UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
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 of (I.R.S. Employer Identification No.)
incorporation or organization)
Minden House, 6 Minden Place
St. Helier, Jersey JE2 4WQ
Channel Islands
(Address of principal executive offices)
(Zip Code)
011 44 (1534) 607700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ____ No |X|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes ____ No |X|
As of May 12, 2006, the registrant had outstanding 64,439,073 Ordinary
Shares, par value $0.05 per share.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Page
Item 1. Financial Statements:
Unaudited Condensed Consolidated Balance Sheets as of March 31, 2006 and
December 31, 2005............................................................................ 3
Unaudited Condensed Consolidated Statements of Operations for the three months
ended March 31, 2006 and 2005................................................................ 4
Unaudited Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2006 and 2005................................................................ 5
Unaudited Consolidated Statement of Changes in Shareholders' Equity for the three months
ended March 31, 2006......................................................................... 6
Unaudited Consolidated Statements of Comprehensive Income for the three months
ended March 31, 2006 and 2005................................................................ 7
Notes to Unaudited Condensed Consolidated Financial Statements................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 25
Item 4. Controls and Procedures.......................................................................... 26
PART II
OTHER INFORMATION
Item 1. Legal Proceedings................................................................................ 27
Item 1A. Risk Factors..................................................................................... 27
Item 6. Exhibits......................................................................................... 28
Signature ................................................................................................. 29
Exhibit Index............................................................................................... 30
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
March 31, December 31,
2006 2005
------------ ------------
ASSETS
Investments (principally of life insurance subsidiary):
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $16,320 and $13,809
as of March 31, 2006 and December 31, 2005, respectively).................. $ 16,316 $ 13,829
Held-to-maturity, at amortized cost (fair value: $3,018 and $6,982
as of March 31, 2006 and December 31, 2005, respectively).................. 3,033 7,011
Equity securities:
Trading, at fair value (cost: $102 as of March 31, 2006
and December 31, 2005)..................................................... 140 84
Available-for-sale, at estimated fair value (cost: $850 as of
March 31, 2006 and December 31, 2005)...................................... 850 850
------------ ------------
Total investments................................................................. 20,339(1) 21,774
Cash and cash equivalents......................................................... 8,216(1) 10,039
Cash held in escrow............................................................... 1,036 1,027
Accrued investment income......................................................... 699 609
Other assets...................................................................... 396 354
------------ ------------
Total assets...................................................................... $ 30,686 $ 33,803
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Life insurance policy liabilities................................................. $ 11,141 $ 13,573
Accounts payable and accruals..................................................... 658 627
------------ ------------
Total liabilities................................................................. 11,799 14,200
------------ ------------
Commitments and contingencies (see Note 6)
Shareholders' equity:
Ordinary shares, $0.05 par value per share: 86,400,000 shares authorized;
64,439,073 shares issued and outstanding as of March 31, 2006 and
December 31, 2005.............................................................. 3,222 3,222
Additional paid-in capital........................................................ 67,692 67,660
Retained earnings................................................................. 10,956 11,682
Employee benefit trusts, at cost (13,522,381 shares
as of March 31, 2006 and December 31, 2005).................................... (62,598) (62,598)
Accumulated other comprehensive loss.............................................. (385) (363)
------------ ------------
Total shareholders' equity........................................................ 18,887 19,603
------------ ------------
Total liabilities and shareholders' equity........................................ $ 30,686 $ 33,803
------------ ------------
------------ ------------
<FN>
(1) Includes $17,160 of investments and $4,343 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 Unaudited Condensed
Consolidated Financial Statements.
3
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share and ADS amounts)
Three Months Ended
March 31,
---------------------------
2006 2005
------------ -------------
Revenues:
Investment income................................................................. $ 354 $ 397
Insurance policy charges.......................................................... - -
Consulting and other fee income................................................... 154 143
Net realized investment losses.................................................... - (43)
Change in net unrealized investment gains and losses on trading securities........ 57 (22)
------------ ------------
565 475
Expenses:
Amounts credited on insurance policyholder accounts............................... 170 290
Operating expenses................................................................ 1,116 1,339
------------ ------------
1,286 1,629
------------ ------------
Loss before income tax expense.................................................... (721) (1,154)
Income tax expense................................................................ 5 5
------------ ------------
Net loss.......................................................................... $ (726) $ (1,159)
------------ ------------
------------ ------------
Basic and diluted loss per share and ADS:
Basic and diluted loss per share.................................................. $ (0.01) $ (0.02)
------------ ------------
------------ ------------
Basic and diluted loss per ADS.................................................... $ (0.14) $ (0.23)
------------ ------------
------------ ------------
See accompanying Notes which are an integral part of these Unaudited Condensed
Consolidated Financial Statements.
4
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
March 31,
---------------------------
2006 2005
------------ ------------
Net cash used in operating activities............................................. $ (592) $ (171)
Cash flows from investing activities:
Purchases of held-to-maturity fixed maturity securities........................... (3,035) (8,510)
Purchases of available-for-sale fixed maturity securities......................... (9,082) (5,122)
Proceeds from maturity of held-to-maturity fixed maturity securities.............. 7,000 200
Proceeds from sale and maturity of available-for-sale fixed maturity securities... 6,575 1,911
------------ ------------
Net cash provided by (used in) investing activities............................... 1,458 (11,521)
------------ ------------
Cash flows from financing activities:
Insurance policyholder benefits paid.............................................. (2,710) (1,309)
Proceeds from disposal of shares by the employee benefit trusts................... - 18
------------ ------------
Net cash used in financing activities............................................. (2,710) (1,291)
------------ ------------
Net decrease in cash and cash equivalents......................................... (1,844) (12,983)
Cash and cash equivalents at beginning of period (1).............................. 10,039 19,495
Foreign currency translation adjustment........................................... 21 (14)
------------ ------------
Cash and cash equivalents at end of period (1), (2)............................... $ 8,216 $ 6,498
------------ ------------
------------ ------------
<FN>
(1) Does not include $1,036 of cash held in escrow as of March 31, 2006.
(2) The amount for March 31, 2006 includes $4,343 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 Unaudited Condensed
Consolidated Financial Statements.
5
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
Accumulated
Other
Ordinary Shares Additional Employee Compre- Total
-------------------- Paid-in Retained Benefit hensive Shareholders'
Number Amount Capital Earnings Trusts Loss Equity
---------- -------- --------- --------- ---------- ----------- -----------
Balance as of
December 31, 2005............ 64,439 $ 3,222 $ 67,660 $ 11,682 $ (62,598) $ (363) $ 19,603
Net loss........................ - - - (726) - - (726)
Vesting of employee share
options, including income
tax effect................... - - 32 - - - 32
Change in net unrealized
gains and losses on
available-for-sale securities - - - - - (24) (24)
Foreign currency translation
adjustment................... - - - - - 2 2
---------- -------- --------- --------- ---------- ----------- -----------
Balance as of
March 31, 2006............... 64,439 $ 3,222 $ 67,692 $ 10,956 $ (62,598) $ (385) $ 18,887
---------- -------- --------- --------- ---------- ----------- -----------
---------- -------- --------- --------- ---------- ----------- -----------
See accompanying Notes which are an integral part of these Unaudited Condensed
Consolidated Financial Statements.
6
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three Months Ended
March 31,
---------------------------
2006 2005
------------ ------------
Net loss.......................................................................... $ (726) $ (1,159)
Other comprehensive loss, net of deferred income taxes:
Foreign currency translation adjustments, net of income taxes of $0............... 2 (9)
Change in net unrealized gains and losses:
Unrealized holding gains and losses on available-for-sale securities........... (38) (88)
Reclassification adjustment for gains and losses included in net loss.......... 14 (2)
Deferred income taxes.......................................................... - -
------------ ------------
Other comprehensive loss.......................................................... (22) (99)
------------ ------------
Comprehensive loss................................................................ $ (748) $ (1,258)
------------ ------------
------------ ------------
See accompanying Notes which are an integral part of these Unaudited Condensed
Consolidated Financial Statements.
7
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
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.
Note 1. Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated financial statements are unaudited
and have been prepared by the Company in conformity with United States generally
accepted accounting principles ("U.S. GAAP"). These unaudited condensed
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 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.
Certain information and note disclosures normally included in the Company's
annual consolidated financial statements have been condensed or omitted. In the
opinion of management, the unaudited condensed consolidated financial statements
reflect all adjustments (consisting of normal recurring accruals) which are
necessary for a fair statement of the results for the interim periods presented.
While the Company's management believes that the disclosures presented are
adequate to make the information not misleading, these unaudited condensed
consolidated financial statements should be read in conjunction with the audited
financial statements and related notes for the year ended December 31, 2005,
which are contained in the Company's Annual Report on Form 10-K, filed with the
U.S. Securities and Exchange Commission ("SEC") on March 30, 2006. The December
31, 2005 condensed balance sheet data was derived from audited financial
statements but does not include all disclosures required by U.S. GAAP.
The results for the three month period ended March 31, 2006 are not
indicative of the results to be expected for the full fiscal year.
The unaudited condensed consolidated balance sheets are 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
Over-the-Counter Bulletin Board in the form of American Depositary Shares
("ADSs"), which are evidenced by American Depositary Receipts ("ADRs"). Pursuant
to the regulations of the SEC, the Company is considered a U.S. domestic
registrant and must file financial statements prepared under U.S. GAAP.
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 unaudited condensed 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 the balance of life
insurance policy liabilities.
8
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Share Based Compensation
Equity compensation plan
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. 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 to 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 grant.
Share based compensation expense
On January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123 (revised 2004) ("SFAS 123R"), "Share-Based Payment," which
establishes standards for the accounting of transactions in which an entity
exchanges its equity instruments for goods or services, primarily focusing on
accounting for transactions where an entity obtains employee services in share
based payment transactions. SFAS 123R requires a public entity to measure the
cost of employee services received in exchange for an award of equity
instruments, including share options, based on the fair value of the award on
the grant date, and to recognize it as compensation expense over the period the
employee is required to provide service in exchange for the award, usually the
vesting period. SFAS 123R supersedes the Company's previous accounting under
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees," and related interpretations, for periods beginning in
fiscal 2006. In March 2005, the SEC issued Staff Accounting Bulletin No. 107
("SAB 107") relating to SFAS 123R. The Company has applied the provisions of SAB
107 in its adoption of SFAS 123R.
The Company adopted SFAS 123R using the modified prospective transition
method, which requires the application of the accounting standard as of January
1, 2006, the first day of the Company's fiscal year 2006. The Company's
consolidated financial statements as of and for the three months ended March 31,
2006 reflect the impact of SFAS 123R. In accordance with the modified
prospective transition method, the Company's consolidated financial statements
for prior periods have not been restated to reflect, and do not include, the
impact of SFAS 123R.
SFAS 123R requires companies to estimate the fair value of share based
payment awards on the date of grant using an option pricing model. The value of
the portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in the Company's consolidated
statement of operations. Prior to the adoption of SFAS 123R, the Company
accounted for share based awards to employees and directors using the intrinsic
value method in accordance with APB 25, as allowed under Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation." Under the intrinsic value method, no share based compensation
expense had been recognized in the Company's consolidated statement of
operations.
Share based compensation expense recognized in the Company's consolidated
statement of operations for the first quarter of 2006 includes compensation
expense for share options granted prior to, but not yet vested as of December
31, 2005, based on the fair value estimated as of the date of grant in
accordance with the provisions of SFAS 123R. SFAS 123R requires forfeitures to
be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. Share based
compensation expense calculated in accordance with SFAS 123R is to be based on
awards ultimately expected to vest, and therefore the expense should be reduced
for estimated forfeitures. The Company's estimated forfeiture rate for the three
month period ended March 31, 2006 of zero percent is based upon the
9
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
short remaining vesting periods of the option grants (all but one option grant
will be fully vested by the end of 2006) and because all of the unvested options
relate to longstanding employees. In the Company's pro forma information
required to be disclosed under SFAS 123 for the periods prior to 2006, the
Company accounted for forfeitures as they occurred.
SFAS 123R requires the cash flows resulting from the tax benefits resulting
from tax deductions in excess of the compensation cost recognized for those
options to be classified as financing cash flows. Due to the Company's loss
position, and as the Company had no tax deductions related to share option
exercises, there were no such tax benefits during the first quarter of 2006.
Prior to the adoption of SFAS 123R, those tax benefits would have been reported
as operating cash flows had the Company received any tax benefits related to
share option exercises.
The fair value of share option grants to employees is calculated using the
Black-Scholes option pricing model, even though this model was developed to
estimate the fair value of freely tradable, fully transferable options without
vesting restrictions, which differ significantly from the Company's share
options. The Black-Scholes model also requires subjective assumptions, including
future share price volatility and expected time to exercise, which greatly
affect the calculated values. The expected term of options granted is derived
from historical data on employee exercises and post-vesting employment
termination behavior. The risk-free rate is based on the U.S. Treasury rates in
effect during the corresponding period of grant. The expected volatility is
based on the historical volatility of the Company's share price. These factors
could change in the future, which would affect the share based compensation
expense in future periods, if the Company, through the ESOT, should grant
additional share options.
Valuation and expense information under SFAS 123R
The estimated fair value of share option compensation awards to employees,
as calculated using the Black-Scholes option pricing model as of the date of
grant, is amortized using the straight-line method over the vesting period of
the options. For the three months ended March 31, 2006, compensation expense
related to employee share options under SFAS 123R totaled $32,000 and is
included in operating expenses in the accompanying statement of operations.
10
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below reflects net loss and basic and diluted loss per share and
ADS for the three months ended March 31, 2006, compared with the pro forma
information for the three months ended March 31, 2005:
Three Months Ended
March 31,
---------------------------
2006 2005
------------ ------------
(In thousands, except per
share and ADS amounts)
Net loss as reported for the prior period (1)..................................... N/A $ (1,159)
Share based compensation expense related to employee share options (2)............ (32) 56(4)
------------ ------------
Net loss, including the effect of share based compensation expense (3)............ $ (726) $ (1,103)
------------ ------------
------------ ------------
Basic and diluted loss per share, as reported for the prior period (1)............ (0.02)
Basic and diluted loss per share, including the effect of share based
compensation.................................................................. (0.01) (0.02)
Basic and diluted loss per ADS, as reported for the prior period (1).............. (0.23)
Basic and diluted loss per ADS, including the effect of share based
compensation.................................................................. (0.14) (0.22)
<FN>
(1) Net loss and loss per share and ADS prior to 2006 did not include share based compensation expense for
employee share options under SFAS 123R because the Company did not adopt the recognition provisions of SFAS 123.
(2) Share based compensation expense prior to 2006 is calculated based on the pro forma application of SFAS 123.
(3) Net loss and net loss per share and ADS prior to 2006 represents pro forma information based on SFAS 123.
(4) Compensation expense was negative for the three month period ended March 31, 2005 due to the reversal of $85,000
in compensation expense recognized in prior periods primarily related to the forfeiture during the first quarter
of 2005 of all of the unvested and out-of-the-money vested options held by employees who terminated employment during
the first quarter of 2005.
</FN>
During the first quarter of 2006, there were no option grants, exercises,
forfeitures or expirations. No options vested during the first quarter of 2006,
as no unvested options at December 31, 2005 have an anniversary date in the
first three months of the year. At December 31, 2005 and March 31, 2006, there
were 6,285,000 options outstanding with a weighted average exercise price of
$2.77. Of these options, 4,881,250 were exercisable at December 31, 2005 and
March 31, 2006, and these have a weighted average exercise price of $3.52. The
remaining 1,403,750 options were unvested at December 31, 2005 and March 31,
2006. These unvested options have a weighted average exercise price of $0.1963.
As of March 31, 2006, total unrecognized compensation expense related to
unvested share options was $62,000, of which $26,000 is expected to be
recognized during the remainder of 2006 and the balance of $36,000 is expected
to be recognized ratably over 2007, 2008 and the first half of 2009.
Option grants have not been made since the second quarter of 2005. The
options granted in May 2005 were valued using the Black-Scholes option pricing
model with the following assumptions: expected share price volatility of 34%,
risk-free interest rate of 3.89%, weighted average expected life of 6.25 years
and expected dividend yield of zero percent.
For additional information relating to our employee share options, see Note
13 to the Company's consolidated financial statements included in our Form 10-K
for the year ended December 31, 2005.
11
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Recently Issued Accounting Pronouncements
Effective January 1, 2006, the Company adopted Statement of Financial
Accounting Standards No. 154 ("SFAS 154"), "Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3." The
statement requires retrospective application to prior periods' financial
statements for a voluntary change in accounting principle unless it is deemed
impracticable. It also requires that a change in the method of depreciation,
amortization, or depletion for long-lived, non-financial assets be accounted for
as a change in accounting estimate rather than a change in accounting principle.
The adoption of SFAS 154 did not have any impact on the Company's unaudited
interim condensed consolidated financial statements.
In September 2005, the American Institute of Certified Public Accountants
issued Statement of Position 05-1 ("SOP 05-1"), "Accounting by Insurance
Enterprises for Deferred Acquisition Costs in Connection with Modifications or
Exchanges of Insurance Contracts." SOP 05-1 provides guidance on accounting by
insurance enterprises for deferred acquisition costs on internal replacements of
insurance and investment contracts other than those specifically described in
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." SOP 05-1 defines an internal
replacement as a modification in product benefits, features, rights, or
coverages that occurs by the exchange of a contract for a new contract, or by
amendment, endorsement, or rider to a contract, or by the election of a feature
or coverage within a contract. Under SOP 05-1, modifications that result in a
substantially unchanged contract will be accounted for as a continuation of the
replaced contract. A replacement contract that is substantially changed will be
accounted for as an extinguishment of the replaced contract resulting in a
release of unamortized deferred acquisition costs, unearned revenue and deferred
sales inducements associated with the replaced contract. The guidance in SOP
05-1 will be applied prospectively and is effective for internal replacements
occurring in fiscal years beginning after December 15, 2006. Because the Company
is not replacing insurance policies, the Company does not expect any impact on
the Company's consolidated financial statements.
12
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2. 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 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 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." As the Company recorded a net loss for both of the
three month periods ended March 31, 2006 and 2005, the calculations of diluted
loss per share for these periods 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 both of the three
month periods ended March 31, 2006 and 2005, there would have been an additional
0 and 117,139 shares, respectively, included in the calculations of diluted
earnings per share for these periods.
A reconciliation of the numerators and denominators for the basic and
diluted earnings (loss) per share calculations is as follows:
Three Months Ended
March 31,
---------------------------
2006 2005
------------ ------------
(In thousands, except per
share and ADS amounts)
Net loss.......................................................................... $ (726) $ (1,159)
------------ ------------
------------ ------------
Basic and diluted loss per share and ADS:
Weighted average number of Ordinary Shares outstanding,
excluding shares held by the employee benefit trusts............................ 50,917 50,917
------------ ------------
Basic and diluted loss per share.................................................. $ (0.01) $ (0.02)
------------ ------------
------------ ------------
Basic and diluted loss per ADS.................................................... $ (0.14) $ (0.23)
------------ ------------
------------ ------------
13
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3. 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 and adjustments to deferred policy
acquisition cost amortization 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.
For a discussion of the Company's accounting policies with respect to the
determination of fair value of investments and other-than-temporary impairments,
see the section entitled "Critical Accounting Policies" in Part I, Item 2
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" below. The Group's private securities primarily consist of
convertible preferred stock holdings in technology companies. Management
periodically reviews financial information with respect to the issuers of equity
securities held by the Group. In addition, management maintains contact with the
management of these issuers through ongoing dialogue to examine the issuers'
future plans and prospects.
Fixed Maturity Securities
The Group's fixed maturity securities are comprised of U.S. and non-U.S.
corporate debt securities. Generally, quoted market prices are available for
these securities.
An analysis of fixed maturity securities is as follows:
March 31, 2006 December 31, 2005
---------------------------------------------- ---------------------------------------------
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......... $ 12,001 $ 14 $ (14) $ 12,001 $ 8,500 $ 38 $ - $ 8,538
Corporate debt securities.. 4,319 - (4) 4,315 5,309 - (18) 5,291
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
16,320 14 (18) 16,316 13,809 38 (18) 13,829
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
Held-to-Maturity:
Corporate debt securities.. 3,033 - (15) 3,018 7,011 - (29) 6,982
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
3,033 - (15) 3,018 7,011 - (29) 6,982
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
Total fixed maturity
securities............... $ 19,353 $ 14 $ (33) $ 19,334 $ 20,820 $ 38 $ (47) $ 20,811
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
14
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Investment Concentration and Risk
As of March 31, 2006, fixed maturity securities held by the Group included
investments in Cadbury Schweppes of $3,731,000, British Telecom of $3,054,000,
AOL Time Warner of $2,016,000 and General Mills of $1,999,000. These four
corporate issuers each represented more than 10% of shareholders' equity as of
March 31, 2006. However, all of these bonds mature on or before June 26, 2007.
As of March 31, 2006, the Company's Jersey based life insurance subsidiary,
LPAL, owned 84% of the Group's $19.3 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 $140,000 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.
As of March 31, 2006, the Group held one fixed maturity security that was
considered less than investment grade. This security represented 1.6% of total
fixed maturity securities as of March 31, 2006. This security was repaid in full
at maturity in April 2006.
Note 4. Cash Held in Escrow
Cash held in escrow consists of the proceeds from the sale of London
Pacific Advisors ("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 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 cash and
accrued interest held in escrow.
For further information, see Part II, Item 1 "Legal Proceedings" below.
Note 5. Other Assets
An analysis of other assets is as follows:
March 31, December 31,
2006 2005
------------ ------------
(In thousands)
Property, equipment and leasehold improvements, net............................... $ 34 $ 43
Prepayments....................................................................... 249 202
Receivables:
Fee income receivable.......................................................... 89 84
Other receivables ............................................................. 24 25
------------ ------------
Total other assets................................................................ $ 396 $ 354
------------ ------------
------------ ------------
15
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 6. Commitments and Contingencies
As previously disclosed in the Company's 2002 to 2005 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.
As discussed above in Note 4 "Cash Held in Escrow," on March 8, 2005, the
Company was made aware of a complaint filed by SunGard and SunGard's claim for
indemnification with respect to alleged losses in an amount equal to at least
$7.2 million resulting from alleged breaches of representations and warranties
contained in the sale and purchase agreement. 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. As such, no provision for this
contingent liability has been included in the Group's financial statements as of
March 31, 2006, nor has the Company made any reserve against the $1.0 million in
cash and accrued interest held in escrow. See Part II, Item 1 "Legal
Proceedings" below for further information.
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 March 31, 2006.
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 sometime 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
March 31, 2006.
16
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7. Business Segment and Geographical Information
The Company's reportable operating segments are classified according to its
businesses of life insurance and annuities, and venture capital and consulting.
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:
Three Months Ended
March 31,
---------------------------
2006 2005
------------ ------------
(In thousands)
Jersey............................................................................ $ 272 $ 310
Guernsey.......................................................................... 29 15
United States..................................................................... 264 150
------------ ------------
Consolidated revenues and net investment gains and losses......................... $ 565 $ 475
------------ ------------
------------ ------------
Revenues and income (loss) before income tax expense for the Company's
reportable operating segments, based on management's internal reporting
structure, were as follows:
Three Months Ended
March 31,
---------------------------
2006 2005
------------ ------------
(In thousands)
Revenues and net investment gains and losses:
Venture capital management........................................................ $ 207 $ 98
Life insurance and annuities ..................................................... 271 296
------------ ------------
478 394
Reconciliation of segment amounts to consolidated amounts:
Interest and other fee income .................................................... 87 81
------------ ------------
Consolidated revenues and net investment gains and losses......................... $ 565 $ 475
------------ ------------
------------ ------------
Loss before income taxes:
Venture capital management........................................................ $ (46) $ (211)
Life insurance and annuities ..................................................... (81) (433)
------------ ------------
(127) (644)
Reconciliation of segment amounts to consolidated amounts:
Interest and other fee income..................................................... 87 81
Corporate expenses................................................................ (681) (591)
------------ ------------
Consolidated loss before income tax expense ...................................... $ (721) $ (1,154)
------------ ------------
------------ ------------
17
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the unaudited condensed
consolidated financial statements, and the notes thereto, included in this
quarterly report, and the December 31, 2005 audited consolidated financial
statements, and the notes thereto, included in our Annual Report on Form 10-K
filed with the SEC on March 30, 2006. The unaudited condensed consolidated
financial statements are prepared in accordance with U.S. GAAP. 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 report 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 report and in our other filings with the SEC. The factors include, but are
not limited to, (i) the risks described in Item 3 "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.
18
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
Venture Capital and Consulting
Certain information regarding our venture capital and consulting segment's
results of operations is as follows:
Three Months Ended
March 31,
---------------------------
2006 2005
------------ ------------
(In thousands)
Revenues and net investment gains (losses):
Consulting fees................................................................... $ 150 $ 138
Change in net unrealized investment gains and losses on trading securities........ 57 (40)
------------ ------------
Total revenues and net investment gains (losses).................................. 207 98
Operating expenses................................................................ 253 309
------------ ------------
Loss before income tax expense.................................................... $ (46) $ (211)
------------ ------------
------------ ------------
First quarter of 2006 compared to first quarter of 2005
In the first quarter of 2006, the venture capital and consulting segment
contributed a loss before income taxes of $46,000 to our overall loss before
income taxes, compared to a loss before income taxes of $0.2 million in the
first quarter of 2005. The lower loss for the first quarter of 2006 was
attributable to lower operating expenses than in the first quarter of 2005, as
well as to unrealized gains instead of unrealized losses on listed equity
securities.
The change in net unrealized gains and losses in the listed equity trading
portfolio during the first quarter of 2006 was a gain of $57,000 compared to a
loss of $40,000 in the first quarter of 2005. The trading portfolio, consisting
of only two listed equity securities, increased from $84,000 as of December 31,
2005 to $140,000 as of March 31, 2006.
The venture capital and consulting segment earned consulting fees of
$150,000 during the first quarter of 2006, compared to $138,000 in the first
quarter of 2005, by advising four Silicon Valley telecommunications equipment
companies in dealing with large incumbent European and Japanese
telecommunications companies. BICC's objective is to use consulting revenues to
finance the development of large telecommunications company relationships, which
will eventually lead to equity based transactions, with fees or direct
investment opportunities for the 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.
Operating expenses in the first quarter of 2006 decreased by $56,000,
compared to the first quarter of 2005, reflecting our overall efforts to reduce
operating costs.
19
Life Insurance and Annuities
Certain information regarding our life insurance and annuities segment's
results of operations is as follows:
Three Months Ended
March 31,
---------------------------
2006 2005
------------ ------------
(In thousands)
Revenues and net investment gains (losses):
Investment income................................................................. $ 271 $ 321
Insurance policy charges ......................................................... - -
Net realized investment losses.................................................... - (43)
Change in net unrealized investment gains and losses on trading securities ....... - 18
------------ ------------
Total revenues and net investment losses.......................................... 271 296
Expenses:
Amounts credited on insurance policyholder accounts .............................. 170 290
General and administrative expenses .............................................. 182 439
------------ ------------
Total expenses.................................................................... 352 729
------------ ------------
Loss before income tax expense.................................................... $ (81) $ (433)
------------ ------------
------------ ------------
As previously disclosed in our 2002 through 2005 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 92% of LPAL's $140.2
million in policyholder liabilities as of June 30, 2002 have been surrendered or
have matured as of March 31, 2006. Policyholder liabilities as of March 31, 2006
were $11.1 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.
First quarter of 2006 compared to first quarter of 2005
In the first quarter of 2006, LPAL contributed a loss before income taxes
of $81,000 to our overall loss before income taxes, compared to a loss before
income taxes of $0.4 million in the first quarter of 2005.
The spread between investment income and amounts credited to policyholders
improved during the first quarter of 2006 compared to the first quarter of 2005,
from $31,000 in the first quarter of 2005 to $101,000 in the first quarter of
2006. Interest and dividend income on investments decreased by $50,000 and was
due primarily to the decline in the level of LPAL's corporate bond investments,
which was consistent with the decline in policyholder liabilities over the
period. Amounts credited on policyholder accounts decreased by $0.1 million in
the first quarter of 2006 to $0.2 million, compared to $0.3 million in the first
quarter of 2005. This decrease was primarily due to policy maturities since the
first quarter of 2005. The average rate credited to policyholders was 5.2% in
the first quarter of 2006, compared with 5.5% in the first quarter of 2005.
There were no net investment gains or losses in the first quarter of 2006,
compared with net investment losses of $25,000 in the first quarter of 2005.
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 had sold all of its listed equity securities and as such, LPAL's
equity market risk has been reduced significantly.
20
Total invested assets decreased to $22.2 million as of March 31, 2006,
compared to $24.7 million as of December 31, 2005, primarily due to policyholder
benefits paid of $2.7 million. On total average invested assets in the first
quarter of 2006, the average annualized net return, including both realized and
unrealized investment gains and losses, was 4.2%, compared with 3.8% in the
first quarter of 2005.
Policyholder liabilities as of March 31, 2006 were $11.1 million of which
$8.1 million is scheduled to mature during the remaining nine months of 2006.
LPAL expects to meet these maturities by using the proceeds from maturing bonds
which are estimated to be $7.2 million during the remaining nine months of 2006
and estimated interest income to be received during the remaining nine months of
2006 of $0.9 million, as well as part of its cash balance of $4.3 million as of
March 31, 2006. 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 the first quarter of
2005 were $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 the first
quarter of 2005 were $146,000. For the first quarter of 2006, general and
administrative expenses were $182,000. This $36,000 increase was due primarily
to higher corporate insurance costs allocated to the life insurance and
annuities segment.
Corporate and Other
First quarter of 2006 compared to first quarter of 2005
Included in corporate expenses for the first quarter of 2005 were $80,000
of employee severance costs. In order to reduce our operating costs and to
conserve cash, and in light of the decrease in the size and complexity of our
continuing operations, we reduced our corporate staff in January 2005. In
addition, we implemented other cost reductions during 2005. Excluding the
$80,000 of employee severance costs, corporate expenses for the first quarter of
2005 were $0.5 million. In the first quarter of 2006, corporate expenses totaled
$0.7 million. This $0.2 million increase was due primarily to legal fees
associated with the SunGard legal proceedings described in Item 1 of Part II of
this Form 10-Q.
As discussed above in Note 1 to our Unaudited Condensed Consolidated
Financial Statements under "Share Based Compensation," we adopted SFAS 123R on
January 1, 2006. As such, we recognized $32,000 of compensation expense in the
corporate segment during the first quarter of 2006 related to employee share
options. As total unrecognized compensation expense related to unvested share
options at March 31, 2006 is only $62,000, SFAS 123R compensation expense in
future periods will not be material, assuming that no new option grants are
made.
Consolidated Loss Before Income Tax Expense
First quarter of 2006 compared to first quarter of 2005
Our consolidated loss before income tax expense was $0.7 million in the
first quarter of 2006 compared to a loss before income tax expense of $1.2
million in the first quarter of 2005. This lower loss was due primarily to a
$0.2 million decrease in operating expenses, higher net investment income after
amounts credited on insurance policyholder accounts of $0.1 million, and net
unrealized investment gains of $57,000 in the first quarter of 2006 compared to
net realized and unrealized investment losses of $65,000 in the first quarter of
2005.
Due to the sale of almost all of our listed equity securities by the end of
January 2005, our results will no longer be significantly impacted by equity
market volatility.
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.
21
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.
First quarter of 2006 compared to first quarter of 2005
The $5,000 tax expense for both the first quarter of 2006 and the first
quarter of 2005 is comprised of California minimum taxes for each year. Although
our loss before income tax expense was $0.7 million for the first quarter of
2006, we did not recognize any tax benefits. Our Jersey and Guernsey operations
contributed losses of $0.3 million during the period for which no tax benefits
will be realized. Losses of $0.4 million were also contributed by our U.S.
subsidiaries during the period; we did not recognize any U.S. tax benefits due
to the 100% valuation allowances that we have provided for all deferred tax
assets.
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
22
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.
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 we
consider 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
23
accumulated value (premiums received, plus accrued interest to the balance sheet
date, less withdrawals and assessed fees).
Contingent Liabilities
As discussed in Note 6 to our Unaudited Condensed Consolidated Financial
Statements, 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.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents decreased during the first quarter of 2006 by
$1.7 million to $8.2 million. This decrease in cash and cash equivalents
resulted from $2.7 million and $0.6 million of cash used in financing activities
and operating activities, respectively, partially offset by $1.5 million
provided by investing activities. Cash used in financing activities related to
insurance policyholder benefits paid by LPAL. Cash used by operating activities
primarily resulted from the $0.7 million operating loss for the first quarter of
2006. Cash provided by investing activities primarily related to the maturity of
corporate bonds held by the Group and LPAL, partially offset by the purchase of
fixed maturity securities by the Group and LPAL. As of March 31, 2006, our cash
and cash equivalents, excluding the amount held by LPAL, amounted to $3.9
million, an increase of $3.3 million from December 31, 2005. We reinvested $3.0
million of the $7.0 million proceeds from the corporate bonds that matured
during the first quarter of 2006. This $3.0 million in corporate bonds will
mature on or before June 26, 2007. 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 March 31, 2006.
Shareholders' equity decreased during the first quarter of 2006 by $0.7
million from $19.6 million at December 31, 2005 to $18.9 million at March 31,
2006, due to the net loss for the period of $0.7 million. As of March 31, 2006
and December 31, 2005, $62.6 million 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 the first quarter of 2006, LPAL continued to service its existing
policyholders. During this period, policy surrenders totaled $35,000 and policy
maturities totaled $2.7 million. Policyholder liabilities were $11.1 million as
of March 31, 2006, compared to $13.6 million as of December 31, 2005. We do not
expect significant surrender activity during the remaining nine months of 2006;
however, approximately $8.1 million of policyholder liabilities are scheduled to
mature during this period. LPAL has sufficient liquid resources to fund these
maturities. As of March 31, 2006, LPAL had cash of $4.3 million, accrued
interest receivable of $0.6 million and corporate bonds of $16.3 million.
In prior years, 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 listed equity holdings during 2004 and in January 2005,
fluctuations in the market value of LPAL's listed equity securities no longer
have an impact on LPAL's required statutory capital level.
As of March 31, 2006, we had no bank borrowings, guarantee obligations,
material commitments outstanding for capital expenditures or additional funding
for private equity portfolio companies.
As of March 31, 2006, we had $3.9 million of cash and cash equivalents and
$3.0 million in corporate bonds that will mature on or before June 26, 2007,
excluding cash and bonds held by our life insurance and annuities segment. We
believe that this cash balance and the bond maturity proceeds are sufficient to
fund our operations (venture capital and corporate activities) over at least the
next 12 months. As discussed below
24
in Part II, Item 1 "Legal Proceedings," we are involved in certain legal
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 March 31, 2006, we had $1.0 million of cash held in escrow related to
our sale of LPA to SunGard as discussed above in Note 4 "Cash Held in Escrow."
Due to the legal proceedings described below in Part II, Item 1, the release of
the escrow amount is currently uncertain. We have not made any reserve against
this $1.0 million in cash and accrued interest 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
our staffing levels in early 2005. After the payment of all related employee
severance costs in 2005, the impact of the staff cost reductions is now being
fully realized during 2006. We implemented other cost reductions during 2005 and
are continuing to implement further cost reductions in 2006.
Item 3. 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 cash and cash equivalents in LPAL and in the
remainder of the Group is expected to be less than $0.2 million during the
remainder of 2006, therefore movements in market interest rates should not have
a material impact on our consolidated results.
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 (loss) 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.
In prior years, we held levels of listed equity securities which exposed us
to significant equity price risk and resulting volatility in our reported
earnings. By the end of January 2005, we sold all but two of our listed equity
holdings. As of March 31, 2006, these two listed equity securities had a market
value of $140,000. 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.
25
As of March 31, 2006, 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.
Item 4. 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 quarterly report on Form 10-Q,
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 such 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 quarterly
report on Form 10-Q.
There were no changes in our internal controls over financial reporting
during the quarter ended March 31, 2006 that materially affected, or that could
reasonably likely materially affect, our internal controls over financial
reporting.
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PART II - OTHER INFORMATION
Item 1. 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.
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 April 3, 2006, we received SunGard's Answer and Cross-Complaint,
responding to our Second Amended Complaint against them. Their Answer generally
denies our allegations and raises several affirmative defenses. Their
Cross-Complaint essentially repeats the alleged breach of contract claim brought
in their Pennsylvania action, while adding SunGard Data Systems Inc. as a
claimant, and essentially repeats their intentional misrepresentation claim. As
before, we believe SunGard's denials and affirmative defenses are unavailing,
and their claims unjustified.
On June 10, 2005, we filed a petition to dismiss SunGard's complaint in the
Pennsylvania court. That motion was heard on April 26, 2006. The court has not
yet issued a ruling.
Costs relating to the above matters are recognized in our statement of
operations as they are incurred.
Item 1A. RISK FACTORS
There are no material changes from the risk factors as previously disclosed
in our Form 10-K for the year ended December 31, 2005 in response to Item 1A to
Part I of Form 10-K.
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Item 6. EXHIBITS
The following exhibits are filed herewith:
Exhibit
Number Description
- ------- ----------------
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.
28
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BERKELEY TECHNOLOGY LIMITED
(Registrant)
Date: May 12, 2006 By: /s/ Ian K. Whitehead
Ian K. Whitehead
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer
of the Registrant)
29
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
EXHIBIT INDEX FOR THE QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2006
Exhibit
Number Description
- ------- ----------------
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.
30