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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-K
(Mark One)
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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, including zip code)
011 44 (1534) 607700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange on
Title of each class which registered
American Depositary Shares, each None
representing ten Ordinary Shares of
$0.05 par value per share
Ordinary Shares of $0.05 par value per share*
*Not for trading, but only in connection with the registration of American
Depositary Shares, pursuant to the requirements of the Securities and Exchange
Commission.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ |X|] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ |X|]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [ |X|]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the closing sale price of the Ordinary Shares on June
30, 2003 as reported on the London Stock Exchange (using an exchange rate of
(pound)1.00 = $1.65) was $6,443,975. Ordinary Shares held by each current
executive officer and director and by each person who is known by the registrant
to own 5% or more of the outstanding Ordinary Shares have been excluded from
this computation in that such persons may be deemed to be affiliates of the
registrant. This determination is not necessarily conclusive that these persons
are affiliates of the registrant.
As of February 27, 2004, the registrant had outstanding 64,439,073 Ordinary
Shares, $0.05 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive proxy statement for its Annual General Meeting
of Shareholders to be held on August 4, 2004, is incorporated by reference in
Part III of this Form 10-K.
TABLE OF CONTENTS
PART I Page
Item 1. Business .................................................................................. 1
Item 2. Properties ................................................................................ 6
Item 3. Legal Proceedings ......................................................................... 6
Item 4. Submission of Matters to a Vote of Security Holders ....................................... 6
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities................................................................... 7
Item 6. Selected Financial Data ................................................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ..... 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ................................ 25
Item 8. Financial Statements and Supplementary Data ............................................... 27
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...... 74
Item 9A. Controls and Procedures.................................................................... 74
PART III
Item 10. Directors and Executive Officers of the Registrant ........................................ 75
Item 11. Executive Compensation .................................................................... 75
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.................................................................... 75
Item 13. Certain Relationships and Related Transactions ............................................ 76
Item 14. Principal Accountant Fees and Services..................................................... 76
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K ........................... 76
Signatures ........................................................................................... 87
Exhibit Index ........................................................................................ 88
As used herein, the terms "registrant," "Company," "we," "us" and "our"
refer to Berkeley Technology Limited (formerly London Pacific Group Limited).
Except as the context otherwise requires, the term "Group" refers collectively
to the registrant and its subsidiaries.
Forward-Looking Statements and Factors That May Affect Future Results
Statements contained in this Annual Report on Form 10-K that are not
historical facts, including, but not limited to, statements found in Item 1
"Business," Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Item 7A "Quantitative and Qualitative Disclosures
About Market Risk," are forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Such forward-looking statements are based on current expectations, estimates,
forecasts and projections about the industries in which we operate, management's
current beliefs and assumptions made by management. Words such as "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates," "goals,"
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions that are
difficult to predict. Future outcomes and results may differ materially from
what is expressed or forecasted in such forward-looking statements. We undertake
no obligation to update any forward-looking statements, whether as a result of
new information, future developments or otherwise.
PART I
Item 1. BUSINESS
OVERVIEW
We are a financial services company based in Jersey, Channel Islands,
specializing in venture capital and consulting.
We evolved from a financial consulting business, The Berkeley Consulting
Group, formed in 1977. That business focused on financial consulting services
and venture capital finance for U.S. high technology companies from non-U.S.
institutional financing sources. The Company was incorporated in 1985 in Jersey,
Channel Islands. We obtained a listing on the London Stock Exchange ("LSE") in
that same year and our Ordinary Shares currently trade under the symbol "BEK.L."
Since 1985, we grew with the establishment of life insurance and annuity
businesses in both the U.S. and Jersey, and through acquisitions in the
financial advisory services and asset management areas. In 2002, we lost
management control of the U.S. life insurance business due to the dilution in
the level of the life insurance company's capital arising from bond and equity
losses in poor market conditions. We continue to service the policyholders of
London Pacific Assurance Limited ("LPAL") in Jersey, but new policies were not
sold in 2003 to avoid the capital requirements related to the sales of new
policies. In 2003, we sold two of our operating businesses: Berkeley Capital
Management ("BCM"), a U.S. based asset management company; and London Pacific
Advisory Services, Inc. and its affiliates ("LPA"), a U.S. based online
investment consulting service. We now focus on our venture capital business. We
are working with North American private technology companies that are looking to
grow their businesses and to expand their investor base overseas, primarily in
Europe and Japan.
American Depositary Receipts ("ADRs") representing our Ordinary Shares
began trading in the U.S. market in 1992. We obtained a listing on The Nasdaq
Stock Market SM in 1993 and in November 1999 migrated to the New York Stock
Exchange ("NYSE") where our ADRs traded under the symbol "LDP." During 2002, our
ADR price fell below the minimum required by the NYSE; consequently, our ADRs
were withdrawn from listing and registration on the NYSE. Our shares currently
trade on the Over-the-Counter ("OTC") Bulletin Board under the symbol
"BKLYY.PK."
During the first quarter of 2000, we completed a four-for-one split of our
American Depositary Shares ("ADSs"). Effective from the close of business on
March 23, 2000, each ADS, evidenced by an ADR, equaled
1
one Ordinary Share. During the second quarter of 2002, we completed a
one-for-ten reverse split of our ADSs. Effective from the opening of business on
June 24, 2002, each ADS represents ten Ordinary Shares.
We currently have offices in Jersey (Channel Islands) and San Francisco,
California.
BUSINESS SEGMENTS
We currently have two business segments that we operate through our
subsidiaries: life insurance and annuities, and venture capital and consulting.
Our principal operating subsidiaries, by business segment and location, are set
forth below:
Principal Subsidiaries Business Segment Location
- ------------------------------------------ ------------------------- -------------------------
London Pacific Assurance Limited Life insurance and annuities Jersey, Channel Islands
Berkeley International Capital Corporation Venture capital and consulting San Francisco, California
Berkeley International Capital Limited Venture capital Guernsey, Channel Islands
See the "Overview" section above for a description of the main changes to
our business segments. We used the proceeds received at the closing of the sales
of BCM and LPA to repay our bank facility which was due and payable during the
course of 2003.
See Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations by Business Segment" and Note 21
to the Consolidated Financial Statements in Item 8 of this Form 10-K for a
summary of our financial information by business segment and geographical
location.
Life Insurance and Annuities
Our U.S. life insurance company, London Pacific Life & Annuity Company
("LPLA"), was established in 1989 and provided tax advantaged annuity products.
By the end of 2001, LPLA grew to approximately $2.3 billion in assets; however,
during 2002, the life insurance and annuities segment suffered from the adverse
conditions in the bond and equity markets. 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. Subsequently, 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
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. Based on this court order, we no longer
exercise control over 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.
London Pacific Assurance Limited
Formed in 1999, our Jersey, Channel Islands insurance subsidiary, LPAL, has
principally been engaged in marketing and servicing investment oriented
insurance products. LPAL sold Sterling, U.S. dollar and Euro guaranteed return
bonds in its home market of Jersey, Channel Islands, and in the U.K., Guernsey,
Isle of Man and other permitted jurisdictions. The products guarantee both
capital and yield for the duration of the investment period, which are typically
three or five years. From LPAL's start of operations in the first quarter of
2000 through the end of June 2002, LPAL generated premiums totaling $135.0
million. LPAL generated sales directly to the public and through financial
intermediaries in the Channel Islands, U.K., Isle of Man and other international
locations.
On July 2, 2002, we announced that LPAL would discontinue writing new
policies effective immediately. The decision to discontinue the issuance of
policies was made to avoid the increased capital requirements created by
additional policyholder liabilities. Subsequent to this announcement and other
announcements
2
relating to the Company and LPLA, LPAL policy surrenders increased
substantially. The number of policyholders fell from 2,603 at June 30, 2002 to
684 at December 31, 2003. The primary financial impact of the high level of
surrenders has been the reduction in the level of capital required to support
the policyholder liabilities.
LPAL has over 200 sales agreements in place with financial intermediaries,
giving the company access to a large number of independent financial advisers
("IFAs") throughout the U.K. and the Channel Islands. However, if LPAL's
management decides to sell policies in the future, it is not clear how many IFAs
in the network will sell LPAL policies again due to the negative announcements
regarding LPLA in the U.S. Inevitably, the high level of surrenders and the
discontinuation of policy issuances will also have a negative impact on this
segment. Policy administration, previously handled for a fee by LPLA in Raleigh,
North Carolina, was transferred to our Jersey office in July 2003.
Investment Portfolio
In turbulent market conditions, LPAL's portfolio strategy has sought to
match the level of policyholder liabilities with corporate bonds and cash. On
December 31, 2003, policyholder liabilities amounted to $28.1 million and the
market value of LPAL's corporate bonds, cash, accrued interest and amounts due
from brokers amounted to $30.2 million. In addition, LPAL's portfolio included
listed equities valued at $13.5 million and private equities valued at $4.2
million at December 31, 2003.
See Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Life Insurance and Annuities" for additional information
on LPAL's investment portfolio and its effect on the profitability of the
insurance segment.
Competition
LPAL operates in a highly competitive environment. The industry consists of
a large number of companies, many of which have greater financial resources,
more diversified product lines and larger staffs than those of LPAL. An
expanding number of other financial services companies also market insurance
products or offer competing products. Competition is based on a number of
factors, including product pricing, service provided to distributors and
policyholders, and ratings.
We believe LPAL could compete again in the future but its distribution
capability may be significantly weakened due to the ongoing discontinuation of
sales activity, as well as the negative publicity associated with the loss of
management control of LPLA. LPAL has had little pro-active contact with sales
agents since the decision to discontinue issuing policies.
Venture Capital and Consulting
Berkeley International Capital Corporation ("BICC") and Berkeley
International Capital Limited ("BICL") comprise our venture capital and
consulting business. In recent years, our venture capital subsidiaries have
focused primarily on U.S. high technology companies, with investments generally
ranging from $5 million to $25 million.
Subsequent to the rehabilitation proceedings involving LPLA in August 2002,
we have not made any venture capital investments. However, we are presently
developing a new venture capital investment strategy. Some progress has been
made at BICC in advising a small number of North American technology companies
which is the first step towards taking principal positions selectively in
technology companies.
Berkeley International Capital Corporation
BICC is primarily responsible for our activities in the venture capital
area. Currently, this involves working with North American private technology
companies that are looking to grow their businesses and to expand their investor
base overseas, primarily in Europe and Japan. We advise on overseas operations,
3
assist in locating investment capital and occasionally will take principal
positions where the case is compelling and the timeframe for realization could
be relatively short.
Typically, BICC seeks a retainer (monthly or upfront depending on the
nature of the assignment) from its U.S. private technology company clients for
its consulting work, and a "success fee" upon the successful conclusion of its
assignment. The consulting work may involve assistance in the preparation of a
business plan; market research; strategy development; identification of investor
prospects; introductory meetings with prospective customers or investors; and
assistance in the implementation of the chosen strategy or transaction.
BICC provides its services currently to a small number of clients, and is
in discussions with additional prospects. As an example of its work, BICC has
been engaged by a North American telecommunications company to develop a
business strategy for penetration of the Western and Central/Eastern European
markets. This engagement has involved detailed market and prospect research,
preparation of a business plan and meetings with potential clients that may lead
to substantial business for the client company. Another example of BICC's work
is an engagement involving the preparation of a business plan, reviewing
financing structures and introducing investors who could finance a major
European research and development, sales and customer support initiative for an
electronic design automation company.
BICC has a long history and experience in both the U.S. technology industry
and the overseas investment and business markets. It is well positioned to
benefit from the globalization forces that are at work in the industry and that
are challenging so many young technology companies. It can also provide overseas
investors and businesses with the access they desire to U.S. businesses,
technologies and potential sources of funding.
Over the past 24 years, BICC arranged over $1.9 billion of placements in
the private capital markets. Placements were typically arranged in later stage
technology companies, which were near alpha test of their product and needed to
scale up their engineering, marketing and sales infrastructure. Within this
strategy, BICC has been able to identify many promising young technology
companies that have grown in prominence in their fields and gone on to
successful public offerings or acquisition transactions. Many of the companies
are headquartered in close proximity to BICC's offices which allows for easier
access to the companies' management. Most of these companies specialize in
"business-to-business" Internet technologies, telecommunications (both central
office and customer premises), data communications, software, semiconductors and
knowledge learning. These placements included investments in America Online,
Oracle Corporation, Cadence Design Systems, Inc., Cypress Semiconductor, Inc.,
Packeteer, Inc. and New Focus, Inc.
The private technology investments arranged by BICC and currently held by
LPAL are Agility Communications, Inc. and Alacritech, Inc.
Due to the loss of control of LPLA in 2002, BICC no longer receives fees
from LPLA. Fees earned by BICC from LPLA during 2002 and 2001 were $2.9 million
and $9.9 million, respectively.
Berkeley International Capital Limited
BICL, formed in 1988 and based in Guernsey, Channel Islands, takes
principal positions in connection with private equity transactions arranged by
its sister company, BICC. These private equity positions may become listed
equity securities pursuant to IPOs or in connection with the acquisition of the
private issuing company by a listed company. As of December 31, 2003, BICL held
$3.4 million of such positions in listed equity securities.
Competition
Our venture capital business faces competition primarily from commercial
banks, investment banks, venture capital firms and insurance companies, many of
which have substantially greater financial resources. The marketplace for
venture capital is highly competitive, and demand for financing is also
influenced by
4
economic and stock market conditions. The pool of capital seeking opportunities
to invest in later stage technology companies contracted further in 2003 but we
believe demand continues for high value technology companies.
Discontinued Operations
Berkeley Capital Management
On May 7, 2003, we 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. BCM was our asset management subsidiary
based in San Francisco, California, managing equity, balanced and bond accounts
for institutional clients and for the wrap fee programs of major brokerage
houses. At the time of the sale, BCM's assets under management were
approximately $1.2 billion.
London Pacific Advisors
On June 5, 2003, we completed the sale of 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"). LPA provided web-based investment consulting, investment
management and back-office services to independent financial advisors and large
institutional clients. At the time of the sale, LPA's assets under management,
consulting or administration were approximately $2.6 billion.
REGULATION
Life Insurance and Annuities - London Pacific Assurance Limited
LPAL is regulated by the Jersey Financial Services Commission ("JFSC").
Under Article 6 of the Insurance Business (Jersey) Law 1996, LPAL is permitted
to conduct long-term insurance business. LPAL is required to submit annual
audited financial statements (prepared under United States generally accepted
accounting principles as permitted by regulation), and an audited annual filing
to the JFSC in the format consistent with that required by the Financial
Services Authority in the United Kingdom. The annual filing submitted by LPAL
must be accompanied by a Certificate from the Appointed Actuary that based on
sufficiently prudent assumptions, assets are sufficient to cover all
liabilities. The annual filing contains a report from the Appointed Actuary on
the matching of investments to liabilities.
The JFSC sets out the conditions with which LPAL must comply and determines
the reporting requirements and the frequency of reporting. These conditions
require that: (i) LPAL must hold, at all times, approved assets at least equal
to the long-term insurance fund plus the required minimum solvency margin, (ii)
the margin of solvency must be the greater of (pound)50,000 or 2.5% of the value
of the long-term business fund, and (iii) assets equal to not less than 90% of
liabilities must be placed with approved independent custodians. As of December
31, 2003, LPAL met all of these conditions.
LPAL is also required under the insurance laws to appoint an actuary. The
actuary must be qualified as defined under the laws and is required to supervise
the long-term insurance fund. No transfers, except in satisfaction of long-term
insurance business liabilities, including dividends, are permitted from the
long-term insurance fund without written consent from the actuary.
Group
We employ compliance officers responsible for managing our subsidiaries'
compliance with applicable regulatory requirements. Although the scope of
regulation and form of supervision to which our subsidiaries are subject, as
described above, may vary from jurisdiction to jurisdiction, the applicable laws
and regulations often are complex and generally grant broad discretion to
supervisory authorities in adopting regulations and supervising regulated
activities. Our continuing ability to engage in businesses in the jurisdictions
in which our subsidiaries currently operate is dependent upon compliance with
the rules and regulations promulgated from
5
time to time by the appropriate authorities in each of these jurisdictions. The
burden of such regulation weighs equally upon all companies carrying on
activities similar to those of our subsidiaries, and we do not consider such
regulations to adversely affect the competitive position of our subsidiaries.
EMPLOYEES
As of December 31, 2003, we had 15 employees. The breakdown by business
segment was as follows: venture capital and consulting, 6; life insurance and
annuities, 4; and corporate, 5. None of the Group's employees are covered by a
collective bargaining agreement and the Group has not experienced any work
stoppages.
Item 2. PROPERTIES
We currently operate from two offices located in Jersey (Channel Islands)
and San Francisco, California, consisting of approximately 3,000 and 14,000
square feet, respectively. We lease both offices, and sublease approximately
one-third of the San Francisco office space to an unaffiliated party. These
leases expire in September 2010 and April 2004, respectively. Our life insurance
and annuities segment operations, as well as our head office corporate
activities, are carried out in the Jersey office. Our venture capital
operations, as well as our U.S. corporate activities, are carried out in the San
Francisco office. The San Francisco office is too large for our current level of
business and staffing, and as our lease expires in April 2004, we are currently
evaluating alternative office space in San Francisco.
See Note 15 to the Consolidated Financial Statements in Item 8 of this
Form 10-K for further information regarding our leases.
Item 3. LEGAL PROCEEDINGS
On August 6, 2002, on petition of the Commissioner of Insurance of the
State of North Carolina (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 the property, books and accounts, documents and other records of
LPLA. LPLA and its officers, directors, agents, employees and all other persons
were enjoined from disposing of LPLA's property and from transacting LPLA's
business except with the consent of the Commissioner. The Court appointed the
Commissioner as rehabilitator of LPLA. Based on the court order, we no longer
exercise control over LPLA.
For further information see Item 1 above.
We were involved in various legal proceedings, including claims for damages
from LPA clients of a nature we consider to be normal for LPA's business. All
proceedings against LPA were resolved prior to the end of January 2004,
resulting in no claims paid or to be paid by us.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to our shareholders during the quarter ended
December 31, 2003.
6
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
The principal trading market for our Ordinary Shares is the LSE, under the
symbol "BEK.L," on which such shares have been listed since February 1985. ADSs,
each representing ten Ordinary Shares, are evidenced by ADRs for which The Bank
of New York is the Depositary. Our ADSs have traded in the United States from
September 1992 through August 1993 on the OTC Bulletin Board, from September
1993 through November 1999 on The Nasdaq Stock Market SM under the symbol
"LPGL," from November 1999 through July 3, 2002 on the NYSE under the symbol
"LDP," from July 12, 2002 through June 15, 2003 on the OTC Bulletin Board under
the symbol "LDPGY.PK" and since June 16, 2003 on the OTC Bulletin Board under
the symbol "BKLYY.PK." As of December 31, 2003, there were 64,439,073 Ordinary
Shares outstanding and 1,504,501 ADSs outstanding, representing 15,045,010
Ordinary Shares or 23.3% of the outstanding Ordinary Shares. ADS holders may
exercise their voting rights through the ADR Depositary.
In June 2002, we completed a one-for-ten reverse split of our ADSs. On June
24, 2002, every ten of our ADSs issued and outstanding were converted and
reclassified into one post-split ADS. Consequently, effective from the opening
of business on June 24, 2002, each ADS is equal to ten Ordinary Shares.
Fractional new ADSs were sold by the Depositary Bank and paid in cash to the ADR
holders. This ADS split did not affect our Ordinary Shares listed on the LSE.
On July 3, 2002, the NYSE halted trading of our ADRs in response to the
administrative actions taken by the North Carolina Department of Insurance
relating to LPLA. On July 9, 2002, trading of the ADRs was suspended and the
securities were withdrawn from listing and registration on the NYSE. As a result
of the delisting, the liquidity of our common stock and its price were adversely
affected. These actions may limit our ability to raise additional capital in the
future, and there is no assurance that a significant trading market for the ADRs
will develop. If an active trading market does not develop, ADR holders may be
unable to sell their ADRs.
Subsequent to the delisting, the ability of ADR holders to buy and sell is
limited to trading on the OTC Bulletin Board. Shares traded on the OTC market
generally experience lower trading volume than those traded on the organized
exchanges. The trading volume of the ADRs has decreased substantially since the
NYSE delisting and the transfer of the ADRs to the OTC Bulletin Board.
The following table shows, for the quarters indicated, the reported highest
and lowest middle market quotations (which represent an average of bid and asked
prices) for our Ordinary Shares on the LSE, based on its Daily Official List,
and the high and low trade price information of the ADSs as obtained from the
NYSE through the second quarter of 2002 and on the OTC Bulletin Board from the
third quarter of 2002 (as restated to reflect the one-for-ten reverse split on
June 24, 2002):
LSE NYSE/OTC Bulletin Board
Pounds Per U.S. Dollars
Ordinary Share Per ADS
----------------------- ----------------------
High Low High Low
--------- --------- --------- ---------
2002:
First quarter ................................................ 3.08 1.93 45.50 27.50
Second quarter................................................ 1.90 0.24 30.50 3.30
Third quarter................................................. 0.25 0.02 3.16 0.20
Fourth quarter................................................ 0.13 0.05 1.75 0.50
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LSE NYSE/OTC Bulletin Board
Pounds Per U.S. Dollars
Ordinary Share Per ADS
----------------------- ----------------------
High Low High Low
--------- --------- --------- ---------
2003:
First quarter ................................................ 0.08 0.04 1.15 0.50
Second quarter................................................ 0.16 0.08 2.50 1.00
Third quarter................................................. 0.17 0.11 2.60 1.45
Fourth quarter................................................ 0.16 0.13 2.40 1.80
Holders
As of February 27, 2004, we had approximately 1,680 Ordinary shareholders
of record and 59 ADS holders of record. Because many Ordinary Shares and ADSs
are held by brokers and various institutions on behalf of other holders, we are
unable to estimate the total number of beneficial holders represented by these
holders of record.
Dividends
Until 2002, we paid dividends on our Ordinary Shares in every year since we
became listed on the LSE in 1985. Dividends on our Ordinary Shares were paid
twice a year. In view of our requirement to conserve cash during periods of
market instability and in order to meet the operating needs and growth
opportunities of the business, we did not pay an interim or final dividend for
2002 or an interim dividend for 2003. Our Board of Directors will not be
recommending a final dividend for the year 2003.
Holders of ADSs are entitled to receive dividends paid, if any, on our
Ordinary Shares through the ADR Depositary.
Under current practice, holders of ADSs who are residents of the United
States for tax purposes receive the net dividend (the gross dividend less the
associated Jersey income tax). See "Taxation - Taxation of Dividends" below.
Currently, Jersey does not have exchange control restrictions on the
payment of dividends on the Ordinary Shares or on the conduct of the Group's
operations. See Note 11 to the Consolidated Financial Statements in Item 8 of
this Form 10-K for details regarding regulatory restrictions on dividends.
TAXATION
The following summary of certain Jersey and U.S. tax consequences regarding
share ownership is based on law and published practice as of February 27, 2004,
and is subject to any changes in Jersey and U.S. law or published practice or in
the establishment of any double taxation convention between Jersey and the U.S.
occurring after that date. The summary is not a complete analysis or listing of
all the possible tax consequences and does not address the tax implications for
special classes of holders, such as banks, insurance companies and dealers in
securities. The summary also does not address U.S. state income tax
consequences. Owners of Ordinary Shares and ADSs should consult their own tax
advisors as to the tax consequences of such ownership.
There is no double tax treaty or similar convention between the U.S. and
Jersey. For the purposes of the U.S. Internal Revenue Code of 1986, as amended,
it is assumed that beneficial owners of ADSs, in accordance with the terms of
the Deposit Agreement, will be treated as the owners of the underlying Ordinary
Shares represented by the ADSs.
8
Taxation of Dividends
Dividends are declared gross in U.S. dollars. Dividends paid by us are
treated as having suffered Jersey income tax at the standard rate (currently
20%) on the gross amount thereof.
Charities, superannuation funds and certain assurance companies in the
U.K., together with individual investors who are Commonwealth citizens or
citizens of a member state of the European Community, may be entitled to a full
or partial repayment of the Jersey income tax credit suffered on distributions,
on submission of a claim to the Jersey Comptroller of Income Tax. Shareholders
who are unsure of their tax position should consult their tax advisor.
Generally, the net dividend paid to a holder or owner who is a U.S.
citizen, a U.S. resident, a U.S. domestic corporation or a trust or estate whose
income is subject to U.S. federal income taxation regardless of source (a "U.S.
holder") will be included in gross income and treated as foreign source dividend
income for U.S. federal income tax purposes to the extent payment is made out of
the Company's current or accumulated earnings and profits as determined under
U.S. federal income tax principles. Such dividends generally will not be
eligible for the "dividends received" deduction permitted to be taken by U.S.
corporations.
However, special rules apply for purposes of determining the dividend
income and potential foreign tax credits available to a U.S. corporation that
controls 10% or more of the Company's voting stock. Any such shareholder should
consult its tax advisor with respect to the U.S. interest in the Company.
Taxation of Capital Gains
Currently, there are no Jersey taxes levied on capital gains. A U.S. holder
that sells or exchanges an ADR or Ordinary Share will generally recognize a gain
or loss for U.S. federal income tax purposes, in an amount equal to the
difference between the amount realized and the holder's tax basis in either the
ADS represented by the ADR or the Ordinary Share. Such a gain or loss will
generally be a capital gain or loss if the ADR or the Ordinary Share was a
capital asset in the hands of the U.S. holder and will generally be a long-term
capital gain or loss if the ADR or Ordinary Share was held for more than one
year (including, in the case of an ADR, the period during which the Ordinary
Shares surrendered in exchange therefore were held). In general, the long-term
capital gain of a non-corporate U.S. holder is subject to a maximum tax rate of
20% if the ADRs or Ordinary Shares were sold before May 6, 2003. Under certain
conditions, an 18% capital gains tax rate is available if the holder made a
certain election for shares held on December 31, 2000. If the ADRs or Ordinary
Shares were sold after May 5, 2003, the maximum tax rate is 15%.
Backup Withholding Tax
A U.S. holder may be subject to U.S. backup withholding tax (currently at a
rate of 30%) with respect to dividends received or gross proceeds from the sale
of ADRs or Ordinary Shares unless the holder provides a taxpayer identification
number and certain certifications or otherwise establishes an exemption from
backup withholding. Certain classes of persons, such as corporations, are exempt
from backup withholding. Backup withholding is not an additional tax; the amount
withheld may be credited against the holder's U.S. federal income tax liability,
and a refund of any excess may be obtained from the U.S. Internal Revenue
Service.
Estate and Gift Tax
No death, estate, gift, inheritance or capital transfer taxes are levied in
Jersey.
Stamp Duty and Stamp Duty Reserve Tax
No U.K. stamp duty should be payable on any transfer of an Ordinary Share,
or of an ADS, provided it is executed and retained outside the U.K. Therefore, a
transfer of an ADS in the United States would not ordinarily give rise to a U.K.
stamp duty charge.
9
An instrument transferring Ordinary Shares, or an ADS, could be subject to
U.K. stamp duty if its execution relates to anything done or to be done in the
U.K. For example, a U.K. stamp duty may apply if such instrument is executed in
the U.K. or is brought into the U.K. after execution. If the transfer is on a
sale then the rate of stamp duty will be 0.5% of the consideration given. This
charge is rounded up to the nearest (pound)5. Gifts and other transfers which
are neither sales, nor made in contemplation of a sale, are not subject to this
charge. Instead, they will either be exempt or subject to a fixed duty of
(pound)5 per transfer.
A transfer from the Depositary to an ADS holder of the underlying Ordinary
Shares may be subject to a fixed stamp duty of (pound)5 if the instrument of
transfer relates to anything done or to be done in the U.K. For example, a fixed
stamp duty of (pound)5 may apply if such transfer is executed in the U.K. or is
to be brought into the U.K. after execution. A transfer of Ordinary Shares from
the Depositary directly to a purchaser on behalf of an ADS holder may be subject
to a stamp duty at a rate of 0.5% of the consideration (rounded up to the
nearest (pound)5) if execution of the instrument of transfer relates to anything
done or to be done in the U.K.; for example, if such transfer is executed in the
U.K. or is to be brought into the U.K. after execution.
U.K. stamp duty reserve tax will not be payable on an agreement to transfer
the Ordinary Shares or ADSs.
EQUITY COMPENSATION PLANS
The following table is a summary of selected information for our equity
compensation plans as of December 31, 2003.
Number of Shares
Number of Shares to Weighted-Average Remaining Available for
be Issued Upon Exercise Exercise Price of Future Issuance Under
of Outstanding Options, Outstanding Options, Equity Compensation
Warrants and Rights Warrants and Rights Plans
------------------------ -------------------- -----------------------
Equity compensation plans
approved by shareholders.............. 8,945,000(1) $3.10 (1)
Equity compensation plans not
approved by shareholders.............. 388,100(1) 3.73 (1)
--------------- --------
Total................................... 9,333,100 $3.13
--------------- --------
--------------- --------
(1) Our equity compensation plans do not contain a limit on the number of
options that may be granted to employees. However, the plans do not allow
for the issuance of previously authorized and unissued shares to meet the
obligations of the plans upon an employee option exercise. When an option
is granted, the trust that administers the plan borrows funds from us or
one of our subsidiaries and uses those funds to purchase the number of
shares underlying the option grant. The maximum loan allowed in any given
year is equal to 5% of consolidated net assets as of the end of the
previous fiscal year.
Information regarding the features of the equity compensation plan not
approved by shareholders is incorporated by reference to Note 17 to the
Consolidated Financial Statements presented in Item 8 of this Form 10-K.
WARRANTS
On November 11, 2002, we agreed to grant 1,933,172 warrants to subscribe
for our Ordinary Shares to Bank of Scotland in connection with the extension of
our credit facility (which was fully repaid and terminated in June 2003). The
warrants were granted on February 14, 2003 and have an exercise price of
(pound)0.1143 (based on the average of the closing prices of the Ordinary Shares
over the trading days from November 1, 2002 through November 11, 2002), which
was higher than the market price of (pound)0.09 on November 11, 2002. These
warrants are exercisable at any time prior to February 14, 2010. At the time of
grant, the Company determined the fair value of the warrants to be approximately
$251,000 which was charged to earnings over the loan period.
10
Item 6. SELECTED FINANCIAL DATA
The following is a summary of selected financial data for the Group. This
data should be read in conjunction with the audited consolidated financial
statements, and the notes thereto, presented in Item 8 "Financial Statements and
Supplementary Data" of this Form 10-K. ADS amounts have been restated to reflect
the four-for-one split in March 2000 and the one-for-ten reverse split in June
2002.
Years Ended/As of December 31,
----------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
(In thousands, except per share and ADS data)
Operating Results
Revenues from continuing operations, including net realized
and change in net unrealized investment gains and losses $ 9,198 $ (33,337) $ (194,376) $ 87,700 $ 194,563
Income (loss) from continuing operations before income
taxes................................................ 1,047 (54,478) (221,033) 66,784 156,778
Income tax expense (benefit) on continuing operations... (42) 1,291 2,107 1,156 2,159
Income (loss) from discontinued operations.............. 9,965 (154,678) (180,194) (51,774) 148,884
Income tax expense (benefit) on discontinued operations. 38 (4,943) (58,550) (18,603) 51,627
Net income (loss)....................................... 11,016 (205,504) (344,784) 32,457 251,876
Basic earnings (loss) per share:
Continuing operations................................ 0.02 (1.10) (4.38) 1.29 3.10
Discontinued operations.............................. 0.20 (2.95) (2.38) (0.65) 1.95
---------- ---------- ---------- ---------- ----------
Total basic earnings (loss) per share................... 0.22 (4.05) (6.76) 0.64 5.05
Diluted earnings (loss) per share:
Continuing operations................................ 0.02 (1.10) (4.38) 1.08 2.79
Discontinued operations.............................. 0.20 (2.95) (2.38) (0.55) 1.75
---------- ---------- ---------- ---------- ----------
Total diluted earnings (loss) per share................. 0.22 (4.05) (6.76) 0.53 4.54
Basic earnings (loss) per ADS:
Continuing operations................................ 0.21 (10.99) (43.77) 12.92 30.99
Discontinued operations.............................. 1.96 (29.50) (23.85) (6.53) 19.50
---------- ---------- ---------- ---------- ----------
Total basic earnings (loss) per ADS..................... 2.17 (40.49) (67.62) 6.39 50.49
Diluted earnings (loss) per ADS:
Continuing operations................................ 0.21 (10.99) (43.77) 10.81 27.89
Discontinued operations.............................. 1.94 (29.50) (23.85) (5.46) 17.54
---------- ---------- ---------- ---------- ----------
Total diluted earnings (loss) per ADS................... 2.15 (40.49) (67.62) 5.35 45.43
Financial Position
Cash and total investments (continuing operations)...... 61,944 69,378 262,058 455,721 355,941
Total assets............................................ 63,513 80,217 2,539,126 2,562,988 2,195,266
Bank debt............................................... - 9,314 36,874 35,556 -
Guarantees under bank facility.......................... - 10,590 - - -
Shareholders' equity.................................... 34,897 21,486 221,653 567,742 552,475
Book value per share (1)................................ 0.69 0.42 4.37 11.00 11.25
Book value per ADS (1).................................. 6.88 4.23 43.68 109.98 112.52
Ordinary Share and ADS Data
Ordinary Shares outstanding as of December 31........... 64,439 64,439 64,439 64,433 64,433
Weighted-average shares used in:
Basic earnings per share calculation................. 50,754 50,753 50,984 50,795 49,892
Diluted earnings per share calculation............... 51,188 50,753 50,984 60,728 55,445
Total dividends per share relating to the year (gross).. $ - $ - $ 0.16 $ 0.29 $ 0.29
Total dividends per ADS relating to the year............ $ - $ - $ 1.28 $ 2.32 $ 2.32
Market price per share on December 31................... (pound) 0.14(pound)0.055 (pound)2.60 (pound)5.53 (pound)5.59
Market price per ADS on December 31..................... $ 2.51 $ 0.50 $ 39.60 $ 75.60 $ 90.00
Market capitalization as of December 31................. $ 16,148 $ 5,706 $ 244,611 $ 530,431 $ 583,495
(1) Based on the net asset value of the Group after deducting the cost of the shares held by the employee benefit trusts,
and on the number of shares outstanding excluding the shares held by the employee benefit trusts.
11
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the audited
consolidated financial statements, and the notes thereto, presented in Item 8
"Financial Statements and Supplementary Data" of this Form 10-K. The
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States. This item should also be
read in conjunction with the "Forward-Looking Statements and Factors That May
Affect Future Results" which are set forth below and our other filings with the
SEC.
Forward-Looking Statements and Factors That May Affect Future Results
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this Form 10-K contain
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking statements are based on
current expectations, estimates, forecasts and projections about the industries
in which we operate, management's current beliefs and assumptions made by
management. Words such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates," "goals," variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions that are difficult to predict. Future outcomes and
results may differ materially from what is expressed or forecasted in such
forward-looking statements. We undertake no obligation to update any
forward-looking statements, whether as a result of new information, future
developments or otherwise.
Factors that could cause or contribute to deviations from the
forward-looking statements include those discussed in this section, elsewhere in
this Form 10-K and in our other filings with the SEC. The factors include, but
are not limited to, (i) the risks described in Item 7A "Quantitative and
Qualitative Disclosures About Market Risk," (ii) variations in demand for our
products and services, (iii) the success of our new products and services, (iv)
significant changes in net cash flows in or out of our businesses, (v)
fluctuations in the performance of debt and equity markets worldwide, (vi) the
enactment of adverse state, federal or foreign regulation or changes in
government policy or regulation (including accounting standards) affecting our
operations, (vii) the effect of economic conditions and interest rates in the
U.S., the U.K. or internationally, (viii) the ability of our subsidiaries to
compete in their respective businesses, (ix) our ability to attract and retain
key personnel, and (x) actions by governmental authorities that regulate our
businesses, including insurance commissions.
12
Results of Operations by Business Segment
Income before income taxes for our reportable operating segments, based on
management's internal reporting structure, is as follows:
Years Ended December 31,
----------------------------------
2003 2002 2001
---------- ---------- ----------
(In thousands)
Income (loss) from continuing operations before income taxes
by operating segment:
Life insurance and annuities (1) .................................... $ 1,577 $ (19,637) $ (163,873)
Venture capital and consulting (2) .................................. 3,571 (28,149) (51,262)
---------- ---------- ----------
5,148 (47,786) (215,135)
Reconciliation of segment amounts to consolidated amounts:
Interest income ..................................................... 53 531 1,967
Corporate expenses .................................................. (3,478) (5,869) (5,635)
Goodwill amortization and write-offs................................. - (389) (48)
Interest expense ................................................... (676) (965) (2,182)
---------- ---------- ----------
Consolidated income (loss) from continuing operations before
income taxes ...................................................... $ 1,047 $ (54,478) $ (221,033)
---------- ---------- ----------
---------- ---------- ----------
(1) Netted against the revenues (investment income) of the life insurance and annuities segment are
management fees paid to BCM (discontinued operations) of $5,000, $39,000 and $47,000 in 2003, 2002
and 2001, respectively.
(2) Included in the revenues of the venture capital and consulting segment are management fees from LPLA
(discontinued operations) of $0, $2,908,000 and $9,924,000 in 2003, 2002 and 2001, respectively.
Business segment data contained in Note 21 to the Consolidated Financial
Statements in Item 8 of this Form 10-K should be read in conjunction with this
discussion. A detailed discussion of the results for each reportable segment
follows.
13
Life Insurance and Annuities
Certain information regarding our life insurance and annuities segment's
results of operations (continuing operations only) is as follows:
Years Ended December 31,
----------------------------------
2003 2002 2001
---------- ---------- ----------
(In thousands)
Revenues:
Investment income.................................................... $ 1,834 $ 6,059 $ 6,214
Insurance policy charges ............................................ 6 1,155 (7)
Net realized investment gains (losses) .............................. (38,329) (114,325) 12,900
Change in net unrealized investment gains and losses on
trading securities................................................. 40,947 97,762 (174,780)
---------- ---------- ----------
Total revenues and net investment gains (losses) .................... 4,458 (9,349) (155,673)
Expenses:
Amounts credited on insurance policyholder accounts ................. 1,922 6,031 6,314
Amortization of deferred policy acquisition costs ................... - 2,952 932
General and administrative expenses ................................. 959 1,305 954
---------- ---------- ----------
Total expenses related to operations ................................ 2,881 10,288 8,200
---------- ---------- ----------
Income (loss) from continuing operations before income taxes ........ $ 1,577 $ (19,637) $ (163,873)
---------- ---------- ----------
---------- ---------- ----------
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 to the Consolidated Financial Statements in Item 8 of this Form
10-K.
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 80% of
LPAL's $140.2 million in policyholder liabilities as of June 30, 2002 had been
surrendered or had matured as of December 31, 2003. During 2003, there were
$10.4 million in policy maturities and $1.1 million in policy surrenders.
Policyholder liabilities as of December 31, 2003 were $28.1 million.
Due to the events referred to above, LPAL focuses on managing the remaining
block of policyholder liabilities. There are no plans currently to write new
policies.
14
2003 compared to 2002
In 2003, LPAL contributed income before income taxes of $1.6 million to our
overall income from continuing operations before income taxes, compared to a
loss before taxes of $19.6 million in 2002. Net realized investment losses in
2003 were $38.3 million compared to net realized investment losses of $114.3
million in 2002. The gain from the change in net unrealized investment gains and
losses was $40.9 million in 2003, compared to $97.8 million in 2002. In 2003,
the spread between investment income and amounts credited to policyholders
decreased by $0.1 million; amortization of deferred policy acquisition costs
("DPAC") decreased by $3.0 million with the write-off of the DPAC asset in 2002;
and general and administration expenses decreased by $0.3 million, each as
compared to 2002. Policy surrender charge income in 2003 decreased by $1.1
million compared to 2002.
LPAL did not generate any premiums during 2003, compared to $6.5 million of
premiums during 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 $1.8 million in 2003,
compared with $6.1 million in 2002. This $4.3 million decrease was primarily due
to a decline in the level of invested bonds.
During 2003, LPAL used $12.5 million of bond proceeds and cash to meet its
policy maturities and redemptions. Following this reduction, and further
expected bond realizations and maturities required to meet 2004 policy
maturities, interest income is expected to decline to approximately $1.2 million
for 2004.
Policyholder liabilities as of December 31, 2003 were $28.1 million of
which $8.9 million is scheduled to mature during 2004. LPAL expects to meet
these maturities by a combination of cash of approximately $3.8 million held at
the beginning of January 2004, the proceeds from maturing bonds which are
estimated to be $4.8 million during 2004, and estimated bond interest to be
received during 2004 of $1.9 million. In the absence of significant redemptions,
policyholder liabilities are projected to be approximately $20.3 million at the
end of 2004. Investment income should equal approximately 89% of the projected
$1.4 million to be credited to policies, and operating expenses are expected to
be approximately $1.1 million during 2004. Net unrealized investment gains on
LPAL's listed equity securities decreased by $1.8 million during the two months
ended February 29, 2004.
Net investment gains totaled $2.6 million in 2003, compared to net
investment losses of $16.6 million in 2002. Net investment gains in 2003 were
comprised of net realized investment losses of $38.3 million and $40.9 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 $13.5 million as of December 31, 2003.
LPAL sold certain trading positions during 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 $4.7 million on two private
equity security holdings in our available-for-sale investment portfolio.
Total invested assets (defined as total assets excluding DPAC and other
assets) decreased to $47.9 million as of December 31, 2003, compared to $51.6
million as of December 31, 2002, primarily due to the decrease in investments
used to pay out maturing policies and the $4.7 million reduction in the value of
two private equity investments that became other-than-temporarily impaired,
partially offset by increases in the value of the trading portfolio. On total
average invested assets in 2003, the average annualized net return, including
both realized and unrealized investment gains and losses, was 8.9%, compared
with -9.1% in 2002.
Policy surrender charge income decreased to $6,000 in 2003, from $1.2
million in 2002. Policy surrenders decreased significantly during 2003 due to
the high volume of surrenders during the second half of 2002.
15
Amounts credited on policyholder accounts decreased by $4.1 million in 2003
to $1.9 million, compared to $6.0 million in 2002. The decrease was primarily
due to substantial increases in policyholder surrenders in the second half of
2002 together with policy maturities in the last nine months of 2003. The
average rate credited to policyholders was 5.9% in 2003, compared with 6.1% in
2002.
There was no DPAC amortization in 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 $0.3 million to $1.0
million in 2003 due to decreases in staff compensation and back office expenses.
2002 compared to 2001
In 2002, LPAL contributed a loss before income taxes of $19.6 million to
our overall loss from continuing operations before income taxes, compared to a
loss before taxes of $163.9 million in 2001. Net realized investment losses in
2002 were $114.3 million compared to net realized investment gains of $12.9
million in 2001. The gain from the change in net unrealized investment gains and
losses was $97.8 million in 2002, compared to a loss of $174.8 million in 2001.
In 2002, the spread between investment income and amounts credited to
policyholders increased by $0.1 million; amortization of DPAC increased by $2.0
million with the write-off of the DPAC asset in 2002; and general and
administration expenses increased by $0.4 million, each as compared to 2001.
Policy charges in 2002 increased by $1.2 million compared to 2001.
LPAL generated $6.5 million of premiums during 2002, a decrease of $69.2
million from the premiums received by LPAL in 2001. LPAL's premium volume
continued to decline as a result of lowering interest crediting rates during the
last quarter of 2001 and the events as described above.
Interest and dividend income on investments was $6.1 million in 2002,
compared with $6.2 million in 2001. This $0.1 million decrease was primarily due
to a decline in the level of invested bonds and cash, offset by the
strengthening of sterling on the level of U.S. dollar income.
Net investment losses were $16.5 million in 2002, compared to net
investment losses of $161.9 million in 2001. Net investment losses in 2002 were
comprised of net realized investment losses of $114.3 million and $97.8 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 decreased from
$22.3 million as of December 31, 2001 to $8.9 million as of December 31, 2002.
Additions to the trading portfolio during 2002 of $5.0 million resulted from the
transfer of certain listed equity securities from the venture capital segment.
LPAL sold certain trading positions during 2002, which resulted in net realized
losses of $102.9 million based on an aggregate original cost of $116.2 million.
These disposals represented shares held in companies that had completed initial
public offerings of their securities. These realized losses were increased by
net realized losses of $2.9 million on sales of $96.9 million of publicly traded
corporate debt securities and by other-than-temporary impairment charges on two
private equity securities totaling $8.2 million and on one public corporate bond
of $0.3 million.
Total invested assets (defined as total assets excluding DPAC and other
assets) decreased to $51.6 million as of December 31, 2002, compared to $161.5
million as of December 31, 2001. On total average invested assets in 2002, the
average annualized net return, including both realized and unrealized investment
gains and losses, was -9.1%, compared with -78.8% in 2001.
Policy surrender charge income increased by $1.2 million in 2002 to $1.2
million, compared with a net expense of $7,000 in 2001. The increase in policy
surrenders followed the events as described above.
Amounts credited on policyholder accounts decreased by $0.3 million in 2002
to $6.0 million, compared with $6.3 million in 2001. The decrease was primarily
due to the substantial increases in policyholder surrenders in the second half
of 2002. The average rate credited to policyholders was 6.1% in 2002, compared
with 6.6% in 2001.
16
Amortization of DPAC was $3.0 million in 2002, an increase of $2.0 million
over 2001. This increase was due to the acceleration of DPAC amortization to
fully write-off DPAC as of September 30, 2002, as explained above.
General and administrative expenses were $1.3 million in 2002, compared
with $1.0 million in 2001. This $0.3 million increase was primarily due to the
reduction in expenses deferred as policy acquisition costs and employee
severance costs.
Venture Capital and Consulting
Certain information regarding our venture capital and consulting segment's
results of operations is as follows:
Years Ended December 31,
----------------------------------
2003 2002 2001
---------- ---------- ----------
(In thousands)
Revenues:
Management fees...................................................... $ - $ 2,908 $ 9,924
Net realized investment gains (losses) (1) .......................... (2,107) (44,130) 42,876
Change in net unrealized investment gains and losses on
trading securities (1)............................................. 6,794 16,703 (93,470)
---------- ---------- ----------
Total revenues and net investment gains (losses)..................... 4,687 (24,519) (40,670)
Operating expenses................................................... 1,116 3,630 10,592
---------- ---------- ----------
Income (loss) before income taxes.................................... $ 3,571 $ (28,149) $ (51,262)
---------- ---------- ----------
---------- ---------- ----------
(1) Net realized investment losses in the amounts of $0 and $1,603,000 were recorded during 2003 and 2002,
respectively, by the venture capital and consulting segment, related to intersegmental investment sales
to the life insurance and annuities segment. These net realized investment losses were offset by
corresponding reclassification adjustments in unrealized investment gains and losses on trading
securities for the same amounts. These gains and losses have been eliminated in our consolidated financial
statements.
2003 compared to 2002
In 2003, the venture capital and consulting segment contributed income
before income taxes of $3.6 million to our overall income from continuing
operations before income taxes, compared to a loss before taxes of $28.1 million
in 2002. The income and loss in those years, 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 and consulting
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 2003 was a gain of $6.8 million, which was partially offset by
net realized losses of $2.1 million. The trading portfolio decreased from $7.6
million as of December 31, 2002 to $3.4 million as of December 31, 2003. We sold
certain trading positions during 2003 which resulted in net realized losses of
$1.9 million based on an aggregate original cost of $11.0 million. These
realized losses were increased by other-than-temporary impairment write-downs of
$0.2 million on two private investments relating to the guarantees as discussed
in Note 12 to the Consolidated Financial Statements in Item 8 of this Form 10-K.
All intersegmental investment gains and losses, other than those arising from
sales to LPLA (discontinued operations), have been eliminated in our
consolidated statements of income.
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.
17
The venture capital and consulting segment earned portfolio management fees
from LPLA of $2.9 million in 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 early 2002.
Operating expenses in 2003 were $1.1 million, compared to $3.6 million in
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.
BICC is redeveloping its venture capital business. BICC has extensive
business relationships 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 early 2004. The operating results
for this business segment, and for the Group as a whole, for 2004 will be
largely driven by portfolio performance in uncertain market conditions.
2002 compared to 2001
The pre-tax loss from the venture capital and consulting segment decreased
from $51.3 million in 2001 to $28.1 million in 2002. The loss in both years
primarily was attributable to net realized and unrealized investment losses on
listed equity securities. These positions in listed equity securities resulted
from privately held technology companies, in which the venture capital and
consulting 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 2002 was a gain of $16.7 million, which was more than offset by
net realized losses of $44.1 million, of which $33.0 million resulted from
disposals of certain listed equity securities to LPLA (discontinued operations),
based on their aggregate cost of $50.0 million. We also took $14.0 million in
other-than-temporary impairment write-downs on four private investments,
including $10.8 million relating to guarantees as discussed in Note 12 to the
Consolidated Financial Statements in Item 8 of this Form 10-K. The trading
portfolio decreased from $45.3 million as of December 31, 2001 to $7.7 million
as of December 31, 2002. Additions to the trading portfolio of $1.3 million in
2002 resulted from the purchase of listed equity securities. The realized losses
were partially offset by net realized gains of $1.3 million on sales of $2.3
million of listed equity securities and a realized gain of $1.6 million
resulting from the disposal of certain listed equity securities to the life
insurance and annuities segment (LPAL), based on their aggregate cost of $3.4
million. All intersegmental investment gains and losses, other than those
arising from sales to LPLA (discontinued operations), have been eliminated in
our consolidated statements of income.
The venture capital and consulting segment earned portfolio management fees
from LPLA of $2.9 million in 2002, compared to $9.9 million in 2001. The $7.0
million decrease in fees resulted from the lower value of the assets managed,
the lower percentage fees recorded for the second quarter of 2002, and the
discontinuation of fees from LPLA for the third and fourth quarter of 2002. As
explained above, BICC no longer manages LPLA's investment portfolio.
BICC completed total financings of $27.2 million during 2002, compared to
$67.0 million in 2001. No financings were made in new companies in 2002, but
follow-on investments were completed in selected portfolio companies, where in
some cases, larger ownership stakes could be taken in promising companies at
attractive prices. This decreased level of activity in venture capital
placements reflected a general trend in the industry as a whole during 2002, as
many venture capitalists curtailed their investments in view of the difficulties
experienced by the overall market and the technology sector in particular.
Operating expenses in 2002 were $3.6 million, compared to $10.6 million in
2001. The $7.0 million decrease was attributable primarily to lower staff costs,
reflecting the reduction in business and staffing during the year.
18
Corporate and Other
2003 compared to 2002
Corporate expenses decreased by $2.4 million to $3.5 million in 2003, as
compared to $5.9 million for 2002. This decrease primarily was due to decreases
in staff compensation and bank facility costs.
The amount of interest income we earned (excluding the life insurance and
annuities segment) decreased by $0.5 million to $53,000 in 2003 as compared with
2002, primarily due to the decrease in our holdings of cash and cash
equivalents, as well as lower interest rates. The amount of interest expense we
incurred (excluding the life insurance and annuities segment) decreased by $0.3
million to $0.7 million in 2003 as compared with 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.
2002 compared to 2001
Corporate expenses increased by $0.3 million to $5.9 million in 2002, as
compared to $5.6 million for 2001. This increase was primarily due to higher
bank facility costs, corporate insurance premiums, pension costs, legal and
professional services fees and audit fees, partially offset by decreases in
staff compensation, directors fees, stock exchange fees and registrar fees.
The amount of interest income we earned (excluding the life insurance and
annuities segment) decreased by $1.5 million to $0.5 million in 2002 as compared
with 2001, primarily due to the decrease in cash and cash equivalents held by
us. The amount of interest expense we incurred (excluding the life insurance and
annuities segment) decreased by $1.2 million to $1.0 million in 2002 as compared
with 2001, primarily due to the partial repayment of bank borrowings and the
lower interest rate environment.
Consolidated Income (Loss) from Continuing Operations Before Income Taxes
2003 compared to 2002
Consolidated income from continuing operations before income taxes was $1.0
million in 2003, compared to a loss of $54.5 million in 2002. This substantial
improvement primarily was due to net realized and unrealized investment gains of
$7.3 million in 2003, compared to net realized and unrealized investment losses
of $44.0 million in 2002.
Consolidated income before income taxes for 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 7A "Quantitative and Qualitative Disclosures About Market
Risk" below.
See the 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.
19
2002 compared to 2001
Our consolidated loss from continuing operations before income taxes
decreased from $221.0 million in 2001 to $54.5 million in 2002. This loss was
attributable primarily to the change in net unrealized investment gains and
losses on the listed equity securities held in the trading portfolio, as well as
net realized investment losses.
Income Taxes
We are subject to taxation on our income in all countries in which we
operate based upon the taxable income arising in each country. However, realized
gains on certain investments are exempt from Jersey and Guernsey taxation. We
are subject to income tax in Jersey at a rate of 20%. In the United States, we
are subject to both federal and California taxes at 34% and 8.84%, respectively.
2003 compared to 2002 (continuing operations)
On income from continuing operations before income taxes of $1.0 million
for 2003, we had an income tax benefit of $42,000. This was largely attributable
to income of $2.6 million contributed by the Jersey and Guernsey operations
during the year, which primarily consisted of realized losses and unrealized
investment gains for which no tax benefits or expense will be realized. Although
$1.5 million of losses were contributed by our U.S. subsidiaries for 2003, we
did not recognize any U.S. tax benefits, due to the 100% valuation allowances
that we have provided for all deferred tax assets.
2002 compared to 2001 (continuing operations)
Although the loss from continuing operations before income taxes was $54.5
million for 2002, an income tax expense of $1.3 million resulted for the year.
This was largely attributable to losses of $52.8 million contributed by the
Jersey and Guernsey operations during the year, which primarily consisted of
realized and unrealized investment losses for which no tax benefits will be
realized. In addition, deferred tax asset valuation allowances in the U.S.
subsidiaries of continuing operations were increased by $3.2 million during the
year. These allowances were considered necessary due to the high level of
operating loss carryovers in the two U.S. tax groups, raising doubt about their
ability to utilize these carryovers.
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
In the first six months of 2002, prior to the loss of management control
over LPLA, we recorded an after-tax loss from operations of LPLA of $104.8
million, compared to an after-tax loss from operations of LPLA of $120.7 million
for all of 2001. The loss in the first half of 2002 primarily was due to net
realized investment losses and the change in net unrealized investment gains and
losses totaling $97.6 million. As discussed above, we recorded impairment losses
totaling $27.9 million related to LPLA in the third quarter of 2002, and
recognized $10.6 million in our income statement for LPLA's net unrealized
losses on available-for-sale securities, net of deferred policy acquisition cost
amortization adjustments and deferred income taxes. For further information see
Note 3 to the Consolidated Financial Statements in Item 8 of this Form 10-K.
20
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 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.
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.
21
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.
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 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 Form 10-K
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
22
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 Statement of Financial Accounting Standard No. 144
("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets,"
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 periods 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,
including earnouts related to the sales of BCM and LPA, from our asset
management or financial advisory services segments in the foreseeable future.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 2 to the Consolidated Financial Statements in Item 8 of this Form
10-K for a summary of recently issued accounting pronouncements.
Liquidity and Capital Resources
Our cash and cash equivalents decreased during 2003 by $0.9 million to
$14.4 million, WHICH INCLUDES $3.8 MILLION HELD BY LPAL WHICH IS NOT AVAILABLE
TO FUND THE OPERATIONS OR COMMITMENTS OF THE COMPANY OR ITS OTHER SUBSIDIARIES.
As discussed above, LPAL is a regulated insurance company, and as such it must
meet stringent capital adequacy requirements and it may not make any
distributions without the consent of LPAL's independent actuary. This decrease
in cash and cash equivalents resulted from $21.6 million of cash used in
financing activities, partially offset by $12.8 million and $7.5 million of cash
provided by investing activities and operating activities, respectively. Cash
used in financing activities related to the repayment of bank borrowings, as
well as insurance policyholder benefits paid by LPAL. Cash provided by investing
activities primarily related to the disposals of BCM and LPA, and to the sale or
maturity of corporate bonds by LPAL, partially offset by the payment of
guarantee obligations under the bank facility and the purchase of corporate
bonds by LPAL. Cash provided by operating activities primarily resulted from the
sale of trading securities. As of December 31, 2003, our cash and cash
equivalents, excluding the amount held by LPAL, amounted to $10.6 million, a
decrease of $0.9 million from December 31, 2002 and a $47.0 million decrease
from December 31, 2001. Excluding LPAL's investments, we also held $3.4 million
of listed equity securities which could be sold within a short period of time,
as of December 31, 2003, compared to $7.7 million as of December 31, 2002 and
$24.4 million as of December 31, 2001.
23
Shareholders' equity increased during 2003 by $13.4 million from $21.5
million at December 31, 2002 to $34.9 million as of December 31, 2003, primarily
due to net income for the period of $11.0 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 income (loss). Shareholders'
equity decreased during 2002 by $200.2 million from $221.7 million at December
31, 2001 to $21.5 million at December 31, 2002, primarily due to a net loss for
the period of $205.5 million and payment of the final dividend for 2001 of $2.0
million. As of December 31, 2003 and 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 used the proceeds 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 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 Consolidated
Financial Statements in Item 8 of this Form 10-K, 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 we may have to cover any current or
future losses of LPLA. However, in the course of the administration of LPLA in
rehabilitation, during November 2002, the North Carolina Department of Insurance
("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.
On July, 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 80% of
LPAL's $140.2 million in policyholder liabilities as of June 30, 2002 had been
surrendered or had matured as of December 31, 2003. During 2003, policy
surrenders totaled $1.1 million and policy maturities totaled $10.4 million.
Policyholder liabilities as of December 31, 2003 were $28.1 million. We do not
expect significant surrender activity during 2004; however, approximately $8.9
million of policyholder liabilities are scheduled to mature during 2004. These
maturities are expected to be met by a combination of cash held as of December
31, 2003 of $3.8 million, the proceeds from maturing bonds which are estimated
to be $4.8 million during 2004, and estimated bond interest to be received
during 2004 of $1.9 million. Assuming no significant surrenders, investment
income should approximately equal 89% of the projected $1.4 million to be
credited to policies during 2004.
24
During 2003, LPAL continued to service its policyholders. Policyholder
liabilities for LPAL fell during 2003 from $35.4 million as of December 31, 2002
to $28.1 million as December 31, 2003. As of December 31, 2003, LPAL's corporate
bonds, cash and accrued interest totaled $30.2 million, listed equity securities
were $13.5 million and the book value of private equity securities was $4.2
million. Due to the weakened economic environment, in February 2003, the 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 $13.5 million as of December 31, 2003, could
have a significant impact on LPAL's statutory capital level. If LPAL's statutory
capital falls below the minimum solvency level required by the Jersey insurance
regulators, we may be required to inject additional capital into LPAL. A capital
injection would be limited to the extent any shortfall arises from a decline in
the value of LPAL's listed equity securities that are required to support
minimum solvency. As of December 31, 2003, approximately $2.9 million of LPAL's
listed equity holdings were required to support the minimum solvency
requirement.
As of December 31, 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 December 31, 2003, we had
$10.6 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 the next
12 months. We also expect to receive $1.0 million in cash out of escrow related
to the sale of LPA by the end of 2004 as discussed in Note 1 to the Consolidated
Financial Statements in Item 8 of this Form 10-K.
CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS
The following table aggregates our expected contractual obligations and
commitments subsequent to December 31, 2003.
2005 - 2007 - Beyond
Contractual obligations (1) 2004 2006 2008 2008 Total
- ------------------------------------- ---------- ---------- ---------- ---------- ----------
(In thousands)
Deferred annuity policy maturities........... $ 8,353 $ 17,880 $ 3,238 $ 134 $ 29,605
Capital lease commitments (2)................ 8 7 - - 15
Operating lease commitments (3).............. 263 229 228 172 892
---------- ---------- ---------- ---------- ----------
Total contractual cash obligations........... $ 8,624 $ 18,116 $ 3,466 $ 306 $ 30,512
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
(1) Does not include other commitments for the purchase of goods and services which in the aggregate are immaterial.
(2) Includes amounts classified as interest.
(3) Includes lease commitments on our San Francisco office lease which expire in April 2004. We are currently evaluating
alternative office space in San Francisco for which [no commitment has been entered into as of the date of filing of
this Form 10-K.]
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The nature of our businesses exposes us to market risk. Market risk is the
risk of loss that may occur when changes in interest rates and public equity
prices adversely affect the value of invested assets.
Interest Rate Risk
LPAL is subject to risk from interest rate fluctuations when payments due
to policyholders are not matched in respect of amount and duration with income
from investments. LPAL attempts to minimize this risk
25
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 yield less than $0.1 million during 2004. Movements
in market interest rates will not have any material impact on this amount.
Equity Price Risk
We are exposed to equity price risk on our holdings of listed equity
securities. Changes in the level or volatility of equity prices affect the value
of the 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 December 31, 2003 and 2002,
which totaled $16.9 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 $8.5 million and $8.3 million,
respectively. The largest of these listed equities represented $16.3 million and
$11.4 million of the total as of December 31, 2003 and 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 $8.2 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, we monitor them daily and seek to sell them over a
period of time.
As of December 31, 2003, we held $4.3 million in private corporate equity
securities of technology companies for which liquid markets do not exist.
Private equity prices do not fluctuate directly with public equity markets, but
significant market movements may trigger a review for other-than-temporary
adjustment of the carrying values of our private equity securities. The risks
inherent in these private equity investments relate primarily to the viability
of the investee companies. We try to mitigate these risks in various ways
including performing extensive due diligence prior to making an investment, and
regularly reviewing the progress of the investee companies.
For additional information relating to our financial risk profile, see Note
16 to the Consolidated Financial Statements in Item 8 of this Form 10-K.
26
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Reports of Independent Certified Public Accountants......................................................... 28
Consolidated Balance Sheets as of December 31, 2003 and 2002................................................ 30
Consolidated Statements of Income for the Years Ended
December 31, 2003, 2002 and 2001......................................................................... 31
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001......................................................................... 33
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended
December 31, 2003, 2002 and 2001......................................................................... 35
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2003, 2002 and 2001......................................................................... 37
Notes to Consolidated Financial Statements.................................................................. 38
27
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders of
Berkeley Technology Limited
Jersey, Channel Islands
We have audited the accompanying consolidated balance sheets of Berkeley
Technology Limited (the "Company") as of December 31, 2003 and 2002 and the
related consolidated statements of income, changes in shareholders' equity, cash
flows, and comprehensive income for the years then ended. We have also audited
the schedules on pages 81 to 86 in Item 15 (the "Schedules"). These financial
statements and the Schedules are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
the Schedules based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Berkeley
Technology Limited at December 31, 2003 and 2002, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the Schedules as of December 31, 2003 and 2002, when considered
in relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects, the information set forth therein.
As discussed in Notes 2 and 7 to the Consolidated Financial Statements, the
Company changed its method of accounting for goodwill in 2002, in accordance
with Statement of Financial Accounting Standard No. 142, "Goodwill and Other
Intangible Assets."
/s/ BDO Seidman, LLP
San Francisco, California
January 30, 2004
28
REPORT OF THE INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Berkeley Technology Limited
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the results of
operations of Berkeley Technology Limited and its subsidiaries and their cash
flows for the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedules listed in the accompanying index
for the period ended December 31, 2001 appearing under Item 15 on pages 76 and
77, present fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedules are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers
Chartered Accountants
Jersey, Channel Islands
April 1, 2002, except for Note 3(a) as for which the date is March 19, 2003
and Note 3(b) and (c) as for which the date is March 10, 2004
29
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 31,
------------------------
2003 2002(1)
----------- -----------
ASSETS
Investments (principally of life insurance subsidiary):
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $25,403 and $30,481
as of December 31, 2003 and 2002, respectively)............................ $ 25,393 $ 30,335
Equity securities:
Trading, at fair value (cost: $4,544 and $26,785 as of December 31,
2003 and 2002, respectively) .............................................. 16,882 16,505
Available-for-sale, at estimated fair value (cost: $4,262 and $8,980 as of
December 31, 2003 and 2002, respectively) ................................. 4,262 7,230
----------- -----------
Total investments ................................................................ 46,537(2) 54,070
Cash and cash equivalents ........................................................ 14,408(2) 15,308
Cash held in escrow .............................................................. 999 -
Accrued investment income ........................................................ 926 900
Property and equipment, net....................................................... 117 189
Other assets ..................................................................... 526 1,360
Total assets of discontinued operations .......................................... - 8,390
----------- -----------
Total assets ..................................................................... $ 63,513 $ 80,217
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Life insurance policy liabilities ................................................ $ 28,054 $ 35,441
Notes payable .................................................................... - 9,314
Accounts payable and accruals..................................................... 562 832
Guarantees under bank facility ................................................... - 10,590
Total liabilities of discontinued operations ..................................... - 2,554
----------- -----------
Total liabilities ................................................................ 28,616 58,731
----------- -----------
Commitments and contingencies (See Notes 12 and 15)
Shareholders' equity:
Ordinary shares, $0.05 par value per share: 86,400,000 shares authorized;
64,439,073 shares issued and outstanding as of December 31, 2003
and 2002....................................................................... 3,222 3,222
Additional paid-in capital ....................................................... 68,615 68,394
Retained earnings ................................................................ 27,070 16,054
Employee benefit trusts, at cost (13,684,881 shares as of December 31,
2003 and 2002, respectively) .................................................. (63,571) (63,571)
Accumulated other comprehensive loss ............................................. (439) (2,613)
----------- -----------
Total shareholders' equity ....................................................... 34,897 21,486
----------- -----------
Total liabilities and shareholders' equity ....................................... $ 63,513 $ 80,217
----------- -----------
----------- -----------
(1) Reclassifications have been made related to discontinued operations - see Note 3.
(2) Includes $43,095 of investments and $3,834 of cash and cash equivalents in the Company's insurance
subsidiary (London Pacific Assurance Limited ("LPAL")) which are not currently available to fund the
operations or commitments of the Company or its other subsidiaries.
See accompanying Notes which are an integral part of these Consolidated
Financial Statements.
30
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share and ADS amounts)
Years Ended December 31,
-------------------------------------
2003 2002(1) 2001(1)
----------- ----------- -----------
Continuing operations:
Revenues:
Investment income............................................................ $ 1,887 $ 6,590 $ 8,181
Insurance policy charges (credits)........................................... 6 1,155 (7)
Fee income (2) ............................................................. - 2,908 9,924
Net realized investment gains (losses)....................................... (15,312) (21,507) 18,507
Change in net unrealized investment gains and losses on trading
securities ............................................................... 22,617 (22,483) (230,981)
----------- ----------- -----------
9,198 (33,337) (194,376)
Expenses:
Amounts credited on insurance policyholder accounts.......................... 1,922 6,031 6,314
Amortization of deferred policy acquisition costs............................ - 2,952 932
Operating expenses........................................................... 5,553 10,804 17,181
Goodwill amortization and write-offs......................................... - 389 48
Interest expense............................................................. 676 965 2,182
----------- ----------- -----------
8,151 21,141 26,657
----------- ----------- -----------
Income (loss) from continuing operations before income taxes................. 1,047 (54,478) (221,033)
Income tax expense (benefit)................................................. (42) 1,291 2,107
----------- ----------- -----------
Income (loss) from continuing operations..................................... 1,089 (55,769) (223,140)
Discontinued operations:
Loss from discontinued operations, net of income
tax expense (benefit) of $2, $(4,943) and $(58,550), respectively......... (1,758) (111,203) (121,644)
Income (loss) on disposal of discontinued operations, net of income
tax expense of $36, $0 and $0, respectively............................... 11,685 (38,532) -
----------- ----------- -----------
Income (loss) on discontinued operations..................................... 9,927 (149,735) (121,644)
----------- ----------- -----------
Net income (loss)............................................................ $ 11,016 $ (205,504) $ (344,784)
----------- ----------- -----------
----------- ----------- -----------
(1) Reclassifications have been made related to discontinued operations - see Note 3.
(2) Amounts represent revenues earned from an entity included in discontinued operations.
See accompanying Notes which are an integral part of these Consolidated
Financial Statements.
31
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Continued)
(In thousands, except per share and ADS amounts)
Years Ended December 31,
-------------------------------------
2003 2002(1) 2001(1)
----------- ----------- -----------
Basic earnings (loss) per share and ADS: (2)
Basic earnings (loss) per share:
Continuing operations........................................................ $ 0.02 $ (1.10) $ (4.38)
Discontinued operations...................................................... 0.20 (2.95) (2.38)
----------- ----------- -----------
$ 0.22 $ (4.05) $ (6.76)
----------- ----------- -----------
----------- ----------- -----------
Basic earnings (loss) per ADS: (2)
Continuing operations........................................................ $ 0.21 $ (10.99) $ (43.77)
Discontinued operations...................................................... 1.96 (29.50) (23.85)
----------- ----------- -----------
$ 2.17 $ (40.49) $ (67.62)
----------- ----------- -----------
----------- ----------- -----------
Diluted earnings (loss) per share and ADS: (2)
Diluted earnings (loss) per share:
Continuing operations........................................................ $ 0.02 $ (1.10) $ (4.38)
Discontinued operations...................................................... 0.20 (2.95) (2.38)
------------ ------------------------
$ 0.22 $ (4.05) $ (6.76)
----------- ----------- -----------
----------- ----------- -----------
Diluted earnings (loss) per ADS: (2)
Continuing operations........................................................ $ 0.21 $ (10.99) $ (43.77)
Discontinued operations...................................................... 1.94 (29.50) (23.85)
----------- ----------- -----------
$ 2.15 $ (40.49) $ (67.62)
----------- ----------- -----------
----------- ----------- -----------
(1) Reclassifications have been made related to discontinued operations - see Note 3.
(2) ADS amounts have been restated to reflect the one-for-ten reverse split in June 2002.
See accompanying Notes which are an integral part of these Consolidated
Financial Statements.
32
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
-------------------------------------
2003 2002 (1) 2001 (1)
----------- ----------- -----------
Cash flows from continuing operating activities:
Net income (loss)............................................................ $ 1,089 $ (55,769) $ (223,140)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization ............................................... 79 460 131
Amortization of deferred policy acquisition costs ........................... - 2,952 932
Deferred income tax expense ................................................. - 2,898 14
Interest credited on insurance policyholder accounts......................... 1,922 6,031 6,314
Net realized investment losses (gains)....................................... 15,312 21,507 (18,507)
Change in net unrealized investment gains and losses
on trading securities..................................................... (22,617) 22,483 230,981
Net amortization of investment premiums and discounts........................ 313 289 311
Stock based employee compensation expense.................................... - - 530
Net changes in operating assets and liabilities:
Trading equity securities................................................. 11,879 32,623 (92,558)
Accrued investment income ................................................ (26) 2,314 (1,284)
Deferred policy acquisition costs ........................................ - (250) (2,142)
Other assets ............................................................. 733 391 2,096
Life insurance policy liabilities......................................... (6) 4 175
Accounts payable, accruals and other liabilities ......................... (804) (3,196) (5,863)
Income taxes payable ..................................................... (26) (3,034) 334
Other operating cash flows .................................................. 223 (471) 1,348
----------- ----------- -----------
Net cash provided by (used in) continuing operations ........................ 8,071 29,232 (100,328)
----------- ----------- -----------
Write-off of doubtful receivables from discontinued operations............... - (15,614) -
Capital paid in to discontinued operations................................... (523) (3,050) (50,815)
Amounts due from (to) discontinued operations................................ - (2,793) 22,015
----------- ----------- -----------
Net cash used in discontinued operations .................................... (523) (21,457) (28,800)
----------- ----------- -----------
Net cash provided by (used in) operating activities ......................... 7,548 7,775 (129,128)
----------- ----------- -----------
Cash flows from investing activities:
Payment of guarantee obligations............................................. (10,836) - -
Purchases of held-to-maturity fixed maturity securities ..................... - (2,828) (1,959)
Purchases of available-for-sale fixed maturity securities ................... (17,096) (7,447) (80,190)
Purchases of available-for-sale equity securities............................ - - (16,000)
Proceeds from redemption of held-to-maturity fixed maturity securities....... - - 1,733
Proceeds from sale and maturity of available-for-sale fixed
maturity securities ...................................................... 24,595 96,884 3,664
Proceeds from sale of available-for-sale equity securities .................. 9 - 149,358
Proceeds from disposal of discontinued operations............................ 16,148 - -
Capital expenditures......................................................... (4) (16) (96)
----------- ----------- -----------
Net cash provided by investing activities ................................... 12,816 86,593 56,510
----------- ----------- -----------
(1) Reclassifications have been made related to discontinued operations - see Note 3.
See accompanying Notes which are an integral part of these Consolidated
Financial Statements.
33
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
Years Ended December 31,
-------------------------------------
2003 2002 (1) 2001 (1)
----------- ----------- -----------
Cash flows from financing activities:
Insurance policyholder contract deposits .................................... - 6,827 74,368
Insurance policyholder benefits paid ........................................ (12,330) (117,063) (2,999)
Issuance of Ordinary Shares ................................................. - - 3
Purchases of Ordinary Shares by the employee benefit trusts.................. - - (6,005)
Proceeds from disposal of shares by the employee benefit trusts.............. - 43 440
Dividends paid .............................................................. - (2,032) (11,802)
Proceeds from issuance of notes payable...................................... - 2,440 -
Repayments of notes payable.................................................. (9,314) (30,000) -
----------- ----------- -----------
Net cash provided by (used in) financing activities ......................... (21,644) (139,785) 54,005
----------- ----------- -----------
Net decrease in cash and cash equivalents ................................... (1,280) (45,417) (18,613)
Cash and cash equivalents at beginning of year (2) .......................... 15,308 60,571 79,221
Foreign currency translation adjustment ..................................... 380 154 (37)
----------- ----------- -----------
Cash and cash equivalents at end of year (2), (3)............................ $ 14,408 $ 15,308 $ 60,571
----------- ----------- -----------
----------- ----------- -----------
Supplemental disclosure of cash flow information: (2)
Cash paid (received) during the year for:
Interest .................................................................... $ 501 $ 956 $ 865
Income taxes (net of amounts recovered) ..................................... $ (51) $ 1,408 $ 1,575
Supplemental disclosure of non-cash investing activities:
Exchange of available-for-sale equity securities for trading equity
securities................................................................ $ 3 $ 22 $ 117
(1) Reclassifications have been made related to discontinued operations - see Note 3.
(2) Amounts reflect continuing operations only. Does not include $999 of cash held in escrow as of December 31, 2003.
(3) The amount for December 31, 2003 includes $3,834 in the Company's insurance subsidiary (LPAL) which is not currently
available to fund the operations or commitments of the Company or its other subsidiaries.
See accompanying Notes which are an integral part of these Consolidated
Financial Statements.
34
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except per share and ADS amounts)
Accumulated
Other
Ordinary Shares Additional Employee Compre- Total
-------------------- Paid-in Retained Benefit hensive Shareholders'
Number Amount Capital Earnings Trusts Loss Equity
--------- --------- ---------- ---------- --------- ---------- ----------
Balance as of January 1, 2001 64,433 $ 3,222 $ 67,591 $ 580,176 $ (58,003) $ (25,244) $ 567,742
Net loss........................ - - - (344,784) - - (344,784)
Change in net unrealized
gains and losses on
available-for-sale securities - - - - - 15,453 15,453
Foreign currency translation
adjustment................... - - - - - (115) (115)
Exercise of employee share
options, including income
tax effect................... 6 - 191 - 409 - 600
Grant of employee share
options below fair market
value........................ - - 530 - - - 530
Net realized gains on
disposal of shares held by
the employee benefit trusts.. - - 31 - - - 31
Cash dividends (23.2 cents
net per share and $2.32
per ADS)(1).................. - - - (11,802) - - (11,802)
Issuance of Ordinary Shares..... - - 3 - - - 3
Purchase of shares by the
employee benefit trusts...... - - - - (6,005) - (6,005)
--------- --------- ---------- ---------- --------- ---------- ----------
Balance as of
December 31, 2001............ 64,439 $ 3,222 $ 68,346 $ 223,590 $ (63,599) $ (9,906) $ 221,653
--------- --------- ---------- ---------- --------- ---------- ----------
--------- --------- ---------- ---------- --------- ---------- ----------
Net loss........................ - $ - $ - $ (205,504) $ - $ - $ (205,504)
Change in net unrealized
gains and losses on
available-for-sale securities - - - - - 7,853 7,853
Foreign currency translation
adjustment................... - - - - - (560) (560)
Exercise of employee share
options, including income
tax effect................... - - 3 - 28 - 31
Warrants issued to bank......... - - 30 - - - 30
Net realized gains on disposal
of shares held by the
employee benefit trusts...... - - 15 - - - 15
Cash dividends ($0.04 net
per share and $0.40 per
ADS) (1)..................... - - - (2,032) - - (2,032)
--------- --------- ---------- ---------- --------- ---------- ----------
Balance as of
December 31, 2002............ 64,439 $ 3,222 $ 68,394 $ 16,054 $ (63,571) $ (2,613) $ 21,486
--------- --------- ---------- ---------- --------- ---------- ----------
--------- --------- ---------- ---------- --------- ---------- ----------
(1) ADS amounts have been restated to reflect the one-for-ten reverse split in June 2002.
See accompanying Notes which are an integral part of these Consolidated
Financial Statements.
35
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Continued)
(In thousands, except per share and ADS amounts)
Accumulated
Other
Ordinary Shares Additional Employee Compre- Total
-------------------- Paid-in Retained Benefit hensive Shareholders'
Number Amount Capital Earnings Trusts Loss Equity
--------- --------- ---------- ---------- --------- ---------- ----------
Balance as of January 1, 2003... 64,439 $ 3,222 $ 68,394 $ 16,054 $ (63,571) $ (2,613) $ 21,486
Net income...................... - - - 11,016 - - 11,016
Change in net unrealized
gains and losses on
available-for-sale securities - - - - - 1,886 1,886
Foreign currency translation
adjustment................... - - - - - 288 288
Warrants issued to bank ........ - - 221 - - - 221
--------- --------- ---------- ---------- --------- ---------- ----------
Balance as of
December 31, 2003............ 64,439 $ 3,222 $ 68,615 $ 27,070 $ (63,571) $ (439) $ 34,897
--------- --------- ---------- ---------- --------- ---------- ----------
--------- --------- ---------- ---------- --------- ---------- ----------
See accompanying Notes which are an integral part of these Consolidated
Financial Statements.
36
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Years Ended December 31,
-------------------------------------
2003 2002 2001
----------- ----------- -----------
Net income (loss)............................................................ $ 11,016 $ (205,504) $ (344,784)
Other comprehensive income, net of deferred income taxes:
Foreign currency translation adjustments, net of income taxes of $0........... 288 (560) (115)
Change in net unrealized gains and losses related to continuing operations:
Unrealized holding gains and losses on available-for-sale securities...... 54 (1,116) (1,623)
Less: reclassification adjustment for gains and losses included in
net income (loss)....................................................... 1,832 366 836
Deferred policy acquisition cost amortization adjustments................. - (551) 405
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 35,583
Deferred policy acquisition cost amortization adjustments................. - (8,044) (13,398)
Deferred income taxes..................................................... - 805 (6,350)
Reclassification adjustment for losses of discontinued
operations included in net income (loss)................................ - 10,649 -
----------- ----------- -----------
Other comprehensive income .................................................. 2,174 7,293 15,338
----------- ----------- -----------
Comprehensive income (loss) ................................................. $ 13,190 $ (198,211) $ (329,446)
----------- ----------- -----------
----------- ----------- -----------
See accompanying Notes which are an integral part of these Consolidated
Financial Statements.
37
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Material Events
The Ordinary Shares of Berkeley Technology Limited (the "Company" and
together with its subsidiaries, the "Group") 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
Group's primary insurance company, due to persistent negative events in the
equity and bond markets, continued to erode significantly the statutory capital
of LPLA and that the Group 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 Group'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 80% of
LPAL's $140.2 million in policyholder liabilities as of June 30, 2002 had been
surrendered or had matured as of December 31, 2003. Of the $35.4 million in
policyholder liabilities remaining at December 31, 2002, 18% matured and 3% were
surrendered during 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 since
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 received a further $1.0
million in cash on December 30, 2003. The Group has been notified that it will
not receive any of the $1.25 million in cash earnout payments under the sale
agreement. 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. The Group has not been notified of any such
claims. At the time of the sale, 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.
38
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO 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 $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. The Group is
not aware of any unresolved claims. At the time of the sale, 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. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared by
the Company in conformity with United States generally accepted accounting
principles ("U.S. GAAP"). These consolidated financial statements include the
accounts of the Company, its subsidiaries (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 principally related to investment
management fees from LPLA (discontinued operations) to the continuing operations
which are disclosed in Note 3 and Note 21 below.
During the second quarter of 2002, the Company completed a one-for-ten
reverse split of its ADSs. On June 24, 2002, every ten of the Company's ADSs
issued and outstanding were converted and reclassified into one post-split ADS.
Consequently, effective from the opening of business on June 24, 2002, each ADS
is equal to ten Ordinary Shares. All earnings (loss) per ADS amounts disclosed
in these financial statements have been restated to reflect this split.
39
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The 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. The Group's other business is venture capital and
consulting.
The Company is incorporated under the laws of Jersey, Channel Islands. Its
Ordinary Shares are traded on the London Stock Exchange and in the U.S. on the
OTC Bulletin Board in the form of ADSs, which are evidenced by ADRs. Pursuant to
the regulations of the U.S. Securities and Exchange Commission ("SEC"), the
Company is considered a U.S. domestic registrant and must file financial
statements prepared under U.S. GAAP.
Cash and Cash Equivalents
The Group considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents.
Investments
The Group's investments consist of fixed maturity and equity securities.
Fixed maturity securities are classified as either available-for-sale or
held-to-maturity, and equity securities are classified as either trading or
available-for-sale. The investments are accounted for as follows:
i) available-for-sale securities are recorded at fair value, with changes
in unrealized gains and losses excluded from net income, but reported
net of applicable income taxes 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. Management's valuation methodologies
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, overall equity market
conditions, and the level of financing already secured and available. This is
combined with analysis of comparable acquisition transactions and values to
determine if the security's liquidation preferences will ensure full recovery of
the Group's investment in a likely acquisition outcome. In its valuation
analysis, management also considers the most recent transaction in a company's
shares.
Amortization of premiums and accretion of discounts on fixed maturity
securities are reflected in earnings over the contractual terms of the
investments in a manner that produces a constant effective yield. Realized gains
and losses on securities are included in net income using the specific
identification method. Any other-than-temporary declines in the fair value of
available-for-sale or held-to-maturity securities, below the cost or amortized
cost basis, are recognized as realized losses in the consolidated statements of
income. The cost basis of such securities is adjusted to reflect the write-down
recorded.
40
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred Policy Acquisition Costs
Policy acquisition costs are the costs of producing life insurance and
annuity business: principally commissions and certain marketing expenses which
vary with, and are primarily related to, the acquisition of new business. Policy
acquisition costs are deferred and amortized over the estimated lives of the
policies in relation to their estimated future gross profits. Amortization is
adjusted in the current year when estimates of total profits to be realized from
a group of products are revised.
Deferred policy acquisition costs are adjusted for the change in
amortization that would have been recorded if fixed maturity securities
classified as available-for-sale had been sold at their stated aggregate fair
value and the proceeds reinvested at current yields. The impact of this
adjustment is included in accumulated other comprehensive income within
shareholders' equity.
From July 2, 2002, the Company's life insurance subsidiary, LPAL,
discontinued writing new policies. As of September 30, 2002, all deferred policy
acquisition costs were written off.
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost less
accumulated depreciation. Depreciation is calculated on a straight-line basis at
rates sufficient to write-off such assets over their estimated useful lives on
the following basis:
Furniture and equipment - five years
Computer equipment, including software - three to five years
Leasehold improvements - life of lease
Assets held under capital leases are included in property, equipment and
leasehold improvements and are depreciated over their estimated useful lives.
The future obligations under these leases are included in accounts payable and
accruals. Interest paid on capital leases is charged to the income statement
over the periods of the leases.
Goodwill
Goodwill is recorded at acquisition of subsidiaries. Goodwill at
acquisition arises where the consideration given exceeds the fair value
attributed to the separable net assets. All goodwill on acquisitions was
capitalized until January 1, 2002, and amortized on a straight-line basis over
its estimated useful economic life, generally 25 years. Beginning January 1,
2002, goodwill is no longer amortized, but is regularly evaluated for impairment
and any impairment losses are recognized in the consolidated income statement.
All unamortized goodwill in the continuing operations was written-off as of the
end of 2002.
Life Insurance Policy Liabilities, Revenues and Expenses
Life insurance policy liabilities, premium revenues and related expenses
are accounted for in accordance with Statement of Financial Accounting Standards
No. 97, "Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sale of
Investments," as follows:
41
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
i) Life insurance policy liabilities for deferred annuities are accounted
for as investment-type insurance products and are recorded at accumulated value
(premiums received, plus accrued interest to the balance sheet date, less
withdrawals and assessed fees).
ii) Revenues for investment-type insurance products consist of charges
assessed against policy account values for surrenders.
iii) Benefits for investment-type insurance products are charged to expense
when incurred and reflect the claim amounts in excess of the policy account
balance. Expenses for investment-type products include the interest credited to
the policy account balance.
Revenue Recognition
Interest income is accounted for on an accrual basis. Dividends are
accounted for when declared.
Listed equity securities received as a result of an acquisition of one of
the Group's investee companies by a publicly traded company that are held in
escrow by an escrow agent, are recognized in the financial statements when the
transaction is completed. Reductions are made to the number of shares of listed
equity securities held in escrow that are carried in the financial statements as
claims are made by the acquiring company against the escrow, or if evidence
exists that a claim is probable.
Fees relating to venture capital activities are recognized in income when
the investment transaction is completed. Fees for consulting services are
recognized in income on an accrual basis, based upon when services are
performed.
Stock Based Compensation
The Company accounts for stock based compensation issued to employees in
accordance with Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees," and related interpretations which
recognizes compensation expense based upon the intrinsic value of the stock
options as of the date of grant. The Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 123 ("SFAS
123"), "Accounting for Stock Based Compensation," which encourages, but does not
require, companies to recognize compensation expense for grants of stock options
based on their fair value. The Company has elected, as permitted by SFAS 123, to
adopt the disclosure requirement of SFAS 123 and to continue to account for
stock based compensation under APB 25.
Had compensation expense for the Company's ESOT activity been determined
based upon the fair value method in accordance with SFAS 123, the Company's
consolidated net income (loss) and earnings (loss) per share and ADS would have
been decreased or increased to the pro forma amounts as reflected below:
42
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31,
-------------------------------------
2003 2002 2001
----------- ----------- -----------
(In thousands, except per share
and ADS amounts)
Net income (loss) as reported................................................ $ 11,016 $ (205,504) $ (344,784)
Add: Stock based employee compensation expense included in
reported income (loss), net of related tax effects........................ - - 530
Deduct: Total stock based employee compensation expense determined
under fair value based methods for all awards, net of related tax effects. (145) (796) (5,165)
----------- ----------- -----------
Pro forma net income (loss) ................................................. $ 10,871 $ (206,300) $ (349,419)
----------- ----------- -----------
----------- ----------- -----------
Basic earnings (loss) per share:
As reported.................................................................. 0.22 (4.05) (6.76)
Pro forma.................................................................... 0.21 (4.06) (6.85)
Basic earnings (loss) per ADS: (1)
As reported.................................................................. 2.17 (40.49) (67.62)
Pro forma.................................................................... 2.14 (40.65) (68.53)
Diluted earnings (loss) per share:
As reported.................................................................. 0.22 (4.05) (6.76)
Pro forma.................................................................... 0.21 (4.06) (6.85)
Diluted earnings (loss) per ADS: (1)
As reported.................................................................. 2.15 (40.49) (67.62)
Pro forma.................................................................... 2.12 (40.65) (68.53)
Weighted-average fair value of options granted
at market price during year............................................... - 0.23 2.38
Weighted-average fair value of options granted
at less than market price during year..................................... - - 2.86
(1) ADS amounts have been restated to reflect the one-for-ten reverse split in June 2002.
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:
2003 (1) 2002 2001
----------- ----------- -----------
Expected dividend yield (2).................................................. - - -
Expected stock price volatility.............................................. - 125% 76%
Risk-free interest rate...................................................... - 3.95% 5.09%
Weighted-average expected life (in years).................................... - 5 5
(1) No grants were made in 2003.
(2) As the Company paid a constant dividend amount for 2001, a deduction to the share price was made in the amount of the
net present value of the dividend and the dividend yield in the option pricing model was set to zero. For 2002, the
deduction to the share price was zero, as future dividends have not been assumed.
43
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income Taxes
The Group accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." Under SFAS 109, the Group recognizes taxes payable or refundable for the
current year, and deferred tax assets and liabilities due to temporary
differences in the basis of assets and liabilities between amounts recorded for
financial statement and tax purposes.
The Group provides a valuation allowance for deferred income tax assets if
it is more likely than not that some portion of the deferred income tax asset
will not be realized. The Group includes in income any increase or decrease in a
valuation allowance that results from a change in circumstances that causes a
change in judgment about the realization of the related deferred income tax
asset.
The Group includes in additional paid-in capital the tax benefit on share
options exercised during the period to the extent that such exercises result in
a permanent difference between financial statement and tax basis compensation
expense.
Earnings Per Share and ADS
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share." This
statement requires the presentation of basic and diluted earnings per share.
Basic earnings per share is calculated by dividing net income or loss by the
weighted-average number of Ordinary Shares outstanding during the applicable
period, excluding shares held by the ESOT and the ALOT which are regarded as
treasury stock for the purposes of this calculation. The Company has issued
employee share options, which are considered potential common stock under SFAS
128. The Company has also issued Ordinary Share warrants to the Bank of Scotland
in connection with the Company's bank facility (now terminated), which are also
considered potential common stock under SFAS 128. Diluted earnings per share is
calculated by dividing net income by the weighted average number of Ordinary
Shares outstanding during the applicable period as adjusted for these
potentially dilutive options and warrants which are determined based on the
"Treasury Stock Method."
Foreign Currencies
The Group uses the (pound) sterling as the functional currency for LPAL and
the U.S. dollar as the functional currency for the Company and all other
significant subsidiaries. Foreign exchange gains and losses resulting from the
remeasurement of foreign currency assets and liabilities into an entity's
functional currency are included in other operating expense in the consolidated
statements of income. For entities using a (pound) sterling functional currency,
assets and liabilities denominated in foreign currencies are translated into
U.S. dollars at the prevailing exchange rates at the balance sheet date and
income and expense items are translated to U.S. dollars at average exchange
rates in effect during the period. The resulting translation adjustment is shown
as a separate component of other comprehensive income in shareholders' equity.
Foreign currency transaction gains and losses are recorded in the results of
operations, and were not material in all periods presented.
Comprehensive Income
Comprehensive income consists of net income; changes in unrealized gains
and losses on available-for-sale securities, net of income taxes and deferred
policy acquisition cost amortization adjustments; and foreign currency
translation gains or losses arising on the translation of the Group's non-U.S.
dollar based subsidiaries.
44
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Recently Issued Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," which requires the consolidation
of variable interest entities ("VIE"), as defined in FIN 46. In December 2003,
the FASB completed deliberations of proposed modifications to FIN 46 ("Revised
Interpretations") resulting in multiple effective dates based on the nature as
well as the creation date of the VIE. VIEs created after January 31, 2003, but
prior to January 1, 2004, may be accounted for either based on the original
interpretation or the Revised Interpretations. However, the Revised
Interpretations must be applied no later than the first quarter of fiscal year
2004. VIEs created after January 1, 2004 must be accounted for under the Revised
Interpretations. As of December 31, 2003, the Group does not have entities
meeting the definition of a VIE and does not expect the adoption of FIN 46 to
have an impact on its financial statements.
In December 2003, the FASB issued Statement of Financial Accounting
Standard No. 132 (revised 2003) ("SFAS 132(R)"), Employers' Disclosures about
Pensions and Other Postretirement Benefits." SFAS 132(R) does not change the
measurement or recognition provisions of other FASB statements but requires
additional disclosures to those in the original SFAS 132 about the assets,
obligations, cash flows, and net periodic benefit cost of defined benefit
pension plans and other defined benefit postretirement plans. As the pension
plan for Jersey, Channel Islands employees is in the process of being
terminated, the Group will not be adopting the disclosure requirements of SFAS
132(R) in 2004.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of these consolidated financial statements as well as
the reported amount of revenues and expenses during this reporting period.
Actual results could differ from these estimates. Certain estimates such as fair
value and actuarial assumptions have a significant impact on the gains and
losses recorded on investments and balance of life insurance policy liabilities.
Reclassifications
Certain reclassifications were made to prior year amounts to conform with
the current year's presentation. These reclassifications had no effect on the
net income or shareholders' equity for the prior years.
Note 3. Discontinued Operations
(a) 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.
45
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of LPLA's pre-tax operating results for the years ended December
31, 2002 and 2001, are shown below.
Years ended December 31,
------------------------
2002 (1) 2001
----------- -----------
(In thousands)
Revenues:
Investment income before intercompany management fee expense...................... $ 62,453 $ 134,758
Intercompany management fee expense (2)........................................... (3,632) (11,831)
Other income...................................................................... 4,176 7,048
Net realized and change in net unrealized investment gains and losses............. (97,618) (164,773)
----------- -----------
Total revenues and net investment losses.......................................... (34,621) (34,798)
Expenses:
Interest credited on insurance policyholder accounts.............................. 56,133 112,651
Amortization of deferred policy acquisition costs................................. 17,145 22,808
Other expenses.................................................................... 4,593 7,573
----------- -----------
Total expenses.................................................................... 77,871 143,032
----------- -----------
Loss before income taxes.......................................................... $ (112,492) $ (177,830)
----------- -----------
----------- -----------
(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. These results
are reflected as discontinued operations in the consolidated income statement.
(2) Fees in the amount of $2,908,000 and $9,924,000 for the years ended December 31, 2002 and 2001, respectively,
were paid to and included in the revenues of the venture capital and consulting 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 had been included in the Group's life insurance and
annuities business segment.
46
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(b) 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 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 years ended December 31, 2003, 2002 and 2001, and BCM's total assets and
total liabilities as of December 31, 2002, are shown below.
Years Ended December 31,
-------------------------------------
2003 2002 2001
----------- ----------- -----------
(In thousands)
Revenues:
Asset management fees........................................................ $ 1,364 $ 4,493 $ 4,810
Intercompany management fee income (1)....................................... 5 763 1,954
----------- ----------- -----------
Total revenues............................................................... 1,369 5,256 6,764
Operating expenses........................................................... 1,403 4,643 5,316
----------- ----------- -----------
Income (loss) before income taxes............................................ $ (34) $ 613 $ 1,448
----------- ----------- -----------
----------- ----------- -----------
(1) Fees were paid from and included in the net revenues of the life insurance and annuities business segment
of continuing operations (LPAL) of $5,000, $39,000 and $47,000 for the years ended December 31, 2003, 2002
and 2001, respectively. For the years ended December 31, 2002 and 2001, these fees also include $724,000
and $1,907,000, 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
-----------
-----------
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.
47
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Previously, BCM was included in the Group's asset management business
segment.
(c) 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 years ended December
31, 2003, 2002 and 2001, 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.
Years Ended December 31,
-------------------------------------
2003 2002 2001
----------- ----------- -----------
(In thousands)
Revenues:
Investment income............................................................ $ 4 $ 18 $ 37
Gross financial advisory services fees....................................... 5,820 16,184 18,627
Payments due to independent advisors......................................... (3,477) (10,029) (12,039)
----------- ----------- -----------
Total net revenues........................................................... 2,347 6,173 6,625
Expenses..................................................................... 4,069 10,440 10,437
----------- ----------- -----------
Loss before income taxes..................................................... $ (1,722) $ (4,267) $ (3,812)
----------- ----------- -----------
----------- ----------- -----------
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
-----------
-----------
The $3,772,000 gain on sale of discontinued operations, and tax expense on
the gain of $36,000, were recorded in the second quarter of 2003 and reported in
the Group's Form 10-Q for that quarter.
Previously, LPA was included in the Group's financial advisory services
business segment.
SunGard did not assume LPA's net liability of $10.6 million to BICC.
48
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4. Investments
Summary Cost and Fair Value Information
Fixed Maturity Securities
An analysis of fixed maturity securities is as follows:
December 31,
--------------------------------------------------------------------------------------
2003 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.......... $ 18,354 $ 48 $ (89) $ 18,313 $ 12,709 $ 115 $ (9) $ 12,815
Corporate debt securities 7,049 33 (2) 7,080 17,772 90 (342) 17,520
--------- --------- --------- --------- --------- --------- --------- ---------
Total fixed maturity securities $ 25,403 $ 81 $ (91) $ 25,393 $ 30,481 $ 205 $ (351) $ 30,335
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
During 2002, $871,000 in private corporate debt securities classified as
held-to-maturity were considered by management to be other-than-temporarily
impaired and consequently their amortized cost was reduced to zero during 2002.
As of December 31, 2003, there were no non-income producing fixed maturity
securities for the twelve months preceding December 31, 2003.
Contractual Maturities
The amortized cost and estimated fair value of fixed maturity securities as
of December 31, 2003 by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities as certain issuers have the
right to call and certain borrowers have the right to prepay obligations without
penalty.
Available-for-Sale
------------------------
Estimated
Amortized Fair
Cost Value
----------- -----------
(In thousands)
Due in one year or less ........................................................ $ 4,939 $ 4,957
Due after one year through five years........................................... 20,464 20,436
----------- -----------
$ 25,403 $ 25,393
----------- -----------
----------- -----------
49
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Equity Securities
Equity securities are comprised of available-for-sale and trading
securities. An analysis of equity securities is as follows:
December 31,
--------------------------------------------------------------------------------------
2003 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............... $ 4,262 $ - $ - $ 4,262 $ 8,980 $ - $ (1,750) $ 7,230
--------- --------- --------- --------- --------- --------- --------- ---------
Total available-for-sale
equity securities........ 4,262 - - 4,262 8,980 - (1,750) 7,230
Trading securities......... 4,544 12,546 (208) 16,882 26,785 5,236 (15,516) 16,505
--------- --------- --------- --------- --------- --------- --------- ---------
Total equity securities.... $ 8,806 $ 12,546 $ (208) $ 21,144 $ 35,765 $ 5,236 $ (17,266) $ 23,735
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Trading securities are carried at fair value with changes in net unrealized
gains and losses of $22,617,000, $(22,483,000) and $(230,981,000) included in
the income and losses for the years ended December 31, 2003, 2002 and 2001,
respectively. During 2002, the loss from the change in net unrealized gains and
losses on trading securities included a reclassification adjustment of
$8,761,000 related to securities purchased from LPLA at above the Group's
original cost.
Investment Concentration and Risk
As of December 31, 2003, equity securities held by the Group included an
investment in Packeteer, Inc. of $16,336,000 which represented more than 10% of
shareholders' equity as of that date. Due to the increase in shareholders'
equity and the sale of fixed maturity securities during 2003, all fixed maturity
securities accounted for less than 10% of shareholders' equity as of December
31, 2003.
As of December 31, 2003, 100% of the Group's $25.4 million in fixed
maturity securities, 99% of the Group's $4.3 million in available-for-sale
private equity securities, and 80% of the Group's $16.9 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 it may not make any distributions without the
consent of LPAL's independent actuary. LPAL'S INVESTMENTS ARE THEREFORE NOT
CURRENTLY AVAILABLE TO FUND THE OPERATIONS OR COMMITMENTS OF THE COMPANY OR ITS
OTHER SUBSIDIARIES.
As of December 31, 2002, fixed maturity securities held by the Group
included investments in General Motors of $7,974,000, British Telecom of
$3,270,000, Daimler Chrysler of $3,269,000, Ford Motor Credit of $3,220,000,
Fiat Finance of $2,871,000, North American Capital of $2,819,000 and Clarica of
$2,771,000. Equity securities held by the Group primarily included investments
in Agility Communications, Inc. of $3,375,000, Alacritech, Inc. of $2,250,000,
New Focus, Inc. of $2,496,000 and Packeteer, Inc. of $11,402,000. These eleven
corporate issuers each represented more than ten percent of shareholders' equity
as of December 31, 2002.
Fixed maturity securities considered less than investment grade
approximated 1.2% and 10.7% of total fixed maturity securities as of December
31, 2003 and 2002, respectively.
50
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net Unrealized Gains (Losses) on Available-for-Sale Securities
Net unrealized losses on fixed maturity securities classified as
available-for-sale as of December 31, 2003 totaled $10,000. There were no
related deferred policy acquisition cost adjustments or income taxes. As of
December 31, 2002, for continuing operations, the net unrealized losses on fixed
maturity securities classified as available-for-sale were $146,000.
There were no net unrealized losses on equity securities classified as
available-for-sale as of December 31, 2003. As of December 31, 2002, for
continuing operations, the net unrealized losses on equity securities classified
as available-for-sale totaled $1,750,000. There were no related income taxes.
Changes in net unrealized gains and losses on available-for-sale securities
included in other comprehensive income for the years ended December 31, 2001,
2002 and 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, 2000.............................................................. $ (18,993) $ (6,209) $ (25,202)
Changes during the year ended December 31, 2001 for continuing operations:
Unrealized holding gains and losses on available-for-sale securities.......... 458 (2,081) (1,623)
Reclassification adjustment for gains and losses included in net income (loss) 724 112 836
Decrease in amortization of deferred policy acquisition costs................. 405 - 405
Changes during the year ended December 31, 2001 for discontinued operations:
Change in net unrealized gains and losses on available-for-sale securities.... 27,687 7,896 35,583
Increase in amortization of deferred policy acquisition costs................. (13,398) - (13,398)
Increase in deferred income tax liabilities................................... (5,001) (1,349) (6,350)
----------- ----------- -----------
Net unrealized losses on available-for-sale securities as of
December 31, 2001............................................................. (8,118) (1,631) (9,749)
Changes during the year ended December 31, 2002 for continuing operations:
Unrealized holding gains and losses on available-for-sale securities.......... (116) (1,000) (1,116)
Reclassification adjustment for gains and losses included in net income (loss) (878) 1,244 366
Increase in amortization of deferred policy acquisition costs................. (551) - (551)
Changes during the year ended December 31, 2002 for discontinued operations:
Change in net unrealized gains and losses on available-for-sale securities.... 16,584 (10,840) 5,744
Increase in amortization of deferred policy acquisition costs................. (8,044) - (8,044)
Decrease (increase) in deferred income tax liabilities........................ (2,989) 3,794 805
Reclassification adjustment for losses of discontinued operations included
in net income (loss)......................................................... 3,966 6,683 10,649
----------- ----------- -----------
Net unrealized losses on available-for-sale securities as of
December 31, 2002............................................................. (146) (1,750) (1,896)
Changes during the year ended December 31, 2003 for continuing operations:
Unrealized holding gains and losses on available-for-sale securities.......... 54 - 54
Reclassification adjustment for gains and losses included in net income....... 82 1,750 1,832
----------- ----------- -----------
Net unrealized losses on available-for-sale securities as of
December 31, 2003............................................................. $ (10) $ - $ (10)
----------- ----------- -----------
----------- ----------- -----------
51
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net Investment Income
The details of investment income, net of investment expenses, are as
follows:
Years Ended December 31,
-------------------------------------
2003 2002 2001
----------- ----------- -----------
(In thousands)
Interest on fixed maturity securities........................................ $ 1,611 $ 5,972 $ 6,040
Interest on cash and cash equivalents........................................ 280 629 2,147
----------- ----------- -----------
Gross investment income...................................................... 1,891 6,601 8,187
Investment expenses.......................................................... (4) (11) (6)
----------- ----------- -----------
1,887 6,590 8,181
Interest credited on insurance policyholder accounts......................... (1,922) (6,031) (6,314)
----------- ----------- -----------
Net investment income (loss)................................................. $ (35) $ 559 $ 1,867
----------- ----------- -----------
----------- ----------- -----------
Investment expenses included costs of investment administration, primarily
custodial fees.
Realized Gains and Losses
Information about gross and net realized gains and losses on securities
transactions is as follows:
Years Ended December 31,
-------------------------------------
2003 2002 2001
----------- ----------- -----------
(In thousands)
Realized gains (losses) on securities transactions:
Fixed maturities, available-for-sale:
Gross gains............................................................... $ 43 $ 1,798 $ 13
Gross losses ............................................................. (286) (15,611) (7,042)
----------- ----------- -----------
Net realized losses on fixed maturities, available-for-sale ................. (243) (13,813) (7,029)
----------- ----------- -----------
Fixed maturities, held-to-maturity:
Gross losses.............................................................. - (2,125) (434)
----------- ----------- -----------
Equity securities, trading:
Gross gains............................................................... 4,874 5,601 36,070
Gross losses.............................................................. (15,237) (1,629) -
----------- ----------- -----------
Net realized gains (losses) on equity securities, trading ................... (10,363) 3,972 36,070
----------- ----------- -----------
Equity securities, available-for-sale:
Gross gains............................................................... 9 - 456
Gross losses.............................................................. (4,715) (9,541) (10,556)
----------- ----------- -----------
Net realized losses on equity securities, available-for-sale ................ (4,706) (9,541) (10,100)
----------- ----------- -----------
Net realized investment gains (losses) on securities transactions............ $ (15,312) $ (21,507) $ 18,507
----------- ----------- -----------
----------- ----------- -----------
52
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During 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 $4.7 million in the consolidated
statement of income.
During 2002, the Group's management determined that two private equity
investments in technology companies were other-than-temporarily impaired and
consequently recorded realized losses totaling $8.2 million in the consolidated
statement of income. Management considered certain other private corporate debt
and equity investments to be other-than-temporarily impaired and recorded
realized losses totaling $12.7 million in the consolidated statement of income.
In addition during 2002, management considered one public corporate debt
security classified as available-for-sale to be other-than-temporarily impaired
and recorded a realized loss of $0.3 million in the consolidated statement of
income for the difference between the amortized cost and the fair value of this
security.
Note 5. Deferred Policy Acquisition Costs
Deferred policy acquisition cost activity was as follows:
Years Ended December 31,
-------------------------------------
2003 2002 2001
----------- ----------- -----------
(In thousands)
Balance as of January 1...................................................... $ - $ 3,113 $ 1,509
Deferral of costs relating to:
Commissions ................................................................. - 169 1,737
Other ....................................................................... - 81 405
----------- ----------- -----------
- 250 2,142
Amortization relating to:
Operations .................................................................. - 2,952 262
Investment gains ............................................................ - - 670
----------- ----------- -----------
- 2,952 932
----------- ----------- -----------
Net deferral ................................................................ - (2,702) 1,210
Adjustment for unrealized losses (gains) on available-for-sale fixed
maturity securities....................................................... - (551) 405
Increase (decrease) due to foreign exchange.................................. - 140 (11)
----------- ----------- -----------
Balance as of December 31 ................................................... $ - $ - $ 3,113
----------- ----------- -----------
----------- ----------- -----------
Due to the events described in Note 1 "Material Events," LPAL discontinued
the issuance of new policies on July 2, 2002 and since that date experienced a
substantial increase in policy redemptions. Based on revised estimates of the
gross profits on the remaining block of business, management determined that the
balance of deferred policy acquisition costs should be written-off in full as of
September 30, 2002.
53
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 6. Property and Equipment
Property and equipment are carried at cost and consisted of the following:
December 31,
------------------------
2003 2002
----------- -----------
(In thousands)
Property, equipment and leasehold improvements................................... $ 1,549 $ 1,539
Accumulated depreciation......................................................... (1,432) (1,350)
----------- -----------
Property and equipment, net...................................................... $ 117 $ 189
----------- -----------
----------- -----------
Note 7. Goodwill
Goodwill activity was as follows:
Years Ended December 31,
-------------------------------------
2003 2002 2001
----------- ----------- -----------
(In thousands)
Cost:
Balance as of January 1 ..................................................... $ 816 $ 1,205 $ 1,205
Goodwill written-off......................................................... - (389) -
----------- ----------- -----------
Balance as of December 31 ................................................... 816 816 1,205
Accumulated amortization:
Accumulated amortization as of January 1 .................................... 816 816 768
Amortization recorded........................................................ - - 48
----------- ----------- -----------
Accumulated amortization as of December 31 .................................. 816 816 816
----------- ----------- -----------
Net book value as of December 31 ............................................ $ - $ - $ 389
----------- ----------- -----------
----------- ----------- -----------
Had SFAS 142 been in effect prior to January 1, 2002, the Group's reported
net loss and loss per share and ADS would have been as follows:
Year Ended
December
31, 2001
-----------
(In thousands,
except per
share and ADS
amounts)
Net loss from continuing operations:
As reported................................................................................. $ (223,140)
Goodwill adjustment......................................................................... 48
-----------
Adjusted.................................................................................... $ (223,092)
-----------
-----------
54
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Year Ended
December
31, 2001
-----------
(In thousands,
except per
share and ADS
amounts)
Basic and diluted loss per share (continuing operations):
As reported................................................................................. $ (4.38)
Effect of goodwill amortization............................................................. -
-----------
Adjusted.................................................................................... $ (4.38)
-----------
-----------
Basic and diluted loss per ADS (continuing operations):
As reported................................................................................. $ (43.77)
Effect of goodwill amortization............................................................. 0.01
-----------
Adjusted.................................................................................... $ (43.76)
-----------
-----------
In accordance with SFAS 142, the Group evaluated its carrying value of
goodwill during 2002 and determined that the goodwill carried on the books of
BICC was impaired. Subsequent to the loss of control of LPLA and the termination
of the investment management contract for LPLA's investment portfolio, the value
of BICC's technology venture capital business became less certain. Consequently,
BICC's unamortized goodwill balance of approximately $389,000 was written-off
during 2002.
Note 8. Cash Held in Escrow
Cash held in escrow as of December 31, 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 9. Other Assets
An analysis of other assets is as follows:
December 31,
------------------------
2003 2002
----------- -----------
(In thousands)
Prepayments ................................................................... $ 499 $ 757
Receivables:
Income tax refund receivable................................................ 17 61
Fee income receivable....................................................... 7 -
Other receivables .......................................................... 3 70
Due from brokers............................................................ - 472
----------- -----------
Total other assets ........................................................... $ 526 $ 1,360
----------- -----------
----------- -----------
55
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 10. Life Insurance Policy Liabilities
An analysis of life insurance policy liabilities is as follows:
December 31,
------------------------
2003 2002
----------- -----------
(In thousands)
Deferred annuities - policyholder contract deposits ........................... $ 27,896 $ 35,441
Other policy claims and benefits .............................................. 158 -
----------- -----------
$ 28,054 $ 35,441
----------- -----------
----------- -----------
The liability for future policy benefits and policyholder contract deposits
was determined based on the following assumptions:
Interest Rate Assumptions
Guaranteed reset rates were 3.0% for seven year annuity products issued in
2002. For three and five year annuity products, credited interest rates
generally ranged from 3.30% to 7.40% in 2003, 3.30% to 7.40% in 2002, and from
3.45% to 7.40% in 2001.
Mortality Assumptions
Assumed mortality rates were based on standard tables commonly used in the
U.K. life insurance industry, namely the AM80 table for male lives and the AF80
table for female lives.
Withdrawal Assumptions
Withdrawal charges on deferred annuities generally ranged from 1% to 7%,
grading to zero over a period of up to 7 years.
Note 11. Statutory Financial Information and Restrictions
LPAL is regulated by the Jersey Financial Services Commission ("JFSC") and
under Article 6 of the Insurance Business (Jersey) Law 1996 is permitted to
conduct long-term insurance business. The JFSC requires LPAL to submit annual
audited financial statements (prepared under U.S. GAAP which is permitted), and
an audited annual filing in the format consistent with that required by the
Financial Services Authority in the United Kingdom. The annual filing submitted
by LPAL to the JFSC must be accompanied by a Certificate from the Appointed
Actuary that based on sufficiently prudent assumptions, assets are sufficient to
cover all liabilities. The annual filing contains a report from the Appointed
Actuary on the matching of investments to liabilities.
The JFSC sets out the conditions with which LPAL must comply and determines
the reporting requirements and the frequency of reporting. These conditions
require that: (i) LPAL must hold, at all times, approved assets at least equal
to the long-term insurance fund plus the required minimum solvency margin, (ii)
the margin of solvency must be the greater of (pound)50,000 or 2.5% of the value
of the long-term business fund, and (iii) assets equal to not less than 90% of
liabilities must be placed with approved independent custodians. As of December
31, 2003, LPAL met all of these conditions.
56
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
LPAL is also required under the insurance laws to appoint an actuary. The
actuary must be qualified as defined under Jersey law and is required to
supervise the long-term insurance fund. No transfers, except in satisfaction of
long-term insurance business liabilities, including dividends, are permitted
from the long-term insurance fund without written consent from the actuary.
Note 12. 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.
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 13. Income Taxes
The Group is subject to taxation on its income in all countries in which it
operates based upon the taxable income arising in each country. However,
realized gains on certain investments are exempt from Jersey and Guernsey
taxation. This and other tax benefits which may not recur have reduced the tax
charge in 2003, 2002 and 2001.
The Group is subject to income tax in Jersey at a rate of 20%. In the
United States, the Group is subject to both federal and California taxes charged
at 34% and 8.84%, respectively.
A breakdown of the Group's book income (loss) from continuing operations
before income taxes by tax jurisdiction follows:
57
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31,
-------------------------------------
2003 2002 2001
----------- ----------- -----------
(In thousands)
Income (loss) from continuing operations before income taxes:
Jersey, Guernsey and United Kingdom.......................................... $ 2,570 $ (52,804) $ (225,098)
United States................................................................ (1,523) (1,674) 4,065
----------- ----------- -----------
Total income (loss) from continuing operations before income taxes .......... $ 1,047 $ (54,478) $ (221,033)
----------- ----------- -----------
----------- ----------- -----------
The provision for income taxes differs from the amount computed by applying
the Jersey, Channel Islands statutory income tax rate of 20% to income (loss)
from continuing operations before income taxes. The sources and tax effects of
the difference are as follows:
Years Ended December 31,
-------------------------------------
2003 2002 2001
----------- ----------- -----------
(In thousands)
Income taxes computed at Jersey statutory income tax rate of 20%............. $ 209 $ (10,896) $ (44,207)
Realized and unrealized investment losses (gains) not subject to taxation
in Jersey ................................................................ (474) 4,880 30,550
Other losses not deductible in Jersey........................................ 896 2,664 830
Losses not deductible (income not taxable) in Guernsey....................... (962) 2,970 15,141
Taxes on income (benefits on losses) at higher than 20% statutory
Jersey rate:
Net income (loss) on continuing operations in the U.S..................... (348) (382) 919
Non-deductible compensation in the U.S....................................... - - 1,012
Adjustment of prior years' provisions........................................ (33) (1,542) 78
Increase (decrease) in valuation allowance .................................. 47,962 23,958 (2,660)
Less: valuation allowance related to discontinued operations................. (52,238) (20,768) 223
Utilization of U.S. capital loss carryforwards for which a full valuation
allowance had been provided in prior years................................ 4,100 - -
Other........................................................................ 846 407 221
----------- ----------- -----------
Actual tax expense (benefit) for continuing operations ...................... $ (42) $ 1,291 $ 2,107
----------- ----------- -----------
----------- ----------- -----------
The components of the actual tax expense for continuing operations are as
follows:
Years Ended December 31,
-------------------------------------
2003 2002 2001
----------- ----------- -----------
(In thousands)
Jersey, Guernsey and United Kingdom:
Current tax expense (benefit)............................................. $ (33) $ (671) $ 1,601
Deferred tax expense...................................................... - - -
United States:
Current tax expense (benefit)............................................. (9) (903) 511
Deferred tax expense (benefit)............................................ - 2,865 (5)
----------- ----------- -----------
Total actual tax (benefit) expense........................................... $ (42) $ 1,291 $ 2,107
----------- ----------- -----------
----------- ----------- -----------
58
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of the actual tax expense (benefit) for discontinued
operations are as follows:
Years Ended December 31,
-------------------------------------
2003 2002 2001
----------- ----------- -----------
(In thousands)
United States:
Current tax expense (benefit)............................................. $ 38 $ (8,159) $ 8,252
Deferred tax expense (benefit)............................................ - 3,216 (66,802)
----------- ----------- -----------
$ 38 $ (4,943) $ (58,550)
----------- ----------- -----------
----------- ----------- -----------
The Group recognizes assets and liabilities for the deferred tax
consequences of temporary differences between the tax basis of assets and
liabilities and their reported amounts in the financial statements. These
temporary differences will result in taxable or deductible amounts in future
years when the reported amounts of assets and liabilities are recovered or
settled. The deferred income tax assets are reviewed periodically for
recoverability and valuation allowances are provided as necessary. Deferred
income tax assets and liabilities are disclosed net in the consolidated
financial statements when they arise within the same tax jurisdiction and tax
return.
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets and deferred income tax liabilities
are presented below. As of both December 31, 2002 and December 31, 2003, full
valuation allowances were provided on the net deferred tax assets of both U.S.
tax groups due to the uncertainty of generating future taxable income or capital
gains to benefit from the deferred tax assets.
December 31,
------------------------
2003 2002
----------- -----------
(In thousands)
U.S. subsidiaries (continuing operations):
Deferred income tax assets:
Net operating loss carryforwards............................................... $ 8,082 $ 8,539
Capital loss carryforwards..................................................... 67,288 18,774
Unrealized losses on investments............................................... - 376
Deferred compensation.......................................................... 9 137
Other assets................................................................... 53 27
Valuation allowance............................................................ (75,382) (27,420)
----------- ----------
Deferred income tax assets, net of valuation allowance......................... 50 433
Deferred income tax liabilities:
Depreciation, amortization and other........................................... - (431)
Other liabilities ............................................................. (50) (2)
----------- -----------
(50) (433)
----------- -----------
Net deferred income tax assets - U.S. subsidiaries
(continuing operations)..................................................... $ - $ -
----------- -----------
----------- -----------
The net increase in the deferred tax valuation allowance during 2003 was
$47,962,000. The primary component of this net increase ($52,238,000) relates to
the loss of control of LPLA during 2002. As of
59
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2002, the deferred tax asset and corresponding 100% valuation
allowance relating to the loss on the Group's investment in LPLA as reported in
the Group's consolidated balance sheet, was based on a loss for tax purposes of
$37.5 million. Upon subsequent review by the Group and its tax advisors, a
capital loss of $159.4 million was reported in the Group's 2002 tax returns
filed during 2003. As the Group has fully provided for all deferred tax assets
as of both December 31, 2002 and December 31, 2003, the adjustment to the tax
loss on LPLA resulted in no income tax expense or benefit in the Group's
consolidated statement of income for 2003.
As of December 31, 2003, the U.S. subsidiaries of continuing operations had
pre-tax federal net operating loss carryforwards of approximately $21.2 million
expiring as follows: approximately $1.6 million from 2004 to 2012, and
approximately $19.6 million from 2020 to 2023. These subsidiaries have
California net operating loss carryforwards of approximately $10.0 million
expiring as follows: approximately $2.1 million in 2004 to 2006, and
approximately $7.9 million from 2012 to 2013. In addition, these subsidiaries
have federal capital loss carryforwards of $157.8 million ($154.2 million for
California purposes) that expire in 2007. The Group has recorded a full
valuation allowance for the deferred tax assets arising from these carryforward
amounts as of December 31, 2003.
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. In December 2003, the Group
filed a protest letter with the FTB. The FTB has acknowledged receipt of this
protest letter and will be assigning a hearing officer to this matter. 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.
Note 14. Shareholders' Equity
The Company has authorized 86,400,000 Ordinary Shares with a par value of
$0.05 per share. As of December 31, 2003 and 2002, there were 64,439,073
Ordinary Shares issued and outstanding.
No dividends were declared and paid in 2003. A final dividend for 2001 was
declared and paid during 2002 of $0.05 gross per Ordinary Share ($0.04 net of
20% Jersey tax) and $0.40 per ADS (net of 20% Jersey tax), or $2,032,000, in
total. Total dividends declared and paid during 2001 were $0.29 gross per
Ordinary Share ($0.232 net of 20% Jersey tax) and $2.32 per ADS (net of 20%
Jersey tax), or $11,802,000, in total.
Accumulated other comprehensive income (loss) consists of two components,
foreign currency translation adjustments and net unrealized gains and losses on
available-for-sale securities. Accumulated foreign currency translation
adjustments were $(429,000), $(717,000) and $(157,000) as of December 31, 2003,
2002 and 2001, respectively. The net unrealized losses on available-for-sale
securities after deferred policy acquisition cost amortization adjustments and
income taxes were $(10,000), $(1,896,000) and $(9,749,000) as of December 31,
2003, 2002 and 2001, respectively. Of these amounts, $0, $0 and $(9,154,000)
related to discontinued operations as of December 31, 2003, 2002 and 2001,
respectively.
The Group has two share incentive plans as described in Note 17 "Share
Incentive Plans." Under the terms of these plans, shares of the Company may be
purchased in the open market and held in trust. These shares are owned by the
employee benefit trusts, which are subsidiaries of the Company for financial
reporting purposes.
60
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Changes in the number of shares held by The London Pacific Group 1990
Employee Share Option Trust ("ESOT") and the Agent Loyalty Opportunity Trust
("ALOT") were as follows:
Years Ended December 31,
----------------------------------------------------------------
2003 2002 2001
-------------------- -------------------- --------------------
ESOT ALOT ESOT ALOT ESOT ALOT
--------- --------- --------- --------- --------- ---------
(In thousands)
Shares held as of January 1 .......... 13,247 438 13,260 438 12,374 438
Purchased ............................ - - - - 1,027 -
Exercised ............................ - - (13) - (141) -
--------- --------- --------- --------- --------- ---------
Shares held as of December 31......... 13,247(1) 438 13,247(1) 438 13,260(1) 438
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
(1) 834,000 shares were held in ADR form.
Warrants
On November 11, 2002, the Company agreed to grant 1,933,172 warrants to
subscribe for the Company's Ordinary Shares to Bank of Scotland in connection
with the extension of the Group's credit facility (which was fully repaid and
terminated in June 2003). The warrants were granted on February 14, 2003 and
have an exercise price of (pound)0.1143 (based on the average of the closing
prices of the Ordinary Shares over the trading days from November 1, 2002
through November 11, 2002), which was higher than the market price of
(pound)0.09 on November 11, 2002. These warrants are exercisable at any time
prior to February 14, 2010 and their fair value was determined to be $251,125,
based on a risk-free rate of 2.80%, volatility of 179% and a dividend yield of
zero. The Company recognized $30,625 of expense relating to these warrants in
2002. The balance of $220,500 was recognized as an expense in 2003, with the
corresponding entries to additional paid-in capital.
Note 15. Commitments and Contingencies
Lease Commitments
The Group leases furniture, fixtures and equipment under capital and
operating leases with terms in excess of one year. The Group also leases office
space under operating leases. Total rent expense on operating leases in the
continuing operations was $407,000, $400,000 and $387,000 for the years ended
December 31, 2003, 2002 and 2001, respectively.
61
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Future minimum lease payments required under capital and non-cancellable
operating leases with terms of one year or more, as of December 31, 2003, were
as follows:
Capital Operating
Leases Leases (1)
----------- -----------
(In thousands)
2004 .......................................................................... $ 8 $ 263
2005 .......................................................................... 7 114
2006........................................................................... - 115
2007........................................................................... - 114
2008........................................................................... - 114
2009 and thereafter ........................................................... - 172
----------- -----------
Total ......................................................................... 15 $ 892
-----------
-----------
Less amounts representing interest ............................................ -
-----------
Present value of net minimum lease payments ................................... $ 15
-----------
-----------
(1) Includes lease commitments on our San Francisco office lease which expire in April 2004. Management
is currently evaluating alternative office space in San Francisco for which no commitment has been
entered into as of the date of filing of this Form 10-K.
Commitments eliminated as of August 6, 2002 as a result of the actions of
the North Carolina Department of Insurance ("NCDOI") with respect to LPLA (as
described in Note 1 "Material Events") for operating and capital lease
commitments were approximately $10.8 million and $0, respectively.
Commitments eliminated following the disposals of BCM and LPA during 2003
(as described in Note 3 "Discontinued Operations") for operating and capital
lease commitments were approximately $1.9 million and $0.1 million,
respectively.
Guarantees
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others - an interpretation of FASB
Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34." The
following is a summary of the Company's agreements that the Company has
determined are within the scope of FIN 45.
Under its Memorandum and Articles of Association, the Company has agreed to
indemnify its officers and directors for certain events or occurrences arising
as a result of the officer or director serving in such capacity. The maximum
potential amount of future payments the Company could be required to make under
these indemnification agreements is unlimited. However, the Company maintains
directors and officers liability insurance that limits the Company's exposure
and enables it to recover a portion of any future amounts paid. As a result of
its insurance coverage, the Company believes the estimated fair value of these
indemnification agreements is minimal and has no liabilities recorded for these
agreements as of December 31, 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 the indemnified party as a result of the Company's activities. These
indemnification provisions sometimes
62
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
include indemnifications relating to representations made by the Company with
regard to intellectual property rights. These indemnification provisions
generally survive termination of the underlying agreement. The maximum potential
amount of future payments the Company could be required to make under these
indemnification provisions is unlimited. The Company believes the estimated fair
value of these agreements is minimal. Accordingly, the Company has no
liabilities recorded for these agreements as of December 31, 2003.
Contingencies
In the course of the administration of LPLA in rehabilitation, the 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 was involved in various legal proceedings, including claims for
damages from LPA clients of a nature considered to be normal for LPA's business.
All proceedings against LPA were resolved prior to the end of January 2004,
resulting in no claims paid or to be paid by the Group.
In October 2003, the 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. In December 2003, the Group filed a protest letter with the
FTB. The FTB has acknowledged receipt of this protest letter and will be
assigning a hearing officer to this matter. 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.
Note 16. Fair Value of Financial Instruments
Substantially all financial instruments used in the Group's trading and
investing activities are carried at fair value or amounts that approximate fair
value. Fair value is based generally on listed market prices or broker-dealer
price quotations. To the extent that prices are not readily available, estimated
fair value is based on valuation methodologies performed by management, which
evaluate company, industry, geographical and overall equity market factors that
would influence the security's fair value.
With the exception of the fixed maturity securities classified as
held-to-maturity, which are held at amortized cost, the carrying values of the
Group's financial assets are equal to estimated fair value.
Considerable judgment is required in interpreting market data used to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that could be realized in a
current market exchange. The use of different market assumptions or estimation
methodologies may have a material effect on the estimated fair value amounts.
63
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The carrying values and estimated fair values of the Group's financial
instruments were as follows:
December 31,
------------------------------------------
2003 2002
-------------------- --------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
--------- --------- --------- ---------
(In thousands)
Financial assets:
Cash and cash equivalents ....................... $ 14,408 $ 14,408 $ 15,308 $ 15,308
Cash held in escrow.............................. 999 999 - -
Investments:
Fixed maturities:
Available-for-sale........................ 25,393 25,393 30,335 30,335
Equity securities:
Trading................................... 16,882 16,882 16,505 16,505
Available-for-sale........................ 4,262 4,262 7,230 7,230
Financial liabilities:
Life insurance policy liabilities ............... 28,054 27,758 35,441 35,430
Notes payable.................................... - - 9,314 9,314
The following methods and assumptions were used by the Group in estimating
the fair value of the financial instruments presented:
Cash, Cash Equivalents and Cash Held in Escrow: The carrying amounts reported in
the consolidated balance sheet for these instruments approximated fair value.
Fixed Maturity Securities: Fair values for actively traded fixed maturity
securities classified as available-for-sale were generally based upon quoted
market prices. Fair values for private corporate debt securities were based on
the results of valuation methodologies performed by management.
Equity Securities:
a) Trading Securities: Fair values for equity securities classified as trading
were based on quoted market prices.
b) Available-for-Sale Securities: Fair values for equity securities
classified as available-for-sale were based upon the results of management's
valuation methodologies, including analysis of company, industry, geographical
and overall equity market factors which influence fair value.
Life Insurance Policy Liabilities: The balance sheet caption "life insurance
policy liabilities" includes investment-type insurance contracts (i.e., deferred
annuities). The estimated fair values of deferred annuity policies were based on
their account values after deduction of surrender charges.
Notes Payable: The carrying amounts reported in the consolidated balance sheet
for these instruments approximated fair value as the bank borrowings bear
interest at a variable rate.
Note 17. Share Incentive Plans
The Group has two share incentive plans for employees, agents and directors
of Berkeley Technology Limited and its subsidiaries that provide for the
issuance of share options and stock appreciation rights.
64
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Employee Share Option Trust
The London Pacific Group 1990 Employee Share Option Trust ("ESOT"), which
was approved by shareholders in 1990, provides for the granting of share options
to employees and directors. The objectives of this plan include retaining the
best personnel and providing for additional performance incentives. Options are
generally granted with an exercise price equal to the fair market value at the
date of grant. Such grants to employees are generally exercisable in four equal
annual installments beginning one year from the date of grant, subject to
employment continuation, and expire seven or ten years from the date of grant.
Such grants to directors are fully vested on the date of grant and expire seven
or ten years from the date of the grant.
The ESOT may purchase shares of the Company in the open market, funded each
year by a loan from the Company or its subsidiaries. While the loan is limited
up to an annual maximum of 5% of the consolidated net assets of the Group, the
ESOT is not limited as to the number of options that may be granted. The loan is
secured by the shares held in the trust, is interest free, and is eliminated in
the consolidated financial statements. The ESOT has waived its entitlement to
dividends on any shares held. See Note 14 "Shareholders' Equity" for a summary
of the share activity within the ESOT.
Share option activity for the years ended December 31, 2003, 2002 and 2001
was as follows:
2003 2002 2001
-------------------- -------------------- --------------------
Weighted- Weighted- Weighted-
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
(Options in thousands) Options Price Options Price Options Price
--------- --------- --------- --------- --------- ---------
Outstanding as of January 1...................... 13,575 $ 3.10 13,263 $ 4.59 12,213 $ 4.32
Granted.......................................... - - 5,165 0.32 2,388 5.19(1)
Exercised........................................ - - (13) 3.26 (141) 3.13
Forfeited........................................ (2,517) 3.12 (4,496) 4.35 (89) 12.44
Expired.......................................... (2,113) 3.09 (344) 2.42 (1,108) 2.48
--------- --------- --------- --------- --------- ---------
Outstanding as of December 31.................... 8,945 $ 3.10 13,575 $ 3.10 13,263 $ 4.59
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Options exercisable as of December 31............ 7,046 $ 3.82 9,297 $ 4.13 11,757 $ 4.44
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
(1) Of the options granted during 2001, those granted at market price had a weighted-average exercise price of $5.44
and those granted at less than market price had a weighted-average exercise price of $2.46. All options granted
during 2002 were granted at market price.
The Group accounts for stock based compensation using the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees." In accordance with APB 25, the Group
recorded compensation expense relating to stock options of $530,000 in 2001.
This expense represented the difference between the exercise price of options
and the market value of the underlying shares at the date of grant and was
recognized in full as all options were fully vested.
See Note 2 "Summary of Significant Accounting Policies" for a
reconciliation of net income (loss) as reported and as adjusted under SFAS 123.
65
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Summary information about the Group's share options outstanding as of
December 31, 2003 is as follows:
Options Outstanding Options Exercisable
------------------------------------------------- ------------------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ------------ --------------- ----------- ----------- ------------- -----------
(In thousands) (Years) (In thousands)
$ 0.10 - $0.50 2,770 8.58 $ 0.32 918 $ 0.35
0.51 - 5.00 3,930 1.79 3.41 3,930 3.41
5.01 - 10.00 2,165 7.24 5.42 2,118 5.41
10.01 - 21.00 80 6.68 21.00 80 21.00
- --------------- --------------- ---------- ---------- ------------- ----------
$ 0.10 - $21.00 8,945 5.26 $ 3.10 7,046 $ 3.82
- --------------- --------------- ---------- ---------- ------------- ----------
- --------------- --------------- ---------- ---------- ------------- ----------
Agent Loyalty Opportunity Trust
The Agent Loyalty Opportunity Trust ("ALOT") provides for the granting of
stock appreciation rights ("SARs") on the Company's Ordinary Shares to agents of
LPLA. The ALOT was established in 1997 without shareholders' approval. Each
award unit entitles the holder to cash compensation equal to the difference
between the Company's prevailing share price and the exercise price. The award
units are exercisable in four equal annual installments commencing on the first
anniversary of the date of grant and are forfeited upon termination of the
agency contract. Vesting of the award in any given year is also contingent on
the holder of the award surpassing a predetermined benchmark tied to sales and
persistency. The SARs expire seven years from the date of grant. Given that LPLA
is under the administrative supervision of the NCDOI and is no longer selling
policies, the status of these awards is unclear.
The ALOT may purchase Ordinary Shares in the open market, funded by a loan
from a Group subsidiary. The loan is secured by the shares held in the trust and
bears interest based upon the trust's net income before interest for each
financial period. The trust receives dividends on all Ordinary Shares held. The
loan, interest income and dividend income are eliminated in the consolidated
financial statements. See Note 14 "Shareholders' Equity" for a summary of the
share activity within the ALOT.
SAR activity for the years ended December 31, 2003, 2002 and 2001 was as
follows:
2003 2002 2001
-------------------- -------------------- --------------------
Weighted- Weighted- Weighted-
Number Average Number Average Number Average
of Award Exercise of Award Exercise of Award Exercise
(Award units in thousands) Units Price Units Price Units Price
--------- --------- --------- --------- --------- ---------
Outstanding as of January 1...................... 388 $ 3.73 404 $ 3.73 438 $ 3.71
Granted.......................................... - - - - - -
Exercised........................................ - - - - (10) 3.46
Forfeited........................................ - - (16) 3.88 (24) 3.41
--------- --------- --------- --------- --------- ---------
Outstanding as of December 31.................... 388 $ 3.73 388 $ 3.73 404 $ 3.73
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Award units exercisable as of December 31........ 284 $ 3.62 284 $ 3.62 173 $ 3.64
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
66
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Summary information about the Group's SARs outstanding as of December 31,
2003 is as follows:
Award Units Outstanding Award Units Exercisable
----------------------------------------------- ------------------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- --------------- ------------- ---------- ------------ ------------ ------------
(In thousands) (Years) (In thousands)
$ 3.35 309 0.99 $ 3.35 243 $ 3.35
5.19 79 2.28 5.19 41 5.19
- --------------- ------------ ---------- ----------- ----------- ------------
$ 3.35 - $5.19 388 1.25 $ 3.73 284 $ 3.62
- --------------- ------------ ---------- ----------- ----------- ------------
- --------------- ------------ ---------- ----------- ----------- ------------
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation, an Interpretation of APB Opinion No. 25," which was
effective for all awards granted after July 1, 2000.
Compensation expense relating to award grants in the ALOT was accounted for
under APB 25, prior to the issuance of FIN 44. Thus, no expense was recognized
at the grant dates because all awards were made with an exercise price equal to
the prevailing market value. However, upon exercise of the awards, compensation
expense of $0, $0 and $20,000 for the years ended December 31, 2003, 2002 and
2001, respectively, was recognized in the consolidated income statements as part
of the loss from discontinued operations. This compensation expense was
capitalized in the consolidated balance sheets as deferred policy acquisition
costs, in accordance with the Group's accounting policy as stated in Note 2
"Summary of Significant Accounting Policies."
Note 18. Pension Plans
Jersey Plan
The Group provided a defined benefit pension plan for its Jersey, Channel
Islands, employees. This plan is in the process of being terminated. It is
anticipated that this will be completed during the first quarter of 2004. The
plan assets are being distributed to the participants of the plan on a pro rata
basis to their accrued benefit entitlements under the plan. The Group will not
have any ongoing liabilities in respect of the plan following its dissolution.
The plan provided benefits on retirement at age sixty based on one sixtieth
of an employee's final average salary over the employee's last three years of
employment for each full year of service, and life insurance coverage for
current employees. There are eight individuals (six current employees and two
ex-employees) who were entitled to future benefits under the plan as at December
31, 2003. The plan was funded by contributions from the Group. The assets of the
plan are held in a trust for the benefit of the employees and were managed by an
external asset manager. The assets are currently in cash pending distribution to
employees.
An actuarial report and valuation by an independent actuary was required
every three years. The most recent report and actuarial valuation received was
as of December 31, 2000. At that time, the trust had assets of $1,153,000 and
the actuarial valuation of past service ongoing liabilities was $1,746,000,
indicating a past
67
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
service deficit of $593,000 in the plan. There were, as at that date, twelve
individuals (nine employees and three ex-employees) who were entitled to future
benefits under the plan. The actuary recommended that the past service deficit
be made up and that contributions be increased from 20.0% to 21.5% of
participants' salaries to cover future liabilities. Additional contributions,
sufficient to cover the deficit indicated in that actuarial valuation, were made
to the trust during 2002 and contributions on salaries were increased to 21.5%
effective from the beginning of 2001.
The Group made contributions of $148,000, $731,000 and $361,000 to the
trust in 2003, 2002 and 2001, respectively. Assets held by the trust were
$2,272,000, $1,721,000 and $1,247,000 as of December 31, 2003, 2002 and 2001,
respectively.
U.K. Plan
The Group provides a defined contribution plan for its U.K. employees.
There is currently one participant in the plan. The Group has no ongoing
liabilities associated with the plan. Contributions of $41,000, $143,000 and
$52,000 were made by the Group to the plan in 2003, 2002 and 2001, respectively.
Of the 2002 contribution, $94,000 was offset by a salary waiver.
Note 19. Earnings Per Share and ADS
Earnings (loss) per ADS are equivalent to ten times earnings (loss) per
Ordinary Share, following the one-for-ten reverse split in June 2002. All ADS
amounts shown below have been restated to reflect this split.
A reconciliation of the numerators and denominators for the basic and
diluted earnings (loss) per share calculations in accordance with Statement of
Financial Accounting Standard No. 128 ("SFAS 128"), "Earnings per Share," is as
follows:
Years Ended December 31,
-------------------------------------
2003 2002 2001
----------- ----------- -----------
(In thousands, except share, per share
and ADS amounts)
Income (loss) from continuing operations............................... $ 1,089 $ (55,769) $ (223,140)
Income (loss) on discontinued operations............................... 9,927 (149,735) (121,644)
----------- ----------- -----------
Net income (loss)...................................................... $ 11,016 $ (205,504) $ (344,784)
----------- ----------- -----------
----------- ----------- -----------
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 50,753,084 50,984,146
----------- ----------- -----------
Basic earnings (loss) per share:
Continuing operations ................................................. $ 0.02 $ (1.10) $ (4.38)
Discontinued operations................................................ 0.20 (2.95) (2.38)
----------- ----------- -----------
$ 0.22 $ (4.05) $ (6.76)
----------- ----------- -----------
----------- ----------- -----------
Basic earnings (loss) per ADS:
Continuing operations.................................................. $ 0.21 $ (10.99) $ (43.77)
Discontinued operations................................................ 1.96 (29.50) (23.85)
----------- ----------- -----------
$ 2.17 $ (40.49) $ (67.62)
----------- ----------- -----------
----------- ----------- -----------
68
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31,
-------------------------------------
2003 2002 2001
----------- ----------- -----------
(In thousands, except share, per share
and ADS amounts)
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 50,753,084 50,984,146
Effect of dilutive securities (warrants and employee share options) .. 433,706 - -
----------- ----------- -----------
Weighted-average number of Ordinary Shares used in diluted
earnings per share calculations..................................... 51,187,898 50,753,084 50,984,146
----------- ----------- -----------
----------- ----------- -----------
Diluted earnings (loss) per share:
Continuing operations ................................................. $ 0.02 $ (1.10) $ (4.38)
Discontinued operations................................................ 0.20 (2.95) (2.38)
----------- ----------- -----------
$ 0.22 $ (4.05) $ (6.76)
----------- ----------- -----------
----------- ----------- -----------
Diluted earnings (loss) per ADS:
Continuing operations.................................................. $ 0.21 $ (10.99) $ (43.77)
Discontinued operations................................................ 1.94 (29.50) (23.85)
----------- ----------- -----------
$ 2.15 $ (40.49) $ (67.62)
----------- ----------- -----------
----------- ----------- -----------
As the Company recorded a net loss for the years ended December 31, 2002
and 2001, the calculations of diluted earnings per share for these years do not
include potentially dilutive employee share options and warrants issued to the
Bank of Scotland as they are anti-dilutive and, if included, would have resulted
in a reduction of the net loss per share. If the Company had reported net income
for the years ended December 31, 2002 and 2001, there would have been an
additional 347,258 and 3,022,963 shares, respectively, included in the
calculations of diluted earnings per share for these years.
Note 20. Transactions with Related Parties
The Group paid legal fees of approximately $76,000, $130,000 and $60,000
during 2003, 2002 and 2001, respectively, to a law firm of which one of its
directors, Victor A. Hebert, is a member.
Note 21. Business Segment and Geographical Information
The Company's reportable operating segments are classified according to its
remaining businesses of life insurance and annuities, and venture capital and
consulting.
Due to the sales of BCM and LPA in 2003 (see Note 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 years ended
December 2003, 2002 and 2001. Due to the loss of control of LPLA (see also Note
1 "Material Events"), the results of operations of LPLA for the years ended
December 2002 and 2001 have been included in discontinued operations.
69
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Intercompany transfers between reportable operating segments are accounted
for at prices which are designed to be representative of unaffiliated third
party transactions. During the years ended December 31, 2003, 2002 and 2001, the
venture capital and consulting segment generated portfolio management fees from
LPLA (discontinued operations) of $0, $2,908,000 and $9,924,000, respectively.
These portfolio management fees are included in the revenues of continuing
operations and have not been eliminated in the consolidated financial
statements. These management fees were approved by the insurance regulatory body
in LPLA's U.S. state of domicile.
The venture capital and consulting segment recorded net realized investment
losses in the amount of $1,603,000 during 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
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:
Years Ended December 31,
-------------------------------------
2003 2002 2001
----------- ----------- -----------
(In thousands)
Jersey................................................................. $ 4,220 $ (22,517) $ (146,416)
Guernsey............................................................... 4,926 (13,636) (59,220)
United States.......................................................... 52 2,816 11,260
----------- ----------- -----------
Consolidated revenues and net investment gains (losses)
for continuing operations.......................................... $ 9,198 $ (33,337) $ (194,376)
----------- ----------- -----------
----------- ----------- -----------
Total assets by geographic segment were as follows:
December 31,
------------------------
2003 2002
----------- -----------
(In thousands)
Jersey......................................................................... $ 50,677 $ 52,221
Guernsey....................................................................... 3,408 8,148
United States.................................................................. 9,428 11,458
----------- -----------
Consolidated total assets - continuing operations ............................. $ 63,513 71,827
-----------
-----------
Discontinued operations (United States)........................................ 8,390
Elimination due to intercompany balances....................................... (4)
-----------
Consolidated total assets as previously reported .................................. $ 80,213
-----------
-----------
Revenues and income (loss) before income taxes for the Company's reportable
operating segments included in continuing operations, based on management's
internal reporting structure, were as follows:
70
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31,
-------------------------------------
2003 2002 2001
----------- ----------- -----------
(In thousands)
Revenues:
Life insurance and annuities (1)....................................... $ 4,458 $ (9,349) $ (155,673)
Venture capital and consulting (2) .................................... 4,687 (24,519) (40,670)
----------- ----------- -----------
9,145 (33,868) (196,343)
Reconciliation of segment amounts to consolidated amounts:
Interest income ....................................................... 53 531 1,967
----------- ----------- -----------
Consolidated revenues and net investment gains (losses)
for continuing operations.......................................... $ 9,198 $ (33,337) $ (194,376)
----------- ----------- -----------
----------- ----------- -----------
Income (loss) from continuing operations before income taxes:
Life insurance and annuities (1)....................................... $ 1,577 $ (19,637) $ (163,873)
Venture capital and consulting (2) .................................... 3,571 (28,149) (51,262)
----------- ----------- -----------
5,148 (47,786) (215,135)
Reconciliation of segment amounts to consolidated amounts:
Interest income ....................................................... 53 531 1,967
Corporate expenses .................................................... (3,478) (5,869) (5,635)
Goodwill amortization and write-offs................................... - (389) (48)
Interest expense ...................................................... (676) (965) (2,182)
----------- ----------- -----------
Consolidated income (loss) from continuing operations
before income taxes ............................................... $ 1,047 $ (54,478) $ (221,033)
----------- ----------- -----------
----------- ----------- -----------
(1) Netted against the revenues (investment income) of the life insurance and annuities segment are management
fees paid to BCM (discontinued operations) of $5,000, $39,000 and $47,000 in 2003, 2002 and 2001, respectively.
(2) Included in the revenues of the venture capital and consulting segment are management fees from LPLA (discontinued
operations) of $0, $2,908,000 and $9,924,000 in 2003, 2002 and 2001, respectively.
Assets attributable to each of the Company's reportable operating segments,
based on management's reporting structure, were as follows:
December 31,
------------------------
2003 2002
----------- -----------
(In thousands)
Assets:
Life insurance and annuities................................................... $ 47,929 $ 51,557
Venture capital and consulting................................................. 3,442 7,710
Corporate and other............................................................ 12,142 12,560
----------- -----------
Consolidated total assets - continuing operations .............................. $ 63,513 71,827
-----------
-----------
Discontinued operations (BCM and LPA).............................................. 8,390
Elimination due to intercompany balances........................................... (4)
-----------
Consolidated total assets as previously reported .................................. $ 80,213
-----------
-----------
71
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 22. Selected Quarterly Financial Information (Unaudited)
Unaudited quarterly financial information (in thousands, except per share
and ADS amounts) is as follows:
2003
-----------------------------------------------------
First Second Third Fourth Full
Quarter(1) Quarter Quarter Quarter Year
--------- --------- --------- --------- ---------
Continuing operations:
Revenues including net investment gains (losses)........ $ 1,524 $ 7,829 $ (4,617) $ 4,462 $ 9,198
Income (loss) before income taxes ...................... (865) 5,448 (6,349) 2,813 1,047
Net income (loss)....................................... (872) 5,443 (6,346) 2,864 1,089
Discontinued operations:
Net income (loss)....................................... (982) 10,909 - - 9,927
Total continuing and discontinued operations:
Net income (loss) ...................................... (1,854) 16,352 (6,346) 2,864 11,016
Basic earnings (loss) per share:
Continuing operations .................................. $ (0.02) $ 0.11 $ (0.13) $ 0.06 $ 0.02
Discontinued operations................................. (0.02) 0.21 - - 0.20
--------- --------- --------- --------- ---------
$ (0.04) $ 0.32 $ (0.13) $ 0.06 $ 0.22
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic earnings (loss) per ADS:
Continuing operations .................................. $ (0.17) $ 1.07 $ (1.25) $ 0.56 $ 0.21
Discontinued operations................................. (0.20) 2.15 - - 1.96
--------- --------- --------- --------- ---------
$ (0.37) $ 3.22 $ (1.25) $ 0.56 $ 2.17
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted earnings (loss) per share:
Continuing operations .................................. $ (0.02) $ 0.11 $ (0.13) $ 0.06 $ 0.02
Discontinued operations................................. (0.02) 0.21 - - 0.20
--------- --------- --------- --------- ---------
$ (0.04) $ 0.32 $ (0.13) $ 0.06 $ 0.22
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted earnings (loss) per ADS:
Continuing operations .................................. $ (0.17) $ 1.06 $ (1.25) $ 0.56 $ 0.21
Discontinued operations................................. (0.20) 2.13 - - 1.94
--------- --------- --------- --------- ---------
$ (0.37) $ 3.19 $ (1.25) $ 0.56 $ 2.15
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
(1) Reclassifications have been made related to discontinued operations - see Note 3.
72
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2002 (1)
-----------------------------------------------------
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
--------- --------- --------- --------- ---------
Continuing operations:
Revenues including net investment gains (losses)........ $ (4,303) $ (13,794) $ (4,897) $ (10,343) $ (33,337)
Loss before income taxes ............................... (9,879) (20,817) (10,750) (13,032) (54,478)
Net loss................................................ (11,030) (22,979) (8,952) (12,808) (55,769)
Discontinued operations:
Net loss................................................ (19,275) (86,116) (41,199) (3,145) (149,735)
Total continuing and discontinued operations:
Net loss................................................ (30,305) (109,095) (50,151) (15,953) (205,504)
Basic loss per share:
Continuing operations .................................. $ (0.22) $ (0.45) $ (0.18) $ (0.25) $ (1.10)
Discontinued operations................................. (0.37) (1.70) (0.81) (0.06) (2.95)
--------- --------- --------- --------- ---------
$ (0.59) $ (2.15) $ (0.99) $ (0.31) $ (4.05)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic loss per ADS: (2)
Continuing operations .................................. $ (2.17) $ (4.53) $ (1.76) $ (2.52) $ (10.99)
Discontinued operations................................. (3.80) (16.97) (8.12) (0.62) (29.50)
--------- --------- --------- --------- ---------
$ (5.97) $ (21.50) $ (9.88) $ (3.14) $ (40.49)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted loss per share:
Continuing operations .................................. $ (0.22) $ (0.45) $ (0.18) $ (0.25) $ (1.10)
Discontinued operations................................. (0.37) (1.70) (0.81) (0.06) (2.95)
--------- --------- --------- --------- ---------
$ (0.59) $ (2.15) $ (0.99) $ (0.31) $ (4.05)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted loss per ADS: (2)
Continuing operations .................................. $ (2.17) $ (4.53) $ (1.76) $ (2.52) $ (10.99)
Discontinued operations................................. (3.80) (16.97) (8.12) (0.62) (29.50)
--------- --------- --------- --------- ---------
$ (5.97) $ (21.50) $ (9.88) $ (3.14) $ (40.49)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
(1) Reclassifications have been made related to discontinued operations - see Note 3.
(2) ADS amounts have been restated to reflect the one-for-ten reverse split in June 2002.
Due to the method required by SFAS 128 to calculate per share and ADS
amounts, the quarterly per share and ADS amounts do not total to the full year
per share and ADS amounts.
73
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Following the resignation of PricewaterhouseCoopers on June 19, 2002, BDO
International and BDO Seidman, LLP were appointed by the Board of Directors as
the Company's independent auditors with effect from July 31, 2002. BDO
International transferred their business from a partnership to a limited
liability partnership ("LLP") with effect from January 1, 2004. All non-U.S.
audit services are now provided by BDO Stoy Hayward, LLP, who were re-appointed
as the Company's auditors on January 28, 2004.
In connection with the audit for the year ended December 31, 2001, and the
review of the Company's unaudited interim financial statements for the quarter
ended March 31, 2002, there were no disagreements between the Company and
PricewaterhouseCoopers on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of PricewaterhouseCoopers
would have caused them to make reference thereto in their report on the
financial statements for such periods, except that there were disagreements
between the Company's management and the representatives of
PricewaterhouseCoopers with respect to the nature, extent and categorization of
the impairment reviews and fair value evaluations of portfolio securities in
accordance with Statement of Financial Accounting Standard No. 115 ("SFAS 115"),
"Accounting for Certain Investments in Debt and Equity Securities." These
disagreements on the application of SFAS 115 were subsequently resolved to the
satisfaction of PricewaterhouseCoopers.
PricewaterhouseCoopers and the Audit Committee of the Board of Directors
discussed the foregoing. The Company authorized PricewaterhouseCoopers to
respond fully to the inquiries of the successor auditors concerning the subject
matter of the foregoing.
In connection with the audit for the year ended December 31, 2001, and
through June 19, 2002, there were no "reportable events" as defined within
Regulation S-K Item 304(a)1(v)(A), except that, in connection with its audit of
the Company's financial statements for the year ended December 31, 2001 and its
review of the Company's unaudited interim financial statements for the quarter
ended March 31, 2002, PricewaterhouseCoopers recommended that steps be taken to
establish an internal audit function, improve the production of timely and
reliable financial reports in accordance with U.S. GAAP, and to strengthen the
corporate governance structure.
In response to these recommendations, all members of the Audit Committee
now participate in all Audit Committee meetings. The loss of control of the U.S.
life insurance subsidiary in August 2002 reduced the size and complexity of the
Group considerably. After discussion with the new auditors, the Audit Committee
determined that the appointment of an internal auditor was not necessary and
that the U.S. GAAP expertise within the Company, as supported by outside
consultants when deemed necessary, is sufficient.
Item 9A. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in our filings under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the periods specified in the rules and forms of the Securities
and Exchange Commission. Such information is accumulated and communicated to our
management, including our chief executive officer and chief financial officer,
as appropriate, to allow timely decisions regarding required disclosure. Our
management, including the chief executive officer and the chief financial
officer, recognizes that any set of controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives.
As of the end of the period covered by this annual report on Form 10-K, we
carried out an evaluation, under the supervision and with the participation of
our management, including our chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on such evaluation, our chief executive officer
and chief financial officer concluded that our
74
disclosure controls and procedures are effective in timely alerting them to
material information required to be included in our periodic SEC filings.
There have been no significant changes in our internal controls or in other
factors that could materially affect the internal controls subsequent to the
date of their evaluation in connection with the preparation of this annual
report on Form 10-K.
PART III
Certain information required by Part III is omitted from this Form 10-K and
is incorporated by reference to our definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on August 4, 2004 (the "Proxy Statement"),
which will be filed with the SEC not later than 120 days after the end of the
fiscal year covered by this Form 10-K.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are as follows:
Arthur I. Trueger, Executive Chairman: Mr. Trueger, age 55, is the founder
and a principal shareholder of Berkeley Technology Limited. He has worked for us
for more than 27 years and holds A.B., M.A. and J.D. degrees from the University
of California.
Ian K. Whitehead, Chief Financial Officer: Mr. Whitehead, age 49, has held
the position of Chief Financial Officer of Berkeley Technology Limited since he
joined us in 1990. Mr. Whitehead is a member of the Institute of Chartered
Accountants in England and Wales.
Information regarding our directors is incorporated by reference to the
sections entitled "Proposal 2 - Election of Director" and "Board of Directors
and Committees" in the Proxy Statement.
Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, is incorporated by reference to the section
entitled "Other Information About Directors and Executive Officers" in the Proxy
Statement.
Information regarding our Code of Ethics, adopted on November 12, 2003, is
incorporated by reference to the section entitled "Code of Ethics" in the Proxy
Statement. Our Code of Ethics is filed as Exhibit 14.1 of this Form 10-K.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
sections entitled "Executive Compensation" and "Directors' Compensation" in our
Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information regarding security ownership of certain beneficial owners
and management is incorporated by reference to the section entitled "Information
Regarding Beneficial Ownership of Principal Shareholders, Directors and
Executive Officers" in our Proxy Statement.
75
The following table is a summary of selected information for our equity
compensation plans as of December 31, 2003.
Number of Shares
Number of Shares to Weighted-Average Remaining Available for
be Issued Upon Exercise Exercise Price of Future Issuance Under
of Outstanding Options, Outstanding Options, Equity Compensation
Warrants and Rights Warrants and Rights Plans
----------------------- -------------------- ----------------------
Equity compensation plans
approved by shareholders.............. 8,945,000(1) $3.10 (1)
Equity compensation plans not
approved by shareholders.............. 388,100(1) 3.73 (1)
--------------- --------
Total................................... 9,333,100 $3.13
--------------- --------
--------------- --------
(1) Our equity compensation plans do not contain a limit on the number of options that may be granted to employees.
However, the plans do not allow for the issuance of previously authorized and unissued shares to meet the
obligations of the plans upon an employee option exercise. When an option is granted, the trust that administers
the plan borrows funds from us or one of our subsidiaries and uses those funds to purchase the number of shares
underlying the option grant. The maximum loan allowed in any given year is equal to 5% of consolidated net assets
as of the end of the previous fiscal year.
Information regarding the features of the equity compensation plan not
approved by shareholders is incorporated by reference to Note 17 to the
Consolidated Financial Statements in Item 8 of this Form 10-K.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
section entitled "Other Information About Directors and Executive Officers" in
our Proxy Statement.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference to the
section entitled "Report of the Audit Committee of the Board of Directors" in
our Proxy Statement.
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Form 10-K:
1. Financial Statements: Page
The following consolidated financial statements of us and
subsidiaries are included in Item 8:
Reports of Independent Certified Public Accountants................... 28
Consolidated Balance Sheets as of December 31, 2003 and 2002 ......... 30
Consolidated Statements of Income for the Years Ended
December 31, 2003, 2002 and 2001 ................................. 31
76
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001 ................................. 33
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 2003, 2002 and 2001 ..................... 35
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2003, 2002 and 2001 ................................. 37
Notes to the Consolidated Financial Statements ....................... 38
2. Financial Statement Schedules:
The following financial statement schedules of Berkeley Technology Limited
and subsidiaries are included in this Form 10-K immediately following Item
15 and should be read in conjunction with the consolidated financial
statements and notes thereto included in Item 8:
Schedule I - Summary of Investments - Other Than Investments in
Related Parties .................................................. 81
Schedule II - Condensed Financial Information of Registrant
Condensed Balance Sheets as of December 31, 2003 and 2002 ........ 82
Condensed Statements of Income for the Years Ended
December 31, 2003, 2002 and 2001 ............................... 83
Condensed Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001 ............................... 84
Note to Condensed Financial Statements ........................... 85
Schedule III - Supplementary Insurance Information ................... 86
All other financial statement schedules required by Regulation S-X have
been omitted because they are not applicable or the required information
is included in the applicable consolidated financial statements or notes
thereto in Item 8 "Financia Statements and Supplementary Data" of this
Form 10-K.
3. Exhibits:
The following exhibits of Berkeley Technology Limited and subsidiaries
are filed herewith or incorporated by reference as indicated below:
Exhibit
Number Description
- --------- -----------
3.(I).1 Memorandum and Articles of Association of Berkeley Technology
Limited, as amended and restated on April 18, 2000 (filed previously
as Exhibit 3.(I) to our Form 10-Q for the quarter ended June 30,
2000).
3.(I).2 Certificate of Incorporation on Change of Name dated June 12, 2003.
4.1 Specimen Ordinary Share certificate (filed previously as Exhibit 4.1
to our Form 10-K for the year ended December 31, 2000).
77
4.2 Form of Deposit Agreement dated September 25, 1992, as amended and
restated as of November 24, 1993, as further amended and restated as
of March 14, 2000, among us, The Bank of New York as Depositary, and
all Owners and Holders from time to time of American Depositary
Receipts issued thereunder (filed previously as Exhibit A to our
Registration Statement on Form F-6 (Registration No. 333-11658) dated
March 14, 2000).
4.3 Letter Agreement dated August 25, 1992 between The Bank of New York
and us covering the Basic Administration Charge relating to the
Deposit Agreement (shown above as Exhibit 4.2) (filed previously as
Exhibit 3.8 to our Post-Effective Amendment No. 2 to our Registration
Statement on Form 20-F/A dated August 31, 1993).
4.4 Form of Deposit Agreement as amended and restated as of June 24,
2002, among us, The Bank of New York as Depositary, and all Owners
and Holders from time to time of American Depositary Receipts issued
thereunder (filed previously as Exhibit 4.4 to our Form 10-Q for the
quarter ended June 30, 2002).
4.5 Warrant Agreement dated February 14, 2003 between us and the Governor
and Company of the Bank of Scotland relating to the Term Loan and
Guarantee Facility dated December 20, 2002 (filed previously as
Exhibit 4.5 to our Form 10-Q for the quarter ended March 31, 2003).
4.6 Specimen Ordinary Share certificate, as amended on June 12, 2003.
10.1.1 Multicurrency Term Facility Agreement dated May 2, 2000 between us
and the Governor and Company of the Bank of Scotland (filed
previously as Exhibit 10.1.1 to our Form 10-Q for the quarter ended
September 30, 2000).
10.1.2 Term Loan and Guarantee Facility of up to $23,000,000, dated December
20, 2002 between us and the Governor and Company of the Bank of
Scotland (filed previously as Exhibit 10.1.2 to our Form 10-K for the
year ended December 31, 2002).
10.1.3 Stock Pledge Agreement dated January 29, 2003 between Berkeley
International Capital Limited and the Governor and Company of the
Bank of Scotland, relating to the Term Loan and Guarantee Facility
dated December 20, 2002 (filed previously as Exhibit 10.1.3 to our
Form 10-Q for the quarter ended March 31, 2003).
10.1.4 Stock Pledge Agreement dated February 7, 2003 between Berkeley
International Capital Limited and the Governor and Company of the
Bank of Scotland, relating to the Term Loan and Guarantee Facility
dated December 20, 2002 (filed previously as Exhibit 10.1.4 to our
Form 10-Q for the quarter ended March 31, 2003).
10.1.5 Stock Pledge Agreement dated February 19, 2003 between Berkeley (USA)
Holdings Limited and the Governor and Company of the Bank of
Scotland, relating to the Term Loan and Guarantee Facility dated
December 20, 2002 (filed previously as Exhibit 10.1.5 to our Form
10-Q for the quarter ended March 31, 2003).
10.1.6 Security Agreement dated February 28, 2003 between us and the
Governor and Company of the Bank of Scotland relating to the Term
Loan and Guarantee Facility dated December 20, 2002 (filed previously
as Exhibit 10.1.6 to our Form 10-Q for the quarter ended March 31,
2003).
10.2.1 Settlement dated February 16, 1990 among (1) us, (2) John Gerald
Patrick Wheeler and (3) Ian Walter Strang, constituting The London
Pacific Group 1990 Employee Share Option Trust (filed previously as
Exhibit 3.2 to our Post-Effective Amendment No. 2 to Registration
Statement on Form 20-F/A dated August 31, 1993).
78
10.2.2 Executed Instrument dated March 18, 1994 among (1) John Gerald
Patrick Wheeler, (2) Ian Walter Strang and (3) Richard John Pirouet,
relating to The London Pacific Group 1990 Employee Share Option Trust
(filed previously as Exhibit 3.2.1 to our Annual Report on Form 20-F
dated June 10, 1994).
10.2.3 Executed Instrument dated September 27, 1994 among (1) Ian Walter
Strang, (2) Richard John Pirouet and (3) Clive Aubrey Charles
Chaplin, relating to The London Pacific Group 1990 Employee Share
Option Trust (filed previously as Exhibit 3.2.2 to our Annual Report
on Form 20-F dated June 29, 1995).
10.2.4 Executed Instrument dated March 3, 1995 among (1) Ian Walter Strang,
(2) Richard John Pirouet and (3) Clive Aubrey Charles Chaplin,
relating to The London Pacific Group 1990 Employee Share Option Trust
(filed previously as Exhibit 3.2.3 to our Annual Report on Form 20-F
dated June 29, 1995).
10.2.5 Executed Instrument dated August 22, 1996 among (1) Richard John
Pirouet, (2) Clive Aubrey Charles Chaplin and (3) Ronald William
Green, relating to The London Pacific Group 1990 Employee Share
Option Trust (filed previously as Exhibit 3.2.4 to our Annual Report
on Form 20-F dated June 30, 1997).
10.2.6 Executed Instrument dated August 29, 1998 among (1) Richard John
Pirouet, (2) Clive Aubrey Charles Chaplin, (3) Ronald William Green
and (4) Victor Aloysius Hebert, relating to The London Pacific Group
1990 Employee Share Option Trust (filed previously as Exhibit 3.2.5
to our Annual Report on Form 20-F dated June 30, 1999).
10.2.7 Executed Instrument dated May 31, 2000 among (1) Richard John
Pirouet, (2) Clive Aubrey Charles Chaplin, (3) Ronald William Green
and (4) Victor Aloysius Hebert, relating to The London Pacific Group
1990 Employee Share Option Trust (filed previously as Exhibit 10.2.1
to our Form 10-Q for the quarter ended September 30, 2000).
10.2.8 Executed Instrument dated May 31, 2000 among (1) Richard John
Pirouet, (2) Clive Aubrey Charles Chaplin, (3) Ronald William Green,
(4) Victor Aloysius Hebert and (5) Christopher Byrne, relating to The
London Pacific Group 1990 Employee Share Option Trust (filed
previously as Exhibit 10.2.2 to our Form 10-Q for the quarter ended
September 30, 2000).
10.3.1(1) Agreement dated July 1, 1990 between us and Ian Kenneth Whitehead
(filed previously as Exhibit 10.3.1 to our Form 10-K for the year
ended December 31, 2000).
10.3.2(1) Berkeley (USA) Holdings Limited Amended and Restated 1993 Deferred
Compensation Plan dated December 16, 1999 (filed previously as
Exhibit 10.3.2 to our Form 10-K for the year ended December 31,
2000).
10.3.3(1) London Pacific Advisers Limited Retirement Scheme confirmation dated
December 5, 2000 for Ian Kenneth Whitehead (filed previously as
Exhibit 10.3.3 to our Form 10-K for the year ended December 31,
2001).
10.4.1 Settlement dated May 23, 1997 among BG Services Limited and A.L.O.T.
Trustee Limited establishing Agent Loyalty Opportunity Trust (filed
previously as Exhibit 10.4.1 to our Form 10-K for the year ended
December 31, 2001).
10.4.2 Executed Deed dated July 16, 1997 by A.L.O.T. Trustee Limited
relating to Agent Loyalty Opportunity Trust (filed previously as
Exhibit 10.4.2 to our Form 10-K for the year ended December 31,
2001).
79
10.4.3 Executed Deed dated August 13, 1997 by A.L.O.T. Trustee Limited
relating to Agent Loyalty Opportunity Trust (filed previously as
Exhibit 10.4.3 to our Form 10-K for the year ended December 31,
2001).
10.4.4 Executed Deed dated August 20, 1998 by A.L.O.T. Trustee Limited
relating to Agent Loyalty Opportunity Trust (filed previously as
Exhibit 10.4.4 to our Form 10-K for the year ended December 31,
2001).
10.4.5 Executed Deed of Amendment and Appointment dated December 11, 2001
among Berkeley International Capital Limited and A.L.O.T. Trustee
Limited relating to Agent Loyalty Opportunity Trust (filed previously
as Exhibit 10.4.5 to our Form 10-K for the year ended December 31,
2001).
10.5 Asset Purchase Agreement dated March 7, 2003 between Berkeley Capital
Management ("BCM"), Berkeley (USA) Holdings Limited and Berkeley
Capital Management LLC relating to the sale of substantially all of
the assets and operations of BCM (filed previously as Exhibit 10.5 to
our Form 10-Q for the quarter ended March 31, 2003).
10.6 Purchase Agreement, dated May 9, 2003, for the acquisition of London
Pacific Advisory Services, Inc. and London Pacific Securities, Inc.
by SunGard Business Systems Inc. (filed previously as Exhibit 10.6 to
our Form 10-Q for the quarter ended June 30, 2003).
14.1 Code of Ethics.
21 Subsidiaries of the Company as of February 27, 2004.
31.1 Certification by the Company's Executive Chairman pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification by the Company's Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification by the Company's Executive Chairman pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification by the Company's Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
__________
(1) Management contract or compensatory arrangement filed in response to
Item 15(a)(3) of the instructions to Form 10-K.
(b) Reports on Form 8-K:
We filed one current report on Form 8-K during the fourth quarter of 2003
as follows:
(1) The Form 8-K filed on November 14, 2003 announcing our financial
results for the quarter ended September 30, 2003.
(c) Our exhibits are listed in Item 15(a)(3) above.
(d) Our financial statement schedules follow on pages 81 through 86.
80
SCHEDULE I - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
As of December 31, 2003
Column A Column B Column C Column D
Amount at
Which Shown
in Consolidated
Fair Balance
Type of Investments Cost (1) Value Sheet (2)
- ----------------------------------------------------------------- ----------- ----------- -----------
(In thousands)
Fixed maturity securities:
Bonds:
United States government and government
agencies and authorities................................... $ - $ - $ -
States, municipalities and political subdivisions............ - - -
Foreign governments.......................................... - - -
Public utilities............................................. - - -
Convertibles and bonds with warrants attached................ - - -
All other corporate bonds.................................... 25,403 25,393 25,393
Redeemable preferred stock...................................... - - -
----------- ----------- -----------
Total fixed maturity securities................................. 25,403 $ 25,393 25,393
----------- ----------- -----------
-----------
Equity securities:
Common stocks:
Industrial, miscellaneous and all other...................... 4,587 $ 16,925 16,925
Non-redeemable preferred stocks................................. 4,219 4,219 4,219
----------- ----------- -----------
Total equity securities......................................... 8,806 $ 21,144 21,144
----------- ----------- -----------
-----------
Total investments............................................... $ 34,209 $ 46,537
----------- -----------
----------- -----------
(1) Cost of fixed maturity securities is original cost, reduced by other-than-temporary impairments,
repayments and adjusted for amortization of premiums and accretion of discounts. Cost of equity securities
is original cost, reduced by other-than-temporary impairments.
(2) Differences between amounts reflected in Column B or Column C and amounts at which shown in the
consolidated balance sheet reflected in Column D result from the application of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
Fixed maturity securities are classified as either available-for-sale or held-to-maturity.
Available-for-sale securities are recorded at fair value, with changes in unrealized gains and losses
excluded from net income, but reported net of applicable taxes and adjustments to deferred policy
acquisition cost amortization as a separate component of comprehensive income. Held-to-maturity
securities are recorded at amortized cost.
81
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BERKELEY TECHNOLOGY LIMITED
CONDENSED BALANCE SHEETS
December 31,
------------------------
2003 2002 (1)
----------- -----------
(In thousands, except share amounts)
ASSETS
Cash and cash equivalents ..................................................... $ 2,496 $ 27
Investment in subsidiaries .................................................... (57,714) (74,519)
Intercompany balances ......................................................... 121,636 121,720
Other assets .................................................................. 247 620
----------- -----------
Total assets .................................................................. $ 66,665 $ 47,848
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accruals ................................................. $ 299 $ 403
Guarantees under bank facility................................................. - 10,590
Intercompany balances ......................................................... 31,469 15,369
----------- -----------
Total liabilities ............................................................. 31,768 26,362
----------- -----------
Commitments and contingencies
Shareholders' equity:
Ordinary shares, $0.05 par value per share: 86,400,000 shares authorized;
64,439,073 shares issued and outstanding as of December 31, 2003
and 2002.................................................................... 3,222 3,222
Additional paid-in capital .................................................... 68,615 68,394
Retained earnings ............................................................. 27,070 16,054
Employee benefit trusts, at cost (13,684,881 shares as of December 31,
2003 and 2002) ............................................................. (63,571) (63,571)
Accumulated other comprehensive loss .......................................... (439) (2,613)
----------- -----------
Total shareholders' equity .................................................... 34,897 21,486
----------- -----------
Total liabilities and shareholders' equity .................................... $ 66,665 $ 47,848
----------- -----------
----------- -----------
(1) Reclassifications have been made related to discontinued operations - see Note 3 to the Consolidated
Financial Statements in Item 8 of Form 10-K for the year ended December 31, 2003.
See accompanying Note to Condensed Financial Statements.
82
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
BERKELEY TECHNOLOGY LIMITED
CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
-------------------------------------
2003 2002 2001(1)
----------- ----------- -----------
(In thousands)
Revenues:
Investment income............................................................ $ 8 $ 128 $ 605
Interest and fees from subsidiaries, net (2)................................. - 307 15,047
Distribution from subsidiary (2)............................................. - - 52,462
Net realized investment losses............................................... (246) (10,827) -
------------ ----------- -----------
(238) (10,392) 68,114
Expenses:
Staff costs.................................................................. 833 2,277 3,180
Escrow release............................................................... - (100) (100)
Other operating expenses..................................................... 2,584 2,840 2,579
----------- ----------- -----------
3,417 5,017 5,659
----------- ----------- -----------
Income (loss) before income tax expense and equity in
undistributed net income (loss) of subsidiaries........................... (3,655) (15,409) 62,455
Income tax expense (benefit)................................................. - (683) 1,579
----------- ----------- -----------
Income before equity in undistributed net income (loss) of
subsidiaries.............................................................. (3,655) (14,726) 60,876
Equity in undistributed net income (loss) of subsidiaries (2)................ 14,671 (190,317) (284,921)
----------- ----------- -----------
Income (loss) from continuing operations .................................... 11,016 (205,043) (224,045)
----------- ----------- -----------
Discontinued operations:
Loss on disposal of discontinued operations, net of income tax
benefit of $0............................................................. - (461) -
Equity in undistributed net loss of discontinued operations (2).............. - - (120,739)
----------- ----------- -----------
Loss on discontinued operations.............................................. - (461) (120,739)
----------- ----------- -----------
Net income (loss) ........................................................... $ 11,016 $ (205,504) $ (344,784)
----------- ----------- -----------
----------- ----------- -----------
(1) Reclassifications have been made related to discontinued operations - see Note 3 to the Consolidated Financial
Statements in Item 8 of Form 10-K for the year ended December 31, 2003.
(2) Eliminated on consolidation.
See accompanying Note to Condensed Financial Statements.
83
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
BERKELEY TECHNOLOGY LIMITED
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-------------------------------------
2003 2002 2001(1)
----------- ----------- -----------
(In thousands)
Cash flows from continuing operating activities:
Net income (loss)............................................................ $ 11,016 $ (205,043) $ (224,045)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Equity in undistributed net income (loss) of subsidiaries.................... (14,671) 190,317 284,921
Distribution from subsidiary................................................. - - (52,462)
Net realized investment (gains) losses....................................... 246 10,827 -
Taxes........................................................................ - (2,162) -
Other operating cash flows .................................................. 489 (532) 299
----------- ----------- -----------
Net cash provided by (used in) operating activities ......................... (2,920) (6,593) 8,713
----------- ----------- -----------
Cash flows from investing activities:
Payment of guarantee obligations............................................. (10,836) - -
Investment in subsidiaries .................................................. - - (33,380)
Distributions from subsidiary ............................................... - - 52,462
Advances to subsidiaries .................................................... (144) - (39,410)
Other cash flows from investing activities .................................. - - (23)
----------- ----------- -----------
Net cash used in investing activities ....................................... (10,980) - (20,351)
----------- ----------- -----------
Cash flows from financing activities:
Dividends paid .............................................................. - (2,032) (11,801)
Issuance of Ordinary Shares ................................................. - - 3
Repayments from subsidiaries ................................................ 16,369 155 -
----------- ----------- -----------
Net cash provided by (used in) financing activities ......................... 16,369 (1,877) (11,798)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents ........................ 2,469 (8,470) (23,436)
Cash and cash equivalents at beginning of year .............................. 27 8,497 31,933
----------- ----------- -----------
Cash and cash equivalents at end of year .................................... $ 2,496 $ 27 $ 8,497
----------- ----------- -----------
----------- ----------- -----------
(1) Reclassifications have been made related to discontinued operations - see Note 3 to the Consolidated Financial
Statements in Item 8 of Form 10-K for the year ended December 31, 2003.
See accompanying Note to Condensed Financial Statements.
84
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
BERKELEY TECHNOLOGY LIMITED
NOTE TO CONDENSED FINANCIAL STATEMENTS
Note 1. Basis of Presentation and Significant Accounting Policies
The accompanying financial statements comprise a condensed presentation
of financial position, results of operations and cash flows of Berkeley
Technology Limited (the "Company") on a separate company basis. These condensed
financial statements do not include the accounts of the Company's subsidiaries,
but instead include the Company's investment in those subsidiaries, stated at
amounts which are equal to the Company's equity in the subsidiaries' net assets.
The consolidated financial statements of the Company and its subsidiaries are
included in Item 8 of this Form 10-K for the year ended December 31, 2003.
Additional information about the significant accounting policies applied
by the Company and its subsidiaries is included in Note 2 to the Consolidated
Financial Statements in Item 8 of this Form 10-K for the year ended December 31,
2003.
85
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
Life Insurance and Annuities Segment (Continuing Operations)
Years Ended/As of December 31,
-------------------------------------
2003 2002 2001(1)
----------- ----------- -----------
(In thousands)
Deferred policy acquisition costs.......................................... $ - $ - $ 3,113
Future policy benefits, losses, claims and loss expenses (2) .............. 28,054 35,441 131,765
Unearned premiums.......................................................... N/A N/A N/A
Other policy claims and benefits payable (2)............................... - - 66
Premium revenue (3)........................................................ 6 1,155 (7)
Net investment income (4) ................................................. 1,834 6,060 6,214
Benefits, claims, losses and settlement expenses........................... N/A N/A N/A
Amortization of deferred policy acquisition costs.......................... - 2,952 932
Other operating expenses................................................... 959 1,294 955
Premiums written........................................................... N/A N/A N/A
- ---------------------------
(1) Reclassifications have been made related to discontinued operations - see Note 3 to the Consolidated Financial Statements
in Item 8 of this Form 10-K for the year ended December 31, 2003.
(2) For additional disclosure regarding life insurance policy liabilities, see Note 10 to the Consolidated Financial Statements
in Item 8 of this Form 10-K for the year ended December 31, 2003.
(3) Insurance policy charges.
(4) Expenses related to the management and administration of investments have been netted with investment income in the
determination of net investment income.
86
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BERKELEY TECHNOLOGY LIMITED
(Registrant)
By /s/ Arthur I. Trueger
Date: March 10, 2004 Arthur I. Trueger
Executive Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Arthur I. Trueger
Date: March 10, 2004 Arthur I. Trueger
Executive Chairman
(Principal Executive Officer)
/s/ Ian K. Whitehead
Date: March 10, 2004 Ian K. Whitehead
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Victor A. Hebert
Date: March 10, 2004 Victor A. Hebert
Deputy Chairman and Non-Executive Director
/s/ John Clennett
Date: March 10, 2004 John Clennett
Non-Executive Director
/s/ Harold E. Hughes, Jr.
Date: March 10, 2004 Harold E. Hughes, Jr.
Non-Executive Director
/s/ The Viscount Trenchard
Date: March 10, 2004 The Viscount Trenchard
Non-Executive Director
87
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
EXHIBIT INDEX FOR THE ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2003
Exhibit
Number Description
- -------- -----------
3.(I).1 Memorandum and Articles of Association of Berkeley Technology
Limited, as amended and restated on April 18, 2000 (filed previously
as Exhibit 3.(I) to our Form 10-Q for the quarter ended June 30,
2000).
3.(I).2 Certificate of Incorporation on Change of Name dated June 12, 2003.
4.1 Specimen Ordinary Share certificate (filed previously as Exhibit 4.1
to our Form 10-K for the year ended December 31, 2000).
4.2 Form of Deposit Agreement dated September 25, 1992, as amended and
restated as of November 24, 1993, as further amended and restated as
of March 14, 2000, among us, The Bank of New York as Depositary, and
all Owners and Holders from time to time of American Depositary
Receipts issued thereunder (filed previously as Exhibit A to our
Registration Statement on Form F-6 (Registration No. 333-11658) dated
March 14, 2000).
4.3 Letter Agreement dated August 25, 1992 between The Bank of New York
and us covering the Basic Administration Charge relating to the
Deposit Agreement (shown above as Exhibit 4.2) (filed previously as
Exhibit 3.8 to our Post-Effective Amendment No. 2 to our Registration
Statement on Form 20-F/A dated August 31, 1993).
4.4 Form of Deposit Agreement as amended and restated as of June 24,
2002, among us, The Bank of New York as Depositary, and all Owners
and Holders from time to time of American Depositary Receipts issued
thereunder (filed previously as Exhibit 4.4 to our Form 10-Q for the
quarter ended June 30, 2002).
4.5 Warrant Agreement dated February 14, 2003 between us and the Governor
and Company of the Bank of Scotland relating to the Term Loan and
Guarantee Facility dated December 20, 2002 (filed previously as
Exhibit 4.5 to our Form 10-Q for the quarter ended March 31, 2003).
4.6 Specimen Ordinary Share certificate, as amended on June 12, 2003.
10.1.1 Multicurrency Term Facility Agreement dated May 2, 2000 between us
and the Governor and Company of the Bank of Scotland (filed
previously as Exhibit 10.1.1 to our Form 10-Q for the quarter ended
September 30, 2000).
10.1.2 Term Loan and Guarantee Facility of up to $23,000,000, dated December
20, 2002 between us and the Governor and Company of the Bank of
Scotland (filed previously as Exhibit 10.1.2 to our Form 10-K for the
year ended December 31, 2002).
10.1.3 Stock Pledge Agreement dated January 29, 2003 between Berkeley
International Capital Limited and the Governor and Company of the
Bank of Scotland, relating to the Term Loan and Guarantee Facility
dated December 20, 2002 (filed previously as Exhibit 10.1.3 to our
Form 10-Q for the quarter ended March 31, 2003).
10.1.4 Stock Pledge Agreement dated February 7, 2003 between Berkeley
International Capital Limited and the Governor and Company of the
Bank of Scotland, relating to the Term Loan
88
and Guarantee Facility dated December 20, 2002 (filed previously
as Exhibit 10.1.4 to our Form 10-Q for the quarter ended March 31,
2003).
10.1.5 Stock Pledge Agreement dated February 19, 2003 between Berkeley (USA)
Holdings Limited and the Governor and Company of the Bank of
Scotland, relating to the Term Loan and Guarantee Facility dated
December 20, 2002 (filed previously as Exhibit 10.1.5 to our Form
10-Q for the quarter ended March 31, 2003).
10.1.6 Security Agreement dated February 28, 2003 between us and the
Governor and Company of the Bank of Scotland relating to the Term
Loan and Guarantee Facility dated December 20, 2002 (filed previously
as Exhibit 10.1.6 to our Form 10-Q for the quarter ended March 31,
2003).
10.2.1 Settlement dated February 16, 1990 among (1) us, (2) John Gerald
Patrick Wheeler and (3) Ian Walter Strang, constituting The London
Pacific Group 1990 Employee Share Option Trust (filed previously as
Exhibit 3.2 to our Post-Effective Amendment No. 2 to Registration
Statement on Form 20-F/A dated August 31, 1993).
10.2.2 Executed Instrument dated March 18, 1994 among (1) John Gerald
Patrick Wheeler, (2) Ian Walter Strang and (3) Richard John Pirouet,
relating to The London Pacific Group 1990 Employee Share Option Trust
(filed previously as Exhibit 3.2.1 to our Annual Report on Form 20-F
dated June 10, 1994).
10.2.3 Executed Instrument dated September 27, 1994 among (1) Ian Walter
Strang, (2) Richard John Pirouet and (3) Clive Aubrey Charles
Chaplin, relating to The London Pacific Group 1990 Employee Share
Option Trust (filed previously as Exhibit 3.2.2 to our Annual Report
on Form 20-F dated June 29, 1995).
10.2.4 Executed Instrument dated March 3, 1995 among (1) Ian Walter Strang,
(2) Richard John Pirouet and (3) Clive Aubrey Charles Chaplin,
relating to The London Pacific Group 1990 Employee Share Option Trust
(filed previously as Exhibit 3.2.3 to our Annual Report on Form 20-F
dated June 29, 1995).
10.2.5 Executed Instrument dated August 22, 1996 among (1) Richard John
Pirouet, (2) Clive Aubrey Charles Chaplin and (3) Ronald William
Green, relating to The London Pacific Group 1990 Employee Share
Option Trust (filed previously as Exhibit 3.2.4 to our Annual Report
on Form 20-F dated June 30, 1997).
10.2.6 Executed Instrument dated August 29, 1998 among (1) Richard John
Pirouet, (2) Clive Aubrey Charles Chaplin, (3) Ronald William Green
and (4) Victor Aloysius Hebert, relating to The London Pacific Group
1990 Employee Share Option Trust (filed previously as Exhibit 3.2.5
to our Annual Report on Form 20-F dated June 30, 1999).
10.2.7 Executed Instrument dated May 31, 2000 among (1) Richard John
Pirouet, (2) Clive Aubrey Charles Chaplin, (3) Ronald William Green
and (4) Victor Aloysius Hebert, relating to The London Pacific Group
1990 Employee Share Option Trust (filed previously as Exhibit 10.2.1
to our Form 10-Q for the quarter ended September 30, 2000).
10.2.8 Executed Instrument dated May 31, 2000 among (1) Richard John
Pirouet, (2) Clive Aubrey Charles Chaplin, (3) Ronald William Green,
(4) Victor Aloysius Hebert and (5) Christopher Byrne, relating to The
London Pacific Group 1990 Employee Share Option Trust (filed
previously as Exhibit 10.2.2 to our Form 10-Q for the quarter ended
September 30, 2000).
10.3.1(1) Agreement dated July 1, 1990 between us and Ian Kenneth Whitehead
(filed previously as Exhibit 10.3.1 to our Form 10-K for the year
ended December 31, 2000).
89
10.3.2(1) Berkeley (USA) Holdings Limited Amended and Restated 1993 Deferred
Compensation Plan dated December 16, 1999 (filed previously as
Exhibit 10.3.2 to our Form 10-K for the year ended December 31,
2000).
10.3.3(1) London Pacific Advisers Limited Retirement Scheme confirmation dated
December 5, 2000 for Ian Kenneth Whitehead (filed previously as
Exhibit 10.3.3 to our Form 10-K for the year ended December 31,
2001).
10.4.1 Settlement dated May 23, 1997 among BG Services Limited and A.L.O.T.
Trustee Limited establishing Agent Loyalty Opportunity Trust (filed
previously as Exhibit 10.4.1 to our Form 10-K for the year ended
December 31, 2001).
10.4.2 Executed Deed dated July 16, 1997 by A.L.O.T. Trustee Limited
relating to Agent Loyalty Opportunity Trust (filed previously as
Exhibit 10.4.2 to our Form 10-K for the year ended December 31,
2001).
10.4.3 Executed Deed dated August 13, 1997 by A.L.O.T. Trustee Limited
relating to Agent Loyalty Opportunity Trust (filed previously as
Exhibit 10.4.3 to our Form 10-K for the year ended December 31,
2001).
10.4.4 Executed Deed dated August 20, 1998 by A.L.O.T. Trustee Limited
relating to Agent Loyalty Opportunity Trust (filed previously as
Exhibit 10.4.4 to our Form 10-K for the year ended December 31,
2001).
10.4.5 Executed Deed of Amendment and Appointment dated December 11, 2001
among Berkeley International Capital Limited and A.L.O.T. Trustee
Limited relating to Agent Loyalty Opportunity Trust (filed previously
as Exhibit 10.4.5 to our Form 10-K for the year ended December 31,
2001).
10.5 Asset Purchase Agreement dated March 7, 2003 between Berkeley Capital
Management ("BCM"), Berkeley (USA) Holdings Limited and Berkeley
Capital Management LLC relating to the sale of substantially all of
the assets and operations of BCM (filed previously as Exhibit 10.5 to
our Form 10-Q for the quarter ended March 31, 2003).
10.6 Purchase Agreement, dated May 9, 2003, for the acquisition of London
Pacific Advisory Services, Inc. and London Pacific Securities, Inc.
by SunGard Business Systems Inc. (filed previously as Exhibit 10.6 to
our Form 10-Q for the quarter ended June 30, 2003).
14.1 Code of Ethics.
21 Subsidiaries of the Company as of February 27, 2004.
31.1 Certification by the Company's Executive Chairman pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification by the Company's Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification by the Company's Executive Chairman pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification by the Company's Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
____________
(1) Management contract or compensatory arrangement filed in response to Item
15(a)(3) of the instructions to Form 10-K.
90