Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 0-21874
Berkeley Technology Limited
(Exact name of registrant as specified in its charter)
______________________
Jersey, Channel Islands Not applicable
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
Minden House, 6 Minden Place
St. Helier, Jersey JE2 4WQ
Channel Islands
(Address of principal executive offices)
(Zip Code)
011 44 (1534) 607700
(Registrant's telephone number, including area code)
London Pacific Group Limited
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No _____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ____ No |X|
As of November 14, 2003, the registrant had outstanding 64,439,073 Ordinary
Shares, par value $0.05 per share.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Page
Item 1. Financial Statements:
Unaudited Condensed Consolidated Balance Sheets as of September 30, 2003 and
December 31, 2002 ........................................................................... 3
Unaudited Condensed Consolidated Statements of Income for the three and nine months
ended September 30, 2003 and 2002............................................................ 4
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2003 and 2002............................................................ 6
Unaudited Consolidated Statement of Changes in Shareholders' Equity for the nine months
ended September 30, 2003 .................................................................... 7
Unaudited Consolidated Statements of Comprehensive Income for the three and nine months
ended September 30, 2003 and 2002............................................................ 8
Notes to Unaudited Condensed Consolidated Financial Statements................................... 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........... 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk ...................................... 37
Item 4. Controls and Procedures ......................................................................... 38
PART II
OTHER INFORMATION
Item 1. Legal Proceedings ............................................................................... 38
Item 6. Exhibits and Reports on Form 8-K ................................................................ 39
Signature ................................................................................................. 40
Exhibit Index .............................................................................................. 41
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
September 30, December 31,
2003 2002 (1)
------------- -------------
ASSETS
Investments (principally of life insurance subsidiary):
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $19,449 and $30,481
as of September 30, 2003 and December 31, 2002, respectively).............. $ 19,449 $ 30,335
Equity securities:
Trading, at fair value (cost: $4,721 and $26,785 as of September 30, 2003
and December 31, 2002, respectively) ...................................... 12,668 16,505
Available-for-sale, at estimated fair value (cost: $5,106 and $8,980
as of September 30, 2003 and December 31, 2002, respectively) ............. 5,106 7,230
------------- -------------
Total investments ................................................................ 37,223(2) 54,070
Cash and cash equivalents ........................................................ 21,385(2) 15,308
Cash held in escrow............................................................... 998 -
Accrued investment income ........................................................ 795 900
Other assets ..................................................................... 1,337 1,549
Total assets of discontinued operations........................................... - 8,390
------------- -------------
Total assets ..................................................................... $ 61,738 $ 80,217
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Life insurance policy liabilities ................................................ $ 29,274 $ 35,441
Notes payable .................................................................... - 9,314
Accounts payable, accruals and taxes payable ..................................... 595 832
Guarantees under bank facility.................................................... - 10,590
Total liabilities of discontinued operations...................................... - 2,554
------------- -------------
Total liabilities ................................................................ 29,869 58,731
------------- -------------
Commitments and contingencies (see Note 9)
Shareholders' equity:
Ordinary shares, $0.05 par value per share: 86,400,000 shares authorized;
64,439,073 shares issued and outstanding as of September 30, 2003 and
December 31, 2002.............................................................. 3,222 3,222
Additional paid-in capital ....................................................... 68,615 68,394
Retained earnings ................................................................ 24,206 16,054
Employee benefit trusts, at cost (13,684,881 shares as of September 30, 2003
and December 31, 2002) ........................................................ (63,571) (63,571)
Accumulated other comprehensive loss ............................................. (603) (2,613)
------------- -------------
Total shareholders' equity ....................................................... 31,869 21,486
------------- -------------
Total liabilities and shareholders' equity ....................................... $ 61,738 $ 80,217
------------- -------------
------------- -------------
(1) Reclassifications have been made related to discontinued operations - see Note 3.
(2) Includes $34,225 of investments and $11,206 of cash and cash equivalents in the Company's insurance subsidiary
which are not available to fund the operations or commitments of the Company or its other subsidiaries.
See accompanying Notes which are an integral part of these Unaudited Condensed
Consolidated Financial Statements.
3
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share and ADS amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2003 2002 (1) 2003 2002 (1)
---------- ---------- ---------- ----------
Continuing operations:
Revenues:
Investment income................................................. $ 433 $ 1,364 $ 1,492 $ 5,962
Insurance policy charges.......................................... 2 1,207 6 1,152
Fee income (2).................................................... - - - 2,908
Net realized investment losses.................................... (839) (2,065) (14,988) (1,740)
Change in net unrealized investment gains and losses
on trading securities ......................................... (4,213) (5,403) 18,226 (31,276)
---------- ---------- ---------- ----------
(4,617) (4,897) 4,736 (22,994)
Expenses:
Amounts credited on insurance policyholder accounts............... 463 1,423 1,509 5,495
Amortization of deferred policy acquisition costs................. - 1,689 - 2,952
Operating expenses................................................ 1,269 2,489 4,317 9,198
Interest expense.................................................. - 252 676 807
---------- ---------- ---------- ----------
1,732 5,853 6,502 18,452
---------- ---------- ---------- ----------
Loss from continuing operations before income taxes............... (6,349) (10,750) (1,766) (41,446)
Income tax expense (benefit)...................................... (3) (1,798) 9 1,515
---------- ---------- ---------- ----------
Loss from continuing operations................................... (6,346) (8,952) (1,775) (42,961)
Discontinued operations:
Loss from discontinued operations, net of income
tax expense (benefit) of $0, $1,617, $2 and $(6,734),
respectively................................................... - (2,667) (1,758) (108,058)
Income (loss) on disposal of discontinued operations, net of
income tax expense of $0, $0, $36 and $0, respectively......... - (38,532) 11,685 (38,532)
---------- ---------- ---------- ----------
Income (loss) on discontinued operations.......................... - (41,199) 9,927 (146,590)
---------- ---------- ---------- ----------
Net income (loss)................................................. $ (6,346) $ (50,151) $ 8,152 $ (189,551)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
(1) Reclassifications have been made related to discontinued operations - see Note 3.
(2) Amount represents revenues earned from an entity included in discontinued operations.
See accompanying Notes which are an integral part of these Unaudited Condensed
Consolidated Financial Statements.
4
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Continued)
(In thousands, except per share and ADS amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2003 2002 (1) 2003 2002 (1)
---------- ---------- ---------- ----------
Basic earnings (loss) per share and ADS:
Basic earnings (loss) per share:
Continuing operations............................................. $ (0.13) $ (0.18) $ (0.03) $ (0.85)
Discontinued operations........................................... - (0.81) 0.19 (2.88)
---------- ---------- ---------- ----------
$ (0.13) $ (0.99) $ 0.16 $ (3.73)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic earnings (loss) per ADS:
Continuing operations............................................. $ (1.25) $ (1.76) $ (0.35) $ (8.46)
Discontinued operations........................................... - (8.12) 1.96 (28.89)
---------- ---------- ---------- ----------
$ (1.25) $ (9.88) $ 1.61 $(37.35)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted earnings (loss) per share and ADS:
Diluted earnings (loss) per share:
Continuing operations............................................. $ (0.13) $ (0.18) $ (0.03) $ (0.85)
Discontinued operations........................................... - (0.81) 0.19 (2.88)
---------- ---------- ---------- ----------
$ (0.13) $ (0.99) $ 0.16 $ (3.73)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted earnings (loss) per ADS:
Continuing operations............................................. $ (1.25) $ (1.76) $ (0.35) $ (8.46)
Discontinued operations........................................... - (8.12) 1.95 (28.89)
---------- ---------- ---------- ----------
$ (1.25) $ (9.88) $ 1.60 $(37.35)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
(1) Reclassifications have been made related to discontinued operations - see Note 3.
See accompanying Notes which are an integral part of these Unaudited Condensed
Consolidated Financial Statements.
5
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
September 30,
-----------------------------
2003 (1) 2002 (2)
------------- -------------
Net cash provided by continuing operations ....................................... $ 8,866 $ 23,711
Net cash used in discontinued operations ......................................... (523) (19,980)
------------- -------------
Net cash provided by operating activities ........................................ 8,343 3,731
------------- -------------
Cash flows from investing activities:
Payments of guarantee obligations................................................. (10,836) -
Purchases of held-to-maturity fixed maturity securities .......................... - (2,828)
Purchases of available-for-sale fixed maturity securities ........................ (8,422) (7,209)
Proceeds from sale of available-for-sale fixed maturity securities................ 20,004 93,256
Proceeds from disposal of discontinued operations................................. 15,148 -
Capital expenditures ............................................................. (4) (23)
------------- -------------
Net cash provided by investing activities ........................................ 15,890 83,196
------------- -------------
Cash flows from financing activities:
Insurance policyholder contract deposits ......................................... - 6,827
Insurance policyholder benefits paid ............................................. (8,630) (110,620)
Dividends paid.................................................................... - (2,032)
Proceeds from disposal of shares by the employee benefit trusts................... - 43
Notes payable..................................................................... - 2,440
Repayment of notes payable........................................................ (9,314) (27,000)
------------- -------------
Net cash used in financing activities ............................................ (17,944) (130,342)
------------- -------------
Net increase (decrease) in cash and cash equivalents ............................. 6,289 (43,415)
Cash and cash equivalents at beginning of period (3) ............................. 15,308 60,571
Foreign currency translation adjustment .......................................... (212) 208
------------- -------------
Cash and cash equivalents at end of period (3) ................................... $ 21,385(4) $ 17,364
------------- -------------
------------- -------------
(1) Reclassifications have been made to conform with the current period presentation.
(2) Reclassifications have been made related to discontinued operations - see Note 3.
(3) Amounts reflect continuing operations only. Does not include $998 of cash held in escrow as of September 30, 2003.
(4) Includes $11,206 in the Company's insurance subsidiary which is not available to fund the operations or commitments
of the Company or its other subsidiaries.
See accompanying Notes which are an integral part of these Unaudited Condensed
Consolidated Financial Statements.
6
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
Accumulated
Other
Ordinary Shares Additional Employee Compre- Total
-------------------- Paid-in Retained Benefit hensive Shareholders'
Number Amount Capital Earnings Trusts Loss Equity
--------- --------- --------- --------- --------- --------- ----------
Balance as of
December 31, 2002............ 64,439 $ 3,222 $ 68,394 $ 16,054 $ (63,571) $ (2,613) $ 21,486
Net income...................... - - - 8,152 - - 8,152
Change in net unrealized
gains and losses on
available-for-sale securities - - - - - 1,896 1,896
Foreign currency translation
adjustment................... - - - - - 114 114
Warrants issued to bank ........ - - 221 - - - 221
--------- --------- --------- --------- --------- --------- ---------
Balance as of
September 30, 2003........... 64,439 $ 3,222 $ 68,615 $ 24,206 $ (63,571) $ (603) $ 31,869
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
See accompanying Notes which are an integral part of these Unaudited Condensed
Consolidated Financial Statements.
7
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------- ----------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income (loss)................................................. $ (6,346) $ (50,151) $ 8,152 $(189,551)
Other comprehensive income (loss), net of deferred
income taxes:
Foreign currency translation adjustments, net of income
taxes of $0.................................................... 12 115 114 (388)
Change in net unrealized gains and losses related to
continuing operations:
Unrealized holding gains and losses on available-for-sale
securities................................................... (32) (4,312) (14) (5,378)
Less: reclassification adjustment for gains and losses
included in net (income) loss................................ 679 253 1,910 73
Deferred policy acquisition cost amortization adjustments...... - - - (551)
Change in net unrealized gains and losses related to
discontinued operations:
Change in net unrealized gains and losses on
available-for-sale securities................................ - - - 5,744
Deferred policy acquisition cost amortization adjustments...... - - - (8,044)
Deferred income taxes.......................................... - - - 805
Reclassification adjustment for losses of discontinued
operations included in net income (loss)..................... - 10,649 - 10,649
---------- ---------- ---------- ----------
Other comprehensive income ...................................... 659 6,705 2,010 2,910
---------- ---------- ---------- ----------
Comprehensive income (loss) ...................................... $ (5,687) $ (43,446) $ 10,162 $(186,641)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
See accompanying Notes which are an integral part of these Unaudited Condensed
Consolidated Financial Statements.
8
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
Note 1. Material Events
The Company's Ordinary Shares are traded on the London Stock Exchange and
on the Over-the-Counter ("OTC") Bulletin Board in the U.S. in the form of
American Depositary Shares ("ADSs"), which are evidenced by American Depositary
Receipts ("ADRs"). During the second quarter of 2002, the Company completed a
one-for-ten reverse split of its ADSs. Each ADS represents ten Ordinary Shares.
On July 2, 2002, the Company announced that declines in the value of the
investment portfolio of London Pacific Life & Annuity Company ("LPLA"), the
primary insurance company of Berkeley Technology Limited (the "Company" and
together with its subsidiaries, the "Group"), due to persistent negative events
in the equity and bond markets continued to erode significantly the statutory
capital of LPLA and that the Company had been unsuccessful in concluding a
transaction to enhance the capital of LPLA. As a consequence, LPLA discontinued
the issuance of new policies as of July 2, 2002. Although the statutory capital
of the Company's Jersey insurance subsidiary, London Pacific Assurance Limited
("LPAL"), had not been affected by the adverse equity and bond markets to the
same extent as the statutory capital of LPLA, the Company also announced on July
2, 2002 that LPAL would discontinue writing new policies effective immediately.
The decision to discontinue the issuance of new policies through LPAL was made
to avoid the increased capital requirements created by additional policyholder
liabilities. Subsequent to this announcement and other announcements relating to
the Company and LPLA, LPAL policy surrenders increased substantially.
Approximately 79% of LPAL's $140.2 million in policyholder liabilities as of
June 30, 2002 had been surrendered or had matured as of September 30, 2003.
During the third quarter of 2002, LPLA was placed under regulatory control
and rehabilitation based on LPLA's statutory capital and surplus as of June 30,
2002. On August 6, 2002, on petition of the Commissioner of Insurance of the
State of North Carolina (the "Commissioner") with the unanimous approval of
LPLA's board of directors, the Superior Court of Wake County in the State of
North Carolina ordered the Commissioner to take possession and control of all of
the property, books and accounts, documents and other records of LPLA. Based on
this court order, the Company no longer exercises control over LPLA. As a result
of this event, the Company deconsolidated LPLA and recorded a charge to earnings
in the third quarter of 2002 of $38.5 million for losses resulting from the
disposition of LPLA. For further information, see Note 3 "Discontinued
Operations" below.
On March 7, 2003, the Group entered into a definitive agreement to sell
substantially all of the assets and operations of Berkeley Capital Management
("BCM"), its U.S. based asset management subsidiary. Consequently, the Company
deconsolidated BCM as of March 31, 2003 and BCM's results of operations were
reported separately in the income statement under discontinued operations for
the first quarter of 2003.
On May 7, 2003, the Group completed the sale of substantially all of the
assets and operations of BCM to a company majority-owned by funds under the
management of Putnam Lovell NBF Private Equity. The Group received initial
proceeds of $8.06 million in cash at the closing of the transaction, and an
additional $0.08 million in cash, representing a purchase price adjustment
pursuant to the sale agreement, in July 2003. The Group will receive a further
$1.0 million in cash on December 31, 2003 subject to certain adjustments. The
Group may also receive up to $1.25 million in cash earnout payments ratably over
the four quarters of 2004 if revenues received in 2003 from a new product
planned for launch by BCM in 2003 exceed certain defined targets; however, the
Group believes that these earnout payments are highly unlikely as the new
product has not yet been launched by BCM. The sale agreement contains certain
customary indemnities given by the Group to the purchaser, such as for any
claims related to the period prior to closing of the transaction. As of April
30, 2003, BCM's assets under management were approximately $1.2 billion. The
Group recognized a book gain on sale of $7.9 million in the second quarter of
2003. For further information, see Note 3 "Discontinued Operations" below.
9
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On May 9, 2003, the Group entered into a definitive agreement to sell all
of the outstanding stock of London Pacific Advisory Services, Inc., London
Pacific Securities, Inc. and LPA Insurance Agency, Inc. together with the
associated assets of the advisory business held within London Pacific
Technologies, Inc. and LP Advisors, Inc. (collectively, "LPA" or the "LPA
business") for total consideration of up to $16.2 million, to a wholly-owned
subsidiary of SunGard Data Systems Inc. ("SunGard"). On June 5, 2003, this sale
was completed and the Group received $6.95 million in cash consideration (which
excluded $1.25 million held back to cover any shortfall to the agreed minimum
tangible net asset value of the LPA assets minus the liabilities acquired in the
transaction, and to cover any indemnity obligations). In September 2003, the
Group received $0.06 million out of the $0.25 million holdback after agreeing
the LPA tangible net asset value with SunGard. The remaining approximate $1.0
million held will be used to cover any indemnity obligations arising within the
18 month period following the close of the transaction. SunGard did not assume
LPA's net liability of $10.6 million to Berkeley International Capital
Corporation ("BICC"), another Group subsidiary. The Group may receive up to a
further $8.0 million cash earnout payment that will be equal in amount to
one-half of the cumulative operating profits from the LPA business in the three
year period immediately following closing of the sale to SunGard. This earnout
payment will be paid within approximately 60 days following the third
anniversary of the closing of the transaction. There is no guarantee that the
Group will receive any portion of the earnout payment. The sale agreement
contains certain customary indemnities given by the Group to the purchaser, such
as for any claims related to the period prior to closing of the transaction. As
of May 31, 2003, LPA's assets under management, consulting or administration
were approximately $2.6 billion. The Group recognized a book gain on sale of
$3.7 million in the second quarter of 2003. For further information, see Note 3
"Discontinued Operations" below.
Subsequent to the sale of the Company's asset management and financial
advisory services businesses, the Company now focuses on rebuilding its
technology venture capital business. At its annual general meeting on June 12,
2003, the Company obtained shareholder approval to change its name from London
Pacific Group Limited back to Berkeley Technology Limited, which was the name of
the Company in 1985 when it first became a public company on the London Stock
Exchange. The name change became effective on June 16, 2003.
Note 2. Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated financial statements are unaudited
and have been prepared by the Company in conformity with United States generally
accepted accounting principles ("U.S. GAAP"). These unaudited condensed
consolidated financial statements include the accounts of the Company, its
subsidiaries (with the exception of LPLA, BCM and LPA as discussed above in Note
1 "Material Events"), 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 and Berkeley International Capital Corporation. All
intercompany transactions and balances have been eliminated in consolidation
except for intercompany transactions between continuing and discontinued
operations which are principally related to investment management fees from LPLA
(discontinued operations) to the continuing operations which are disclosed in
Note 3 and Note 10 below.
Certain information and note disclosures normally included in the Company's
annual consolidated financial statements have been condensed or omitted. In the
opinion of management, the unaudited condensed consolidated financial statements
reflect all adjustments (consisting of normal recurring accruals) necessary for
a fair statement of the results for the interim periods presented.
While the Company's management believes that the disclosures presented are
adequate to make the information not misleading, these unaudited condensed
consolidated financial statements should be read in conjunction with the audited
financial statements and related notes for the year ended December 31, 2002,
10
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
which are contained in the Company's Annual Report on Form 10-K, filed with the
U.S. Securities and Exchange Commission ("SEC") on March 19, 2003. The year-end
condensed balance sheet data was derived from audited financial statements but
does not include all disclosures required by U.S. GAAP. Certain
reclassifications have been made to prior quarter's amounts to conform with the
current period's presentation. These reclassifications have no effect on the
prior quarter's net income or shareholders' equity.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of these unaudited condensed consolidated financial
statements as well as the reported amount of revenues and expenses during this
reporting period. Actual results could differ from these estimates. Certain
estimates such as fair value and actuarial assumptions have a significant impact
on the gains and losses recorded on investments and balance of life insurance
policy liabilities.
Because of the events described above in Note 1 "Material Events," as well
as other unknown events that may occur during the next three months, the results
for the three and nine month periods ended September 30, 2003, are not
indicative of the results to be expected for the full fiscal year.
Share Incentive Plan
The Company accounts for stock based compensation issued to employees in
accordance with Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees," and related interpretations which
recognizes compensation expense based upon the intrinsic value of the stock
options as of the date of grant. The Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 123 ("SFAS
123"), "Accounting for Stock Based Compensation," which encourages, but does not
require, companies to recognize compensation expense for grants of stock options
based on their fair value. The Company has elected, as permitted by SFAS 123, to
adopt the disclosure requirement of SFAS 123 and to continue to account for
stock based compensation under APB 25.
Had compensation expense for the Company's ESOT activity been determined
based upon the fair value method in accordance with SFAS 123, the Company's
consolidated net income (loss) and earnings (loss) per share and ADS would have
been decreased or increased to the pro forma amounts as reflected below:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
(In thousands, except per
share and ADS amounts)
Net income (loss) as reported..................................... $ (6,346) $ (50,151) $ 8,152 $(189,551)
Add: Stock based employee compensation expense included in
reported income (loss), net of related tax effects............. - - - -
Deduct: Total stock based employee compensation expense
determined under fair value based methods for all awards,
net of related tax effects..................................... 267(1) (224) (76) (734)
---------- ---------- ---------- ----------
Pro forma net income (loss)....................................... $ (6,079) $ (50,375) $ 8,076 $(190,285)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
(1) Compensation expense was negative for the three month period ended September 30, 2003 due to the reversal of $314,000
in compensation expense recognized in prior periods related to the forfeiture during the third quarter of 2003 of all
of the unvested options held by LPA employees (LPA was sold in the second quarter of 2003).
11
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Basic earnings (loss) per share:
As reported....................................................... $(0.13) $(0.99) $ 0.16 $(3.73)
Pro forma......................................................... (0.12) (0.99) 0.16 (3.75)
Basic earnings (loss) per ADS:
As reported....................................................... (1.25) (9.88) 1.61 (37.35)
Pro forma......................................................... (1.20) (9.93) 1.59 (37.49)
Diluted earnings (loss) per share:
As reported....................................................... (0.13) (0.99) 0.16 (3.73)
Pro forma......................................................... (0.12) (0.99) 0.16 (3.75)
Diluted earnings (loss) per ADS:
As reported....................................................... (1.25) (9.88) 1.60 (37.35)
Pro forma......................................................... (1.20) (9.93) 1.58 (37.49)
The pro forma disclosures shown above were calculated for all options
granted after December 31, 1994 using a Black-Scholes option pricing model with
the following assumptions:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2003 (1) 2002 2003 (1) 2002
---------- ---------- ---------- ----------
Expected dividend yield (2)....................................... - - - -
Expected stock price volatility................................... - 125% - 125%
Risk-free interest rate........................................... - 3.95% - 3.95%
Weighted average expected life (in years)......................... - 5 - 5
(1) No grants were made in the three and nine months ended September 30, 2003.
(2) The deduction to the share price was zero, as future dividends have not been assumed.
Note 3. Discontinued Operations
London Pacific Life & Annuity Company
As described above in Note 1 "Material Events," the Company, with the
unanimous approval of LPLA's board of directors, ceded control of LPLA to the
North Carolina insurance regulators on August 6, 2002. In connection therewith,
the Company deconsolidated LPLA and recorded a charge to earnings of $38.5
million during the third quarter of 2002. Although LPLA was placed under
regulatory control and rehabilitation, the Company will not regain control or
receive any benefit from LPLA in the future. As such, in accordance with
Statement of Financial Accounting Standard No. 144 ("SFAS 144"), "Accounting for
the Impairment or Disposal of Long Lived Assets," the results of operations of
LPLA (pre-rehabilitation) have been reported in discontinued operations. Under
SFAS 144, the results of operations of a discontinued business, and any
impairment losses related to a discontinued business, are reported separately in
the income statement under discontinued operations for the current and prior
periods.
12
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of LPLA's pre-tax operating results for the three and nine
month periods ended September 30, 2002 is shown below.
Three Months Nine Months
Ended Ended
September 30, September 30,
2002 (1) 2002 (1)
-------------- -------------
(In thousands)
Revenues:
Investment income before intercompany management fee expense...................... $ - $ 62,453
Intercompany management fee expense (2)........................................... - (3,632)
Other income...................................................................... - 4,176
Net realized and change in net unrealized investment gains and losses............. - (97,618)
------------- -------------
Total revenues and net investment losses.......................................... - (34,621)
Expenses:
Interest credited on insurance policyholder accounts.............................. - 56,133
Amortization of deferred policy acquisition costs................................. - 17,145
Other expenses.................................................................... - 4,593
------------- -------------
Total expenses.................................................................... - 77,871
------------- -------------
Loss before income taxes ......................................................... $ - $ (112,492)
------------- -------------
------------- -------------
(1) Though the Group did not lose control of LPLA until August 6, 2002, the Group was not able to obtain LPLA's financial
results on a U.S. GAAP basis for the period July 1, 2002 up to August 6, 2002. Therefore, the Group's consolidated
income statement includes LPLA's results only through June 30, 2002.
(2) Fees in the amount of $0 and $2,908 for the three and nine months ended September 30, 2002, respectively, were paid
to and included in the revenues of the venture capital management business segment of continuing operations. The
remaining fees were paid to the asset management business segment of discontinued operations.
The loss on disposal of discontinued operations, net of tax, was recorded
in the third quarter of 2002 and reported in the Group's Form 10-Q as follows:
(In thousands)
Net unrealized losses on available-for-sale securities, net of
deferred policy acquisition cost amortization adjustments and deferred income taxes........... $ 10,649
Impairment on long-lived assets (LPLA's net assets).............................................. 12,269
Write-off of doubtful receivables from LPLA...................................................... 15,614
-------------
38,532
Income tax benefit............................................................................... -
-------------
Net loss on disposal of discontinued operations.................................................. $ 38,532
-------------
-------------
Previously, LPLA was included in the Company's life insurance and annuities
business segment.
13
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Berkeley Capital Management
As described in Note 1 "Material Events," the Group entered into a
definitive agreement to sell substantially all of the assets and operations of
BCM on March 7, 2003, and on May 7, 2003 completed the sale. In connection
therewith, the Company deconsolidated BCM as of March 31, 2003 and BCM's assets
and liabilities are shown as total assets of discontinued operations and total
liabilities of discontinued operations in the prior period consolidated balance
sheet, in accordance with SFAS 144. The Company does not expect to receive any
material amounts of income from its asset management segment in the foreseeable
future. The results of operations of BCM and, in addition for the first nine
months of 2002, the results of Berkeley International Limited ("BIL") (the
remainder of the asset management segment in that period) have been reported in
discontinued operations.
A summary of BCM's pre-tax operating results (including the results of the
remainder of the asset management segment for the prior periods from BIL) for
the three and nine month periods ended September 30, 2003 and 2002,
respectively, and BCM's total assets and total liabilities as of December 31,
2002, are shown below.
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
(In thousands)
Revenues:
Asset management fees............................................. $ - $ 1,120 $ 1,364 $ 3,500
Intercompany management fee income (1)............................ - 5 5 759
---------- ---------- ---------- ----------
Total revenues.................................................... - 1,125 1,369 4,259
Operating expenses................................................ - 1,080 1,403 3,688
---------- ---------- ---------- ----------
Income (loss) before income taxes................................. $ - $ 45 $ (34) $ 571
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
(1) Fees were paid from and included in the net revenues of the life insurance and annuities business segment of continuing
operations (LPAL) of $0, $5,000, $5,000 and $35,000 for the three and nine months ended September 30, 2003 and 2002,
respectively. For the three and nine months ended September 30, 2002, these fees also include $0 and $724,000,
respectively, received from LPLA (discontinued operations).
December 31,
2002
-------------
(In thousands)
Assets of discontinued operations:
Cash............................................................................................. $ 401
Property and equipment, net...................................................................... 125
Goodwill, net.................................................................................... 1,267
Other assets..................................................................................... 209
-------------
Total assets of discontinued operations.......................................................... $ 2,002
-------------
-------------
Liabilities of discontinued operations:
Accounts payable, accruals and other liabilities................................................. $ 413
-------------
Total liabilities of discontinued operations..................................................... $ 413
-------------
-------------
14
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The $7,949,000 gain on sale of discontinued operations, net of tax of $0,
was recorded in the second quarter of 2003 and reported in the Group's Form 10-Q
for that quarter.
Previously, BCM was included in the Company's asset management business
segment.
London Pacific Advisors
As described in Note 1 "Material Events," the Group entered into a
definitive agreement to sell the LPA business on May 9, 2003 and on June 5, 2003
completed the sale. In connection therewith, the Company now reports the results
of operations of LPA for the current and prior periods as discontinued
operations, and LPA's assets and liabilities (excluding LPA's net liability to
BICC which was not part of the sale) are shown as total assets of discontinued
operations and total liabilities of discontinued operations in the prior period
consolidated balance sheet, in accordance with SFAS 144.
A summary of LPA's pre-tax operating results for the three and nine month
periods ended September 30, 2003 and 2002, respectively, and LPA's total assets
and total liabilities (excluding LPA's net liability to BICC which was not part
of the sale) as of December 31, 2002, are shown below.
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
(In thousands)
Revenues:
Investment income................................................. $ - $ 4 $ 4 $ 14
Gross financial advisory services fees............................ - 3,766 5,820 12,583
Payments due to independent advisors.............................. - (2,300) (3,477) (7,853)
---------- ---------- ---------- ----------
Total net revenues................................................ - 1,470 2,347 4,744
Expenses.......................................................... - 2,565 4,069 7,615
---------- ---------- ---------- ----------
Loss before income taxes.......................................... $ - $ (1,095) $ (1,722) $ (2,871)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
December 31,
2002
-------------
(In thousands)
Assets of discontinued operations:
Cash and investments............................................................................. $ 566
Property and equipment, net...................................................................... 2,986
Goodwill, net.................................................................................... 1,301
Other assets..................................................................................... 1,535
-------------
Total assets of discontinued operations.......................................................... $ 6,388
-------------
-------------
Liabilities of discontinued operations:
Accounts payable, accruals and other liabilities................................................. $ 2,141
-------------
Total liabilities of discontinued operations..................................................... $ 2,141
-------------
-------------
15
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The $3,772,000 gain on sale of discontinued operations, and tax expense on
the gain of $36,000, were recorded in the second quarter of 2003 and reported in
the Group's Form 10-Q for that quarter.
Previously, LPA was included in the Company's financial advisory services
business segment.
SunGard did not assume LPA's net liability of $10.6 million to BICC.
Note 4. 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." As the Company recorded a net loss for both of the
three month periods ended September 30, 2003 and 2002, and for the nine month
period ended September 30, 2002, the calculations of diluted earnings per share
for these periods do not include potentially dilutive employee share options and
warrants issued to the Bank of Scotland as they are anti-dilutive and, if
included, would have resulted in a reduction of the net loss per share. If the
Company had reported net income for both of the three month periods ended
September 30, 2003 and 2002, and for the nine month period ended September 30,
2002, there would have been an additional 609,629, 0 and 431,334 shares,
respectively, included in the calculations of diluted earnings per share for
these periods.
16
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of the numerators and denominators for the basic and
diluted earnings per share calculations is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
(In thousands, except share,
per share and ADS amounts)
Loss from continuing operations................................... $ (6,346) $ (8,952) $ (1,775) $ (42,961)
Income (loss) on discontinued operations.......................... - (41,199) 9,927 (146,590)
---------- ---------- ---------- ----------
Net income (loss)................................................. $ (6,346) $ (50,151) $ 8,152 $(189,551)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic earnings (loss) per share and ADS:
Weighted average number of Ordinary Shares outstanding,
excluding shares held by the employee benefit trusts........... 50,754,192 50,754,192 50,754,192 50,754,192
---------- ---------- ---------- ----------
Basic earnings (loss) per share:
Continuing operations............................................. $ (0.13) $ (0.18) $ (0.03) $ (0.85)
Discontinued operations........................................... - (0.81) 0.19 (2.88)
---------- ---------- ---------- ----------
$ (0.13) $ (0.99) $ 0.16 $ (3.73)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic earnings (loss) per ADS:
Continuing operations............................................. $ (1.25) $ (1.76) $ (0.35) $ (8.46)
Discontinued operations........................................... - (8.12) 1.96 (28.89)
---------- ---------- ---------- ----------
$ (1.25) $ (9.88) $ 1.61 $ (37.35)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted earnings (loss) per share and ADS:
Weighted average number of Ordinary Shares outstanding,
excluding shares held by the employee benefit trusts........... 50,754,192 50,754,192 50,754,192 50,754,192
Effect of dilutive securities (warrants and employee share
options)....................................................... - - 339,342 -
---------- ---------- ---------- ----------
Weighted average number of Ordinary Shares used in
diluted earnings per share calculations........................ 50,754,192 50,754,192 51,093,534 50,754,192
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted earnings (loss) per share:
Continuing operations............................................. $ (0.13) $ (0.18) $ (0.03) $ (0.85)
Discontinued operations........................................... - (0.81) 0.19 (2.88)
---------- ---------- ---------- ----------
$ (0.13) $ (0.99) $ 0.16 $ (3.73)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted earnings (loss) per ADS:
Continuing operations............................................. $ (1.25) $ (1.76) $ (0.35) $ (8.46)
Discontinued operations........................................... - (8.12) 1.95 (28.89)
---------- ---------- ---------- ----------
$ (1.25) $ (9.88) $ 1.60 $ (37.35)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
17
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 5. Investments
The Group's investments consist of fixed maturity and equity securities.
Fixed maturity securities are classified as either available-for-sale or
held-to-maturity, and equity securities are classified as either trading or
available-for-sale. The investments are accounted for as follows:
i) available-for-sale securities are recorded at fair value, with changes
in unrealized gains and losses excluded from net income, but reported
net of applicable income taxes and adjustments to deferred policy
acquisition cost amortization as a separate component of accumulated
other comprehensive income;
ii) held-to-maturity securities are recorded at amortized cost unless
these securities become other-than-temporarily impaired; and
iii) trading securities are recorded at fair value with changes in
unrealized gains and losses included in net income.
When a quoted market price is available for a security, the Group uses this
price 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 appropriate valuation methodologies.
For a discussion of the Company's accounting policies with respect to the
determination of fair value of investments and other-than-temporary impairments,
see the section entitled "Critical Accounting Policies" in Part I, Item 2
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" below. The Group's private securities consist primarily of
convertible preferred stock holdings in technology companies. Financial
information with respect to the issuers of these equity securities is received
and reviewed periodically by the Group's management. In addition, the Group's
management maintains contact with the management of these issuers through
ongoing dialogue to examine the issuers' future plans and prospects.
The Group's fixed maturity securities are principally comprised of U.S. and
non-U.S. corporate debt. Generally, quoted market prices are available for these
securities.
Fixed Maturity Securities
An analysis of fixed maturity securities is as follows:
September 30, 2003 December 31, 2002
------------------------------------------- ------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
---------- --------- --------- --------- --------- --------- --------- ---------
(In thousands)
Available-for-Sale:
Non-U.S. corporate
debt securities.......... $ 12,882 $ 18 $ (68) $ 12,832 $ 12,709 $ 115 $ (9) $ 12,815
Corporate debt securities . 6,567 52 (2) 6,617 17,772 90 (342) 17,520
---------- --------- --------- --------- --------- --------- --------- ---------
Total fixed maturity securities $ 19,449 $ 70 $ (70) $ 19,449 $ 30,481 $ 205 $ (351) $ 30,335
---------- --------- --------- --------- --------- --------- --------- ---------
---------- --------- --------- --------- --------- --------- --------- ---------
18
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED 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:
September 30, 2003 December 31, 2002
------------------------------------------- ------------------------------------------
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............... $ 5,106 $ - $ - $ 5,106 $ 8,980 $ - $ (1,750) $ 7,230
---------- --------- --------- --------- --------- --------- --------- ---------
Total available-for-sale
equity securities........ 5,106 - - 5,106 8,980 - (1,750) 7,230
Trading securities......... 4,721 8,170 (223) 12,668 26,785 5,236 (15,516) 16,505
---------- --------- --------- --------- --------- --------- --------- ---------
Total equity securities.... $ 9,827 $ 8,170 $ (223) $ 17,774 $ 35,765 $ 5,236 $ (17,266) $ 23,735
---------- --------- --------- --------- --------- --------- --------- ---------
---------- --------- --------- --------- --------- --------- --------- ---------
Trading securities are carried at fair value with changes in net unrealized
gains and losses of $(4,213,000), $(5,403,000), $18,226,000 and $(31,276,000)
included in the income and losses for the three and nine month periods ended
September 30, 2003 and 2002, respectively.
Investment Concentration and Risk
As of September 30, 2003, equity securities held by the Group included an
investment in Packeteer, Inc. of $12.1 million, which represented more than ten
percent of shareholders' equity as of that date.
As of September 30, 2003, 100% of the Group's $19.4 million in fixed
maturity securities, 99% of the Group's $5.1 million in available-for-sale
private equity securities, and 77% of the Group's $12.7 million in trading
securities were owned by the Company's Jersey based life insurance subsidiary,
LPAL. LPAL is a regulated insurance company, and as such it must meet stringent
capital adequacy requirements and no distributions may be made from it without
the consent of LPAL's independent actuary. LPAL'S INVESTMENTS ARE THEREFORE NOT
AVAILABLE TO FUND THE OPERATIONS OR COMMITMENTS OF THE COMPANY OR ITS OTHER
SUBSIDIARIES.
Net Unrealized Gains (Losses) on Available-for-Sale Securities
Net unrealized losses on fixed maturity securities classified as
available-for-sale as of September 30, 2003 and December 31, 2002 totaled $0 and
$146,000, respectively. There were no related deferred policy acquisition cost
adjustments or income taxes.
Net unrealized losses on equity securities classified as available-for-sale
as of September 30, 2003 and December 31, 2002 totaled $0 and $1,750,000,
respectively. There were no related income taxes.
19
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Changes in net unrealized gains and losses on available-for-sale securities
included in other comprehensive income for the period ended September 30, 2003
were as follows:
Net Unrealized Gains (Losses)
-------------------------------------
Fixed
Maturity Equity
Securities Securities Total
---------- ---------- ------------
(In thousands)
Net unrealized losses on available-for-sale securities as of
December 31, 2002......................................................... $ (146) $ (1,750) $ (1,896)
Changes during the nine month period ended September 30, 2003 for
continuing operations:
Unrealized holding gains and losses on available-for-sale securities...... (14) - (14)
Reclassification adjustment for gains and losses included in net income... 160 1,750 1,910
---------- ---------- ----------
Net unrealized gains and losses on available-for-sale securities as of
September 30, 2003........................................................ $ - $ - $ -
---------- ---------- ----------
---------- ---------- ----------
Realized Gains and Losses
Information about gross and net realized gains and losses on securities
transactions is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
(In thousands)
Realized gains (losses) on securities transactions:
Fixed maturities, available-for-sale:
Gross gains................................................... $ - $ 1,767 $ 43 $ 1,770
Gross losses.................................................. - (1,858) (286) (4,679)
---------- ---------- ---------- ----------
Net realized losses on fixed maturities, available-for-sale....... - (91) (243) (2,909)
---------- ---------- ---------- ----------
Fixed maturities, held-to-maturity:
Gross losses.................................................. - (1,190) - (1,701)
---------- ---------- ---------- ----------
Equity securities, trading:
Gross gains................................................... 485 - 4,363 3,841
Gross losses.................................................. - (784) (15,237) (851)
---------- ---------- ---------- ----------
Net realized gains (losses) on equity securities, trading......... 485 (784) (10,874) 2,990
---------- ---------- ---------- ----------
Equity securities, available-for-sale:
Gross losses.................................................. (1,324) - (3,871) (120)
---------- ---------- ---------- ----------
Net realized investment losses on securities transactions......... $ (839) $ (2,065) $ (14,988) $ (1,740)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
During the three month period ended September 30, 2003, the Group's
management determined that two private equity investments in technology
companies were other-than-temporarily impaired and consequently recorded
realized losses totaling $1.3 million in the unaudited condensed consolidated
statements of income.
20
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During the nine month period ended September 30, 2003, the Group's
management determined that three private equity investments in technology
companies were other-than-temporarily impaired and consequently recorded
realized losses totaling $3.9 million in the unaudited condensed consolidated
statements of income.
Note 6. Cash Held in Escrow
Cash held in escrow as of September 30, 2003 consisted of the proceeds from
the sale of LPA on June 5, 2003. Funds are due to be released with accrued
interest in December 2004, less any amounts related to indemnification matters
as set out in the sale agreement.
Note 7. Other Assets
An analysis of other assets is as follows:
September 30, December 31,
2003 2002
------------- -------------
(In thousands)
Property, equipment and leasehold improvements, net............................... $ 145 $ 190
Prepayments....................................................................... 159 756
Receivables:
Income tax refund receivable................................................... - 61
Fee income receivable.......................................................... 22 -
Allowance for doubtful accounts................................................ (7) -
Other receivables (1).......................................................... 1,018 42
Due from brokers............................................................... - 472
Other assets...................................................................... - 28
------------- -------------
Total other assets................................................................ $ 1,337 $ 1,549
------------- -------------
------------- -------------
(1) Includes $1.0 million holdback related to the sale of BCM.
Note 8. Notes Payable
On December 20, 2002, the Company and the Bank of Scotland agreed to the
terms and conditions of an amended credit facility, providing up to $23.0
million of borrowings. The facility limit was to be reduced at the end of each
calendar quarter, such that the facility was to be repaid in full no later than
December 31, 2003.
As of December 31, 2002, $9.3 million was outstanding under the facility.
In addition, $10.6 million of the remaining $10.7 million under the facility was
utilized in the form of guarantees provided on behalf of certain former investee
companies. As the Group's management believed that it would be unlikely that the
former investee companies would have the ability to repay any of their
borrowings during 2003, the Company recorded the maximum guarantee obligation of
$10.6 million at December 31, 2002 on its consolidated balance sheet and took
other-than-temporary impairment losses on the related investments in its
consolidated income statement for 2002. During February 2003, the Group sold
certain of its listed equity securities for $4.7 million and the proceeds were
used to reduce the Group's borrowings to $4.4 million and the facility to $15.0
million.
21
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As discussed in Note 1 "Material Events," on May 7, 2003, the Group
completed the sale of BCM and received initial sale proceeds of $8.06 million.
On May 8, 2003, the Company paid $7.75 million to the Bank of Scotland which
reduced the Group's borrowings to zero and the amounts due under its guarantee
obligations to $7.25 million.
As discussed in Note 1 "Material Events," on June 5, 2003, the Group
completed the sale of LPA and received initial sale proceeds of $6.95 million.
On that same date, the Company paid $6.95 million to the Bank of Scotland which
reduced the amounts due under its guarantee obligations to $0.3 million. On June
20, 2003, using its existing cash resources, the Company paid $0.3 million to
the Bank of Scotland and the facility was reduced to zero and terminated.
Note 9. Commitments and Contingencies
In the course of the administration of LPLA in rehabilitation, the North
Carolina Department of Insurance ("NCDOI") requested information concerning the
history of a limited number of investments in securities of portfolio companies
during November 2002. These portfolio investments have been associated with LPLA
for more than seven years, and involve intercompany transfers. The history of
their investment performance and ownership is complex. The Company has complied
with these requests. The Company is not able at this time to predict what
conclusions the NCDOI will reach after evaluation of this information.
The Group is involved in various legal proceedings, including claims for
damages from LPA clients of a nature the Group considers to be normal for LPA's
business. The Group believes the ultimate settlement or other resolution of the
claims will not materially affect its consolidated financial position, results
of operations or cash flows.
In October 2003, the California Franchise Tax Board ("FTB") notified the
Group of proposed income tax assessments totaling $2.3 million plus interest
related to the Group's 1998 and 1999 tax returns. The Group intends to file a
protest with the FTB prior to the deadline of December 15, 2003. The Group's
management believes, after consultation with its tax and legal advisors, that
the actual income tax liability owed will not have a material adverse impact on
the Group's financial position, results of operations or cash flows.
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 September 30, 2003.
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
22
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
September 30, 2003.
Note 10. 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
management.
Due to the sales of BCM and LPA in 2003 (see Note 1 "Material Events"), the
Company's asset management and financial advisory segments have been classified
as discontinued operations as of December 31, 2002 and for the three and nine
month periods ended September 30, 2003 and 2002. Due to the loss of control of
LPLA in 2002 (see also Note 1 "Material Events"), the results of operations of
LPLA for the three and nine month periods ended September 30, 2002 have been
included in discontinued operations.
Intercompany transfers between reportable operating segments are accounted
for at prices which are designed to be representative of unaffiliated third
party transactions.
During the nine month periods ended September 30, 2003 and 2002, the
venture capital management segment generated portfolio management fees from LPLA
(discontinued operations) of $0 and $2,908,000, respectively. These portfolio
management fees are included in the revenues of continuing operations and have
not been eliminated in the unaudited condensed consolidated financial
statements.
The venture capital management segment recorded net realized investment
losses in the amount of $31,368,000 during the first nine months of 2002 related
to intersegmental investment sales to the life insurance and annuities segment.
These net realized investment losses were offset by a corresponding
reclassification adjustment in unrealized investment gains and losses on trading
securities for the same amount. These gains and losses have been eliminated in
the Company's unaudited condensed consolidated financial statements.
Summary revenue and investment gain (loss) information by geographic
segment, based on the domicile of the Group company generating those revenues,
is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
(In thousands)
Jersey............................................................ $ (3,624) $ (669) $ 907 $ (8,086)
Guernsey.......................................................... (1,001) (4,299) 3,794 (17,802)
United States..................................................... 8 71 35 2,894
---------- ---------- ---------- ----------
Consolidated revenues and net investment gains (losses)
from continuing operations.................................... $ (4,617) $ (4,897) $ 4,736 $ (22,994)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
23
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenues and income (loss) before taxes for the Company's reportable
operating segments included in continuing operations, based on management's
internal reporting structure, were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
(In thousands)
Revenues:
Life insurance and annuities (1).................................. $ (3,628) $ 334 $ 1,148 $ (5,851)
Venture capital management (2) ................................... (1,002) (5,352) 3,546 (17,669)
---------- ---------- ---------- ----------
(4,630) (5,018) 4,694 (23,520)
Reconciliation of segment amounts to consolidated amounts:
Interest income .................................................. 13 121 42 526
---------- ---------- ---------- ----------
Consolidated revenues and net investment gains (losses)
for continuing operations..................................... $ (4,617) $ (4,897) $ 4,736 $(22,994)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Income (loss) from continuing operations before income taxes:
Life insurance and annuities (1).................................. $ (4,329) $ (3,125) $ (1,082) $(15,212)
Venture capital management (2) ................................... (1,345) (6,035) 2,723 (20,964)
---------- ---------- ---------- ----------
(5,674) (9,160) 1,641 (36,176)
Reconciliation of segment amounts to consolidated amounts:
Interest income................................................... 13 121 42 526
Corporate expenses................................................ (688) (1,459) (2,773) (4,989)
Interest expense ................................................. - (252) (676) (807)
---------- ---------- ----------------------
Consolidated loss from continuing operations before
income taxes ................................................. $ (6,349) $(10,750) $ (1,766) $(41,446)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
(1) Netted against the revenues (investment income) of the life insurance and annuities segment are management fees paid
to BCM (discontinued operations) of $0 and $5,000 in the third quarters of 2003 and 2002, respectively, and $5,000
and $35,000 in the first nine months of 2003 and 2002, respectively.
(2) Included in the revenues of the venture capital management segment are management fees from LPLA (discontinued
operations) of $0 for both of the third quarters of 2003 and 2002, and $0 and $2,908,000 in the first nine months of
2003 and 2002, respectively.
During the first nine months of 2003, assets in the venture capital
management segment decreased by $4,712,000 from $7,710,000 to $2,998,000,
primarily due to the sale of $5,971,000 of trading securities, partially offset
by an increase in unrealized gains on the remaining listed equity securities
held in the trading account.
24
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
As used herein, the terms "registrant," "Company," "we," "us" and "our"
refer to Berkeley Technology Limited. Except as the context otherwise requires,
the term "Group" refers collectively to the registrant and its subsidiaries.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the unaudited condensed
consolidated financial statements, and the notes thereto, and the December 31,
2002 audited consolidated financial statements, and the notes thereto, included
in our recent Annual Report on Form 10-K. The unaudited condensed consolidated
financial statements are prepared in accordance with U.S. GAAP. This item should
also be read in conjunction with the "Forward-Looking Statements and Factors
That May Affect Future Results" which are set forth below and in our other
filings with the SEC.
Forward-Looking Statements and Factors That May Affect Future Results
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this report contain forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Such forward-looking statements are based on current
expectations, estimates, forecasts and projections about the industries in which
we operate, management's current beliefs and assumptions made by management.
Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," "goals," variations of such words and similar expressions are
intended to identify such forward-looking statements. These statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions that are difficult to predict. Future outcomes and results may
differ materially from what is expressed or forecast in such forward-looking
statements. We undertake no obligation to update any forward-looking statements,
whether as a result of new information, future developments or otherwise.
Factors that could cause or contribute to deviations from the
forward-looking statements include those discussed in this section, elsewhere in
this report and in our other filings with the SEC. The factors include, but are
not limited to, (i) the risks described in Item 3 "Quantitative and Qualitative
Disclosures About Market Risk," (ii) variations in demand for our products and
services, (iii) the success of our new products and services (iv) significant
changes in net cash flows in or out of our businesses, (v) fluctuations in the
performance of debt and equity markets worldwide, (vi) the enactment of adverse
state, federal or foreign regulation or changes in government policy or
regulation (including accounting standards) affecting our operations, (vii) the
effect of economic conditions and interest rates in the U.S., the U.K. or
internationally, (viii) the ability of our subsidiaries to compete in their
respective businesses, (ix) our ability to attract and retain key personnel, and
(x) actions by governmental authorities that regulate our businesses, including
insurance commissions.
25
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
Life Insurance and Annuities
Certain information regarding our life insurance and annuities segment's
results of operations (continuing operations only) is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
(In thousands)
Revenues:
Investment income................................................. $ 420 $ 1,243 $ 1,450 $ 5,436
Insurance policy charges ......................................... 2 1,207 6 1,152
Net realized investment losses.................................... (1,313) (65,586) (37,486) (73,512)
Change in net unrealized investment gains and losses on
trading securities ........................................... (2,737) 63,470 37,178 61,073
---------- ---------- ---------- ----------
Total revenues and net investment gains (losses).................. (3,628) 334 1,148 (5,851)
Expenses:
Amounts credited on insurance policyholder accounts .............. 463 1,423 1,509 5,495
Amortization of deferred policy acquisition costs................. - 1,689 - 2,952
General and administrative expenses .............................. 238 347 721 914
---------- ---------- ---------- ----------
Total expenses related to operations.............................. 701 3,459 2,230 9,361
---------- ---------- ---------- ----------
Loss from continuing operations before income taxes .............. $ (4,329) $ (3,125) $ (1,082) $ (15,212)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
As previously disclosed in our 2002 Annual Report on Form 10-K, during
2002, our primary insurance company, LPLA, was placed under regulatory control
and rehabilitation based on LPLA's statutory capital and surplus as of June 30,
2002. On August 6, 2002, on petition of the Commissioner with the consent of
LPLA and unanimous approval of its board of directors, the Superior Court of
Wake County in the State of North Carolina ordered the Commissioner to take
possession and control of all of the property, books and accounts, documents and
other records of LPLA. As a result of this event, we deconsolidated LPLA and
recorded a charge to earnings in 2002 of $38.5 million for losses resulting from
this disposition.
For further discussion, see the "Liquidity and Capital Resources"
section below and Note 3 "Discontinued Operations" to the Unaudited condensed
Consolidated Financial Statements in Part I, Item 1.
On July 2, 2002, we announced that further declines in the value of LPLA's
investment portfolio, due to persistent negative events in the equity and bond
markets, continued to erode significantly the statutory capital of LPLA and that
we were unsuccessful in concluding a transaction to enhance the capital of LPLA.
As a consequence, LPLA discontinued the issuance of new policies as of July 2,
2002. Although the statutory capital of our Jersey insurance subsidiary, LPAL,
was not affected by the adverse equity and bond markets to the same extent as
the statutory capital of LPLA, we also announced on July 2, 2002 that LPAL would
discontinue writing new policies effective immediately. The decision to
discontinue the issuance of new policies through LPAL was made to avoid the
increased capital requirements created by additional policyholder liabilities.
Subsequent to this announcement and other announcements relating to the Company
and LPLA, LPAL policy surrenders increased substantially. Approximately 79% of
LPAL's policyholder liabilities as of June 30, 2002 had been surrendered or had
matured as of September 30, 2003.
Due to the events referred to above, LPAL plans to focus on managing the
remaining block of policyholder liabilities. There are no plans currently to
write new policies.
26
Third quarter of 2003 compared to third quarter of 2002
In the third quarter of 2003, LPAL contributed a loss before income taxes
of $4.3 million to our overall loss before income taxes, compared to a loss
before income taxes of $3.1 million in the third quarter of 2002. Net realized
investment losses in the third quarter of 2003 were $1.3 million compared to
$65.6 million in the third quarter of 2002. The loss from the change in net
unrealized investment gains and losses was $2.7 million in the third quarter of
2003, compared to a gain of $63.5 million in the third quarter of 2002. In the
third quarter of 2003, the negative spread between investment income and amounts
credited to policyholders improved by $0.1 million; policy surrender charge
income decreased by $1.2 million; amortization of deferred policy acquisition
costs ("DPAC") decreased by $1.7 million with the write-off of the DPAC asset in
2002; and general and administrative expenses decreased by $0.1 million, each as
compared to the third quarter of 2002.
LPAL did not generate any premiums during the third quarters of 2003 and
2002. LPAL discontinued selling new policies on July 2, 2002 as a result of the
events described above.
Interest and dividend income on investments was $0.4 million in the third
quarter of 2003, compared with $1.2 million in the third quarter of 2002. This
$0.8 million decrease was due primarily to a decline in the level of invested
bonds and cash, consistent with the decline in policyholder liabilities which
began in the third quarter of 2002.
During the third quarter of 2003, $5.6 million of the $6.7 million in
proceeds from bond maturities were used to meet policy maturities and
redemptions. Following this reduction in bond investments, and further expected
bond realizations and maturities required to meet policy maturities during the
remaining three months of 2003, interest income is expected to decline to
approximately $1.6 million for the full year 2003.
Policyholder liabilities as of September 30, 2003 were $29.3 million of
which $3.3 million is scheduled to mature during the remaining three months of
2003. These maturities are expected to be met by a combination of cash of
approximately $11.2 million held at the beginning of October 2003 and bond
maturities of approximately $4.4 million during the remaining three months of
2003. Excess cash will be reinvested in bonds to meet future policy redemptions
and expenses as appropriate. If there are no significant redemptions,
policyholder liabilities are projected to be approximately $26.4 million at the
end of 2003. Assuming the reinvestment of excess cash in bonds, investment
income should approximately equal the amount credited to policies, and operating
expenses are expected to be approximately $1.0 million for the full year 2003.
Net unrealized investment gains on LPAL's listed equity securities increased by
$4.1 million during the month of October 2003.
Net investment losses totaled $4.0 million in the third quarter of 2003,
compared to net investment losses of $2.1 million in the third quarter of 2002.
Net investment losses in the third quarter of 2003 were comprised of net
realized investment losses of $1.3 million and $2.7 million of losses from the
change in net realized gains and losses on the listed equity securities held in
the trading portfolio. The trading portfolio decreased from $12.5 million as of
June 30, 2003 to $9.7 million as of September 30, 2003 principally due to the
decline in market value of our investment in Packeteer. The realized losses
comprised an other-than-temporary impairment charge on one private equity
security holding in our available-for-sale investment portfolio.
Total invested assets (defined as total assets excluding DPAC and other
assets) decreased to $46.3 million as of September 30, 2003, compared to $55.0
million as of June 30, 2003 primarily due to a decrease in the value of the
trading portfolio and the bond maturities discussed above. On total average
invested assets in the third quarter of 2003, the average annualized net return,
including both realized and unrealized investment gains and losses, was -29.3%,
compared with -1.8% in the third quarter of 2002.
Policy surrender charge income decreased to $2,000 in the third quarter of
2003, from $1.2 million in the third quarter of 2002. Policy surrenders
decreased significantly during 2003 due to the high volume of surrenders
resulting from the events in 2002 as described above.
Amounts credited on policyholder accounts decreased by $0.9 million in the
third quarter of 2003 to $0.5 million, compared with $1.4 million in the third
quarter of 2002. This decrease was due primarily to substantial
27
increases in policyholder surrenders during the second half of 2002 combined
with policy maturities in the second and third quarters of 2003. The average
rate credited to policyholders was 5.8% in the third quarter of 2003, compared
with 5.6% in the third quarter of 2002.
There was no DPAC amortization in the third quarter of 2003 due to the
acceleration of DPAC amortization to fully write-off DPAC as of September 30,
2002. The reasons for the write-off in 2002 were the discontinuance of new
business at the beginning of the third quarter of 2002 and the lack of interest
spread on the remaining block of business.
General and administrative expenses decreased by $0.1 million to $0.2
million in the third quarter of 2003, compared with the third quarter of 2002
due to decreases in staff compensation, back office and marketing expenses.
First nine months of 2003 compared to first nine months of 2002
In the first nine months of 2003, LPAL contributed a loss before income
taxes of $1.1 million to our overall income before income taxes, compared to a
loss before income taxes of $15.2 million in the first nine months of 2002. Net
realized investment losses in the first nine months of 2003 were $37.5 million
compared to $73.5 million in the first nine months of 2002. The gain from the
change in net unrealized investment gains and losses was $37.2 million in the
first nine months of 2003, compared to $61.1 million in the first nine months of
2002. In the first nine months of 2003, the spread between investment income and
amounts credited to policyholders remained flat; policy surrender charge income
decreased by $1.2 million; amortization of DPAC decreased by $3.0 million with
the write-off of the DPAC asset in 2002; and general and administrative expenses
decreased by $0.2 million, each as compared to the first nine months of 2002.
LPAL did not generate any premiums during the first nine months of 2003,
compared to $6.5 million of premiums during the first nine months of 2002. LPAL
discontinued selling new policies on July 2, 2002 as a result of the events
described above.
Interest and dividend income on investments was $1.5 million in the first
nine months of 2003, compared with $5.4 million in the first nine months of
2002. This $3.9 million decrease was due primarily to a decline in the level of
invested bonds and cash, consistent with the decline in policyholder liabilities
which began in the third quarter of 2002.
Net investment losses totaled $0.3 million in the first nine months of
2003, compared to net investment losses of $12.4 million in the first nine
months of 2002. Net investment losses in the first nine months of 2003 were
comprised of net realized investment losses of $37.5 million and $37.2 million
in gains from the change in net realized gains and losses on the listed equity
securities held in the trading portfolio. The trading portfolio increased from
$8.9 million as of December 31, 2002 to $9.7 million as of September 30, 2003.
LPAL sold certain trading positions during the first nine months of 2003, which
resulted in net realized losses of $20.8 million based on an aggregate original
cost of $23.7 million and one of LPAL's trading positions was acquired by a
larger listed company, in exchange for $0.6 million of stock in the acquiring
company, which resulted in a realized loss of $12.8 million based on an original
cost of $13.4 million. These disposals represented shares held in companies that
had completed initial public offerings of their securities. These realized
losses were increased by other-than-temporary impairment charges totaling $3.9
million on two private equity security holdings in our available-for-sale
investment portfolio.
Total invested assets decreased to $46.3 million as of September 30, 2003,
compared to $51.6 million as of December 31, 2002 primarily due to bond sales
and maturities during the period, partly offset by increases in the value of the
trading portfolio. On total average invested assets in the first nine months of
2003, the average annualized net return, including both realized and unrealized
investment gains and losses, was 3.0% compared with -6.6% in the first nine
months of 2002.
Policy surrender charge income decreased to $6,000 in the first nine months
of 2003, from $1.2 million in the first nine months of 2002. Policy surrenders
decreased significantly during 2003 after the high volume of surrenders during
the second half of 2002.
28
Amounts credited on policyholder accounts decreased by $4.0 million in the
first nine months of 2003 to $1.5 million, compared with $5.5 million in the
first nine months of 2002. This decrease was due primarily to substantial
increases in policyholder surrenders during the second half of 2002 combined
with policy maturities in the second and third quarters of 2003. The average
rate credited to policyholders was 5.9% in the first nine months of 2003,
compared with 6.2% in the first nine months of 2002.
There was no DPAC amortization in the first nine months of 2003, due to the
acceleration of DPAC amortization to fully write-off DPAC as of September 30,
2002, as explained above.
General and administrative expenses decreased by $0.2 million to $0.7
million in the first nine months of 2003, compared with the first nine months of
2002 due to decreases in staff compensation, marketing and back office expenses.
Venture Capital Management
Certain information regarding our venture capital management segment's
results of operations is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
(In thousands)
Revenues:
Management fees................................................... $ - $ - $ - $ 2,908
Net realized investment gains (losses) (1)........................ 473 (1,190) (2,626) (33,188)
Change in net unrealized investment gains and losses on
trading securities (1)........................................ (1,475) (4,162) 6,172 12,611
---------- ---------- ---------- ----------
Total revenues and net investment gains (losses).................. (1,002) (5,352) 3,546 (17,669)
Operating expenses................................................ 343 683 823 3,295
---------- ---------- ---------- ----------
Income (loss) before income taxes................................. $ (1,345) $ (6,035) $ 2,723 $ (20,964)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
(1) Net realized investment losses in the amounts of $0 and $31,368,000 were recorded in the first quarters of
2003 and 2002, respectively, by the venture capital management segment, related to intersegmental investment
sales to the life insurance and annuities segment. These net realized investment losses were offset by a corresponding
reclassification adjustment in unrealized investment gains and losses on trading securities for the same amount.
These gains and losses have been eliminated in our unaudited condensed consolidated financial statements.
Third quarter of 2003 compared to third quarter of 2002
In the third quarter of 2003, the venture capital management segment
realized a loss before income taxes of $1.3 million, compared to a loss before
income taxes of $6.0 million in the third quarter of 2002. These losses were
attributable primarily to net realized and unrealized investment gains and
losses on listed equity securities. These positions in listed equity securities
resulted from privately held technology companies, in which the venture capital
management segment had an equity interest, completing initial public offerings
or being acquired by publicly traded companies in stock-for-stock acquisitions.
The change in net unrealized gains and losses in the listed equity trading
portfolio during the third quarter of 2003 was a loss of $1.5 million and net
realized gains were $0.5 million. The trading portfolio decreased from $4.6
million as of June 30, 2003 to $3.0 million as of September 30, 2003. We sold
certain trading positions during the third quarter of 2003, which resulted in
net realized gains of $0.5 million based on an aggregate original cost of $0.2
million. These realized gains were partially offset by an other-than-temporary
impairment write-down of $12,000 on a private equity investment.
29
We expect significant fluctuations in net unrealized gains and losses in
the listed equity trading portfolio in future periods, reflecting continued
equity market volatility, especially in the technology sector.
Operating expenses in the third quarter of 2003 totaled $0.3 million,
compared to $0.7 million in the third quarter of 2002. This decrease was
attributable primarily to lower staff costs, reflecting the reduction in
business and staffing during the second half of 2002.
BICC is seeking to redevelop its venture capital business. BICC's business
relationships are extensive among Silicon Valley companies seeking later stage
capital and in the investor community globally. The venture capital industry
continues to face a difficult environment in 2003. The operating results for
this business segment, and for the Group as a whole, for the fourth quarter of
2003 and for 2004 will be largely driven by portfolio performance in uncertain
market conditions.
First nine months of 2003 compared to first nine months of 2002
In the first nine months of 2003, the venture capital management segment
contributed income before income taxes of $2.7 million, compared to a loss
before income taxes of $21.0 million in the first nine months of 2002. The
income and loss in those periods, respectively, was attributable primarily to
net realized and unrealized investment gains and losses on listed equity
securities. These positions in listed equity securities resulted from privately
held technology companies, in which the venture capital management segment had
an equity interest, completing initial public offerings or being acquired by
publicly traded companies in stock-for-stock acquisitions.
The change in net unrealized gains and losses in the listed equity trading
portfolio during the first nine months of 2003 was a gain of $6.2 million, which
was partially offset by net realized losses of $2.6 million. The trading
portfolio decreased from $7.6 million as of December 31, 2002 to $3.0 million as
of September 30, 2003. We sold certain trading positions during the first nine
months of 2003, which resulted in net realized losses of $2.4 million based on
an aggregate original cost of $10.9 million. These realized losses were
increased by other-than-temporary impairment write-downs totaling $0.2 million
on two private investments relating to the guarantees as discussed in Note 8
"Notes Payable" to the Unaudited Condensed Consolidated Financial Statements and
an $12,000 impairment charge on another private equity security. All
intersegmental investment gains and losses, other than those arising from sales
to LPLA (discontinued operations), have been eliminated in our unaudited
condensed consolidated statements of income.
The venture capital management segment earned portfolio management fees
from LPLA of $2.9 million in the first nine months of 2002. Due to the events
described above in the section entitled "Life Insurance and Annuities," BICC has
not received fees from the management of LPLA's investment portfolio since that
time.
Operating expenses in the first nine months of 2003 were $0.8 million,
compared to $3.3 million in the first nine months of 2002. The $2.5 million
decrease was attributable primarily to lower staff costs, reflecting the
reduction in business and staffing during the second half of 2002.
Corporate and Other
Third quarter of 2003 compared to third quarter of 2002
Corporate expenses decreased by $0.8 million to $0.7 million in the third
quarter of 2003, as compared to $1.5 million in the third quarter of 2002. This
decrease was primarily due to decreases in staff compensation, bank facility
costs, legal fees and audit fees.
Interest income earned by us and our subsidiaries (excluding the life
insurance and annuities segment) decreased by $0.1 million to $13,000 in the
third quarter of 2003 as compared with the third quarter of 2002, primarily due
to the decrease in cash and cash equivalents held by us, as well as lower
interest rates. Excluding the life insurance and annuities segment, we incurred
no interest expense in the third quarter of 2003, as compared to $0.3 million in
the third quarter of 2002. We fully repaid our bank borrowings during the
30
second quarter of 2003. A discussion of our sources and uses of cash is
discussed in "Liquidity and Capital Resources" below.
First nine months of 2003 compared to first nine months of 2002
Corporate expenses decreased by $2.2 million to $2.8 million in the first
nine months of 2003, as compared to $5.0 million for the first nine months of
2002. This decrease was primarily due to decreases in staff compensation and
bank facility costs, partially offset by higher directors and officers insurance
costs.
Interest income earned by us and our subsidiaries (excluding the life
insurance and annuities segment) decreased by $0.5 million to $42,000 in the
first nine months of 2003 as compared with the first nine months of 2002,
primarily due to the decrease in cash and cash equivalents held by us, as well
as lower interest rates. Interest expense incurred by us and our subsidiaries
(excluding the life insurance and annuities segment) decreased by $0.1 million
to $0.7 million in the first nine months of 2003 as compared with the first nine
months of 2002 due to the impact of lower bank borrowings which was largely
offset by the accelerated amortization of bank facility costs (restructuring
fees and the value of warrants issued to the Bank of Scotland) in the second
quarter of 2003, resulting from the early repayment of the bank facility. A
discussion of our sources and uses of cash is discussed in "Liquidity and
Capital Resources" below.
Consolidated Income (Loss) from Continuing Operations Before Income Taxes
Third quarter of 2003 compared to third quarter of 2002
Our consolidated loss from continuing operations before income taxes was
$6.3 million in the third quarter of 2003, compared to a loss of $10.8 million
in the third quarter of 2002. This $4.5 million improvement was primarily due to
net realized and unrealized investment losses of $5.1 million in the third
quarter of 2003, compared to net realized and unrealized investment losses of
$7.5 million in the third quarter of 2002, together with a reduction of $1.2
million in operating expenses.
Consolidated income before income taxes for the fourth quarter of 2003 and
future years may be volatile due to our holdings of listed equity securities
primarily in the technology sector, which are marked to market with changes in
their market value recognized in the income statement for each period.
Other-than-temporary impairments of our private equity securities primarily in
the technology sector could also affect our consolidated income before income
taxes in future periods. For more information on the possible effects of
volatility in the prices of equity securities, see Item 3 "Quantitative and
Qualitative Disclosures About Market Risk" below.
See discussion of events relating to LPLA, LPAL, BCM and LPA in the
"Liquidity and Capital Resources" section below.
Subsequent to the completion of the sales of BCM and LPA, our focus is now
on our technology venture capital business. The market environment for venture
capital continues to be very weak. We are pursuing opportunities to grow the
business in the future. However, there is no guarantee that we will be
successful in redeveloping our venture capital operations.
First nine months of 2003 compared to first nine months of 2002
Our consolidated loss from continuing operations before income taxes was
$1.8 million in the first nine months of 2003, compared to a loss of $41.4
million in the first nine months of 2002. This substantial improvement was
primarily due to net realized and unrealized investment gains of $3.2 million in
the first nine months of 2003, compared to net realized and unrealized
investment losses of $33.0 million in the first nine months of 2002, together
with a reduction of $4.9 million in operating expenses.
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
31
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 34%
and 8.84%, respectively.
Third quarter of 2003 compared to third quarter of 2002 (continuing operations)
On losses from continuing operations before income taxes of $6.3 million
for the third quarter of 2003, we had an income tax benefit of $3,000. This low
level of tax benefit was primarily due to the $6.0 million of losses contributed
by our Jersey and Guernsey operations during the period, which primarily
consisted of net realized and unrealized investment losses for which no tax
benefits will be realized.
First nine months of 2003 compared to first nine months of 2002
(continuing operations)
On losses from continuing operations before income taxes of $1.8 million
for the first nine months of 2003, we realized income tax expense of $9,000.
Although, $1.1 million of the $1.8 million in losses were contributed by our
U.S. subsidiaries during the period, we did not recognize any U.S. tax benefits,
due to the 100% valuation allowances that we have provided for all deferred tax
assets. The remaining losses were contributed by our Jersey and Guernsey
operations during the period for which no tax benefits are available.
Third quarter and first nine months of 2003(disposal of discontinued operations)
We recorded $36,000 of income tax expense on book gains totaling $11.7
million from the sales of BCM and LPA. Income taxes based on statutory tax rates
applied to the taxable gains on these sales were approximately $4.9 million.
However, due to net operating losses in the U.S. tax groups in the current and
prior years, and capital loss carryovers from prior years, we expect to offset
all of the taxes related to the gains on the sale of BCM and LPA, except for a
small amount of federal alternative minimum tax. A portion of the capital loss
carryovers from prior years which we expect to utilize to offset the current
year taxable gains resulted from the loss of control of LPLA in 2002.
Discontinued Operations
Third quarter of 2003 compared to third quarter of 2002
There were no results to report for discontinued operations in the third
quarter of 2003, as we completed the sales of BCM and LPA in the second quarter
of 2003 and we lost management control over LPLA in the third quarter of 2002.
For further information, see Note 3 "Discontinued Operations" to the Unaudited
Condensed Consolidated Financial Statements in Part I, Item 1.
The $2.7 million loss from discontinued operations net of income taxes for
the third quarter of 2002 resulted from LPA's after-tax loss of $2.5 million and
BCM's after-tax loss of $0.2 million. The $38.5 million loss on disposal of
discontinued operations for the third quarter of 2002 resulted from the loss of
control of LPLA.
First nine months of 2003 compared to first nine months of 2002
Our consolidated income statement for the first nine months of 2003
includes the results of discontinued operations for the first four months of
2003, in the case of BCM, and for the first five months of 2003, in the case of
LPA. Our consolidated income statement for the first nine months of 2002
includes the results of discontinued operations for the first six months of
2002, in the case of LPLA, and for the first nine months of 2002 for both BCM
and LPA. Therefore, the results for the first nine months of 2003 are not
directly comparable to the results for the first nine months of 2002.
32
The following summarizes the components of the results of discontinued
operations:
Nine Months Ended
September 30,
-----------------------------
2003 2002
------------- -------------
LPA operating loss after income taxes............................................... $ (1,724) $ (3,562)
BCM operating income (loss) after income taxes...................................... (34) 266
LPLA operating loss after income taxes.............................................. - (104,762)
------------- -------------
Total loss from discontinued operations after income taxes.......................... $ (1,758) $ (108,058)
------------- -------------
------------- -------------
LPA gain on disposal after income taxes............................................. $ 3,736 $ -
BCM gain on disposal after income taxes............................................. 7,949 -
LPLA loss on disposal after income taxes............................................ - (38,532)
------------- -------------
Total gain (loss) on disposal of discontinued operations after income taxes......... $ 11,685 $ (38,532)
------------- -------------
------------- -------------
For further information, see Note 3 "Discontinued Operations" to the
Unaudited Condensed Consolidated Financial Statements in Part I, Item 1.
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 and to the accounting for life insurance policy liabilities. In
addition, for 2002 and for the first six months of 2003, our accounting policies
relating to consolidation, deconsolidation and the reporting of discontinued
operations became very important to the portrayal of our financial condition and
results of operations. These critical accounting policies are described below.
Determination of Fair Values of Investments
When a quoted market price is available for a security, we use this price
in the determination of fair value. If a quoted market price is not available
for a security, management estimates the security's fair value based on
valuation methodologies as described below.
We hold investments in privately held equity securities, primarily
convertible preferred stock in venture capital companies doing business in
various segments of technology industries. Venture capital investing entails
making investments in companies that are developing products or services for
large emerging markets with the belief that these investments will yield
superior returns if these companies are successful. These investments are
normally held for a number of years. When we make these investments, most of the
companies are still developing the products they intend to bring to market or
are in the early stages of product sales. Venture capital companies are net
consumers of cash and often dependent upon additional financing to execute their
business plans. These investments involve substantial risk and the companies
generally lack meaningful historical financial results used in traditional
valuation models. The process of pricing these securities range from fierce
competitive bidding between financial institutions to existing investors
negotiating prices with the company without outside investor validation.
Investments in convertible preferred stock come with rights that vary
dramatically both from company to company and between rounds of financing within
the same company. These rights, such as anti-dilution, redemption, liquidation
preferences and participation, bear directly on the price an investor is willing
to pay for a security. The returns on these investments are generally realized
through an initial public offering of the company's shares or, more commonly,
through the company's acquisition by a public company.
33
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 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.
34
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).
Consolidation, Deconsolidation and Reporting of Discontinued Operations
Our unaudited condensed consolidated financial statements include the
accounts of the Company, its subsidiaries (with the exception of LPLA which was
deconsolidated during 2002, and BCM and LPA which were deconsolidated during the
first half of 2003, as discussed below), the Employee Share Option Trust and the
Agent Loyalty Opportunity Trust (collectively, the "Group"). Significant
subsidiaries included in the continuing operations of the Group and discussed in
this report include London Pacific Assurance Limited and Berkeley International
Capital Corporation. All intercompany transactions and balances are eliminated
in consolidation except for intercompany transactions between continuing and
discontinued operations principally related to investment management fees from
LPLA (the discontinued operations) to the continuing operations. Our unaudited
condensed consolidated balance sheet is presented in an unclassified format as
the majority of the Group's assets relate to its continuing life insurance and
annuities business.
In accordance with SFAS 144, if a long-lived asset or "component of an
entity" (a reportable segment, an operating segment, a reporting unit, a
subsidiary or an asset group) is disposed of by sale or by abandonment, then the
results of operations of that component of an entity shall be reported in
discontinued operations if both of the following conditions are met: (i) the
operations and cash flows of the component have been eliminated from the ongoing
operations of the entity, and (ii) the entity will not have any significant
continuing involvement in the operations of the component.
During the third quarter of 2002, our U.S. life insurance company, LPLA,
was placed under regulatory control and rehabilitation by the North Carolina
insurance regulators. As we no longer exercise control over LPLA, we
deconsolidated LPLA and recorded a charge to earnings in the third quarter of
2002 of approximately $38.5 million for losses resulting from the disposition of
LPLA. We will not regain control or receive any benefit from LPLA in the future.
As such, in accordance with SFAS 144, the results of operations of LPLA
(pre-rehabilitation) have been reported in discontinued operations. Under SFAS
144, the results of operations of a discontinued business, and any impairment
losses related to a discontinued business, are reported separately in the income
statement under discontinued operations for the current and prior periods, and
in the prior period balance sheet as total assets of discontinued operations and
total liabilities of discontinued operations.
The results of operations of both BCM and LPA are reported in the income
statement under discontinued operations for the current and prior period due to
the sale of each during the second quarter of 2003. The assets and liabilities
of both BCM and LPA have been classified as assets of discontinued operations
and liabilities of discontinued operations in the prior period consolidated
balance sheet. We do not expect to receive any material amounts of income from
our asset management or financial advisory services segments in the foreseeable
future.
Liquidity and Capital Resources
Our cash and cash equivalents increased during the first nine months of
2003 by $6.1 million to $21.4 million, WHICH INCLUDES $11.2 MILLION HELD BY LPAL
WHICH IS NOT AVAILABLE TO FUND THE OPERATIONS OR COMMITMENTS OF THE COMPANY OR
ITS OTHER SUBSIDIARIES. (LPAL is a regulated insurance company, and as such it
must meet stringent capital adequacy requirements and no
35
distributions may be made from it without the consent of LPAL's independent
actuary.) This increase in cash and cash equivalents resulted from $15.9 million
and $8.3 million of cash provided by investing activities and operating
activities, respectively, partially offset by $17.9 million of cash used in
financing activities. Cash provided by investing activities primarily related to
the disposals of BCM and LPA, and to the sale of corporate bonds by LPAL,
partially offset by the payment of guarantee obligations under the bank
facility. Cash provided by operating activities primarily resulted from the sale
of trading securities. Cash used in financing activities related to the
repayment of bank borrowings, as well as insurance policyholder benefits paid by
LPAL. As of September 30, 2003, our cash and cash equivalents, excluding the
amount held by LPAL, amounted to $10.2 million, a decrease of $1.3 million from
December 31, 2002. Excluding LPAL's investments, we also held $3.0 million of
listed equity securities which could be sold within a short period of time as of
September 30, 2003, compared to $7.7 million as of December 31, 2002.
Shareholders' equity increased during the first nine months of 2003 by
$10.4 million from $21.5 million at December 31, 2002 to $31.9 million at
September 30, 2003, primarily due to net income for the period of $8.2 million,
in addition to the positive change in unrealized gains and losses on
available-for-sale securities of $1.9 million included in accumulated other
comprehensive loss. As of September 30, 2003 and December 31, 2002, $63.6
million of our Ordinary Shares, at cost, held by the employee benefit trusts
have been netted against shareholders' equity.
On December 20, 2002, we and the Bank of Scotland agreed to the terms and
conditions of an amended credit facility, providing up to $23.0 million of
borrowings. The facility limit was to be reduced at the end of each calendar
quarter, such that the facility was to be repaid in full no later than December
31, 2003.
As of December 31, 2002, $9.3 million was outstanding under the facility.
In addition, $10.6 million of the remaining $10.7 million under the facility was
utilized in the form of guarantees provided on behalf of certain former investee
companies. As we believed that it would be unlikely that the former investee
companies would have the ability to repay any of their borrowings during 2003,
we recorded the maximum guarantee obligation of $10.6 million at December 31,
2002 on our consolidated balance sheet and took other-than-temporary impairment
losses on the related investments in our consolidated income statement for 2002.
During February 2003, we sold certain of our listed equity securities for $4.7
million and the proceeds were used to reduce our borrowings to $4.4 million and
the facility to $15.0 million.
On May 7, 2003, we completed the sale of BCM and received initial sale
proceeds of $8.06 million. On May 8, 2003, we paid $7.75 million to the Bank of
Scotland which reduced our borrowings to zero and the amounts due under our
guarantee obligations to $7.25 million.
On June 5, 2003, we completed the sale of LPA and received initial sale
proceeds of $6.95 million. On that same date, we paid $6.95 million to the Bank
of Scotland which reduced the amounts due under our guarantee obligations to
$0.3 million. On June 20, 2003, using our existing cash resources, we paid $0.3
million to the Bank of Scotland and the facility was reduced to zero and
terminated.
During 2002, LPLA paid investment management fees to our asset management
and venture capital management segments totaling $3.6 million. Due to the loss
of control of LPLA as more fully described in Note 1 and Note 3 to the Unaudited
Condensed Consolidated Financial Statements in Item 1 of Part I, we no longer
manage LPLA's portfolio of public corporate bonds and private equity and debt
investments and no longer receive investment management fees for these services.
We are not aware of any obligations of the Group to cover any current or
future losses of LPLA. However, in the course of the administration of LPLA in
rehabilitation, during November 2002, the NCDOI requested information concerning
the history of a limited number of investments in securities of portfolio
companies. These portfolio investments have been associated with LPLA for more
than seven years, and involve intercompany transfers. The history of their
investment performance and ownership is complex. We have complied with these
requests. We are not able at this time to predict what conclusions the NCDOI
will reach after evaluating this information.
36
On July 2, 2002, we announced that LPAL discontinued issuing new policies.
Subsequent to this announcement and other announcements relating to the Group
and LPLA, LPAL policy surrenders substantially increased. Approximately 79% of
LPAL's $140.2 million policyholder liabilities as of June 30, 2002 had been
surrendered or had matured as of September 30, 2003. Policy surrenders and
maturities for the first nine months of 2003 totaled $8.6 million. We do not
expect significant surrender activity during the fourth quarter of 2003;
however, approximately $3.3 million of policyholder liabilities are scheduled to
mature during the remaining three months of 2003. These maturities are expected
to be met by a combination of cash held as of September 30, 2003 of $11.2
million and the proceeds from maturing bonds which are estimated to be $4.4
million during the remaining three months of 2003. Assuming the reinvestment of
excess cash in bonds, investment income should approximately equal the amount
credited to policies during the fourth quarter of 2003.
During the first nine months of 2003, LPAL continued to service its
policyholders. Policyholder liabilities for LPAL fell by $6.1 million during the
first nine months of 2003 from $35.4 million as of December 31, 2002 to $29.3
million as of September 30, 2003. As of September 30, 2003, LPAL's corporate
bonds, cash and accrued interest totaled $31.4 million, listed equity securities
were $9.7 million and the book value of private equity securities was $5.1
million. Due to the weakened economic environment, in February 2003, the Jersey
Financial Services Commission ("JFSC") amended LPAL's insurance permit such that
private equity investments are no longer approved assets. Therefore, declines in
the market value of LPAL's listed equity securities, which totaled $9.7 million
as of September 30, 2003, could have a significant impact on LPAL's statutory
capital level.
As of September 30, 2003, we had no material commitments outstanding for
capital expenditures or additional funding for private equity portfolio
companies.
As discussed above, we have fully repaid our bank borrowings and our
guarantee obligations have been satisfied, and as of September 30, 2003, we had
$10.2 million of cash and cash equivalents, excluding cash held by our life
insurance and annuities segment. We believe that this cash balance is sufficient
to fund our operations (venture capital and corporate activities) over at least
the next 12 months. We also expect to receive additional cash consideration of
$1.0 million related to the sale of BCM at the end of 2003 and, in addition,
$1.0 million in cash out of escrow at the end of 2004 related to the sale of
LPA, as discussed in Note 1 and Note 6 to the Unaudited Condensed Consolidated
Financial Statements in Item 1 of Part I.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The nature of our businesses exposes us to market risk. Market risk is the
risk of loss that may occur when changes in interest rates and public equity
prices adversely affect the value of invested assets.
Interest Rate Risk
LPAL is subject to risk from interest rate fluctuations when payments due
to policyholders are not matched in respect of amount and duration with income
from investments. LPAL attempts to minimize this risk by ensuring that payments
and income are matched as closely as possible while also maximizing investment
returns. LPAL has not used derivative financial instruments as part of its
investment strategy. Exposure to interest rate risk is estimated by performing
sensitivity tests to changes in interest rates.
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 no interest rate risk. Interest income earned on
excess cash is expected to be approximately $0.1 million during the fourth
quarter of 2003. For each 100 basis point move in market interest rates this
amount will vary by approximately $121,000 per annum.
37
Equity Price Risk
We are exposed to equity price risk on our listed equity securities.
Changes in the level or volatility of equity prices affect the value of our
listed equity securities. These changes in turn directly affect our consolidated
net income because our holdings of listed equity securities are marked to
market, with changes in their market value recognized in the income statement
for the period in which the changes occur. These listed equity securities are in
small capitalization stocks in the volatile high technology industry sector.
If the fair value of our listed equities as of September 30, 2003 and
December 31, 2002, which totaled $12.7 million and $16.5 million, respectively,
had abruptly increased or decreased by 50%, the fair value of the listed equity
portfolio would have increased or decreased by $6.4 million and $8.3 million,
respectively. The largest of these listed equities represented $12.1 million and
$11.4 million of the total as of September 30, 2003 and December 31, 2002,
respectively. If the fair value of the largest listed equity had abruptly
increased or decreased by 50%, its fair value would have increased or decreased
by $6.1 million and $5.7 million, respectively.
Our listed equity securities represent investments that were originally
made as private equity investments in companies that subsequently completed an
initial public offering. The performance of these listed equity securities can
be highly volatile, however they are monitored daily and we seek to sell them
over a period of time.
As of September 30, 2003, we held $5.1 million in private corporate equity
securities primarily in technology companies for which liquid markets do not
exist. Private equity prices do not fluctuate directly with public equity
markets, but significant market movements may trigger a review for
other-than-temporary adjustment of the carrying values of our private equity
securities. The risks inherent in these private equity investments relate
primarily to the viability of the investee companies. We try to mitigate these
risks in various ways including performing extensive due diligence prior to
making an investment, and regularly reviewing the progress of the investee
companies.
Item 4. CONTROLS AND PROCEDURES
The Company's management evaluated, with the participation of the Company's
chief executive officer and chief financial officer, the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), as of September 30, 2003. Based on their evaluation, the Company's chief
executive officer and chief financial officer concluded that the Company's
disclosure controls and procedures were effective as of September 30, 2003.
There has been no change in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
that occurred during the Company's fiscal quarter ended September 30, 2003, that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
We are involved in various legal proceedings, including claims for damages
from LPA clients of a nature we consider to be normal for LPA's business. We
believe the ultimate settlement or other resolution of the claims will not
materially affect our consolidated financial position, results of operations or
cash flows.
38
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed herewith:
Exhibit
Number Description
- ------- -----------------
99.1 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.
99.2 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.
99.3 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.
99.4 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.
(b) REPORTS ON FORM 8-K:
We filed one current report on Form 8-K during the third quarter of 2003
as follows:
(1) The Form 8-K filed on August 6, 2003 announcing our financial
results for the quarter ended June 30, 2003.
39
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BERKELEY TECHNOLOGY LIMITED
(Registrant)
Date: November 14, 2003 By: /s/ Ian K. Whitehead
Ian K. Whitehead
Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer of the Registrant)
40
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
EXHIBIT INDEX FOR THE QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
Exhibit
Number Description
- ------- -----------------
99.1 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.
99.2 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.
99.3 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.
99.4 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.
41