2005 is as follows:
Options Outstanding Options Exercisable
----------------------------------------------- --------------------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ------------ ------------- ----------- ------------ --------------- ------------
(In thousands) (Years) (In thousands)
$ 0.10 - $0.50 2,915 7.52 $0.27 1,511 $ 0.33
0.51 - 5.00 1,220 1.15 3.36 1,220 3.36
5.01 - 10.00 2,090 5.24 5.40 2,090 5.40
10.01 - 21.00 60 4.68 21.00 60 21.00
- --------------- ------------- ----------- ------------ --------------- ------------
$ 0.10 - $21.00 6,285 5.50 $2.77 4,881 $3.52
- --------------- ------------- ----------- ------------ --------------- ------------
- --------------- ------------- ----------- ------------ --------------- ------------
Agent Loyalty Opportunity Trust
The Agent Loyalty Opportunity Trust ("ALOT") provides for the granting of
stock appreciation rights ("SARs") on the Company's Ordinary Shares to agents of
LPLA. The ALOT was established in 1997 without shareholders' approval. Each
award unit entitles the holder to cash compensation equal to the difference
between the Company's prevailing share price and the exercise price. The award
units are exercisable in four
52
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
equal annual installments commencing on the first anniversary of the date of
grant and are forfeited upon termination of the agency contract. Vesting of the
award in any given year is also contingent on the holder of the award surpassing
a predetermined benchmark tied to sales and persistency. The SARs expire seven
years from the date of grant. The 79,000 awards outstanding at December 31, 2005
will expire in April 2006. Subsequent to that date, the Group's management
intends to recommend to the trustees that the Ordinary Shares held by the ALOT
be sold to the ESOT and that the ALOT be dissolved.
The ALOT may purchase Ordinary Shares in the open market, funded by a loan
from a Group subsidiary. The loan is secured by the shares held in the trust and
bears interest based upon the trust's net income before interest for each
financial period. The trust receives dividends on all Ordinary Shares held. The
loan, interest income and dividend income are eliminated in the consolidated
financial statements. See Note 10 "Shareholders' Equity" for a summary of the
share activity within the ALOT.
SAR activity for the years ended December 31, 2005, 2004 and 2003 was as
follows:
2005 2004 2003
---------------------------------------------------------------
Weighted- Weighted- Weighted-
Number Average Number Average Number Average
of Award Exercise of Award Exercise of Award Exercise
(Award units in thousands) Units Price Units Price Units Price
--------- --------- --------- --------- -------- --------
Outstanding as of January 1...................... 290 $ 3.85 388 $ 3.73 388 $ 3.73
Granted.......................................... - - - - - -
Exercised........................................ - - - - - -
Forfeited........................................ - - - - - -
Expired.......................................... (211) 3.35 (98) 3.35 - -
--------- --------- --------- --------- -------- --------
Outstanding as of December 31.................... 79 $ 5.19 290 $ 3.85 388 $ 3.73
--------- --------- --------- --------- -------- --------
--------- --------- --------- --------- -------- --------
Award units exercisable as of December 31........ 42 $ 5.19 187 $ 3.76 284 $ 3.62
--------- --------- --------- --------- -------- --------
--------- --------- --------- --------- -------- --------
Summary information about the Group's SARs outstanding as of December 31,
2005 is as follows:
Award Units Outstanding Award Units Exercisable
---------------------------------------------- -----------------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- --------------- ------------- ----------- ------------ -------------- -----------
(In thousands) (Years) (In thousands)
$5.19 79 0.28 $5.19 42 $5.19
- --------------- ------------- ---------- ------------- ------------- -----------
- --------------- ------------- ---------- ------------- ------------- -----------
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation, an Interpretation of APB Opinion No. 25," which was
effective for all awards granted after July 1, 2000.
Compensation expense relating to award grants in the ALOT was accounted for
under APB 25, prior to the issuance of FIN 44. Thus, no expense was recognized
at the grant dates because all awards were made with an exercise price equal to
the prevailing market value. Instead, compensation expense would be recognized
upon exercise of the awards; however, no awards have been exercised since 2001.
53
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 14. Pension Plans
Jersey Plan
Until early 2004, the Group provided a defined benefit pension plan for its
Jersey, Channel Islands, employees. This plan was terminated and the plan assets
were distributed to the participants of the plan on a pro rata basis to their
accrued benefit entitlements under the plan. The plan was dissolved in March
2005. The Group does not have any ongoing liabilities in respect of the plan
following its dissolution.
The Group made contributions of $0, $15,000 and $148,000 to the trust in
2005, 2004 and 2003, respectively.
U.K. Plan
The Group provides a defined contribution plan for its U.K. employees.
There is currently one participant in the plan. The Group has no ongoing
liabilities associated with the plan. Contributions of $154,000, $49,000 and
$41,000 were made by the Group to the plan in 2005, 2004 and 2003, respectively.
Of the 2005 contribution, $105,000 was offset by a salary waiver.
Note 15. Earnings Per Share and ADS
Earnings (loss) per ADS are equivalent to ten times earnings (loss) per
Ordinary Share, following the one-for-ten reverse split in June 2002.
A reconciliation of the numerators and denominators for the basic and
diluted earnings (loss) per share calculations in accordance with Statement of
Financial Accounting Standard No. 128 ("SFAS 128"), "Earnings per Share," is as
follows:
Years Ended December 31,
----------------------------------
2005 2004 2003
---------- ---------- ----------
(In thousands, except share, per share
and ADS amounts)
Income (loss) from continuing operations............................... $ (3,247) $ (12,141) $ 1,089
Income on discontinued operations...................................... - - 9,927
---------- ---------- ----------
Net income (loss)...................................................... $ (3,247) $ (12,141) $ 11,016
---------- ---------- ----------
---------- ---------- ----------
54
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31,
----------------------------------
2005 2004 2003
---------- ---------- ----------
(In thousands, except share, per share
and ADS amounts)
Basic earnings (loss) per share and ADS:
Weighted-average number of Ordinary Shares outstanding,
excluding shares held by the employee benefit trusts................ 50,916,692 50,754,192 50,754,192
---------- ---------- ----------
Basic earnings (loss) per share:
Continuing operations.................................................. $ (0.06) $ (0.24) $ 0.02
Discontinued operations................................................ - - 0.20
---------- ---------- ----------
$ (0.06) $ (0.24) $ 0.22
---------- ---------- ----------
---------- ---------- ----------
Basic earnings (loss) per ADS:
Continuing operations.................................................. $ (0.64) $ (2.39) $ 0.21
Discontinued operations................................................ - - 1.96
---------- ---------- ----------
$ (0.64) $ (2.39) $ 2.17
---------- ---------- ----------
---------- ---------- ----------
Diluted earnings (loss) per share and ADS:
Weighted-average number of Ordinary Shares outstanding,
excluding shares held by the employee benefit trusts................ 50,916,692 50,754,192 50,754,192
Effect of dilutive securities (warrants and employee share options) ... - - 433,706
---------- ---------- ----------
Weighted-average number of Ordinary Shares used in diluted
earnings per share calculations..................................... 50,916,692 50,754,192 51,187,898
---------- ---------- ----------
---------- ---------- ----------
Diluted earnings (loss) per share:
Continuing operations.................................................. $ (0.06) $ (0.24) $ 0.02
Discontinued operations................................................ - - 0.20
---------- ---------- ----------
$ (0.06) $ (0.24) $ 0.22
---------- ---------- ----------
---------- ---------- ----------
Diluted earnings (loss) per ADS:
Continuing operations.................................................. $ (0.64) $ (2.39) $ 0.21
Discontinued operations................................................ - - 1.94
---------- ---------- ----------
$ (0.64) $ (2.39) $ 2.15
---------- ---------- ----------
---------- ---------- ----------
As the Company recorded a net loss for the years ended December 31, 2005
and 2004, the calculations of diluted earnings per share for these years do not
include potentially dilutive employee share options and warrants issued to the
Bank of Scotland as they are anti-dilutive and, if included, would have resulted
in a reduction of the net loss per share. If the Company had reported net income
for the years ended December 31, 2005 and 2004, there would have been an
additional 66,397 and 650,913 shares, respectively, included in the calculations
of diluted earnings per share for these years.
55
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 16. Transactions with Related Parties
The Group paid legal fees of approximately $60,000, $36,000 and $76,000
during 2005, 2004 and 2003, respectively, to a law firm of which one of its
directors, Victor A. Hebert, is a member.
Note 17. Business Segment and Geographical Information
The Company's reportable operating segments are classified according to its
remaining businesses of life insurance and annuities, and venture capital and
consulting.
Due to the sales of BCM and LPA in 2003 (see Note 2 "Discontinued
Operations"), the results of operations of the Company's asset management and
financial advisory segments (up to their disposal dates) have been classified as
discontinued operations for the year ended December 31, 2003.
Intercompany transfers between reportable operating segments are accounted
for at prices which are designed to be representative of unaffiliated third
party transactions.
Summary revenue and investment gain (loss) information by geographic
segment, based on the domicile of the Group company generating those revenues,
is as follows:
Years Ended December 31,
----------------------------------
2005 2004 2003
---------- ---------- ----------
(In thousands)
Jersey................................................................. $ 1,215 $ (5,715) $ 4,220
Guernsey............................................................... 109 (720) 4,926
United States.......................................................... 769 676 52
---------- ---------- ----------
Consolidated revenues and net investment gains (losses)
for continuing operations.......................................... $ 2,093 $ (5,759) $ 9,198
---------- ---------- ----------
---------- ---------- ----------
56
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Total assets by geographic segment were as follows:
December 31,
----------------------
2005 2004
---------- ----------
(In thousands)
Jersey............................................................................. $ 25,066 $ 37,273
Guernsey........................................................................... 3,107 14
United States...................................................................... 5,630 7,420
---------- ----------
Consolidated total assets ......................................................... $ 33,803 $ 44,707
---------- ----------
---------- ----------
Revenues and income (loss) before income taxes for the Company's reportable
operating segments included in continuing operations, based on management's
internal reporting structure, were as follows:
Years Ended December 31,
----------------------------------
2005 2004 2003
---------- ---------- ----------
(In thousands)
Revenues:
Venture capital and consulting......................................... $ 535 $ (125) $ 4,687
Life insurance and annuities .......................................... 1,192 (5,759) 4,458
---------- ---------- ----------
1,727 (5,884) 9,145
Reconciliation of segment amounts to consolidated amounts:
Interest and other fee income.......................................... 366 125 53
---------- ---------- ----------
Consolidated revenues and net investment gains and losses
for continuing operations.......................................... $ 2,093 $ (5,759) $ 9,198
---------- ---------- ----------
---------- ---------- ----------
Income (loss) from continuing operations before income taxes:
Venture capital and consulting......................................... $ (584) $ (1,365) $ 3,571
Life insurance and annuities........................................... (701) (8,091) 1,577
---------- ---------- ----------
(1,285) (9,456) 5,148
Reconciliation of segment amounts to consolidated amounts:
Interest and other fee income.......................................... 366 125 53
Corporate expenses..................................................... (2,312) (2,415) (3,478)
Interest expense....................................................... (4) (105) (676)
---------- ---------- ----------
Consolidated income (loss) from continuing operations
before income taxes................................................ $ (3,235) $ (11,851) $ 1,047
---------- ---------- ----------
---------- ---------- ----------
57
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Assets attributable to each of the Company's reportable operating segments,
based on management's reporting structure, were as follows:
December 31,
----------------------
2005 2004
---------- ----------
(In thousands)
Assets:
Venture capital and consulting..................................................... $ 90 $ 92
Life insurance and annuities....................................................... 24,720 33,142
Corporate and other................................................................ 8,993 11,473
---------- ----------
Consolidated total assets.......................................................... $ 33,803 $ 44,707
---------- ----------
---------- ----------
Note 18. Selected Quarterly Financial Information (Unaudited)
Unaudited quarterly financial information (in thousands, except per share
and ADS amounts) is as follows:
2005
----------------------------------------------------------
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
---------- ---------- ---------- ---------- ----------
Continuing operations:
Revenues including net investment gains (losses)........ $ 475 $ 601 $ 505 $ 512 $ 2,093
Loss before income taxes................................ (1,154) (677) (698) (706) (3,235)
Net loss................................................ (1,159) (677) (698) (713) (3,247)
Basic loss per share:
Continuing operations................................... $ (0.02) $ (0.01) $ (0.01) $ (0.01) $ (0.06)
Discontinued operations................................. - - - - -
---------- ---------- ---------- ---------- ----------
$ (0.02) $ (0.01) $ (0.01) $ (0.01) $ (0.06)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Basic loss per ADS:
Continuing operations................................... $ (0.23) $ (0.13) $ (0.14) $ (0.14) $ (0.64)
Discontinued operations................................. - - - - -
---------- ---------- ---------- ---------- ----------
$ (0.23) $ (0.13) $ (0.14) $ (0.14) $ (0.64)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Diluted loss per share:
Continuing operations................................... $ (0.02) $ (0.01) $ (0.01) $ (0.01) $ (0.06)
Discontinued operations................................. - - - - -
---------- ---------- ---------- ---------- ----------
$ (0.02) $ (0.01) $ (0.01) $ (0.01) $ (0.06)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Diluted loss per ADS:
Continuing operations................................... $ (0.23) $ (0.13) $ (0.14) $ (0.14) $ (0.64)
Discontinued operations................................. - - - - -
---------- ---------- ---------- ---------- ----------
$ (0.23) $ (0.13) $ (0.14) $ (0.14) $ (0.64)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
58
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2004
----------------------------------------------------------
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
---------- ---------- ---------- ---------- ----------
Continuing operations:
Revenues including net investment gains (losses)........ $ (5,021) $ 2,081 $ (2,498) $ (321) $ (5,759)
Income (loss) before income taxes....................... (6,683) 478 (3,913) (1,733) (11,851)
Net income (loss)....................................... (6,690) 195 (3,913) (1,733) (12,141)
Basic earnings (loss) per share:
Continuing operations................................... $ (0.13) $ - $ (0.08) $ (0.03) $ (0.24)
Discontinued operations................................. - - - - -
---------- ---------- ---------- ---------- ----------
$ (0.13) $ - $ (0.08) $ (0.03) $ (0.24)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Basic earnings (loss) per ADS:
Continuing operations................................... $ (1.32) $ 0.04 $ (0.77) $ (0.34) $ (2.39)
Discontinued operations................................. - - - - -
---------- ---------- ---------- ---------- ----------
$ (1.32) $ 0.04 $ (0.77) $ (0.34) $ (2.39)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Diluted earnings (loss) per share:
Continuing operations................................... $ (0.13) $ - $ (0.08) $ (0.03) $ (0.24)
Discontinued operations................................. - - - - -
---------- ---------- ---------- ---------- ----------
$ (0.13) $ - $ (0.08) $ (0.03) $ (0.24)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Diluted earnings (loss) per ADS:
Continuing operations................................... $ (1.32) $ 0.04 $ (0.77) $ (0.34) $ (2.39)
Discontinued operations................................. - - - - -
---------- ---------- ---------- ---------- ----------
$ (1.32) $ 0.04 $ (0.77) $ (0.34) $ (2.39)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Due to the method required by SFAS 128 to calculate per share and ADS
amounts, the quarterly per share and ADS amounts do not necessarily total to the
full year per share and ADS amounts.
59
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in our filings under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the periods specified in the rules and forms of the SEC. Such
information is accumulated and communicated to our management, including our
chief executive officer and chief financial officer, as appropriate, to allow
timely decisions regarding required disclosure. Our management, including the
chief executive officer and the chief financial officer, recognizes that any set
of controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives.
As of the end of the period covered by this annual report on Form 10-K, we
carried out an evaluation, under the supervision and with the participation of
our management, including our chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on this evaluation, our chief executive officer
and chief financial officer concluded that our disclosure controls and
procedures were effective as of the end of the period covered by this annual
report on Form 10-K.
There were no changes in our internal controls over financial reporting
during the quarter ended December 31, 2005 that materially affected, or that
could reasonably likely materially affect, our internal controls over financial
reporting.
PART III
Certain information required by Part III is omitted from this Form 10-K and
is incorporated by reference to our definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on August 31, 2006 (the "Proxy Statement"),
which will be filed with the SEC not later than 120 days after the end of the
fiscal year covered by this Form 10-K.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are as follows:
Arthur I. Trueger, Executive Chairman: Mr. Trueger, age 57, is the founder
and a principal shareholder of Berkeley Technology Limited. He has worked for us
for more than 29 years and holds A.B., M.A. and J.D. degrees from the University
of California.
Ian K. Whitehead, Chief Financial Officer: Mr. Whitehead, age 51, has held
the position of Chief Financial Officer of Berkeley Technology Limited since he
joined us in 1990. Mr. Whitehead is a member of the Institute of Chartered
Accountants in England and Wales.
Information regarding our directors is incorporated by reference to the
sections entitled "Proposal 2 - Election of Director" and "Board of Directors
and Committees" in our Proxy Statement.
Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, is incorporated by reference to the section
entitled "Other Information About Directors and Executive Officers" in our Proxy
Statement.
60
Information regarding our Code of Ethics, adopted on November 12, 2003, is
incorporated by reference to the section entitled "Code of Ethics" in our Proxy
Statement.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
sections entitled "Executive Compensation" and "Directors' Compensation" in our
Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information regarding security ownership of certain beneficial owners
and management is incorporated by reference to the section entitled "Information
Regarding Beneficial Ownership of Principal Shareholders, Directors and
Executive Officers" in our Proxy Statement.
The following table is a summary of selected information for our equity
compensation plans as of December 31, 2005.
Number of Shares
Number of Shares to Weighted-Average Remaining Available for
be Issued Upon Exercise Exercise Price of Future Issuance Under
of Outstanding Options, Outstanding Options, Equity Compensation
Warrants and Rights Warrants and Rights Plans
----------------------- -------------------- -----------------------
Equity compensation plans
approved by shareholders............. 6,285,000 (1) $2.77 (1)
Equity compensation plans not
approved by shareholders............. 79,200 (1) 5.19 (1)
--------------- --------
Total................................... 6,364,200 $2.80
--------------- --------
--------------- --------
<FN>
(1) Our equity compensation plans do not contain a limit on the number of options that may be granted to employees. However, the
plans do not allow for the issuance of previously authorized and unissued shares to meet the obligations of the plans upon an
employee option exercise. When an option is granted, the trust that administers the plan borrows funds from the Company or one
of its subsidiaries and uses those funds to purchase the number of shares underlying the option grant. The maximum loan allowed
in any given year is equal to 5% of consolidated net assets as of the end of the previous fiscal year.
</FN>
Information regarding the features of the equity compensation plan not
approved by shareholders is incorporated by reference to Note 13 to the
Consolidated Financial Statements in Item 8 of this Form 10-K.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
section entitled "Other Information About Directors and Executive Officers" in
our Proxy Statement.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference to the
section entitled "Report of the Audit Committee of the Board of Directors" in
our Proxy Statement.
61
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as a part of this Form 10-K:
1. Financial Statements: Page
The following consolidated financial statements of Berkeley Technology
Limited and subsidiaries are included in Item 8:
Report of Independent Registered Public Accounting Firm...................................... 23
Consolidated Balance Sheets as of December 31, 2005 and 2004................................. 24
Consolidated Statements of Operations for the Years Ended
December 31, 2005, 2004 and 2003......................................................... 25
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2005, 2004 and 2003......................................................... 27
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended
December 31, 2005, 2004 and 2003......................................................... 29
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2005, 2004 and 2003......................................................... 30
Notes to the Consolidated Financial Statements............................................... 31
2. Financial Statement Schedules:
The following financial statement schedules of Berkeley Technology
Limited and subsidiaries are included in this Form 10-K immediately
following Item 15 and should be read in conjunction with the
consolidated financial statements and notes thereto included in Item
8:
Schedule I - Summary of Investments - Other Than Investments in Related
Parties.................................................................................. 66
Schedule II - Condensed Financial Information of Registrant
Condensed Balance Sheets as of December 31, 2005 and 2004................................ 67
Condensed Statements of Operations for the Years Ended
December 31, 2005, 2004 and 2003...................................................... 68
Condensed Statements of Cash Flows for the Years Ended
December 31, 2005, 2004 and 2003...................................................... 69
Note to Condensed Financial Statements................................................... 70
Schedule III - Supplementary Insurance Information........................................... 71
All other financial statement schedules required by Regulation S-X
have been omitted because they are not applicable or the required
information is included in the applicable consolidated financial
statements or notes thereto in Item 8 "Financial Statements and
Supplementary Data" of this Form 10-K.
62
3. Exhibits:
The following exhibits of Berkeley Technology Limited and subsidiaries
are filed herewith or incorporated by reference as indicated below:
Exhibit
Number Description
- --------- -----------------
3.(I).1 Memorandum and Articles of Association of Berkeley Technology Limited,
as amended and restated on April 18, 2000 (filed previously as Exhibit
3.(I) to our Form 10-Q for the quarter ended June 30, 2000).
3.(I).2 Certificate of Incorporation on Change of Name dated June 12, 2003
(filed previously as Exhibit 3.(I).2 to our Form 10-K for the year
ended December 31, 2003).
4.1 Specimen Ordinary Share certificate (filed previously as Exhibit 4.1
to our Form 10-K for the year ended December 31, 2000).
4.2 Form of Deposit Agreement dated September 25, 1992, as amended and
restated as of November 24, 1993, as further amended and restated as
of March 14, 2000, among us, The Bank of New York as Depositary, and
all Owners and Holders from time to time of American Depositary
Receipts issued thereunder (filed previously as Exhibit A to our
Registration Statement on Form F-6 (Registration No. 333-11658) dated
March 14, 2000).
4.3 Letter Agreement dated August 25, 1992 between The Bank of New York
and us covering the Basic Administration Charge relating to the
Deposit Agreement (shown above as Exhibit 4.2) (filed previously as
Exhibit 3.8 to our Post-Effective Amendment No. 2 to our Registration
Statement on Form 20-F/A dated August 31, 1993).
4.4 Form of Deposit Agreement as amended and restated as of June 24, 2002,
among us, The Bank of New York as Depositary, and all Owners and
Holders from time to time of American Depositary Receipts issued
thereunder (filed previously as Exhibit 4.4 to our Form 10-Q for the
quarter ended June 30, 2002).
4.5 Warrant Agreement dated February 14, 2003 between us and the Governor
and Company of the Bank of Scotland relating to the Term Loan and
Guarantee Facility dated December 20, 2002 (filed previously as
Exhibit 4.5 to our Form 10-Q for the quarter ended March 31, 2003).
4.6 Specimen Ordinary Share certificate, as amended on June 12, 2003
(filed previously as Exhibit 4.6 to our Form 10-K for the year ended
December 31, 2003).
10.1.1 Settlement dated February 16, 1990 among (1) us, (2) John Gerald
Patrick Wheeler and (3) Ian Walter Strang, constituting The London
Pacific Group 1990 Employee Share Option Trust (filed previously as
Exhibit 3.2 to our Post-Effective Amendment No. 2 to Registration
Statement on Form 20-F/A dated August 31, 1993).
10.1.2 Executed Instrument dated March 18, 1994 among (1) John Gerald Patrick
Wheeler, (2) Ian Walter Strang and (3) Richard John Pirouet, relating
to The London Pacific Group 1990 Employee Share Option Trust (filed
previously as Exhibit 3.2.1 to our Annual Report on Form 20-F dated
June 10, 1994).
63
10.1.3 Executed Instrument dated September 27, 1994 among (1) Ian Walter
Strang, (2) Richard John Pirouet and (3) Clive Aubrey Charles Chaplin,
relating to The London Pacific Group 1990 Employee Share Option Trust
(filed previously as Exhibit 3.2.2 to our Annual Report on Form 20-F
dated June 29, 1995).
10.1.4 Executed Instrument dated March 3, 1995 among (1) Ian Walter Strang,
(2) Richard John Pirouet and (3) Clive Aubrey Charles Chaplin,
relating to The London Pacific Group 1990 Employee Share Option Trust
(filed previously as Exhibit 3.2.3 to our Annual Report on Form 20-F
dated June 29, 1995).
10.1.5 Executed Instrument dated August 22, 1996 among (1) Richard John
Pirouet, (2) Clive Aubrey Charles Chaplin and (3) Ronald William
Green, relating to The London Pacific Group 1990 Employee Share Option
Trust (filed previously as Exhibit 3.2.4 to our Annual Report on Form
20-F dated June 30, 1997).
10.1.6 Executed Instrument dated August 29, 1998 among (1) Richard John
Pirouet, (2) Clive Aubrey Charles Chaplin, (3) Ronald William Green
and (4) Victor Aloysius Hebert, relating to The London Pacific Group
1990 Employee Share Option Trust (filed previously as Exhibit 3.2.5 to
our Annual Report on Form 20-F dated June 30, 1999).
10.1.7 Executed Instrument dated May 31, 2000 among (1) Richard John Pirouet,
(2) Clive Aubrey Charles Chaplin, (3) Ronald William Green and (4)
Victor Aloysius Hebert, relating to The London Pacific Group 1990
Employee Share Option Trust (filed previously as Exhibit 10.2.1 to our
Form 10-Q for the quarter ended September 30, 2000).
10.1.8 Executed Instrument dated May 31, 2000 among (1) Richard John Pirouet,
(2) Clive Aubrey Charles Chaplin, (3) Ronald William Green, (4) Victor
Aloysius Hebert and (5) Christopher Byrne, relating to The London
Pacific Group 1990 Employee Share Option Trust (filed previously as
Exhibit 10.2.2 to our Form 10-Q for the quarter ended September 30,
2000).
10.2.1(1) Agreement dated July 1, 1990 between us and Ian Kenneth Whitehead
(filed previously as Exhibit 10.3.1 to our Form 10-K for the year
ended December 31, 2000).
10.2.2(1) London Pacific Advisers Limited Retirement Scheme confirmation dated
December 5, 2000 for Ian Kenneth Whitehead (filed previously as
Exhibit 10.3.3 to our Form 10-K for the year ended December 31, 2001).
10.3.1 Settlement dated May 23, 1997 among BG Services Limited and A.L.O.T.
Trustee Limited establishing Agent Loyalty Opportunity Trust (filed
previously as Exhibit 10.4.1 to our Form 10-K for the year ended
December 31, 2001).
10.3.2 Executed Deed dated July 16, 1997 by A.L.O.T. Trustee Limited relating
to Agent Loyalty Opportunity Trust (filed previously as Exhibit 10.4.2
to our Form 10-K for the year ended December 31, 2001).
10.3.3 Executed Deed dated August 13, 1997 by A.L.O.T. Trustee Limited
relating to Agent Loyalty Opportunity Trust (filed previously as
Exhibit 10.4.3 to our Form 10-K for the year ended December 31, 2001).
10.3.4 Executed Deed dated August 20, 1998 by A.L.O.T. Trustee Limited
relating to Agent Loyalty Opportunity Trust (filed previously as
Exhibit 10.4.4 to our Form 10-K for the year ended December 31, 2001).
64
10.3.5 Executed Deed of Amendment and Appointment dated December 11, 2001
among Berkeley International Capital Limited and A.L.O.T. Trustee
Limited relating to Agent Loyalty Opportunity Trust (filed previously
as Exhibit 10.4.5 to our Form 10-K for the year ended December 31,
2001).
10.4 Asset Purchase Agreement dated March 7, 2003 between Berkeley Capital
Management ("BCM"), Berkeley (USA) Holdings Limited and Berkeley
Capital Management LLC relating to the sale of substantially all of
the assets and operations of BCM (filed previously as Exhibit 10.5 to
our Form 10-Q for the quarter ended March 31, 2003).
10.5 Purchase Agreement, dated May 9, 2003, for the acquisition of London
Pacific Advisory Services, Inc. and London Pacific Securities, Inc. by
SunGard Business Systems Inc. (filed previously as Exhibit 10.6 to our
Form 10-Q for the quarter ended June 30, 2003).
14.1 Code of Ethics (filed previously as Exhibit 14.1 to our Form 10-K for
the year ended December 31, 2003).
21 Subsidiaries of the Company as of March 30, 2006.
31.1 Certification by the Company's Executive Chairman pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification by the Company's Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification by the Company's Executive Chairman pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification by the Company's Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
__________
(1) Management contract or compensatory arrangement filed in response to Item
15(a)(3) of the instructions to Form 10-K.
(b) Our exhibits are listed in Item 15(a)(3) above.
(c) Our financial statement schedules follow on pages 66 through 71.
65
SCHEDULE I - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
As of December 31, 2005
Column A Column B Column C Column D
Amount at
Which Shown
in Consolidated
Fair Balance
Type of Investments Cost (1) Value Sheet (2)
- ----------------------------------------------------------------- ---------- ---------- ----------
(In thousands)
Fixed maturity securities:
Bonds:
United States government and government
agencies and authorities................................... $ - $ - $ -
States, municipalities and political subdivisions............ - - -
Foreign governments.......................................... - - -
Public utilities............................................. - - -
Convertibles and bonds with warrants attached................ - - -
All other corporate bonds.................................... 20,820 20,811 20,840
Redeemable preferred stock...................................... - - -
---------- ---------- ----------
Total fixed maturity securities................................. 20,820 $ 20,811 20,840
---------- ---------- ----------
----------
Equity securities:
Common stocks:
Industrial, miscellaneous and all other...................... 108 $ 90 90
Non-redeemable preferred stocks................................. 844 844 844
---------- ---------- ----------
Total equity securities......................................... 952 $ 934 934
---------- ---------- ----------
----------
Total investments............................................... $ 21,772 $ 21,774
---------- ----------
---------- ----------
<FN>
(1) Cost of fixed maturity securities is original cost, reduced by other-than-temporary impairments, repayments and adjusted for
amortization of premiums and accretion of discounts. Cost of equity securities is original cost, reduced by other-than-temporary
impairments.
(2) Differences between amounts reflected in Column B or Column C and amounts at which shown in the consolidated balance sheet
reflected in Column D result from the application of Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Fixed maturity securities are classified as either
available-for-sale or held-to-maturity. Available-for-sale securities are recorded at fair value, with changes in unrealized
gains and losses excluded from net income, but reported net of applicable income taxes as a separate component of
comprehensive income. Held-to-maturity securities are recorded at amortized cost.
</FN>
66
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BERKELEY TECHNOLOGY LIMITED
CONDENSED BALANCE SHEETS
December 31,
----------------------
2005 2004
---------- ----------
(In thousands, except
share amounts)
ASSETS
Cash and cash equivalents......................................................... $ 308 $ 3,943
Investment in subsidiaries........................................................ (69,853) (67,677)
Intercompany balances............................................................. 90,288 87,152
Other assets...................................................................... 37 187
---------- ----------
Total assets...................................................................... $ 20,780 $ 23,605
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accruals..................................................... $ 330 $ 379
Intercompany balances............................................................. 847 333
---------- ----------
Total liabilities................................................................. 1,177 712
---------- ----------
Commitments and contingencies
Shareholders' equity:
Ordinary shares, $0.05 par value per share: 86,400,000 shares authorized;
64,439,073 shares issued and outstanding as of December 31, 2005
and 2004....................................................................... 3,222 3,222
Additional paid-in capital........................................................ 67,660 68,615
Retained earnings................................................................. 11,682 14,929
Employee benefit trusts, at cost (13,522,381 and 13,684,881 shares as of
December 31, 2005 and 2004, respectively)...................................... (62,598) (63,571)
Accumulated other comprehensive loss.............................................. (363) (302)
---------- ----------
Total shareholders' equity........................................................ 19,603 22,893
---------- ----------
Total liabilities and shareholders' equity........................................ $ 20,780 $ 23,605
---------- ----------
---------- ----------
See accompanying Note to Condensed Financial Statements.
67
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
BERKELEY TECHNOLOGY LIMITED
CONDENSED STATEMENTS OF OPERATIONS
Years Ended December 31,
----------------------------------
2005 2004 2003
---------- ---------- ----------
(In thousands)
Revenues:
Investment income............................................................ $ 24 $ 44 $ 8
Net realized investment losses............................................... - - (246)
---------- ---------- ----------
24 44 (238)
Expenses:
Staff costs.................................................................. 471 626 833
Other operating expenses..................................................... 667 1,459 2,584
---------- ---------- ----------
1,138 2,085 3,417
---------- ---------- ----------
Loss before income tax benefit and equity in
undistributed net income (loss) of subsidiaries........................... (1,114) (2,041) (3,655)
Income tax benefit........................................................... - - -
---------- ---------- ----------
Loss before equity in undistributed net income (loss) of
subsidiaries.............................................................. (1,114) (2,041) (3,655)
Equity in undistributed net income (loss) of subsidiaries (1)................ (2,133) (10,100) 14,671
---------- ---------- ----------
Net income (loss)............................................................ $ (3,247) $ (12,141) $ 11,016
---------- ---------- ----------
---------- ---------- ----------
- -----------------------
<FN>
(1) Eliminated on consolidation.
</FN>
See accompanying Note to Condensed Financial Statements.
68
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
BERKELEY TECHNOLOGY LIMITED
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
----------------------------------
2005 2004 2003
---------- ---------- ----------
(In thousands)
Cash flows from continuing operating activities:
Net income (loss)............................................................ $ (3,247) $ (12,141) $ 11,016
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Equity in undistributed net (income) loss of subsidiaries.................... 2,133 10,100 (14,671)
Net realized investment losses............................................... - - 246
Other operating cash flows................................................... 101 140 489
---------- ---------- ----------
Net cash used in operating activities ....................................... (1,013) (1,901) (2,920)
---------- ---------- ----------
Cash flows from investing activities:
Payment of guarantee obligations............................................. - - (10,836)
Advances to subsidiaries..................................................... (3,149) (195) (144)
---------- ---------- ----------
Net cash used in investing activities........................................ (3,149) (195) (10,980)
---------- ---------- ----------
Cash flows from financing activities:
Repayments from subsidiaries................................................. 527 3,543 16,369
---------- ---------- ----------
Net cash provided by financing activities ................................... 527 3,543 16,369
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents......................... (3,635) 1,447 2,469
Cash and cash equivalents at beginning of year............................... 3,943 2,496 27
---------- ---------- ----------
Cash and cash equivalents at end of year..................................... $ 308 $ 3,943 $ 2,496
---------- ---------- ----------
---------- ---------- ----------
See accompanying Note to Condensed Financial Statements.
69
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
BERKELEY TECHNOLOGY LIMITED
NOTE TO CONDENSED FINANCIAL STATEMENTS
Note 1. Basis of Presentation and Significant Accounting Policies
The accompanying financial statements comprise a condensed presentation of
financial position, results of operations and cash flows of Berkeley Technology
Limited (the "Company") on a separate company basis. These condensed financial
statements do not include the accounts of the Company's subsidiaries, but
instead include the Company's investment in those subsidiaries, stated at
amounts which are equal to the Company's equity in the subsidiaries' net assets.
The consolidated financial statements of the Company and its subsidiaries are
included in Item 8 of this Form 10-K for the year ended December 31, 2005.
Additional information about the significant accounting policies applied by
the Company and its subsidiaries is included in Note 1 to the Consolidated
Financial Statements in Item 8 of this Form 10-K for the year ended December 31,
2005.
70
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
Life Insurance and Annuities Segment
Years Ended/As of December 31,
----------------------------------
2005 2004 2003
---------- ---------- ----------
(In thousands)
Deferred policy acquisition costs.......................................... $ - $ - $ -
Future policy benefits, losses, claims and loss expenses (1)............... 13,573 21,229 28,054
Unearned premiums.......................................................... N/A N/A N/A
Other policy claims and benefits payable (1)............................... - - -
Premium revenue (2)........................................................ 4 4 6
Net investment income (3).................................................. 1,213 1,295 1,834
Benefits, claims, losses and settlement expenses........................... N/A N/A N/A
Amortization of deferred policy acquisition costs.......................... - - -
Other operating expenses................................................... 913 974 959
Premiums written........................................................... N/A N/A N/A
_______________
<FN>
(1) For additional disclosure regarding life insurance policy liabilities, see Note 7 to the Consolidated Financial Statements in
Item 8 ofthis Form 10-K for the year ended December 31, 2005.
(2) Insurance policy charges.
(3) Expenses related to the management and administration of investments have been netted with investment income in the
determination of net investment income.
</FN>
71
SIGNATURES
Pursuant to the requirements of 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.
BERKELEY TECHNOLOGY LIMITED
(Registrant)
By /s/ Arthur I. Trueger
Date: March 30, 2006 Arthur I. Trueger
Executive Chairman
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.
/s/ Arthur I. Trueger
Date: March 30, 2006 Arthur I. Trueger
Executive Chairman
(Principal Executive Officer)
/s/ Ian K. Whitehead
Date: March 30, 2006 Ian K. Whitehead
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Victor A. Hebert
Date: March 30, 2006 Victor A. Hebert
Deputy Chairman and Non-Executive Director
/s/ Harold E. Hughes, Jr.
Date: March 30, 2006 Harold E. Hughes, Jr.
Non-Executive Director
/s/ Trenchard
Date: March 30, 2006 The Viscount Trenchard
Non-Executive Director
72
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
EXHIBIT INDEX FOR THE ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2005
Exhibit
Number Description
- -------- -----------------
3.(I).1 Memorandum and Articles of Association of Berkeley Technology Limited,
as amended and restated on April 18, 2000 (filed previously as Exhibit
3.(I) to our Form 10-Q for the quarter ended June 30, 2000).
3.(I).2 Certificate of Incorporation on Change of Name dated June 12, 2003
(filed previously as Exhibit 3.(I).2 to our Form 10-K for the year
ended December 31, 2003).
4.1 Specimen Ordinary Share certificate (filed previously as Exhibit 4.1
to our Form 10-K for the year ended December 31, 2000).
4.2 Form of Deposit Agreement dated September 25, 1992, as amended and
restated as of November 24, 1993, as further amended and restated as
of March 14, 2000, among us, The Bank of New York as Depositary, and
all Owners and Holders from time to time of American Depositary
Receipts issued thereunder (filed previously as Exhibit A to our
Registration Statement on Form F-6 (Registration No. 333-11658) dated
March 14, 2000).
4.3 Letter Agreement dated August 25, 1992 between The Bank of New York
and us covering the Basic Administration Charge relating to the
Deposit Agreement (shown above as Exhibit 4.2) (filed previously as
Exhibit 3.8 to our Post-Effective Amendment No. 2 to our Registration
Statement on Form 20-F/A dated August 31, 1993).
4.4 Form of Deposit Agreement as amended and restated as of June 24, 2002,
among us, The Bank of New York as Depositary, and all Owners and
Holders from time to time of American Depositary Receipts issued
thereunder (filed previously as Exhibit 4.4 to our Form 10-Q for the
quarter ended June 30, 2002).
4.5 Warrant Agreement dated February 14, 2003 between us and the Governor
and Company of the Bank of Scotland relating to the Term Loan and
Guarantee Facility dated December 20, 2002 (filed previously as
Exhibit 4.5 to our Form 10-Q for the quarter ended March 31, 2003).
4.6 Specimen Ordinary Share certificate, as amended on June 12, 2003
(filed previously as Exhibit 4.6 to our Form 10-K for the year ended
December 31, 2003).
10.1.1 Settlement dated February 16, 1990 among (1) us, (2) John Gerald
Patrick Wheeler and (3) Ian Walter Strang, constituting The London
Pacific Group 1990 Employee Share Option Trust (filed previously as
Exhibit 3.2 to our Post-Effective Amendment No. 2 to Registration
Statement on Form 20-F/A dated August 31, 1993).
10.1.2 Executed Instrument dated March 18, 1994 among (1) John Gerald Patrick
Wheeler, (2) Ian Walter Strang and (3) Richard John Pirouet, relating
to The London Pacific Group 1990 Employee Share Option Trust (filed
previously as Exhibit 3.2.1 to our Annual Report on Form 20-F dated
June 10, 1994).
10.1.3 Executed Instrument dated September 27, 1994 among (1) Ian Walter
Strang, (2) Richard John Pirouet and (3) Clive Aubrey Charles Chaplin,
relating to The London Pacific Group 1990 Employee Share Option Trust
(filed previously as Exhibit 3.2.2 to our Annual Report on Form 20-F
dated June 29, 1995).
73
10.1.4 Executed Instrument dated March 3, 1995 among (1) Ian Walter Strang,
(2) Richard John Pirouet and (3) Clive Aubrey Charles Chaplin,
relating to The London Pacific Group 1990 Employee Share Option Trust
(filed previously as Exhibit 3.2.3 to our Annual Report on Form 20-F
dated June 29, 1995).
10.1.5 Executed Instrument dated August 22, 1996 among (1) Richard John
Pirouet, (2) Clive Aubrey Charles Chaplin and (3) Ronald William
Green, relating to The London Pacific Group 1990 Employee Share Option
Trust (filed previously as Exhibit 3.2.4 to our Annual Report on Form
20-F dated June 30, 1997).
10.1.6 Executed Instrument dated August 29, 1998 among (1) Richard John
Pirouet, (2) Clive Aubrey Charles Chaplin, (3) Ronald William Green
and (4) Victor Aloysius Hebert, relating to The London Pacific Group
1990 Employee Share Option Trust (filed previously as Exhibit 3.2.5 to
our Annual Report on Form 20-F dated June 30, 1999).
10.1.7 Executed Instrument dated May 31, 2000 among (1) Richard John Pirouet,
(2) Clive Aubrey Charles Chaplin, (3) Ronald William Green and (4)
Victor Aloysius Hebert, relating to The London Pacific Group 1990
Employee Share Option Trust (filed previously as Exhibit 10.2.1 to our
Form 10-Q for the quarter ended September 30, 2000).
10.1.8 Executed Instrument dated May 31, 2000 among (1) Richard John Pirouet,
(2) Clive Aubrey Charles Chaplin, (3) Ronald William Green, (4) Victor
Aloysius Hebert and (5) Christopher Byrne, relating to The London
Pacific Group 1990 Employee Share Option Trust (filed previously as
Exhibit 10.2.2 to our Form 10-Q for the quarter ended September 30,
2000).
10.2.1(1) Agreement dated July 1, 1990 between us and Ian Kenneth Whitehead
(filed previously as Exhibit 10.3.1 to our Form 10-K for the year
ended December 31, 2000).
10.2.2(1) London Pacific Advisers Limited Retirement Scheme confirmation dated
December 5, 2000 for Ian Kenneth Whitehead (filed previously as
Exhibit 10.3.3 to our Form 10-K for the year ended December 31, 2001).
10.3.1 Settlement dated May 23, 1997 among BG Services Limited and A.L.O.T.
Trustee Limited establishing Agent Loyalty Opportunity Trust (filed
previously as Exhibit 10.4.1 to our Form 10-K for the year ended
December 31, 2001).
10.3.2 Executed Deed dated July 16, 1997 by A.L.O.T. Trustee Limited relating
to Agent Loyalty Opportunity Trust (filed previously as Exhibit 10.4.2
to our Form 10-K for the year ended December 31, 2001).
10.3.3 Executed Deed dated August 13, 1997 by A.L.O.T. Trustee Limited
relating to Agent Loyalty Opportunity Trust (filed previously as
Exhibit 10.4.3 to our Form 10-K for the year ended December 31, 2001).
10.3.4 Executed Deed dated August 20, 1998 by A.L.O.T. Trustee Limited
relating to Agent Loyalty Opportunity Trust (filed previously as
Exhibit 10.4.4 to our Form 10-K for the year ended December 31, 2001).
10.3.5 Executed Deed of Amendment and Appointment dated December 11, 2001
among Berkeley International Capital Limited and A.L.O.T. Trustee
Limited relating to Agent Loyalty Opportunity Trust (filed previously
as Exhibit 10.4.5 to our Form 10-K for the year ended December 31,
2001).
74
10.4 Asset Purchase Agreement dated March 7, 2003 between Berkeley Capital
Management ("BCM"), Berkeley (USA) Holdings Limited and Berkeley
Capital Management LLC relating to the sale of substantially all of
the assets and operations of BCM (filed previously as Exhibit 10.5 to
our Form 10-Q for the quarter ended March 31, 2003).
10.5 Purchase Agreement, dated May 9, 2003, for the acquisition of London
Pacific Advisory Services, Inc. and London Pacific Securities, Inc. by
SunGard Business Systems Inc. (filed previously as Exhibit 10.6 to our
Form 10-Q for the quarter ended June 30, 2003).
14.1 Code of Ethics (filed previously as Exhibit 14.1 to our Form 10-K for
the year ended December 31, 2003).
21 Subsidiaries of the Company as of March 30, 2006.
31.1 Certification by the Company's Executive Chairman pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification by the Company's Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification by the Company's Executive Chairman pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification by the Company's Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
____________
(1) Management contract or compensatory arrangement filed in response to Item 15
(a)(3) of the instructions to Form 10-K.
75