UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 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)
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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, 2006 as reported on the London Stock Exchange (using an exchange rate of
(pound)1.00 = $1.85) was $3,853,808. 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 23, 2007, 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 September 18, 2007, 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.............................................. 5
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities......................................................................... 5
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...................................................... 21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. 56
Item 9A. Controls and Procedures.......................................................................... 56
PART III
Item 10. Directors and Executive Officers of the Registrant............................................... 56
Item 11. Executive Compensation........................................................................... 57
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.......................................................................... 57
Item 13. Certain Relationships and Related Transactions................................................... 57
Item 14. Principal Accountant Fees and Services........................................................... 57
PART IV
Item 15. Exhibits and Financial Statement Schedules ...................................................... 58
Signatures ................................................................................................. 68
Exhibit Index............................................................................................... 69
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 and
other telecommunications equipment companies in dealing with large incumbent
European and Japanese telecommunications companies.
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. All but $0.1
million in policyholder liabilities are scheduled to mature by mid-2007.
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 and consulting 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 to grow their
business and in locating investment 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 and assist in locating partners, customers and investment
capital.
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.
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 27 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, Cirrus Logic, Cypress Semiconductor,
Flextronics, IDT, Linear Technology, LSI Logic, Nellcor, Oracle, PMC Sierra and
Packeteer, Inc.
2
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, previously
held principal positions in connection with private equity transactions arranged
by its sister company, BICC. Some of these private equity positions became
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.
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 75 at December 31, 2006; however, much of the decline
during 2003 through 2006 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,
2006, policyholder liabilities totaled $3.6 million and the market value of
LPAL's corporate bonds, cash and accrued interest totaled $13.6 million. In
addition, LPAL's portfolio included private equities valued at $0.8 million at
December 31, 2006.
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 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
3
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, 2006, 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 and prior
approval from the JFSC.
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, 2006, 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. 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.
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
4
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 400 and 3,800 square
feet, respectively. We lease both offices. These leases expire in September 2010
and October 2008, 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, at approximately 3,000 square feet, was too large for our current
level of business and staffing, and therefore in June 2006, we entered into a
sublease agreement for the remaining term of our lease for the entire office
space except for approximately 400 square feet through July 2007.
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
There are no legal proceedings pending against the Group.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to our shareholders during the quarter ended
December 31, 2006.
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, 2006, there were
64,439,073 Ordinary Shares outstanding of which 12,901,640, or 20.0%, were
represented by 1,290,164 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.
5
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.
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
-------- -------- -------- --------
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
2006:
First quarter................................................. 0.07 0.06 1.10 0.70
Second quarter................................................ 0.07 0.06 1.20 0.85
Third quarter................................................. 0.07 0.06 1.06 0.90
Fourth quarter................................................ 0.07 0.04 1.14 0.55
Holders
As of February 28, 2007, we had approximately 1,336 Ordinary shareholders
of record and 67 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 2005 or an interim dividend for 2006. Our Board of
Directors will not be recommending a final dividend for the year 2006.
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.
6
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.
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, 2007,
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%.
7
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 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.
8
SHARE PERFORMANCE GRAPH
The graph presented below compares the yearly change in the Company's
cumulative total return on ADRs for the five years ended December 31, 2006, with
the cumulative total returns of the S&P 500 Index and the S&P Insurance Index.
The comparison assumes $100 was invested on December 31, 2001 in each of the
Company ADRs, the stocks included in the S&P 500 Index, and the stocks included
in the S&P Insurance Index. It also assumes reinvestment of all dividends.
This performance graph shall not be deemed "filed" for purposes of Section
18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to
the liabilities under that Section, and shall not be deemed to be incorporated
by reference into any filing of Berkeley Technology Limited with the Securities
and Exchange Commission ("SEC").
Comparison of Five-Year Cumulative Total Return
[GRAPH]
------------ ----------- ----------- ----------- ----------- -----------
2001 2002 2003 2004 2005 2006
- ----------------------------------- ------------ ----------- ----------- ----------- ----------- -----------
Berkeley Technology Limited $ 100.00 $ 1.26 $ 6.31 $ 4.29 $ 1.77 $ 1.26
- ----------------------------------- ------------ ----------- ----------- ----------- ----------- -----------
S&P 500 Index $ 100.00 $ 76.63 $ 96.85 $ 105.56 $ 108.73 $ 123.54
- ----------------------------------- ------------ ----------- ----------- ----------- ----------- -----------
S&P Insurance Index $ 100.00 $ 78.43 $ 93.64 $ 99.18 $ 111.63 $ 122.09
- ----------------------------------- ------------ ----------- ----------- ----------- ----------- -----------
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.
Years Ended/As of December 31,
---------------------------------------------------------------
2006 2005 2004 2003 2002 (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 $ 1,943 $ 2,093 $ (5,759) $ 9,198 $ (33,337)
Income (loss) from continuing operations before income
taxes................................................ (2,678) (3,235) (11,851) 1,047 (54,478)
Income tax expense (benefit) on continuing operations... 5 12 290 (42) 1,291
Income (loss) from continuing operations................ (2,683) (3,247) (12,141) 1,005 (55,769)
Income (loss) from discontinued operations.............. (1,000) - - 9,965 (154,678)
Income tax expense (benefit) on discontinued operations. - - - 38 (4,943)
Net income (loss)....................................... (3,683) (3,247) (12,141) 11,016 (205,504)
Basic earnings (loss) per share:
Continuing operations................................ (0.05) (0.06) (0.24) 0.02 (1.10)
Discontinued operations.............................. (0.02) - - 0.20 (2.95)
----------- ----------- ----------- ----------- -----------
Total basic earnings (loss) per share................... (0.07) (0.06) (0.24) 0.22 (4.05)
Diluted earnings (loss) per share:
Continuing operations................................ (0.05) (0.06) (0.24) 0.02 (1.10)
Discontinued operations.............................. (0.02) - - 0.20 (2.95)
----------- ----------- ----------- ----------- -----------
Total diluted earnings (loss) per share................. (0.07) (0.06) (0.24) 0.22 (4.05)
Basic earnings (loss) per ADS:
Continuing operations................................ (0.53) (0.64) (2.39) 0.21 (10.99)
Discontinued operations.............................. (0.20) - - 1.96 (29.50)
----------- ----------- ----------- ----------- -----------
Total basic earnings (loss) per ADS..................... (0.73) (0.64) (2.39) 2.17 (40.49)
Diluted earnings (loss) per ADS:
Continuing operations................................ (0.53) (0.64) (2.39) 0.21 (10.99)
Discontinued operations.............................. (0.20) - - 1.94 (29.50)
----------- ----------- ----------- ----------- -----------
Total diluted earnings (loss) per ADS................... (0.73) (0.64) (2.39) 2.15 (40.49)
Financial Position
Cash and total investments (continuing operations)...... 19,567 32,840 43,279 61,944 69,378
Total assets............................................ 20,237 33,803 44,707 63,513 80,217
Bank debt............................................... - - - - 9,314
Guarantees under bank facility.......................... - - - - 10,590
Shareholders' equity.................................... 15,923 19,603 22,893 34,897 21,486
Book value per share (1)................................ 0.31 0.39 0.45 0.69 0.42
Book value per ADS (1).................................. 3.13 3.85 4.51 6.88 4.23
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 50,917 50,754 50,754 50,753
Diluted earnings per share calculation............... 50,917 50,917 50,754 51,188 50,753
Total dividends per share/ADS relating to the year ..... - - - - -
Market price per share on December 31................... (pound)0.053 (pound)0.06 (pound)0.11 (pound)0.14 (pound)0.055
Market price per ADS on December 31..................... $ 0.70 $ 0.70 $ 1.70 $ 2.51 $ 0.50
Market capitalization as of December 31................. $ 6,631 $ 6,706 $ 13,115 $ 16,148 $ 5,706
<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,
-------------------------------------
2006 2005 2004
----------- ----------- -----------
(In thousands)
Loss from continuing operations before income tax expense
by operating segment:
Venture capital and consulting .............................................. $ (403) $ (584) $ (1,365)
Life insurance and annuities ................................................ (221) (701) (8,091)
----------- ----------- -----------
(624) (1,285) (9,456)
Reconciliation of segment amounts to consolidated amounts:
Interest and other fee income................................................ 283 366 125
Corporate expenses........................................................... (2,336) (2,312) (2,415)
Interest expense............................................................. (1) (4) (105)
----------- ----------- -----------
Consolidated loss from continuing operations before
income tax expense......................................................... $ (2,678) $ (3,235) $ (11,851)
----------- ----------- -----------
----------- ----------- -----------
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,
-------------------------------------
2006 2005 2004
----------- ----------- -----------
(In thousands)
Revenues and net investment gains (losses):
Consulting fees.............................................................. $ 705 $ 536 $ 490
Net realized investment gains ............................................... - - 2,010
Change in net unrealized investment gains and losses on
trading securities........................................................ 18 (1) (2,625)
----------- ----------- -----------
Total revenues and net investment gains (losses)............................. 723 535 (125)
Operating expenses........................................................... 1,126 1,119 1,240
----------- ----------- -----------
Loss from continuing operations before income tax expense.................... $ (403) $ (584) $ (1,365)
----------- ----------- -----------
----------- ----------- -----------
2006 compared to 2005
In 2006, our venture capital and consulting segment contributed a loss
before income taxes of $0.4 million to our overall loss from continuing
operations before income taxes, compared to a loss before taxes of $0.6 million
in 2005. The losses for both years were attributable to an excess of fixed
operating expenses over consulting fee income.
Consulting fees earned by the venture capital and consulting segment
increased from $536,000 in 2005 to $705,000 in 2006, as the number of consulting
clients increased during the year. BICC advises Silicon
12
Valley and other telecommunications equipment companies in dealing with large
incumbent European and Japanese telecommunications companies.
In prior years, this segment's results were significantly impacted by
fluctuations in the market value of its portfolio of listed equity securities.
As of the end of the third quarter of 2006, all listed equity investments had
been sold, and our results will no longer be impact by equity market volatility.
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.
Life Insurance and Annuities
Certain information regarding our life insurance and annuities segment's
results of operations is as follows:
Years Ended December 31,
-------------------------------------
2006 2005 2004
----------- ----------- -----------
(In thousands)
Revenues and net investment gains (losses):
Investment income............................................................ $ 937 $ 1,213 $ 1,295
Insurance policy charges..................................................... 2 4 4
Net realized investment gains (losses)....................................... (2) (43) 1,273
Change in net unrealized investment gains and losses on
trading securities........................................................ - 18 (8,331)
----------- ----------- -----------
Total revenues and net investment gains (losses)............................. 937 1,192 (5,759)
Expenses:
Amounts credited on insurance policyholder accounts.......................... 468 980 1,358
General and administrative expenses.......................................... 690 913 974
----------- ----------- -----------
Total expenses............................................................... 1,158 1,893 2,332
----------- ----------- -----------
Loss from continuing operations before income tax expense.................... $ (221) $ (701) $ (8,091)
----------- ----------- -----------
----------- ----------- -----------
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 98% of LPAL's $140.2
million in policyholder liabilities as of June 30, 2002 have been surrendered or
have matured as of December 31, 2006. Policyholder liabilities as of December
31, 2006 were $3.6 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.
13
2006 compared to 2005
In 2006, LPAL contributed a loss before income taxes of $0.2 million to our
overall loss from continuing operations before income taxes, compared to a loss
before income taxes of $0.7 million in 2005.
The spread between investment income and amounts credited to policyholders
increased from $0.2 million in 2005 to $0.5 million in 2006, primarily due to
increased returns on invested assets resulting from more investments in
corporate bonds instead of lower-yielding cash equivalents, and an increasing
interest rate environment. Interest and dividend income on investments totaled
$0.9 million in 2006, compared with $1.2 million in 2005. This $0.3 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, 2005. Amounts credited on policyholder accounts decreased by
$0.5 million in 2006 to $0.5 million, compared to $1.0 million in 2005. This
decrease was primarily due to policy maturities since December 31, 2005. The
average rate credited to policyholders was 5.1% in 2006, compared with 5.7% in
2005.
Total invested assets decreased to $14.5 million as of December 31, 2006,
compared to $24.7 million as of December 31, 2005, primarily due to policyholder
benefits paid of $11.6 million. On total average invested assets in 2006, the
average net return, including both realized and unrealized investment gains and
losses, was 4.6%, compared with 4.2% in 2005.
Policyholder liabilities as of December 31, 2006 were $3.6 million of which
$3.5 million is scheduled to mature during 2007. LPAL expects to meet these
maturities primarily by using the cash balance as of December 31, 2006 of $4.4
million. In the absence of significant redemptions, policyholder liabilities are
projected to be approximately $0.1 million at the end of 2007.
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 $0.7 million for 2006. This $0.1 million increase was primarily
due to the partial allocation of corporate insurance expense to this segment
since the fourth quarter of 2005.
Subsequent to December 31, 2006, LPAL received a $1.2 million payment
representing a partial distribution resulting from the settlements achieved in
the WorldCom, Inc. securities litigation. LPAL held certain WorldCom, Inc.
publicly traded bonds which it sold at a loss in 2002. The $1.2 million payment
will be recognized in the first quarter of 2007 in our consolidated statement of
operations as a realized gain, which reverses part of the realized loss recorded
in 2002. LPAL expects to receive an additional $0.4 million as a final
distribution later in 2007.
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
increased from negative $63,000 in 2004 to positive $233,000 in 2005, primarily
due to increased returns on invested assets resulting from more investments in
corporate bonds instead of lower-yielding cash equivalents, and an increasing
interest rate environment. 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
14
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 was
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.
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 was primarily
due to lower staff costs.
Corporate and Other
2006 compared to 2005
Corporate expenses remained level in 2006 compared to 2005, at $2.3
million. Lower corporate insurance costs (due to their partial allocation to the
life insurance and annuities segment from the fourth quarter of 2005) and a $0.1
million reduction in legal expenses associated with the legal proceedings (which
terminated during 2006) as described in Note 4 "Cash Held in Escrow" to the
Consolidated Financial Statements in Item 8 of this Form 10-K, were offset by
$0.2 million of losses associated with the sublease of our Jersey office and
$58,000 of SFAS 123R compensation expense.
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 (which terminated during 2006)
described in Note 4 "Cash Held in Escrow" to the Consolidated Financial
Statements in Item 8 of this Form 10-K.
Consolidated Loss from Continuing Operations Before Income Taxes
2006 compared to 2005
Our consolidated loss from continuing operations before income tax expense
was $2.7 million in 2006, compared to a loss of $3.2 million in 2005. This lower
loss of $0.5 million was due primarily to a decline in operating expenses of
$0.2 million (primarily lower legal expenses as discussed above), an increase in
consulting fee income of $0.2 million, and an increase in the spread between
investment income and amounts credited to policyholders of $0.15 million.
Due to the sale of all of our listed equity securities (most were sold in
2004), our results are no longer 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.
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 only
$26,000 in 2005, compared to net realized and unrealized investment losses of
$7.7 million in 2004. During 2004, we held significant levels of listed equity
securities and our results were significantly impacted by equity market
volatility.
15
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.
2006 compared to 2005 (continuing operations)
The $5,000 tax expense for 2006 is comprised of our minimum California
taxes. Other than these taxes, no other tax expense or benefits are applicable
to our Group for this period. While losses were contributed by our Jersey and
Guernsey operations, we did not recognize any tax benefits due to the
uncertainty surrounding their recovery before expiry. Losses were also
contributed by our U.S subsidiaries during 2006; we did not recognize any U.S.
tax benefits due to the 100% valuation allowances that we have provided for all
deferred tax assets.
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.
Discontinued Operations
The $1.0 million loss on discontinued operations recorded in 2006 resulted
from the write-off of the $1.0 million of cash held in escrow which was part of
the proceeds from the sale of London Pacific Advisors in June 2003 held back to
cover any of the Group's indemnity obligations. For further information see Note
4 "Cash Held in Escrow" to the Consolidated Financial Statements in Item 8 of
this Form 10-K.
While the $1.0 million loss on discontinued operations in 2006 was
attributable to one of our U.S subsidiaries, 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
16
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
financed 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.
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
17
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).
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 2006 by $3.3 million from
$10.0 million as of December 31, 2005 to $6.7 million as of December 31, 2006.
This decrease in cash and cash equivalents primarily resulted from $11.6 million
and $1.4 million of cash used in financing activities and operating activities,
respectively, partially offset by $9.2 million of cash provided by investing
activities. Cash used in financing activities related to insurance policyholder
benefits paid by LPAL. Cash used in operating activities primarily resulted from
the $2.7 million operating loss for 2006, partially offset by a decrease in
accrued investment income and the sale of trading securities. Cash provided by
investing activities primarily related to the maturity of fixed maturity
securities by the LPAL and the Group, partially offset by the purchase of fixed
maturity securities held by LPAL and the Group. As of December 31, 2006, our
cash and cash equivalents, excluding the amount held by LPAL, amounted to $2.35
million, an increase of $1.8 million from December 31, 2005. We reinvested $3.0
million of the $7.0 million proceeds from the corporate bonds that matured in
early 2006 and received $0.1 million from the sale of our remaining listed
equities. The $3.0 million in corporate bonds will mature on or before June 26,
2007.
The $4.4 million of cash and cash equivalents held by LPAL, as well as the
$9.8 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 2006 by $3.7 million from $19.6
million at December 31, 2005 to $15.9 million as of December 31, 2006, primarily
due to the net loss for the period of $3.7 million. As of December 31, 2006 and
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 2006, LPAL continued to service its existing
18
policyholders. During this period, policy surrenders totaled $0.2 million and
policy maturities totaled $11.4 million. Policyholder liabilities were $3.6
million as of December 31, 2006, compared to $13.6 million as of December 31,
2005. We do not expect significant surrender activity during 2007; however, all
but the remaining seven-year policies, approximately $3.5 million of
policyholder liabilities, are scheduled to mature during this period. LPAL has
sufficient liquid resources to fund these maturities. As of December 31, 2006,
LPAL had cash of $4.4 million, accrued interest receivable of $0.2 million and
corporate bonds of $9.0 million. In addition, as discussed above in the Results
of Operations section for the life insurance and annuities segment, in January
2007, LPAL received a $1.2 million payment representing a partial distribution
resulting from the settlements achieved in the WorldCom, Inc. securities
litigation. LPAL expects to receive an additional $0.4 million as a final
distribution later in 2007.
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 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 December 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 December 31, 2006, we had $2.35 million of cash and cash equivalents
and $3.0 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 2007 from our bond maturities are sufficient to fund our operations
(venture capital and consulting and corporate activities) over at least the next
12 months.
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. We implemented other cost reductions during 2005, and in 2006,
we implemented the sublease of our Jersey office space for the remainder of our
lease term, effective from June 2006.
CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS
The following table aggregates our expected contractual obligations and
commitments subsequent to December 31, 2006.
2008 - 2010 -
Contractual obligations (1) 2007 2009 2011 Total
- ------------------------------------- ----------- ----------- ----------- -----------
(In thousands)
Deferred annuity policy maturities........... $3,260 $ 149 $ - $3,409
Capital lease commitments.................... - - - -
Operating lease commitments (2).............. 285 390 66 741
----------- ----------- ----------- -----------
Total contractual cash obligations........... $3,545 $ 539 $ 66 $4,150
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
<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 entered into a sublease
of our Jersey office during 2006. Expected future sublease income from 2007 through 2010 is $296,000. A liability of
$158,000 remains recorded on our consolidated balance sheet as of December 31, 2006, representing the loss on the
sublease from 2007 through 2010.
</FN>
19
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 and cash equivalents in LPAL and in
the remainder of the Group is expected to be approximately $0.6 million during
2007, therefore movements in market interest rates should not have a material
impact on our consolidated results.
Equity Price Risk
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 September 2006, we had sold all of our listed equity
holdings and thus we are no longer exposed to equity price risk on listed equity
securities.
As of December 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.
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.
20
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm..................................................... 22
Consolidated Balance Sheets as of December 31, 2006 and 2005................................................ 23
Consolidated Statements of Operations for the Years Ended
December 31, 2006, 2005 and 2004.......................................................................... 24
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2006, 2005 and 2004.......................................................................... 25
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended
December 31, 2006, 2005 and 2004.......................................................................... 27
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2006, 2005 and 2004.......................................................................... 28
Notes to Consolidated Financial Statements.................................................................. 29
21
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, 2006 and 2005 and the
related consolidated statements of operations, cash flows, changes in
shareholders' equity and comprehensive income for each of the three years in the
period ended December 31, 2006. We have also audited the schedules on pages 62
to 67 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, 2006 and 2005, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2006, in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2006, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 123 (revised 2004), "Share-Based Payment."
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 20, 2007
22
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 31,
------------------------
2006 2005
----------- -----------
ASSETS
Investments (principally of life insurance subsidiary):
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $9,021 and $13,809
as of December 31, 2006 and 2005, respectively)............................ $ 9,007 $ 13,829
Held-to-maturity, at amortized cost (fair value: $3,004 and $6,982 as of
December 31, 2006 and 2005, respectively).................................. 3,009 7,011
Equity securities:
Trading, at fair value (cost: $0 and $102 as of December 31,
2006 and 2005, respectively)............................................... - 84
Available-for-sale, at estimated fair value (cost: $844 and $850 as of
December 31, 2006 and 2005, respectively).................................. 844 850
----------- -----------
Total investments................................................................. 12,860(1) 21,774
Cash and cash equivalents......................................................... 6,707(1) 10,039
Cash held in escrow............................................................... - 1,027
Accrued investment income......................................................... 304 609
Property and equipment, net....................................................... 17 43
Other assets...................................................................... 349 311
----------- -----------
Total assets...................................................................... $ 20,237 $ 33,803
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Life insurance policy liabilities................................................. $ 3,640 $ 13,573
Accounts payable and accruals..................................................... 674 627
----------- -----------
Total liabilities................................................................. 4,314 14,200
----------- -----------
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, 2006
and 2005....................................................................... 3,222 3,222
Additional paid-in capital........................................................ 67,718 67,660
Retained earnings................................................................. 7,999 11,682
Employee benefit trusts, at cost (13,522,381 shares as of
December 31, 2006 and 2005).................................................... (62,598) (62,598)
Accumulated other comprehensive loss.............................................. (418) (363)
----------- -----------
Total shareholders' equity........................................................ 15,923 19,603
----------- -----------
Total liabilities and shareholders' equity........................................ $ 20,237 $ 33,803
----------- -----------
----------- -----------
<FN>
(1) Includes $9,851 of investments and $4,354 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.
23
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share and ADS amounts)
Years Ended December 31,
-------------------------------------
2006 2005 2004
----------- ----------- -----------
Continuing operations:
Revenues:
Investment income............................................................ $ 1,203 $ 1,562 $ 1,397
Insurance policy charges..................................................... 2 4 4
Consulting and other fee income.............................................. 722 553 513
Net realized investment gains (losses)....................................... (2) (43) 4,700
Change in net unrealized investment gains and losses on trading
securities................................................................ 18 17 (12,373)
----------- ----------- -----------
1,943 2,093 (5,759)
Expenses:
Amounts credited on insurance policyholder accounts.......................... 468 980 1,358
Operating expenses........................................................... 4,152 4,344 4,629
Interest expense............................................................. 1 4 105
----------- ----------- -----------
4,621 5,328 6,092
----------- ----------- -----------
Loss from continuing operations before income tax expense.................... (2,678) (3,235) (11,851)
Income tax expense .......................................................... 5 12 290
----------- ----------- -----------
Loss from continuing operations.............................................. (2,683) (3,247) (12,141)
Discontinued operations:
Loss on disposal of discontinued operations, net of income
tax expense of $0......................................................... (1,000) - -
----------- ----------- -----------
Loss on discontinued operations.............................................. (1,000) - -
----------- ----------- -----------
Net loss..................................................................... $ (3,683) $ (3,247) $ (12,141)
----------- ----------- -----------
----------- ----------- -----------
Basic and diluted loss per share and ADS:
Basic and diluted loss per share:
Continuing operations........................................................ $ (0.05) $ (0.06) $ (0.24)
Discontinued operations...................................................... (0.02) - -
----------- ----------- -----------
$ (0.07) $ (0.06) $ (0.24)
----------- ----------- -----------
----------- ----------- -----------
Basic and diluted loss per ADS:
Continuing operations........................................................ $ (0.53) $ (0.64) $ (2.39)
Discontinued operations...................................................... (0.20) - -
----------- ----------- -----------
$ (0.73) $ (0.64) $ (2.39)
----------- ----------- -----------
----------- ----------- -----------
See accompanying Notes which are an integral part of these
Consolidated Financial Statements.
24
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
-------------------------------------
2006 2005 2004
----------- ----------- -----------
Net loss..................................................................... $ (3,683) $ (3,247) $ (12,141)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization................................................ 32 36 53
Amounts credited on insurance policyholder accounts.......................... 468 980 1,358
Net realized investment losses (gains)....................................... 2 43 (4,700)
Loss on forfeiture of escrow................................................. 1,000 - -
Change in net unrealized investment gains and losses
on trading securities..................................................... (18) (17) 12,373
Net amortization of investment premiums and discounts........................ 185 656 572
Share based compensation..................................................... 58 - -
Net changes in operating assets and liabilities:
Trading equity securities................................................. 108 441 12,009
Accrued investment income ................................................ 305 128 189
Other assets.............................................................. (37) 310 (112)
Life insurance policy liabilities......................................... (2) (4) (4)
Accounts payable, accruals and other liabilities.......................... 168 193 174
Income taxes payable...................................................... - 7 17
Other operating cash flows................................................... 25 (22) (6)
----------- ----------- -----------
Net cash provided by (used in) operating activities.......................... (1,389) (496) 9,782
----------- ----------- -----------
Cash flows from investing activities:
Purchases of held-to-maturity fixed maturity securities...................... (3,036) (8,510) -
Purchases of available-for-sale fixed maturity securities.................... (9,082) (5,121) -
Purchases of available-for-sale equity securities............................ - - (15)
Proceeds from maturity of held-to-maturity fixed maturity securities......... 7,000 1,350 -
Proceeds from sale and maturity of available-for-sale fixed
maturity securities....................................................... 14,364 10,611 5,060
Proceeds from sale of available-for-sale equity securities................... - - 75
Capital expenditures......................................................... (7) (9) (5)
----------- ----------- -----------
Net cash provided by (used in) investing activities ......................... 9,239 (1,679) 5,115
----------- ----------- -----------
See accompanying Notes which are an integral part of these
Consolidated Financial Statements.
25
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
Years Ended December 31,
-------------------------------------
2006 2005 2004
----------- ----------- -----------
Cash flows from financing activities:
Insurance policyholder benefits paid......................................... (11,625) (6,749) (9,824)
Proceeds from disposal of shares by the employee benefit trusts.............. - 18 -
----------- ----------- -----------
Net cash used in financing activities........................................ (11,625) (6,731) (9,824)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents......................... (3,775) (8,906) 5,073
Cash and cash equivalents at beginning of year .............................. 10,039 19,495 14,408
Foreign currency translation adjustment...................................... 443 (550) 14
----------- ----------- -----------
Cash and cash equivalents at end of year (1), (2)............................ $ 6,707 $ 10,039 $ 19,495
----------- ----------- -----------
----------- ----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest..................................................................... $ - $ 4 $ 105
Income taxes (net of amounts recovered)...................................... $ 5 $ 5 $ 274
Supplemental disclosure of non-cash investing activities:
Exchange of available-for-sale equity securities for trading equity
securities................................................................ $ - $ - $ 98
<FN>
(1) The amount for December 31, 2006 includes $4,354 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.
(2) Does not include $1,027 of cash held in escrow as of December 31, 2005.
</FN>
See accompanying Notes which are an integral part of these
Consolidated Financial Statements.
26
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, 2004 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
---------- ---------- ---------- ---------- ---------- ----------- ----------
---------- ---------- ---------- ---------- ---------- ----------- ----------
Net loss........................ - $ - $ - $ (3,683) $ - $ - $ (3,683)
Change in net unrealized
gains and losses on
available-for-sale securities - - - - - (34) (34)
Foreign currency translation
adjustment................... - - - - - (21) (21)
Share based compensation........ - - 58 - - - 58
---------- ---------- ---------- ---------- ---------- ----------- ----------
Balance as of
December 31, 2006............ 64,439 $ 3,222 $ 67,718 $ 7,999 $ (62,598) $ (418) $ 15,923
---------- ---------- ---------- ---------- ---------- ----------- ----------
---------- ---------- ---------- ---------- ---------- ----------- ----------
See accompanying Notes which are an integral part of these
Consolidated Financial Statements.
27
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Years Ended December 31,
-------------------------------------
2006 2005 2004
----------- ----------- -----------
Net loss..................................................................... $ (3,683) $ (3,247) $ (12,141)
Other comprehensive income (loss), net of deferred income taxes:
Foreign currency translation adjustments, net of income taxes of $0.......... (21) (45) 91
Change in net unrealized gains and losses:
Unrealized holding gains and losses on available-for-sale securities...... (14) (44) 64
Reclassification adjustment for gains and losses included in
net loss................................................................ (20) 28 (18)
Deferred income taxes..................................................... - - -
----------- ----------- -----------
Other comprehensive income (loss)............................................ (55) (61) 137
----------- ----------- -----------
Comprehensive loss........................................................... $ (3,738) $ (3,308) $ (12,004)
----------- ----------- -----------
----------- ----------- -----------
See accompanying Notes which are an integral part of these
Consolidated Financial Statements.
28
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
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
29
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.
30
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.
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.
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 year ended December 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.
In November 2005, the Financial Accounting Standards Board ("FASB") issued
Staff Position No. FAS 123(R)-3 ("FSP 123R-3"), "Transition Election Related to
Accounting for the Tax Effects of Share-Based Payments." The Company has elected
to adopt the alternative transition method provided in FSP 123R-3 for
calculating the tax effects of share based compensation under SFAS 123R. The
alternative transition method includes simplified methods to establish the
beginning balance of the additional paid-in capital pool ("APIC pool") related
to the tax effects of share based compensation, and for determining the
subsequent impact on the APIC pool and consolidated statements of cash flows of
the tax effects of share based compensation awards that are outstanding upon
adoption of SFAS 123R.
31
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 year ended December 31, 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 year
ended December 31, 2006 of zero percent is based upon the short remaining
vesting periods of the option grants (only one option grant is not fully vested
at 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 year ended December 31,
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 year ended December 31, 2006, compensation expense related
to employee share options under SFAS 123R totaled $58,000, and is included in
operating expenses in the accompanying statement of operations.
The table below reflects the proforma net loss and basic and diluted loss
per share and ADS for the years ended December 31, 2005 and 2004:
32
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Pro Forma Results Under
SFAS 123 for the
Years Ended December 31,
------------------------
2005 2004
----------- -----------
(In thousands, except per
share and ADS amounts)
Net loss as reported for the prior period (1)................................ $ (3,247) $ (12,141)
Share based compensation expense related to employee
share options (2)......................................................... (39) (190)
----------- -----------
Net loss, including the effect of share based compensation expense (3)....... $ (3,286) $ (12,331)
----------- -----------
----------- -----------
Basic and diluted loss per share, as reported for the prior period (1)....... (0.06) (0.24)
Basic and diluted loss per share, including the effect of
share based compensation................................................... (0.06) (0.24)
Basic and diluted loss per ADS, as reported for the prior period (1)......... (0.64) (2.39)
Basic and diluted loss per ADS, including the effect of
share based compensation................................................... (0.65) (2.43)
<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.
</FN>
During 2006, there were no option grants, exercises or forfeitures. During
2006, 1,060,000 options expired and 653,750 options vested. At December 31,
2006, there were 5,225,000 options outstanding with a weighted average exercise
price of $2.59. Of these options, 4,475,000 were exercisable at December 31,
2006, and these have a weighted average exercise price of $3.00. The remaining
750,000 options were unvested at December 31, 2006. These unvested options have
a weighted average exercise price of $0.15. As of December 31, 2006, total
unrecognized compensation expense related to unvested share options was $36,000,
which is expected to be recognized ratably over 2007, 2008 and the first half of
2009.
During the three year period ended December 31, 2006, only one option grant
was made in the second quarter of 2005. The 1,000,000 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. These options were granted at an exercise price equal to the
market price of the shares, or $61,500.
For additional information relating to the Company's employee share
options, see Note 13 "Share Incentive Plans" below.
33
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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.
34
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO 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 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's management does not expect
any impact on the Company's consolidated financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"),
"Accounting for Uncertainty in Income Taxes - an Interpretation of FASB
Statement No. 109." FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in a company's financial statements in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." FIN 48 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. It also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company's management does not expect the
adoption of FIN 48 to have a material effect on its consolidated financial
statements.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157 ("SFAS 157"), "Fair Value Measurements," which defines fair
value, establishes guidelines for measuring fair value and expands disclosures
regarding fair value measurements. SFAS 157 does not require any new fair value
measurements but rather eliminates inconsistencies in guidance found in various
prior accounting pronouncements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007. Earlier adoption is permitted, provided the
company has not yet issued financial statements, including for interim periods,
for that fiscal year. The Company's management is currently evaluating the
impact of SFAS 157, but does not expect the adoption of SFAS 157 to have a
material impact on its consolidated financial position, results of operations or
cash flows.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 ("SAB
108"), "Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements." SAB 108 provides guidance
on how prior year misstatements should be considered when quantifying
misstatements in the current year financial statements. SAB 108 requires
registrants to quantify
35
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
misstatements using both a balance sheet and an income statement approach and
evaluate whether either approach results in quantifying a misstatement that,
when all relevant quantitative and qualitative factors are considered, is
material. SAB 108 does not change the guidance in SAB 99, "Materiality," when
evaluating the materiality of misstatements. SAB 108 is effective for fiscal
years ending after November 15, 2006. Upon initial application, SAB 108 permits
a one-time cumulative effect adjustment to beginning retained earnings. The
adoption of SAB 108 did not have any impact on the Company's consolidated
financial statements.
In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159 ("SFAS 159"), "The Fair Value Option for Financial Assets and
Financial Liabilities - Including an amendment of FASB Statement No 115." SFAS
159 permits entities to choose to measure many financial instruments and certain
other items at fair value. SFAS 159 is effective for fiscal years beginning
after November 15, 2007. Early adoption is permitted, provided the company also
elects to apply the provisions of SFAS 157. The Company's management is
currently evaluating the impact of SFAS 159, but does not expect the adoption of
SFAS 159 to have a material impact on its consolidated financial position,
results of operations or cash flows.
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
The $1.0 million loss on discontinued operations recorded in 2006 resulted
from the write-off of the $1.0 million of cash held in escrow which was part of
the proceeds from the sale of London Pacific Advisors ("LPA") in June 2003 held
back to cover any of the Group's indemnity obligations. See Note 4 "Cash Held in
Escrow" below for further information.
36
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3. Investments
Summary Cost and Fair Value Information
Fixed Maturity Securities
An analysis of fixed maturity securities is as follows:
December 31,
----------------------------------------------------------------------------------------------
2006 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......... $ 4,017 $ - $ (6) $ 4,011 $ 8,500 $ 38 $ - $ 8,538
Corporate debt securities.. 5,004 - (8) 4,996 5,309 - (18) 5,291
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
9,021 - (14) 9,007 13,809 38 (18) 13,829
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Held-to-Maturity:
Corporate debt securities.. 3,009 - (5) 3,004 7,011 - (29) 6,982
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
3,009 - (5) 3,004 7,011 - (29) 6,982
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total fixed maturity securities $ 12,030 $ - $ (19) $ 12,011 $ 20,820 $ 38 $ (47) $ 20,811
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
As of December 31, 2006, there were no non-income producing fixed maturity
securities for the twelve months preceding December 31, 2006.
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............................. $ 9,021 $ 9,007 $ 3,009 $ 3,004
Due after one year through five years............... - - - -
---------- ---------- ---------- ----------
$ 9,021 $ 9,007 $ 3,009 $ 3,004
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
37
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Equity Securities
Equity securities are comprised of available-for-sale and trading
securities. An analysis of equity securities is as follows:
December 31,
----------------------------------------------------------------------------------------------
2006 2005
---------------------------------------------- ----------------------------------------------
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.............. $ 844 $ - $ - $ 844 $ 850 $ - $ - $ 850
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total available-for-sale
equity securities....... 844 - - 844 850 - - 850
Trading securities......... - - - - 102 7 (25) 84
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total equity securities.... $ 844 $ - $ - $ 844 $ 952 $ 7 $ (25) $ 934
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Trading securities are carried at fair value with changes in net unrealized
gains and losses of $18,000, $17,000 and $(12,373,000) included in the income
and losses for the years ended December 31, 2006, 2005 and 2004, respectively.
Investment Concentration and Risk
As of December 31, 2006, fixed maturity securities held by the Group
included investments in British Telecom of $3,017,000, AOL Time Warner of
$2,002,000, General Mills of $2,000,000 and Cadbury Schweppes of $1,996,000.
These four corporate issuers each represented more than 10% of shareholders'
equity as of December 31, 2006. However, the General Mills bond matured on
February 15, 2007 and the Group received repayment of principal in full and all
interest due on this bond. The remaining bonds will mature on or before July 16,
2007.
As of December 31, 2006, the Company's Jersey based life insurance
subsidiary, LPAL, owned 75% of the Group's $12.0 million in fixed maturity
securities and 100% of the Group's $0.8 million in available-for-sale private
equity 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 and the Jersey
Financial Services Commission ("JFSC"). 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 0.0% and 30.2% of total fixed maturity
securities as of December 31, 2006 and 2005, respectively. The Group held $12.0
million in fixed maturity securities considered less than investment grade as of
December 31, 2005. These holdings were repaid in full at maturity in early 2006.
Net Unrealized Gains (Losses) on Available-for-Sale Securities
Net unrealized gains (losses) on fixed maturity securities classified as
available-for-sale as of December 31, 2006 and 2005 totaled $(14,000) and
$20,000, respectively. There were no related income taxes.
38
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
There were no net unrealized losses on equity securities classified as
available-for-sale as of December 31, 2006 or 2005.
Changes in net unrealized gains and losses on available-for-sale securities
included in other comprehensive income for the years ended December 31, 2004,
2005 and 2006 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, 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
Changes during the year ended December 31, 2006:
Unrealized holding gains and losses on available-for-sale securities...... (14) - (14)
Reclassification adjustment for gains and losses included in net loss..... (20) - (20)
----------- ----------- -----------
Net unrealized losses on available-for-sale securities as of December 31, 2006 $ (14) $ - $ (14)
----------- ----------- -----------
----------- ----------- -----------
Net Investment Income
The details of investment income, net of investment expenses, are as
follows:
Years Ended December 31,
-------------------------------------
2006 2005 2004
----------- ----------- -----------
(In thousands)
Interest on fixed maturity securities........................................ $ 881 $ 1,217 $ 1,131
Interest on cash and cash equivalents........................................ 324 347 268
----------- ----------- -----------
Gross investment income...................................................... 1,205 1,564 1,399
Investment expenses.......................................................... (2) (2) (2)
----------- ----------- -----------
1,203 1,562 1,397
Amounts credited on insurance policyholder accounts.......................... (468) (980) (1,358)
----------- ----------- -----------
Net investment income........................................................ $ 735 $ 582 $ 39
----------- ----------- -----------
----------- ----------- -----------
Investment expenses included costs of investment administration, primarily
custodial fees.
39
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Realized Gains and Losses
Information about gross and net realized gains and losses on securities
transactions is as follows:
Years Ended December 31,
-------------------------------------
2006 2005 2004
----------- ----------- -----------
(In thousands)
Realized gains (losses) on securities transactions: Fixed maturities,
available-for-sale:
Gross gains............................................................... $ - $ - $ -
Gross losses ............................................................. (2) - -
----------- ----------- -----------
Net realized losses on fixed maturities, available-for-sale.................. (2) - -
----------- ----------- -----------
Equity securities, trading:
Gross gains............................................................... 6 22 8,219
Gross losses.............................................................. - (65) (265)
----------- ----------- -----------
Net realized gains (losses) on equity securities, trading.................... 6 (43) 7,954
----------- ----------- -----------
Equity securities, available-for-sale:
Gross gains............................................................... - - 121
Gross losses.............................................................. (6) - (3,375)
----------- ----------- -----------
Net realized losses on equity securities, available-for-sale................. (6) - (3,254)
----------- ----------- -----------
Net realized investment gains (losses) on securities transactions............ $ (2) $ (43) $ 4,700
----------- ----------- -----------
----------- ----------- -----------
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 consolidated
statement of operations. There were no such impairments recorded in 2005 or
2006.
Subsequent to December 31, 2006, the Company received a $1.2 million
payment representing a partial distribution resulting from the settlements
achieved in the WorldCom, Inc. securities litigation. LPAL held certain
WorldCom, Inc. publicly traded bonds which it sold at a loss in 2002. The $1.2
million payment will be recognized in the first quarter of 2007 in the Company's
consolidated statement of operations as a realized gain, which reverses part of
the realized loss recorded in 2002. The Company expects to receive an additional
$0.4 million as a final distribution later in 2007. Since these payments are for
LPAL's account, they are not available to fund the operations or commitments of
the Company or its other subsidiaries.
Note 4. Cash Held in Escrow
Cash held in escrow at December 31, 2005 consisted of $1.0 million of the
cash 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. As disclosed in the Company's 2005 Annual Report on Form 10-K and
in its 2006 Quarterly Reports on Form 10-Q, in February 2005, SunGard filed a
lawsuit against the Company and certain of its subsidiaries alleging breaches of
representations and warranties contained in the sale and purchase agreement.
Subsequently, in April 2005, the Company filed a lawsuit against SunGard and
certain of its affiliates accusing SunGard of wrongful conduct. In August 2006,
the Company and SunGard entered into a settlement agreement covering the above
actions. All lawsuits against each other were dismissed and the Company agreed
to forego the $1.0 million escrow account, including accrued interest on the
account.
40
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accordingly, the $1.0 million of cash held in escrow (and $56,000 of interest
earned on the escrow account) was written off as of June 30, 2006. The write-off
of the $1.0 million original escrow amount has been shown as a loss on
discontinued operations, and the write-off of the $56,000 of interest earned has
been netted against investment income, in the Company's consolidated statement
of operations for 2006.
Note 5. Property and Equipment
Property and equipment are carried at cost and consisted of the following:
December 31,
------------------------
2006 2005
----------- -----------
(In thousands)
Property, equipment and leasehold improvements.................................... $ 729 $ 745
Accumulated depreciation.......................................................... (712) (702)
----------- -----------
Property and equipment, net....................................................... $ 17 $ 43
----------- -----------
----------- -----------
Note 6. Other Assets
An analysis of other assets is as follows:
December 31,
------------------------
2006 2005
----------- -----------
(In thousands)
Prepayments....................................................................... $ 195 $ 202
Receivables:
Due from broker................................................................ 1 -
Fee income receivable.......................................................... 169 84
Other receivables.............................................................. 18 25
Allowance for doubtful accounts................................................ (34) -
----------- -----------
Total other assets................................................................ $ 349 $ 311
----------- -----------
----------- -----------
Note 7. Life Insurance Policy Liabilities
An analysis of life insurance policy liabilities is as follows:
December 31,
------------------------
2006 2005
----------- -----------
(In thousands)
Deferred annuities - policyholder contract deposits............................... $ 3,360 $ 13,322
Other policy claims and benefits.................................................. 280 251
----------- -----------
$ 3,640 $ 13,573
----------- -----------
----------- -----------
41
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The liability for future policy benefits and policyholder contract deposits
was determined based on the following assumptions:
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 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, 2006, 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 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 and
the JFSC.
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 2006, 2005 and 2004.
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.
42
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A breakdown of the Group's book loss before income taxes by tax
jurisdiction follows:
Years Ended December 31,
-------------------------------------
2006 2005 2004
----------- ----------- -----------
(In thousands)
Loss before income taxes:
Jersey, Guernsey and United Kingdom.......................................... $ (1,410) $ (1,878) $ (11,049)
United States................................................................ (2,268) (1,357) (802)
----------- ----------- -----------
Total loss before income taxes............................................... $ (3,678) $ (3,235) $ (11,851)
----------- ----------- -----------
----------- ----------- -----------
The provision for income taxes differs from the amount computed by applying
the Jersey, Channel Islands statutory income tax rate of 20% to the loss before
income taxes. The sources and tax effects of the difference are as follows:
Years Ended December 31,
-------------------------------------
2006 2005 2004
----------- ----------- -----------
(In thousands)
Income tax benefit computed at Jersey statutory income tax
rate of 20%............................................................... $ (736) $ (647) $ (2,370)
Realized and unrealized investment losses (gains) not subject to taxation
in Jersey................................................................. - 5 1,412
Other losses not deductible in Jersey........................................ 268 359 619
Losses not deductible (income not taxable) in Guernsey....................... (20) (22) 144
Tax benefit on losses at higher than 20% statutory Jersey rate:
Losses in the U.S......................................................... (518) (310) (183)
Adjustment of prior years' provisions........................................ - 11 (308)
Increase in valuation allowance.............................................. 972 582 941
Forfeiture of U.S. net operating loss carryforwards related to dissolved
U.S. entities (1)......................................................... 5,070 - -
Decrease in valuation allowance related to dissolved U.S. entities (1)....... (5,070) - -
Other........................................................................ 39 34 35
----------- ----------- -----------
Actual tax expense .......................................................... $ 5 $ 12 $ 290
----------- ----------- -----------
----------- ----------- -----------
<FN>
(1) Related to two of the Group's inactive U.S. subsidiaries which were dissolved in December 2006. These entities were owned
by a non-U.S. subsidiary of the registrant and as a result of their dissolution, $4.4 million of federal net operating
loss carryforward benefits and $0.7 million of state net operating loss carryforward benefits were forfeited.
</FN>
The components of the actual tax expense were as follows:
Years Ended December 31,
-------------------------------------
2006 2005 2004
----------- ----------- -----------
(In thousands)
Jersey, Guernsey and United Kingdom:
Current tax expense....................................................... $ - $ - $ -
Deferred tax expense...................................................... - - -
United States:
Current tax expense ...................................................... 5 12 290
Deferred tax expense...................................................... - - -
----------- ----------- -----------
Total actual tax expense .................................................... $ 5 $ 12 $ 290
----------- ----------- -----------
----------- ----------- -----------
43
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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, 2006 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,
------------------------
2006 2005
----------- -----------
(In thousands)
U.S. subsidiaries:
Deferred income tax assets:
Net operating loss carryforwards.................................................. $ 5,543 $ 9,645
Capital loss carryforwards........................................................ 67,245 67,283
Unrealized losses on investments.................................................. - 8
Deferred compensation............................................................. 4 4
Bad debts......................................................................... 14 -
Other assets...................................................................... 2 2
Valuation allowance............................................................... (72,807) (76,905)
----------- -----------
Deferred income tax assets, net of valuation allowance............................ 1 37
Deferred income tax liabilities:
Deferred capital gains............................................................ - (36)
Depreciation, amortization and other.............................................. (1) (1)
----------- -----------
(1) (37)
----------- -----------
Net deferred income tax assets - U.S. subsidiaries................................ $ - $ -
----------- -----------
----------- -----------
As of December 31, 2006, the Group's U.S. subsidiaries have pre-tax federal
net operating loss carryforwards of approximately $13.4 million expiring as
follows: approximately $1.3 million in 2011, and approximately $12.1 million
from 2020 to 2026. These subsidiaries have California net operating loss
carryforwards of approximately $10.9 million expiring from 2012 to 2016. In
addition, these subsidiaries have federal capital loss carryforwards of $157.2
million ($155.9 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, 2006, 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, 2006 and 2005, there were 64,439,073
Ordinary Shares issued and outstanding.
44
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
No dividends were declared and paid in 2004, 2005 or 2006.
Accumulated other comprehensive 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 $(404,000), $(383,000) and $(338,000) as of December 31, 2006,
2005 and 2004, respectively. The net unrealized gains (losses) on
available-for-sale securities after deferred income taxes were $(14,000),
$20,000 and $36,000 as of December 31, 2006, 2005 and 2004, respectively.
The Group has two share incentive plans as described in Note 13 "Share
Incentive Plans" below. 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,
----------------------------------------------------------------------
2006 2005 2004
---------------------- ---------------------- ----------------------
ESOT ALOT ESOT ALOT ESOT ALOT
---------- ---------- ---------- ---------- ---------- ----------
(In thousands)
Shares held as of January 1........... 13,084 438 13,247 438 13,247 438
Purchased............................. - - - - - -
Exercised............................. - - (163) - - -
---------- ---------- ---------- ---------- ---------- ----------
Shares held as of December 31......... 13,084(1) 438 13,084(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
under these operating leases was $207,000 (net of sublease income of $46,000),
$230,000 and $288,000 for the years ended December 31, 2006, 2005 and 2004,
respectively. The Group had no capital leases as of December 31, 2006.
45
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, 2006, were as follows:
Operating
Leases(1)
------------
(In thousands)
2007............................................................................................... $ 285
2008............................................................................................... 259
2009............................................................................................... 131
2010............................................................................................... 66
------------
Total.............................................................................................. $ 741
------------
------------
<FN>
(1) Includes commitments related to the Group's Jersey office lease which expires in September 2010. The Group entered
into a sublease of its Jersey office during 2006. Expected future sublease income from 2007 through 2010 is $296,000.
A liability of $158,000 remains recorded on the Company's consolidated balance sheet as of December 31, 2006,
representing the loss on the sublease from 2007 through 2010.
</FN>
Approximately 64% of the Jersey office lease commitments are covered by a
sublease to a third party.
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, 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 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, 2006.
46
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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,
--------------------------------------------------
2006 2005
------------------------ ------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----------- ----------- ----------- -----------
(In thousands)
Financial assets:
Cash and cash equivalents........................ $ 6,707 $ 6,707 $ 10,039 $ 10,039
Cash held in escrow.............................. - - 1,027 1,027
Investments:
Fixed maturities:
Available-for-sale........................ 9,007 9,007 13,829 13,829
Held-to-maturity.......................... 3,009 3,004 7,011 6,982
Equity securities:
Trading................................... - - 84 84
Available-for-sale........................ 844 844 850 850
Financial liabilities:
Life insurance policy liabilities................ 3,640 3,603 13,573 13,432
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.
47
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 2006, 2005 and 2004
was as follows:
2006 2005 2004
-------------------- -------------------- --------------------
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...................... 6,285 $ 2.77 6,940 $ 3.00 8,945 $ 3.10
Granted.......................................... - - 1,000 0.15 - -
Exercised........................................ - - (163) 0.11 - -
Forfeited........................................ - - (808) 1.46 (2,005) 3.46
Expired.......................................... (1,060) 3.66 (684) 3.39 - -
--------- --------- --------- --------- --------- ---------
Outstanding as of December 31.................... 5,225 $ 2.59 6,285 $ 2.77 6,940 $ 3.00
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
48
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2006 2005 2004
-------------------- -------------------- --------------------
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............ 4,475 $ 3.00 4,881 $ 3.52 5,685 $ 3.57
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
See Note 1 "Summary of Significant Accounting Policies" for information
regarding the Group's accounting for share based compensation.
Summary information about the Group's share options outstanding as of
December 31, 2006 is as follows:
Options Outstanding(1) Options Exercisable(1)
------------------------------------------------- --------------------------------
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 6.52 $0.27 2,165 $0.31
0.51 - 5.00 220 4.18 2.46 220 2.46
5.01 - 10.00 2,030 4.38 5.41 2,030 5.41
10.01 - 21.00 60 3.68 21.00 60 21.00
- --------------- --------------- ----------- ------------ --------------- ------------
$0.10 -$21.00 5,225 5.56 $2.59 4,475 $3.00
- --------------- --------------- ----------- ------------ --------------- ------------
- --------------- --------------- ----------- ------------ --------------- ------------
<FN>
(1) The intrinsic value of all options outstanding is zero as all options were granted with an exercise price equal to the fair
market value of the underlying shares at the date of grant.
</FN>
Agent Loyalty Opportunity Trust
The Agent Loyalty Opportunity Trust ("ALOT") was established in 1997
(without shareholders' approval) to provide for the granting of stock
appreciation rights ("SARs") on the Company's Ordinary Shares to agents of the
Company's former U.S. life insurance subsidiary. Each award unit entitled the
holder to cash compensation equal to the difference between the Company's
prevailing share price and the exercise price. The award units were exercisable
in four equal annual installments commencing on the first anniversary of the
date of grant and were forfeited upon termination of the agency contract.
Vesting of the award in any given year was also contingent on the holder of the
award surpassing a predetermined benchmark tied to sales and persistency. The
SARs expired seven years from the date of grant. The 79,000 awards outstanding
at December 31, 2005 expired in April 2006.
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.
49
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SAR activity for the years ended December 31, 2006, 2005 and 2004 was as
follows:
2006 2005 2004
-------------------- -------------------- --------------------
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...................... 79 $5.19 290 $3.85 388 $3.73
Granted.......................................... - - - - - -
Exercised........................................ - - - - - -
Forfeited........................................ - - - - - -
Expired.......................................... (79) $5.19 (211) 3.35 (98) 3.35
--------- --------- --------- --------- --------- ---------
Outstanding as of December 31.................... - - 79 $5.19 290 $3.85
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Award units exercisable as of December 31........ - - 42 $5.19 187 $3.76
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
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, $0 and $15,000 to the trust in 2006,
2005 and 2004, 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 $161,000, $154,000 and
$49,000 were made by the Group to the plan in 2006, 2005 and 2004, respectively.
Of the 2006 and 2005 contributions, $111,000 and $105,000, respectively, were
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:
50
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31,
-------------------------------------
2006 2005 2004
----------- ----------- -----------
(In thousands, except share, per share
and ADS amounts)
Loss from continuing operations........................................ $ (2,683) $ (3,247) $ (12,141)
Loss on discontinued operations........................................ (1,000) - -
----------- ----------- -----------
Net loss............................................................... $ (3,683) $ (3,247) $ (12,141)
----------- ----------- -----------
----------- ----------- -----------
Basic loss per share and ADS:
Weighted-average number of Ordinary Shares outstanding,
excluding shares held by the employee benefit trusts................ 50,916,692 50,916,692 50,754,192
----------- ----------- -----------
Basic loss per share:
Continuing operations.................................................. $ (0.05) $ (0.06) $ (0.24)
Discontinued operations................................................ (0.02) - -
----------- ----------- -----------
$ (0.07) $ (0.06) $ (0.24)
----------- ----------- -----------
----------- ----------- -----------
Basic loss per ADS:
Continuing operations.................................................. $ (0.53) $ (0.64) $ (2.39)
Discontinued operations................................................ $ (0.20) - -
----------- ----------- -----------
$ (0.73) $ (0.64) $ (2.39)
----------- ----------- -----------
----------- ----------- -----------
Diluted loss per share and ADS:
Weighted-average number of Ordinary Shares outstanding,
excluding shares held by the employee benefit trusts................ 50,916,692 50,916,692 50,754,192
Effect of dilutive securities (warrants and employee share options) ... - - -
----------- ----------- -----------
Weighted-average number of Ordinary Shares used in diluted
earnings per share calculations..................................... 50,916,692 50,916,692 50,754,192
----------- ----------- -----------
----------- ----------- -----------
Diluted loss per share:
Continuing operations.................................................. $ (0.05) $ (0.06) $ (0.24)
Discontinued operations................................................ (0.02) - -
----------- ----------- -----------
$ (0.07) $ (0.06) $ (0.24)
----------- ----------- -----------
----------- ----------- -----------
Diluted loss per ADS:
Continuing operations.................................................. $ (0.53) $ (0.64) $ (2.39)
Discontinued operations................................................ $ (0.20) - -
----------- ----------- -----------
$ (0.73) $ (0.64) $ (2.39)
----------- ----------- -----------
----------- ----------- -----------
As the Company recorded a net loss for the years ended December 31, 2006,
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, 2006, 2005 and 2004, there would
have been an additional 8,125, 66,397 and 650,913 shares, respectively, included
in the calculations of diluted earnings per share for these years.
51
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 16. Transactions with Related Parties
The Group paid legal fees of approximately $1,000, $60,000 and $36,000
during 2006, 2005 and 2004, 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.
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,
-------------------------------------
2006 2005 2004
----------- ----------- -----------
(In thousands)
Jersey................................................................. $ 968 $ 1,215 $ (5,715)
Guernsey............................................................... 103 109 (720)
United States.......................................................... 872 769 676
----------- ----------- -----------
Consolidated revenues and net investment gains (losses)
for continuing operations.......................................... $ 1,943 $ 2,093 $ (5,759)
----------- ----------- -----------
----------- ----------- -----------
Total assets by geographic segment were as follows:
December 31,
------------------------
2006 2005
----------- -----------
(In thousands)
Jersey............................................................................. $ 15,203 $ 25,066
Guernsey........................................................................... 2,082 3,107
United States...................................................................... 2,952 5,630
----------- -----------
Consolidated total assets ......................................................... $ 20,237 $ 33,803
----------- -----------
----------- -----------
52
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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,
-------------------------------------
2006 2005 2004
----------- ----------- -----------
(In thousands)
Revenues:
Venture capital and consulting......................................... $ 723 $ 535 $ (125)
Life insurance and annuities .......................................... 937 1,192 (5,759)
----------- ----------- -----------
1,660 1,727 (5,884)
Reconciliation of segment amounts to consolidated amounts:
Interest and other fee income.......................................... 283 366 125
----------- ----------- -----------
Consolidated revenues and net investment gains and losses
for continuing operations.......................................... $ 1,943 $ 2,093 $ (5,759)
----------- ----------- -----------
----------- ----------- -----------
Loss from continuing operations before income tax expense:
Venture capital and consulting......................................... $ (403) $ (584) $ (1,365)
Life insurance and annuities........................................... (221) (701) (8,091)
----------- ----------- -----------
(624) (1,285) (9,456)
Reconciliation of segment amounts to consolidated amounts:
Interest and other fee income.......................................... 283 366 125
Corporate expenses..................................................... (2,336) (2,312) (2,415)
Interest expense....................................................... (1) (4) (105)
----------- ----------- -----------
Consolidated loss from continuing operations
before income tax expense.......................................... $ (2,678) $ (3,235) $ (11,851)
----------- ----------- -----------
----------- ----------- -----------
Assets attributable to each of the Company's reportable operating segments,
based on management's reporting structure, were as follows:
December 31,
------------------------
2006 2005
----------- -----------
(In thousands)
Assets:
Venture capital and consulting..................................................... $ - $ 90
Life insurance and annuities....................................................... 14,518 24,720
Corporate and other................................................................ 5,719 8,993
----------- -----------
Consolidated total assets.......................................................... $ 20,237 $ 33,803
----------- -----------
----------- -----------
53
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 18. Selected Quarterly Financial Information (Unaudited)
Unaudited quarterly financial information (in thousands, except per share
and ADS amounts) is as follows:
2006
---------------------------------------------------------------
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
----------- ----------- ----------- ----------- -----------
Continuing operations:
Revenues including net investment gains (losses)........ $ 565 $ 413 $ 457 $ 508 $ 1,943
Loss before income tax expense.......................... (721) (1,018) (558) (381) (2,678)
Net loss................................................ (726) (1,018) (558) (381) (2,683)
Discontinued operations:
Loss, net of income tax expense of $0................... - (1,000) - - (1,000)
Total continuing and discontinued operations:
Net loss................................................ (726) (2,018) (558) (381) (3,683)
Basic and diluted loss per share:
Continuing operations................................... $ (0.01) $ (0.02) $ (0.01) $ (0.01) $ (0.05)
Discontinued operations................................. - (0.02) - - (0.02)
----------- ----------- ----------- ----------- -----------
$ (0.01) $ (0.04) $ (0.01) $ (0.01) $ (0.07)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Basic and diluted loss per ADS:
Continuing operations................................... $ (0.14) $ (0.20) $ (0.11) $ (0.07) $ (0.53)
Discontinued operations................................. - (0.20) - - (0.20)
----------- ----------- ----------- ----------- -----------
$ (0.14) $ (0.40) $ (0.11) $ (0.07) $ (0.73)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
54
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 and 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)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Basic and 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)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
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.
55
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, 2006 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 September 18, 2007 (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 58, is the founder
and a principal shareholder of Berkeley Technology Limited. He has worked for us
for more than 30 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 52, 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.
56
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, 2006.
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............. 5,225,000 (1) $2.59 (1)
Equity compensation plans not
approved by shareholders............. - -
--------------- --------
Total................................... 5,225,000 $2.59
--------------- --------
--------------- --------
<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.
57
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...................................... 22
Consolidated Balance Sheets as of December 31, 2006 and 2005................................. 23
Consolidated Statements of Operations for the Years Ended
December 31, 2006, 2005 and 2004......................................................... 24
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2006, 2005 and 2004......................................................... 25
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended
December 31, 2006, 2005 and 2004......................................................... 27
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2006, 2005 and 2004......................................................... 28
Notes to the Consolidated Financial Statements............................................... 29
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.................................................................................. 62
Schedule II - Condensed Financial Information of Registrant
Condensed Balance Sheets as of December 31, 2006 and 2005................................ 63
Condensed Statements of Operations for the Years Ended
December 31, 2006, 2005 and 2004...................................................... 64
Condensed Statements of Cash Flows for the Years Ended
December 31, 2006, 2005 and 2004...................................................... 65
Note to Condensed Financial Statements................................................... 66
Schedule III - Supplementary Insurance Information........................................... 67
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.
58
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).
59
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).
60
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 23, 2007.
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 62 through 67.
61
SCHEDULE I - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
As of December 31, 2006
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.................................... 12,030 12,011 12,016
Redeemable preferred stock...................................... - - -
-------------- -------------- ---------------
Total fixed maturity securities................................. 12,030 $ 12,011 12,016
-------------- -------------- ---------------
--------------
Equity securities:
Non-redeemable preferred stocks................................. 844 844 844
-------------- -------------- ---------------
Total equity securities......................................... 844 $ 844 844
-------------- -------------- ---------------
--------------
Total investments............................................... $ 12,874 $ 12,860
-------------- ---------------
-------------- ---------------
<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>
62
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BERKELEY TECHNOLOGY LIMITED
CONDENSED BALANCE SHEETS
December 31,
------------------------------
2006 2005
------------ ------------
(In thousands, except share amounts)
ASSETS
Cash and cash equivalents......................................................... $ 677 $ 308
Investment in subsidiaries........................................................ (66,080) (69,853)
Intercompany balances............................................................. 82,099 90,288
Other assets...................................................................... 7 37
------------ ------------
Total assets...................................................................... $ 16,703 $ 20,780
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accruals..................................................... $ 498 $ 330
Intercompany balances............................................................. 282 847
------------ ------------
Total liabilities................................................................. 780 1,177
------------ ------------
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, 2006
and 2005....................................................................... 3,222 3,222
Additional paid-in capital........................................................ 67,718 67,660
Retained earnings................................................................. 7,999 11,682
Employee benefit trusts, at cost (13,522,381 shares as of
December 31, 2006 and 2005, respectively)...................................... (62,598) (62,598)
Accumulated other comprehensive loss.............................................. (418) (363)
------------ ------------
Total shareholders' equity........................................................ 15,923 19,603
------------ ------------
Total liabilities and shareholders' equity........................................ $ 16,703 $ 20,780
------------ ------------
------------ ------------
See accompanying Note to Condensed Financial Statements.
63
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
BERKELEY TECHNOLOGY LIMITED
CONDENSED STATEMENTS OF OPERATIONS
Years Ended December 31,
-----------------------------------
2006 2005 2004
---------- ----------- ----------
(In thousands)
Revenues:
Investment income............................................................ $ 31 $ 24 $ 44
---------- ----------- ----------
31 24 44
Expenses:
Staff costs.................................................................. 407 471 626
Other operating expenses..................................................... 733 667 1,459
---------- ----------- ----------
1,140 1,138 2,085
---------- ----------- ----------
Loss before income tax benefit and equity in
undistributed net loss of subsidiaries.................................... (1,109) (1,114) (2,041)
Income tax benefit........................................................... - - -
---------- ----------- ----------
Loss before equity in undistributed net loss of
subsidiaries.............................................................. (1,109) (1,114) (2,041)
Equity in undistributed net loss of subsidiaries (1)......................... (2,574) (2,133) (10,100)
---------- ----------- ----------
Net loss..................................................................... $ (3,683) $ (3,247) $ (12,141)
---------- ----------- ----------
---------- ----------- ----------
- -----------------------
<FN>
(1) Eliminated on consolidation.
</FN>
See accompanying Note to Condensed Financial Statements.
64
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
BERKELEY TECHNOLOGY LIMITED
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------------
2006 2005 2004
---------- ----------- ----------
(In thousands)
Cash flows from operating activities:
Net loss..................................................................... $ (3,683) $ (3,247) $ (12,141)
Adjustments to reconcile net loss to net
cash used in operating activities:
Equity in undistributed net loss of subsidiaries............................. 2,574 2,133 10,100
Other operating cash flows................................................... 256 101 140
---------- ----------- ----------
Net cash used in operating activities ....................................... (853) (1,013) (1,901)
---------- ----------- ----------
Cash flows from investing activities:
Advances to subsidiaries..................................................... (181) (3,149) (195)
---------- ----------- ----------
Net cash used in investing activities........................................ (181) (3,149) (195)
---------- ----------- ----------
Cash flows from financing activities:
Repayments from subsidiaries................................................. 1,403 527 3,543
---------- ----------- ----------
Net cash provided by financing activities ................................... 1,403 527 3,543
---------- ----------- ----------
Net increase (decrease) in cash and cash equivalents......................... 369 (3,635) 1,447
Cash and cash equivalents at beginning of year............................... 308 3,943 2,496
---------- ----------- ----------
Cash and cash equivalents at end of year..................................... $ 677 $ 308 $ 3,943
---------- ----------- ----------
---------- ----------- ----------
See accompanying Note to Condensed Financial Statements.
65
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, 2006.
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,
2006.
66
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
Life Insurance and Annuities Segment
Years Ended/As of December 31,
-----------------------------------
2006 2005 2004
---------- ----------- ----------
(In thousands)
Deferred policy acquisition costs.......................................... $ - $ - $ -
Future policy benefits, losses, claims and loss expenses (1)............... 3,640 13,573 21,229
Unearned premiums.......................................................... N/A N/A N/A
Other policy claims and benefits payable (1)............................... - - -
Premium revenue (2)........................................................ 2 4 4
Net investment income (3).................................................. 936 1,213 1,295
Benefits, claims, losses and settlement expenses........................... N/A N/A N/A
Amortization of deferred policy acquisition costs.......................... - - -
Other operating expenses................................................... 689 913 974
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 of this Form 10-K for the year ended December 31, 2006.
(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>
67
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 23, 2007 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 23, 2007 Arthur I. Trueger
Executive Chairman
(Principal Executive Officer)
/s/ Ian K. Whitehead
Date: March 23, 2007 Ian K. Whitehead
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Victor A. Hebert
Date: March 23, 2007 Victor A. Hebert
Deputy Chairman and Non-Executive Director
/s/ Harold E. Hughes, Jr.
Date: March 23, 2007 Harold E. Hughes, Jr.
Non-Executive Director
/s/ Trenchard
Date: March 23, 2007 The Viscount Trenchard
Non-Executive Director
68
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
EXHIBIT INDEX FOR THE ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2006
Exhibit
Number Description
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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).
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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).
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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 23, 2007.
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.
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(1) Management contract or compensatory arrangement filed in response to Item
15(a)(3) of the instructions to Form 10-K.
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