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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 0-21874
Berkeley Technology Limited
(Exact name of registrant as specified in its charter)
______________________
Jersey, Channel Islands Not applicable
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Minden House, 6 Minden Place
St. Helier, Jersey JE2 4WQ
Channel Islands
(Address of principal executive offices)
(Zip Code)
011 44 (1534) 607700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ____ No |X|
As of November 2, 2004, the registrant had outstanding 64,439,073 Ordinary
Shares, par value $0.05 per share.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Page
Item 1. Financial Statements:
Unaudited Condensed Consolidated Balance Sheets as of September 30, 2004 and
December 31, 2003............................................................................ 3
Unaudited Condensed Consolidated Statements of Income for the three and nine months
ended September 30, 2004 and 2003............................................................ 4
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2004 and 2003............................................................ 6
Unaudited Consolidated Statement of Changes in Shareholders' Equity for the nine months
ended September 30, 2004..................................................................... 7
Unaudited Consolidated Statements of Comprehensive Income for the three and nine months
ended September 30, 2004 and 2003............................................................ 8
Notes to Unaudited Condensed Consolidated Financial Statements................................... 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 31
Item 4. Controls and Procedures.......................................................................... 32
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 33
Item 6. Exhibits and Reports on Form 8-K................................................................. 33
Signature ................................................................................................. 34
Exhibit Index............................................................................................... 35
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
September 30, December 31,
2004 2003
------------- -------------
ASSETS
Investments (principally of life insurance subsidiary):
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $20,275 and $25,403
as of September 30, 2004 and December 31, 2003, respectively).............. $ 20,247 $ 25,393
Equity securities:
Trading, at fair value (cost: $586 and $4,544 as of September 30, 2004
and December 31, 2003, respectively)....................................... 426 16,882
Available-for-sale, at estimated fair value (cost: $1,850 and $4,262
as of September 30, 2004 and December 31, 2003, respectively).............. 1,850 4,262
------------- -------------
Total investments................................................................. 22,523(1) 46,537
Cash and cash equivalents......................................................... 18,348(1) 14,408
Cash held in escrow............................................................... 1,002 999
Due from broker................................................................... 4,649(1) -
Accrued investment income......................................................... 654 926
Other assets...................................................................... 409 643
------------- -------------
Total assets...................................................................... $ 47,585 $ 63,513
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Life insurance policy liabilities................................................. $ 22,134 $ 28,054
Accounts payable and accruals..................................................... 951 562
------------- -------------
Total liabilities................................................................. 23,085 28,616
------------- -------------
Commitments and contingencies (see Note 8)
Shareholders' equity:
Ordinary shares, $0.05 par value per share: 86,400,000 shares authorized;
64,439,073 shares issued and outstanding as of September 30, 2004 and
December 31, 2003.............................................................. 3,222 3,222
Additional paid-in capital........................................................ 68,615 68,615
Retained earnings................................................................. 16,662 27,070
Employee benefit trusts, at cost (13,684,881 shares as of September 30, 2004
and December 31, 2003)......................................................... (63,571) (63,571)
Accumulated other comprehensive loss.............................................. (428) (439)
------------- -------------
Total shareholders' equity........................................................ 24,500 34,897
------------- -------------
Total liabilities and shareholders' equity........................................ $ 47,585 $ 63,513
------------- -------------
------------- -------------
(1) Includes $22,466 of investments, $7,573 of cash and cash equivalents and $4,275 of broker receivables 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 Unaudited Condensed
Consolidated Financial Statements.
3
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share and ADS amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Continuing operations:
Revenues:
Investment income................................................. $ 337 $ 433 $ 1,028 $ 1,492
Insurance policy charges.......................................... - 2 3 6
Consulting and other fee income................................... 135 - 329 -
Net realized investment gains (losses)............................ 4,787 (839) 5,700 (14,988)
Change in net unrealized investment gains and losses
on trading securities.......................................... (7,757) (4,213) (12,498) 18,226
---------- ---------- ---------- ----------
(2,498) (4,617) (5,438) 4,736
Expenses:
Amounts credited on insurance policyholder accounts............... 326 463 1,043 1,509
Operating expenses................................................ 1,089 1,269 3,637 4,317
Interest expense.................................................. - - - 676
---------- ---------- ---------- ----------
1,415 1,732 4,680 6,502
---------- ---------- ---------- ----------
Loss from continuing operations before income taxes............... (3,913) (6,349) (10,118) (1,766)
Income tax expense (benefit)...................................... - (3) 290 9
---------- ---------- ---------- ----------
Loss from continuing operations................................... (3,913) (6,346) (10,408) (1,775)
Discontinued operations:
Loss from discontinued operations, net of income tax
expense of $2 in 2003.......................................... - - - (1,758)
Income on disposal of discontinued operations, net of
income tax expense of $36 in 2003.............................. - - - 11,685
---------- ---------- ---------- ----------
Income on discontinued operations................................. - - - 9,927
---------- ---------- ---------- ----------
Net income (loss)................................................. $ (3,913) $ (6,346) $ (10,408) $ 8,152
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
See accompanying Notes which are an integral part of these Unaudited Condensed
Consolidated Financial Statements.
4
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Continued)
(In thousands, except per share and ADS amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Basic earnings (loss) per share and ADS:
Basic earnings (loss) per share:
Continuing operations............................................. $ (0.08) $ (0.13) $ (0.21) $ (0.03)
Discontinued operations........................................... - - - 0.19
---------- ---------- ---------- ----------
$ (0.08) $ (0.13) $ (0.21) $ 0.16
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic earnings (loss) per ADS:
Continuing operations............................................. $ (0.77) $ (1.25) $ (2.05) $ (0.35)
Discontinued operations........................................... - - - 1.96
---------- ---------- ---------- ----------
$ (0.77) $ (1.25) $ (2.05) $ 1.61
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted earnings (loss) per share and ADS:
Diluted earnings (loss) per share:
Continuing operations............................................. $ (0.08) $ (0.13) $ (0.21) $ (0.03)
Discontinued operations........................................... - - - 0.19
---------- ---------- ---------- ----------
$ (0.08) $ (0.13) $ (0.21) $ 0.16
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted earnings (loss) per ADS:
Continuing operations............................................. $ (0.77) $ (1.25) $ (2.05) $ (0.35)
Discontinued operations........................................... - - - 1.95
---------- ---------- ---------- ----------
$ (0.77) $ (1.25) $ (2.05) $ 1.60
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
See accompanying Notes which are an integral part of these Unaudited Condensed
Consolidated Financial Statements.
5
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
September 30,
-------------------------------
2004 2003
------------- -------------
Net cash provided by continuing operations........................................ $ 6,156 $ 8,866
Net cash used in discontinued operations.......................................... - (523)
------------- -------------
Net cash provided by operating activities......................................... 6,156 8,343
------------- -------------
Cash flows from investing activities:
Payment of guarantee obligations.................................................. - (10,836)
Purchases of available-for-sale fixed maturity securities......................... - (8,422)
Purchases of available-for-sale equity securities................................. (15) -
Proceeds from sale and maturity of available-for-sale fixed maturity securities... 5,034 20,004
Proceeds from sale of available-for-sale equity securities........................ 75 -
Proceeds from disposal of discontinued operations................................. - 15,148
Capital expenditures.............................................................. (5) (4)
------------- -------------
Net cash provided by investing activities......................................... 5,089 15,890
------------- -------------
Cash flows from financing activities:
Insurance policyholder benefits paid.............................................. (7,332) (8,630)
Repayment of notes payable........................................................ - (9,314)
------------- -------------
Net cash used in financing activities............................................. (7,332) (17,944)
------------- -------------
Net increase in cash and cash equivalents......................................... 3,913 6,289
Cash and cash equivalents at beginning of period (1).............................. 14,408 15,308
Foreign currency translation adjustment........................................... 27 (212)
------------- -------------
Cash and cash equivalents at end of period (1), (2)............................... $ 18,348 $ 21,385
------------- -------------
------------- -------------
(1) Amounts reflect continuing operations only. Does not include $1,002 of cash held in escrow as of September 30, 2004.
(2) The amount for September 30, 2004 includes $7,573 in the Company's insurance subsidiary (LPAL) which is not
available to fund the operations or commitments of the Company or its other subsidiaries.
See accompanying Notes which are an integral part of these Unaudited Condensed
Consolidated Financial Statements.
6
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
Accumulated
Other
Ordinary Shares Additional Employee Compre- Total
-------------------- Paid-in Retained Benefit hensive Shareholders'
Number Amount Capital Earnings Trusts Loss Equity
--------- --------- --------- ---------- ---------- --------- ----------
Balance as of
December 31, 2003............ 64,439 $ 3,222 $ 68,615 $ 27,070 $ (63,571) $ (439) $ 34,897
Net loss........................ - - - (10,408) - - (10,408)
Change in net unrealized
gains and losses on
available-for-sale securities - - - - - (18) (18)
Foreign currency translation
adjustment................... - - - - - 29 29
--------- --------- --------- ---------- ---------- --------- ----------
Balance as of
September 30, 2004........... 64,439 $ 3,222 $ 68,615 $ 16,662 $ (63,571) $ (428) $ 24,500
--------- --------- --------- ---------- ---------- --------- ----------
--------- --------- --------- ---------- ---------- --------- ----------
See accompanying Notes which are an integral part of these Unaudited Condensed
Consolidated Financial Statements.
7
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income (loss)................................................. $ (3,913) $ (6,346) $ (10,408) $ 8,152
Other comprehensive income, net of deferred
income taxes:
Foreign currency translation adjustments, net of income
taxes of $0.................................................... 1 12 29 114
Change in net unrealized gains and losses related to
continuing operations:
Unrealized holding gains and losses on available-for-sale
securities................................................... 110 (32) - (14)
Reclassification adjustment for gains and losses included
in net (income) loss......................................... (12) 679 (18) 1,910
Deferred income taxes.......................................... - - - -
---------- ---------- ---------- ----------
Other comprehensive income........................................ 99 659 11 2,010
---------- ---------- ---------- ----------
Comprehensive income (loss)....................................... $ (3,814) $ (5,687) $ (10,397) $ 10,162
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
See accompanying Notes which are an integral part of these Unaudited Condensed
Consolidated Financial Statements.
8
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
As used herein, the terms "registrant," "Company," "we," "us" and "our"
refer to Berkeley Technology Limited. Except as the context otherwise requires,
the term "Group" refers collectively to the registrant and its subsidiaries.
Note 1. Material Events
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, to a company majority-owned
by funds under the management of Putnam Lovell NBF Private Equity. Consequently,
the Company deconsolidated BCM as of March 31, 2003 and BCM's results of
operations have been reported separately in the income statement under
discontinued operations since the first quarter of 2003. On May 7, 2003, the
Group completed the sale and the Group received all proceeds under the sale
agreement as of the end of 2003.
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") to a wholly-owned subsidiary of SunGard Data Systems Inc.
("SunGard"). On June 5, 2003, the Group completed the sale. Consequently, LPA's
results of operations have been reported separately in the income statement
under discontinued operations since the second quarter of 2003. SunGard paid
$1.0 million of the initial purchase consideration into an escrow account as a
holdback to cover any of the Group's indemnity obligations arising within the 18
month period following the close of the transaction. Under the sale and purchase
agreement, the Group is entitled to receive an earnout payment of up to $8.0
million in cash 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 the close of the transaction. This earnout amount, if any, would be
payable within approximately 60 days following the third anniversary of the
transaction closing. There is no guarantee that the Group will receive any
portion of the $8.0 million earnout payment.
On August 31, 2004, the Group was notified of SunGard's claim for
indemnification with respect to damages in an amount equal to at least $5.0
million resulting from, among other things, alleged breaches of representations
and covenants contained in the sale and purchase agreement. The Group's
management believes, after consultation with its legal advisors, that this claim
is without merit, and the Group will defend the matter vigorously. No provision
for this contingent liability has been included in the Group's financial
statements as of September 30, 2004.
For information on the operating results for BCM and LPA during 2003, see
Note 3 "Discontinued Operations" below.
Subsequent to the sale of the Group's asset management and financial
advisory services businesses, the Group now focuses on rebuilding its venture
capital and consulting business.
Note 2. Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated financial statements are unaudited
and have been prepared by the Company in conformity with United States generally
accepted accounting principles ("U.S. GAAP"). These unaudited condensed
consolidated financial statements include the accounts of the Company, its
subsidiaries (with the exception of 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
9
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
subsidiaries included in the continuing operations of the Group and discussed in
this document include London Pacific Assurance Limited and Berkeley
International Capital Corporation. All intercompany transactions and balances
have been eliminated in consolidation except for intercompany transactions
between continuing and discontinued operations which are disclosed in Note 3 and
Note 9 below.
Certain information and note disclosures normally included in the Company's
annual consolidated financial statements have been condensed or omitted. In the
opinion of management, the unaudited condensed consolidated financial statements
reflect all adjustments (consisting of normal recurring accruals) which are
necessary for a fair statement of the results for the interim periods presented.
While the Company's management believes that the disclosures presented are
adequate to make the information not misleading, these unaudited condensed
consolidated financial statements should be read in conjunction with the audited
financial statements and related notes for the year ended December 31, 2003,
which are contained in the Company's Annual Report on Form 10-K, filed with the
U.S. Securities and Exchange Commission ("SEC") on March 10, 2004. The year-end
condensed balance sheet data was derived from audited financial statements but
does not include all disclosures required by U.S. GAAP. Certain
reclassifications have been made to prior period amounts to conform with the
current period's presentation. These reclassifications have no effect on the
prior period's net income or shareholders' equity.
The results for the nine month period ended September 30, 2004 are not
indicative of the results to be expected for the full fiscal year.
The unaudited condensed consolidated balance sheets are presented in an
unclassified format as the majority of the Group's assets relate to its
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
Over-the-Counter Bulletin Board in the form of American Depositary Shares
("ADSs"), which are evidenced by American Depositary Receipts ("ADRs"). Pursuant
to the regulations of the SEC, the Company is considered a U.S. domestic
registrant and must file financial statements prepared under U.S. GAAP.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of these unaudited condensed consolidated financial
statements as well as the reported amount of revenues and expenses during this
reporting period. Actual results could differ from these estimates. Certain
estimates such as fair value and actuarial assumptions have a significant impact
on the gains and losses recorded on investments and the balance of life
insurance policy liabilities.
Share Incentive Plan
The Company accounts for stock based compensation issued to employees in
accordance with Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees," and related interpretations, which
recognizes compensation expense based upon the intrinsic value of the stock
options as of the date of grant. The Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 123 ("SFAS
123"), "Accounting for Stock Based Compensation," which encourages, but does not
require, companies to recognize compensation expense for grants of stock options
based on their fair value. The Company has elected, as permitted by SFAS 123, to
adopt the disclosure requirement of SFAS 123 and to continue to account for
stock based compensation under APB 25.
10
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Had compensation expense for the Company's ESOT activity been determined
based upon the fair value method in accordance with SFAS 123, the Company's
consolidated net income (loss) and earnings (loss) per share and ADS would have
been decreased or increased to the pro forma amounts as reflected below:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
(In thousands, except per share and ADS amounts)
Net income (loss) as reported..................................... $ (3,913) $ (6,346) $ (10,408) $ 8,152
Add: Stock based employee compensation expense included in
reported income (loss), net of related tax effects............. - - - -
Deduct: Total stock based employee compensation expense
determined under fair value based methods for all awards,
net of related tax effects..................................... (47) 267(1) (143) (76)
---------- ---------- ---------- ----------
Pro forma net income (loss)....................................... $ (3,960) $ (6,079) $ (10,551) $ 8,076
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic earnings (loss) per share:
As reported....................................................... $ (0.08) $ (0.13) $ (0.21) $ 0.16
Pro forma......................................................... (0.08) (0.12) (0.21) 0.16
Basic earnings (loss) per ADS:
As reported....................................................... (0.77) (1.25) (2.05) 1.61
Pro forma......................................................... (0.78) (1.20) (2.08) 1.59
Diluted earnings (loss) per share:
As reported....................................................... (0.08) (0.13) (0.21) 0.16
Pro forma......................................................... (0.08) (0.12) (0.21) 0.16
Diluted earnings (loss) per ADS:
As reported....................................................... (0.77) (1.25) (2.05) 1.60
Pro forma......................................................... (0.78) (1.20) (2.08) 1.58
(1) Compensation expense was negative for the three month period ended September 30, 2003 due to the reversal
of $314,000 in compensation expense recognized in prior periods related to the forfeiture during the third quarter
of 2003 of all of the unvested options held by LPA employees (LPA was sold in the second quarter of 2003).
The pro forma disclosures shown above were calculated for all options
granted after December 31, 1994 using a Black-Scholes option pricing model. No
option grants were made during 2003 or the first nine months of 2004.
Note 3. Discontinued Operations
(a) 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 in accordance
with Statement of Financial Accounting Standard No.144 ("SFAS 144"), "Accounting
for the Impairment or Disposal of Long Lived Assets." The Company does not
expect to receive any material amounts of income from its
11
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
asset management segment in the foreseeable future. The results of operations of
BCM for the prior periods have been reported in discontinued operations.
A summary of BCM's pre-tax operating results for the three and nine month
periods ended September 30, 2003 are shown below.
Three Months Nine Months
Ended Ended
September 30, September 30,
2003 2003
------------- -------------
(In thousands)
Revenues:
Asset management fees............................................................. $ - $ 1,364
Intercompany management fee income (1)............................................ - 5
------------- -------------
Total revenues.................................................................... - 1,369
Operating expenses................................................................ - 1,403
------------- -------------
Loss before income taxes.......................................................... $ - $ (34)
------------- -------------
------------- -------------
(1) Fees were paid from and netted against the revenues of the life insurance and annuities business
segment of continuing operations (LPAL) of $5,000 for the nine months ended September 30, 2003.
BCM had been included in the Group's asset management business segment.
(b) 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 reports the results of
operations of LPA for the prior periods as discontinued operations in accordance
with SFAS 144.
A summary of LPA's pre-tax operating results for the three and nine month
periods ended September 30, 2003 are shown below.
Three Months Nine Months
Ended Ended
September 30, September 30,
2003 2003
------------- -------------
(In thousands)
Revenues:
Investment income................................................................. $ - $ 4
Gross financial advisory services fees............................................ - 5,820
Payments due to independent advisors.............................................. - (3,477)
------------- -------------
Total net revenues................................................................ - 2,347
Expenses.......................................................................... - 4,069
------------- -------------
Loss before income taxes.......................................................... $ - $ (1,722)
------------- -------------
------------- -------------
LPA had been included in the Group's financial advisory services business
segment.
12
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4. Earnings Per Share and ADS
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share." This
statement requires the presentation of basic and diluted earnings per share.
Basic earnings per share is calculated by dividing net income or loss by the
weighted-average number of Ordinary Shares outstanding during the applicable
period, excluding shares held by the ESOT and the ALOT which are regarded as
treasury stock for the purposes of this calculation. The Company has issued
employee share options, which are considered potential common stock under SFAS
128.
The Company has also issued Ordinary Share warrants to the Bank of Scotland
in connection with the Company's bank facility (now terminated), which are also
considered potential common stock under SFAS 128. Diluted earnings per share is
calculated by dividing net income by the weighted-average number of Ordinary
Shares outstanding during the applicable period as adjusted for these
potentially dilutive options and warrants which are determined based on the
"Treasury Stock Method." As the Company recorded a net loss for both of the
three month periods ended September 30, 2004 and 2003, and for the nine month
period ended September 30, 2004, the calculation of diluted loss per share for
these periods do not include potentially dilutive employee share options and
warrants issued to the Bank of Scotland as they are anti-dilutive and, if
included, would have resulted in a reduction of the net loss per share. If the
Company had reported net income for both of the three month periods ended
September 30, 2004 and 2003, and for the nine month period ended September 30,
2004, there would have been an additional 607,593, 609,629 and 753,598 shares,
respectively, included in the calculations of diluted earnings per share for
these periods.
A reconciliation of the numerators and denominators for the basic and
diluted earnings (loss) per share calculations is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
(In thousands, except share,
per share and ADS amounts)
Income (loss) from continuing operations.......................... $ (3,913) $ (6,346) $ (10,408) $ (1,775)
Income on discontinued operations................................. - - - 9,927
---------- ---------- ---------- ----------
Net income (loss)................................................. $ (3,913) $ (6,346) $ (10,408) $ 8,152
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic earnings (loss) per share and ADS:
Weighted-average number of Ordinary Shares outstanding,
excluding shares held by the employee benefit trusts........... 50,754,192 50,754,192 50,754,192 50,754,192
---------- ---------- ---------- ----------
Basic earnings (loss) per share:
Continuing operations............................................. $ (0.08) $ (0.13) $ (0.21) $ (0.03)
Discontinued operations........................................... - - - 0.19
---------- ---------- ---------- ----------
$ (0.08) $ (0.13) $ (0.21) $ 0.16
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic earnings (loss) per ADS:
Continuing operations............................................. $ (0.77) $ (1.25) $ (2.05) $ (0.35)
Discontinued operations........................................... - - - 1.96
---------- ---------- ---------- ----------
$ (0.77) $ (1.25) $ (2.05) $ 1.61
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
13
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
(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 50,754,192 50,754,192 50,754,192
Effect of dilutive securities (warrants and employee share
options)....................................................... - - - 339,342
---------- ---------- ---------- ----------
Weighted-average number of Ordinary Shares used in
diluted earnings per share calculations........................ 50,754,192 50,754,192 50,754,192 51,093,534
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted earnings (loss) per share:
Continuing operations............................................. $ (0.08) $ (0.13) $ (0.21) $ (0.03)
Discontinued operations........................................... - - - 0.19
---------- ---------- ---------- ----------
$ (0.08) $ (0.13) $ (0.21) $ 0.16
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted earnings (loss) per ADS:
Continuing operations............................................. $ (0.77) $ (1.25) $ (2.05) $ (0.35)
Discontinued operations........................................... - - - 1.95
---------- ---------- ---------- ----------
$ (0.77) $ (1.25) $ (2.05) $ 1.60
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Note 5. Investments
The Group's investments consist of fixed maturity and equity securities.
Fixed maturity securities are classified as either available-for-sale or
held-to-maturity, and equity securities are classified as either trading or
available-for-sale. The investments are accounted for as follows:
i) available-for-sale securities are recorded at fair value, with changes
in unrealized gains and losses excluded from net income, but reported
net of applicable income taxes and adjustments to deferred policy
acquisition cost amortization as a separate component of accumulated
other comprehensive income;
ii) held-to-maturity securities are recorded at amortized cost unless
these securities become other-than-temporarily impaired; and
iii) trading securities are recorded at fair value with changes in
unrealized gains and losses included in net income.
When a quoted market price is available for a security, the Group uses this
price in the determination of fair value. If a quoted market price is not
available for a security, management estimates the security's fair value based
on appropriate valuation methodologies.
For a discussion of the Company's accounting policies with respect to the
determination of fair value of investments and other-than-temporary impairments,
see the section entitled "Critical Accounting Policies" in Part I, Item 2
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" below. The Group's private securities primarily consist of
convertible preferred stock holdings in technology companies. Management
periodically reviews financial information with respect to the issuers of equity
14
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
securities held by the Group. In addition, management maintains contact with the
management of these issuers through ongoing dialogue to examine the issuers'
future plans and prospects.
The Group's fixed maturity securities are principally comprised of U.S. and
non-U.S. corporate debt. Generally, quoted market prices are available for these
securities.
Fixed Maturity Securities
An analysis of fixed maturity securities is as follows:
September 30, 2004 December 31, 2003
------------------------------------------ ------------------------------------------
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......... $ 18,157 $ 20 $ (52) $ 18,125 $ 18,354 $ 48 $ (89) $ 18,313
Corporate debt securities . 2,118 6 (2) 2,122 7,049 33 (2) 7,080
--------- --------- --------- --------- --------- --------- --------- ---------
Total fixed maturity securities $ 20,275 $ 26 $ (54) $ 20,247 $ 25,403 $ 81 $ (91) $ 25,393
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Equity Securities
Equity securities are comprised of available-for-sale and trading
securities. An analysis of equity securities is as follows:
September 30, 2004 December 31, 2003
------------------------------------------ ------------------------------------------
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.............. $ 1,850 $ - $ - $ 1,850 $ 4,262 $ - $ - $ 4,262
--------- --------- --------- --------- --------- --------- --------- ---------
Total available-for-sale
equity securities....... 1,850 - - 1,850 4,262 - - 4,262
Trading securities......... 586 22 (182) 426 4,544 12,546 (208) 16,882
--------- --------- --------- --------- --------- --------- --------- ---------
Total equity securities.... $ 2,436 $ 22 $ (182) $ 2,276 $ 8,806 $ 12,546 $ (208) $ 21,144
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Trading securities are carried at fair value with changes in net unrealized
gains and losses of $(7,757,000), $(4,213,000), $(12,498,000) and $18,226,000
included in the income statements for the three and nine month periods ended
September 30, 2004 and 2003, respectively.
Investment Concentration and Risk
As of September 30, 2004, the Group's investment portfolio did not include
any individual investments which represented more than 10% of shareholders'
equity.
15
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of September 30, 2004, the Company's Jersey based life insurance
subsidiary, LPAL, owned 100% of the Group's $20.2 million in fixed maturity
securities, 100% of the Group's $1.8 million in available-for-sale private
equity securities, and 88% of the Group's $0.4 million in trading securities.
LPAL is a regulated insurance company, and as such it must meet stringent
capital adequacy requirements and it may not make any distributions without the
consent of LPAL's independent actuary. LPAL'S INVESTMENTS ARE THEREFORE NOT
CURRENTLY AVAILABLE TO FUND THE OPERATIONS OR COMMITMENTS OF THE COMPANY OR ITS
OTHER SUBSIDIARIES.
Net Unrealized Gains (Losses) on Available-for-Sale Securities
Net unrealized losses on fixed maturity securities classified as
available-for-sale as of September 30, 2004 and December 31, 2003 totaled
$28,000 and $10,000, respectively. There were no related deferred policy
acquisition cost adjustments or income taxes.
There were no unrealized gains or losses on equity securities classified as
available-for-sale as of September 30, 2004 and December 31, 2003.
Changes in net unrealized gains and losses on available-for-sale securities
included in other comprehensive income for the period ended September 30, 2004
were as follows:
Net Unrealized Gains (Losses)
----------------------------------
Fixed
Maturity Equity
Securities Securities Total
---------- ---------- ----------
(In thousands)
Net unrealized losses on available-for-sale securities as of
December 31, 2003......................................................... $ (10) $ - $ (10)
Changes during the nine month period ended September 30, 2004:
Unrealized holding gains and losses on available-for-sale securities...... - - -
Reclassification adjustment for gains and losses included in net loss..... (18) - (18)
---------- ---------- ----------
Net unrealized losses on available-for-sale securities as of
September 30, 2004........................................................ $ (28) $ - $ (28)
---------- ---------- ----------
---------- ---------- ----------
16
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Realized Gains and Losses
Information about gross and net realized gains and losses on securities
transactions is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
(In thousands)
Realized gains (losses) on securities transactions:
Fixed maturities, available-for-sale:
Gross gains.................................................... $ - $ - $ - $ 43
Gross losses................................................... - - - (286)
---------- ---------- ---------- ----------
Net realized losses on fixed maturities, available-for-sale....... - - - (243)
---------- ---------- ---------- ----------
Equity securities, trading:
Gross gains.................................................... 5,053 485 8,220 4,363
Gross losses................................................... (266) - (266) (15,237)
---------- ---------- ---------- ----------
Net realized gains (losses) on equity securities, trading......... 4,787 485 7,954 (10,874)
---------- ---------- ---------- ----------
Equity securities, available-for-sale:
Gross gains.................................................... - - 121 -
Gross losses................................................... - (1,324) (2,375) (3,871)
---------- ---------- ---------- ----------
Net realized losses on equity securities, available-for-sale...... - (1,324) (2,254) (3,871)
---------- ---------- ---------- ----------
Net realized investment gains (losses) on securities
transactions................................................... $ 4,787 $ (839) $ 5,700 $ (14,988)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
During the nine month period ended September 30, 2004, the Group's
management determined that one private equity investment in a technology company
was other-than-temporarily impaired and consequently recorded realized losses
totaling $2.4 million in the unaudited condensed consolidated statement of
income.
Note 6. Cash Held in Escrow
Cash held in escrow consists of the proceeds from the sale of LPA on June
5, 2003 which were held back to cover any of the Group's indemnity obligations
within the 18 month period following the close of the transaction. Funds are due
to be released with accrued interest in December 2004, less any amounts related
to indemnification matters as set out in the sale and purchase agreement. As
discussed above in Note 1 "Material Events," the Group was notified on August
31, 2004 of SunGard's claim for indemnification with respect to damages in an
amount equal to at least $5.0 million resulting from, among other things,
alleged breaches of representations and covenants contained in the sale and
purchase agreement. The Group's management believes, after consultation with its
legal advisors, that this claim is without merit, and the Group will defend the
matter vigorously. However, due to the current uncertainty with respect to this
claim, there is the possibility that the $1.0 million in cash held in escrow may
not be released to the Group in December 2004.
17
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7. Other Assets
An analysis of other assets is as follows:
September 30, December 31,
2004 2003
------------- -------------
(In thousands)
Property, equipment and leasehold improvements, net............................... $ 80 $ 117
Prepayments....................................................................... 195 499
Receivables:
Income tax refund receivable................................................... 17 17
Fee income receivable.......................................................... 96 7
Other receivables.............................................................. 21 3
------------- -------------
Total other assets................................................................ $ 409 $ 643
------------- -------------
------------- -------------
Note 8. Commitments and Contingencies
As previously disclosed in the Company's 2002 and 2003 audited consolidated
financial statements, and notes thereto, included in the Company's Annual Report
on Form 10-K for each of those years, the Company's primary insurance company,
London Pacific Life & Annuity Company ("LPLA"), in August 2002 was placed under
regulatory control and rehabilitation based on LPLA's statutory capital and
surplus as of June 30, 2002. On July 9, 2004, a court order was issued approving
a plan of liquidation for LPLA and also approving exchange agreements which give
policyholders the option of exchanging their existing policies for new policies
in another insurance company. In the course of the administration of LPLA in
rehabilitation, the North Carolina Department of Insurance ("NCDOI") requested
information concerning the history of a limited number of investments in
securities of portfolio companies during November 2002. These portfolio
investments have been associated with LPLA for more than seven years, and
involve intercompany transfers. The history of their investment performance and
ownership is complex. The Company has complied with these requests. The Company
is not able at this time to predict what conclusions the NCDOI will reach after
evaluation of this information.
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 acknowledged receipt of this
protest letter in December 2003; however, no further communication from the FTB
has been received to date. After consultation with its tax and legal advisors,
the Group's management believes that this matter has now been resolved through
legislation that was signed on September 29, 2004. This new legislation provides
that a taxpayer may elect to determine its deduction for dividends received from
an insurance company subsidiary for taxable years ending on or after December 1,
1997, and commencing before January 1, 2004, in an amount equal to 80 percent of
the qualified dividends received. The Group has estimated that additional
California taxes of $283,000 will be due as a result of this legislation, and
this amount, plus estimated interest through June 30, 2004 of $95,000, was
recorded in the Group's financial statements as of June 30, 2004. These amounts
remain recorded in the Group's financial statements as of September 30, 2004,
plus estimated additional interest for the third quarter of 2004 of $4,000.
As discussed above in Note 1 "Material Events" and in Note 6 "Cash Held in
Escrow," on August 31, 2004, the Group was notified of SunGard's claim for
indemnification with respect to damages in an amount equal to at least $5.0
million resulting from, among other things, alleged breaches of representations
and covenants contained in the sale and purchase agreement. The Group's
management believes, after
18
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
consultation with its legal advisors, that this claim is without merit, and the
Group will defend the matter vigorously. As such, no provision for this
contingent liability has been included in the Group's financial statements as of
September 30, 2004.
Guarantees
The Company reports guarantees in accordance with FASB Interpretation No.
45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others - an
interpretation of FASB Statements No. 5, 57 and 107 and rescission of FASB
Interpretation No. 34." The following is a summary of the Company's agreements
that the Company has determined are within the scope of FIN 45.
Under its Memorandum and Articles of Association, the Company has agreed to
indemnify its officers and directors for certain events or occurrences arising
as a result of the officer or director serving in such capacity. The maximum
potential amount of future payments the Company could be required to make under
these indemnification agreements is unlimited. However, the Company maintains
directors and officers liability insurance that limits the Company's exposure
and enables it to recover a portion of any future amounts paid. As a result of
its insurance coverage, the Company believes the estimated fair value of these
indemnification agreements is minimal and has no liabilities recorded for these
agreements as of September 30, 2004.
The Company enters into indemnification provisions under its agreements
with other companies in its ordinary course of business, typically with business
partners, clients and landlords. Under these provisions, the Company generally
indemnifies and holds harmless the indemnified party for losses suffered or
incurred by the indemnified party as a result of the Company's activities. These
indemnification provisions sometimes include indemnifications relating to
representations made by the Company with regard to intellectual property rights.
These indemnification provisions generally survive termination of the underlying
agreement. The maximum potential amount of future payments the Company could be
required to make under these indemnification provisions is unlimited. The
Company believes the estimated fair value of these agreements is minimal.
Accordingly, the Company has no liabilities recorded for these agreements as of
September 30, 2004.
Note 9. 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 the second quarter of 2003 (see Note 1
"Material Events"), the Company's asset management and financial advisory
segments have been classified as discontinued operations for the nine month
period ended September 30, 2003.
Intercompany transfers between reportable operating segments are accounted
for at prices which are designed to be representative of unaffiliated third
party transactions.
Summary revenue and investment gain (loss) information by geographic
segment, based on the domicile of the Group company generating those revenues,
is as follows:
19
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
(In thousands)
Jersey............................................................ $ (2,413) $ (3,624) $ (5,157) $ 907
Guernsey.......................................................... (192) (1,001) (720) 3,794
United States..................................................... 107 8 439 35
---------- ---------- ---------- ----------
Consolidated revenues and net investment gains and
losses for continuing operations............................... $ (2,498) $ (4,617) $ (5,438) $ 4,736
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
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:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
(In thousands)
Revenues and net investment gains and losses:
Life insurance and annuities (1).................................. $ (2,426) $ (3,628) $ (5,182) $ 1,148
Venture capital and consulting.................................... (103) (1,002) (339) 3,546
---------- ---------- ---------- ----------
(2,529) (4,630) (5,521) 4,694
Reconciliation of segment amounts to consolidated amounts:
Interest and other fee income..................................... 31 13 83 42
---------- ---------- ---------- ----------
Consolidated revenues and net investment gains and
losses for continuing operations............................... $ (2,498) $ (4,617) $ (5,438) $ 4,736
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Income (loss) from continuing operations before
income taxes:
Life insurance and annuities (1).................................. $ (2,988) $ (4,329) $ (6,952) $ (1,082)
Venture capital and consulting.................................... (380) (1,345) (1,264) 2,723
---------- ---------- ---------- ----------
(3,368) (5,674) (8,216) 1,641
Reconciliation of segment amounts to consolidated amounts:
Interest and other fee income..................................... 31 13 83 42
Corporate expenses................................................ (576) (688) (1,985) (2,773)
Interest expense.................................................. - - - (676)
---------- ---------- ---------- ----------
Consolidated loss from continuing operations
before income taxes............................................ $ (3,913) $ (6,349) $ (10,118) $ (1,766)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
(1) Netted against the revenues (investment income) of the life insurance and annuities segment are management
fees paid to BCM (discontinued operations) of $0 in the third quarter of 2003, and $5,000 in the first nine
months of 2003.
20
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During the three months ended September 30, 2004, assets in the venture
capital and consulting segment decreased by $608,000 from $665,000 to $57,000,
primarily due to the sale of $565,000 of trading securities.
During the first nine months of 2004, assets in the venture capital and
consulting segment decreased by $3,385,000 from $3,442,000 to $57,000, primarily
due to the sale of $3,396,000 of trading securities.
21
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As used herein, the terms "registrant," "Company," "we," "us" and "our"
refer to Berkeley Technology Limited. Except as the context otherwise requires,
the term "Group" refers collectively to the registrant and its subsidiaries.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the unaudited condensed
consolidated financial statements, and the notes thereto, included in this
quarterly report, and the December 31, 2003 audited consolidated financial
statements, and the notes thereto, included in our Annual Report on Form 10-K,
filed with the SEC on March 10, 2004. The unaudited condensed consolidated
financial statements are prepared in accordance with U.S. GAAP. This item should
also be read in conjunction with the "Forward-Looking Statements and Factors
That May Affect Future Results" which are set forth below and in our other
filings with the SEC.
Forward-Looking Statements and Factors That May Affect Future Results
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this report contain forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Such forward-looking statements are based on current
expectations, estimates, forecasts and projections about the industries in which
we operate, management's current beliefs and assumptions made by management.
Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," "goals," variations of such words and similar expressions are
intended to identify such forward-looking statements. These statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions that are difficult to predict. Future outcomes and results may
differ materially from what is expressed or forecasted in such forward-looking
statements. We undertake no obligation to update any forward-looking statements,
whether as a result of new information, future developments or otherwise.
Factors that could cause or contribute to deviations from the
forward-looking statements include those discussed in this section, elsewhere in
this report and in our other filings with the SEC. The factors include, but are
not limited to, (i) the risks described in Item 3 "Quantitative and Qualitative
Disclosures About Market Risk," (ii) variations in demand for our products and
services, (iii) the success of our new products and services (iv) significant
changes in net cash flows in or out of our businesses, (v) fluctuations in the
performance of debt and equity markets worldwide, (vi) the enactment of adverse
state, federal or foreign regulation or changes in government policy or
regulation (including accounting standards) affecting our operations, (vii) the
effect of economic conditions and interest rates in the U.S., the U.K. or
internationally, (viii) the ability of our subsidiaries to compete in their
respective businesses, (ix) our ability to attract and retain key personnel, and
(x) actions by governmental authorities that regulate our businesses, including
insurance commissions.
22
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
Life Insurance and Annuities
Certain information regarding our life insurance and annuities segment's
results of operations is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
(In thousands)
Revenues and net investment gains (losses):
Investment income................................................. $ 311 $ 420 $ 964 $ 1,450
Insurance policy charges.......................................... - 2 3 6
Net realized investment gains (losses)............................ 3,434 (1,313) 2,273 (37,486)
Change in net unrealized investment gains and losses on
trading securities............................................. (6,171) (2,737) (8,422) 37,178
---------- ---------- ---------- ----------
Total revenues and net investment gains (losses).................. (2,426) (3,628) (5,182) 1,148
Expenses:
Amounts credited on insurance policyholder accounts............... 326 463 1,043 1,509
General and administrative expenses............................... 236 238 727 721
---------- ---------- ---------- ----------
Total expenses.................................................... 562 701 1,770 2,230
---------- ---------- ---------- ----------
Loss from continuing operations before
income taxes................................................... $ (2,988) $ (4,329) $ (6,952) $ (1,082)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
As previously disclosed in our 2002 and 2003 Annual Reports 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 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 84% of
LPAL's $140.2 million in policyholder liabilities as of June 30, 2002 have been
surrendered or have matured as of September 30, 2004. Policyholder liabilities
as of September 30, 2004 were $22.1 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.
Third quarter of 2004 compared to third quarter of 2003
In the third quarter of 2004, LPAL contributed a loss before income taxes
of $3.0 million to our overall loss from continuing operations before income
taxes, compared to a loss before income taxes of $4.3 million in the third
quarter of 2003. Net realized investment gains in the third quarter of 2004 were
$3.4 million compared to net realized investment losses of $1.3 million in the
third quarter of 2003. The loss from the change in net unrealized investment
gains and losses was $6.2 million in the third quarter of 2004, compared to a
loss of $2.7 million in the third quarter of 2003. In the third quarter of 2004,
the spread between investment income and amounts credited to policyholders, and
general and administrative expenses remained flat, each as compared to the third
quarter of 2003.
23
LPAL did not generate any premiums during the third quarter of 2004 or
2003. LPAL discontinued selling new policies on July 2, 2002 as a result of the
events described above.
Interest and dividend income on investments was $0.3 million in the third
quarter of 2004, compared with $0.4 million in the third quarter of 2003. This
$0.1 million decrease was primarily due to the decline in the level of LPAL's
corporate bond investments, which was consistent with the decline in
policyholder liabilities since the third quarter of 2003.
During the third quarter of 2004, LPAL used $1.8 million of cash to meet
its policy maturities and redemptions, and received cash of $3.9 million from
the sale of listed equities and $1.7 million from bond maturities. Following
this net increase in cash, and further expected bond realizations required to
meet fourth quarter 2004 policy maturities, interest income is expected to be
approximately $1.3 million for the full year 2004, compared to $1.8 million for
the full year 2003.
Policyholder liabilities as of September 30, 2004 were $22.1 million of
which $2.2 million is scheduled to mature during the remaining three months of
2004. LPAL expects to meet these maturities by a combination of cash held at the
beginning of October 2004 of $7.6 million, amounts due from brokers of $4.3
million, and estimated bond interest to be received during the remaining three
months of 2004 of $0.4 million. In the absence of significant redemptions,
policyholder liabilities are projected to be approximately $20.0 million at the
end of 2004. Investment income should equal approximately 95% of the projected
$0.3 million to be credited to policies, and operating expenses are expected to
be approximately $0.2 million, both during the remaining three months of 2004.
Net investment losses totaled $2.7 million in the third quarter of 2004,
compared to net investment losses of $4.0 million in the third quarter of 2003.
Net investment losses in the third quarter of 2004 were comprised of net
realized investment gains of $3.4 million and $6.1 million in losses from the
change in net realized gains and losses on the listed equity securities held in
the trading portfolio. The trading portfolio decreased from $10.3 million as of
June 30, 2004 to $0.4 million as of September 30, 2004. LPAL sold its remaining
Packeteer, Inc. holding during the third quarter of 2004, which resulted in net
realized gains of $3.7 million based on an aggregate original cost of $3.5
million. During the third quarter of 2004, one of LPAL's trading positions was
acquired by a larger listed company, in exchange for $0.3 million of stock in
the acquiring company, which resulted in a realized loss of $0.3 million based
on an original cost of $0.6 million.
Due to the substantial decrease in LPAL's listed equity portfolio as of
September 30, 2004, fluctuations in the market value of LPAL's listed equity
holdings will no longer have a significant impact on LPAL's financial results.
Total invested assets decreased to $35.0 million as of September 30, 2004,
compared to $39.4 million as of June 30, 2004 primarily due to net investment
losses of $2.7 million and policyholder benefits paid of $1.8 million during the
third quarter of 2004. On total average invested assets in the third quarter of
2004, the average annualized net return, including both realized and unrealized
investment gains and losses, was -28.3%, compared with -29.3% in the third
quarter of 2003.
Amounts credited on policyholder accounts decreased by $0.2 million in the
third quarter of 2004 to $0.3 million, compared with $0.5 million in the third
quarter of 2003. The decrease was primarily due to policy maturities since the
third quarter of 2003. The average rate credited to policyholders was 5.5% in
the third quarter of 2004, compared with 5.8% in the third quarter of 2003.
First nine months of 2004 compared to first nine months of 2003
In the first nine months of 2004, LPAL contributed a loss before income
taxes of $7.0 million to our overall loss from continuing operations before
income taxes, compared to a loss before income taxes of $1.1 million in the
first nine months of 2003. Net realized investment gains in the first nine
months of 2004 were $2.3 million compared to net realized investment losses of
$37.5 million in the first nine months of 2003. The loss from the change in net
unrealized investment gains and losses was $8.4 million in the first nine months
of 2004, compared to a gain of $37.2 million in the first nine months of 2003.
In the first nine months of 2004, the
24
spread between investment income and amounts credited to policyholders, and
general and administrative expenses remained flat, each as compared to the first
nine months of 2003.
LPAL did not generate any premiums during the first nine months of 2004 or
2003. LPAL discontinued selling new policies on July 2, 2002 as a result of the
events described above.
Interest and dividend income on investments was $1.0 million in the first
nine months of 2004, compared with $1.5 million in the first nine months of
2003. This $0.5 million decrease was primarily due to the decline in the level
of LPAL's corporate bond investments, which was consistent with the decline in
policyholder liabilities since September 30, 2003.
Net investment losses totaled $6.1 million in the first nine months of
2004, compared to net investment losses of $0.3 million in the first nine months
of 2003. Net investment losses in the first nine months of 2004 were comprised
of net realized investment gains of $2.3 million and $8.4 million in losses from
the change in net realized gains and losses on the listed equity securities held
in the trading portfolio. The trading portfolio decreased from $13.5 million as
of December 31, 2003 to $0.4 million as of September 30, 2004. LPAL sold its
remaining Packeteer, Inc. holding during the first nine months of 2004, which
resulted in net realized gains of $4.9 million based on an aggregate original
cost of $4.4 million. These realized gains were partially offset by
other-than-temporary impairment charges on one private equity security holding
totaling $2.3 million and one of LPAL's trading positions was acquired by a
larger listed company, in exchange for $0.3 million of stock in the acquiring
company, which resulted in a realized loss of $0.3 million based on an original
cost of $0.6 million.
Total invested assets decreased to $35.0 million as of September 30, 2004,
compared to $47.9 million as of December 31, 2003 primarily due to policyholder
benefits paid of $7.3 million and net investment losses of $6.1 million during
the first nine months of 2004. On total average invested assets in the first
nine months of 2004, the average annualized net return, including both realized
and unrealized investment gains and losses, was -17.8%, compared with 3.0% in
the first nine months of 2003.
Amounts credited on policyholder accounts decreased by $0.5 million in the
first nine months of 2004 to $1.0 million, compared with $1.5 million in the
first nine months of 2003. The decrease was primarily due to policy maturities
since September 30, 2003. The average rate credited to policyholders was 5.5% in
the first nine months of 2004, compared with 5.9% in the first nine months of
2003.
Venture Capital and Consulting
Certain information regarding our venture capital and consulting segment's
results of operations is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
(In thousands)
Revenues and net investment gains (losses):
Consulting fees................................................... $ 130 $ - $ 310 $ -
Net realized investment gains (losses)............................ 237 473 2,010 (2,626)
Change in net unrealized investment gains and losses on
trading securities............................................. (470) (1,475) (2,659) 6,172
---------- ---------- ---------- ----------
Total revenues and net investment gains (losses).................. (103) (1,002) (339) 3,546
Operating expenses................................................ 277 343 925 823
---------- ---------- ---------- ----------
Income (loss) from continuing operations before
income taxes................................................... $ (380) $ (1,345) $ (1,264) $ 2,723
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
25
Third quarter of 2004 compared to third quarter of 2003
In the third quarter of 2004, the venture capital and consulting segment
contributed a loss before income taxes of $0.4 million to our overall loss from
continuing operations before income taxes, compared to a loss before income
taxes of $1.3 million in the third quarter of 2003. The losses in both periods
were attributable primarily 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 the third quarter of 2004 was a loss of $0.5 million, which was
partially offset by net realized gains of $0.2 million. The trading portfolio
decreased from $0.7 million as of June 30, 2004 to $0.05 million as of September
30, 2004. We sold our remaining holding in Packeteer, Inc. in the third quarter
of 2004 which resulted in net realized gains of $0.2 million based on an
aggregate original cost of $0.1 million. All intersegmental investment gains and
losses have been eliminated in our consolidated statements of income.
The venture capital segment began earning fee income once again in 2004.
The segment earned consulting fees of $130,000 in the third quarter of 2004, by
advising a small number of North American technology companies. Typically, BICC
seeks a monthly retainer from its North American private technology company
clients for its consulting work, and in some cases, it may receive a "success
fee" upon successful completion of an assignment.
Operating expenses in the third quarter of 2004 remained flat at $0.3
million, compared to the third quarter of 2003.
First nine months of 2004 compared to first nine months of 2003
In the first nine months of 2004, the venture capital and consulting
segment contributed a loss before income taxes of $1.3 million to our overall
loss from continuing operations before income taxes, compared to income before
income taxes of $2.7 million in the first nine months of 2003. The results in
both periods were attributable primarily to net realized and unrealized
investment gains and losses on listed equity securities.
The change in net unrealized gains and losses in the listed equity trading
portfolio during the first nine months of 2004 was a loss of $2.6 million, which
was partially offset by net realized gains of $2.0 million. The trading
portfolio decreased from $3.4 million as of December 31, 2003 to $0.05 million
as of September 30, 2004. We sold most of our trading positions during the first
nine months of 2004, which resulted in net realized gains of $1.9 million based
on an aggregate original cost of $0.8 million. All intersegmental investment
gains and losses have been eliminated in our consolidated statements of income.
The venture capital segment began earning fee income once again in 2004.
The segment earned consulting fees of $310,000 in the first nine months of 2004
by advising a small number of North American technology companies.
Operating expenses in the first nine months of 2004 were $0.9 million,
compared to $0.8 million in the first nine months of 2003. The $0.1 million
increase was attributable primarily to additional staff costs, reflecting the
additional resources required to redevelop our venture capital business.
Corporate and Other
Third quarter of 2004 compared to third quarter of 2003
Corporate expenses decreased by $0.1 million to $0.6 million in the third
quarter of 2004, as compared to $0.7 million in the third quarter of 2003. This
decrease was primarily due to lower facilities costs, professional services fees
and insurance costs.
26
Since we fully repaid and terminated our bank facility during June 2003, we
did not incur any interest expense in the third quarters of 2004 and 2003.
First nine months of 2004 compared to first nine months of 2003
Corporate expenses decreased by $0.8 million to $2.0 million in the first
nine months of 2004, as compared to $2.8 million for the first nine months of
2003. This decrease was primarily due to lower facilities costs, professional
services fees and insurance costs.
Since we fully repaid and terminated our bank facility during June 2003, we
did not incur any interest expense in the first nine months of 2004, compared to
$0.7 million in the first nine months of 2003.
Consolidated Loss from Continuing Operations Before Income Taxes
Third quarter of 2004 compared to third quarter of 2003
Our consolidated loss from continuing operations before income taxes was
$3.9 million in the third quarter of 2004, compared to a loss of $6.3 million in
the third quarter of 2003. This lower loss was primarily due to net realized and
unrealized investment losses of $3.0 million in the third quarter of 2004,
compared to net realized and unrealized losses of $5.1 million in the third
quarter of 2003.
Following the sale of our remaining 435,000 shares in Packeteer, Inc. on
September 30, 2004, volatility in the market prices of our remaining $0.4
million in listed equity holdings will have a significantly reduced impact on
our consolidated income before income taxes in future periods. However,
other-than-temporary impairments of our private equity securities primarily in
the technology sector could materially affect our consolidated income before
income taxes in future periods.
Subsequent to the completion of the sales of BCM and LPA during 2003, we
now focus on our venture capital and consulting business. We continue to pursue
opportunities to grow the business in the future, however, there is no guarantee
that we will be successful in redeveloping our venture capital operations.
First nine months of 2004 compared to first nine months of 2003
The consolidated loss from continuing operations before income taxes was
$10.1 million in the first nine months of 2004, compared to a loss of $1.8
million in the first nine months of 2003. This dramatic change was primarily due
to net realized and unrealized investment losses of $6.8 million in the first
nine months of 2004, compared to net realized and unrealized investment gains of
$3.2 million in the first nine months of 2003.
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.
Third quarter of 2004 (continuing operations)
No tax expense or benefits are applicable to our Group for the third
quarter of 2004. Losses were contributed by our combined Jersey and Guernsey
operations, primarily consisting of net unrealized investment losses for which
no tax benefits will be realized. Losses were also contributed by our U.S.
subsidiaries during the period; however, we did not recognize any U.S. tax
benefits due to the 100% valuation allowances that we have provided for all
deferred tax assets.
27
First nine months of 2004 (continuing operations)
The $0.3 million tax expense for the first nine months of 2004 is largely
our estimated California tax liability related to tax years 1998 and 1999 as
described in Note 8 to the Unaudited Condensed Consolidated Financial Statements
in Part I, Item 1. Other than $7,000 of tax expense recorded in the first
quarter of 2004 primarily representing minimum California taxes, no other tax
expense or benefits are applicable to our Group for this period. Losses were
contributed by our Jersey and Guernsey operations, primarily consisting of net
realized and unrealized investment losses for which no tax benefits will be
realized. Losses were also contributed by our U.S. subsidiaries during this
period; however, we did not recognize any U.S. tax benefits due to the 100%
valuation allowances that we have provided for all deferred tax assets.
Discontinued Operations
Third quarter of 2004 compared to third quarter of 2003
There were no results to report for discontinued operations for the third
quarter of 2004, as we completed the sales of BCM and LPA in the second quarter
of 2003. For further information, see Note 3 "Discontinued Operations" to the
Unaudited Condensed Consolidated Financial Statements in Part I, Item 1.
First nine months of 2004 compared to first nine months of 2003
There were no results to report for discontinued operations for the first
nine months of 2004, as we completed the sales of BCM and LPA in the second
quarter of 2003.
Our consolidated income statement for the first nine months of 2003
includes the results of discontinued operations for the first four months of
2003, in the case of BCM, and for the first five months of 2003, in the case of
LPA.
CRITICAL ACCOUNTING POLICIES
Management has identified those accounting policies that are most important
to the accurate portrayal of our financial condition and results of operations
and that require management's most complex or subjective judgments, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain. These most critical accounting policies pertain to our
investments, life insurance policy liabilities and contingent liabilities. In
addition, for 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
28
with rights that vary dramatically both from company to company and between
rounds of financing within the same company. These rights, such as
anti-dilution, redemption, liquidation preferences and participation, bear
directly on the price an investor is willing to pay for a security. The returns
on these investments are generally realized through an initial public offering
of the company's shares or, more commonly, through the company's acquisition by
a public company.
One of the factors affecting fair value is the amount of time before a
company requires additional financing to support its operations. Management
believes that companies that are financed to the estimated point of operational
profitability or for a period greater than one year will most likely return
value to the investor through an acquisition between a willing buyer and seller,
as the company does not need to seek financing from an opportunistic investor or
insider in an adverse investment environment. If a particular company needs
capital in the near term, management considers a range of factors in its fair
value analysis, including our ability to recover our investment through
surviving liquidation preferences. Management's valuation methodologies also
include fundamental analysis that evaluates the investee company's progress in
developing products, building intellectual property portfolios and securing
customer relationships, as well as overall industry conditions, conditions in
and prospects for the investee's geographic region, and overall equity market
conditions. This is combined with analysis of comparable acquisition
transactions and values to determine if the security's liquidation preferences
will ensure full recovery of our investment in a likely acquisition outcome. In
its valuation analysis, management also considers the most recent transaction in
a company's shares.
The determination of fair values of investments requires the application of
significant judgment. It is possible that the factors evaluated by management
and fair values will change in subsequent periods, especially with respect to
our privately held equity securities in technology companies, resulting in
material impairment charges in future periods.
Other-than-temporary Impairments
Management performs an ongoing review of all investments in the portfolio
to determine if there are any declines in fair value that are
other-than-temporary.
Since our listed equity securities are classified as trading securities,
impairment adjustments are not required as any change in the market value of
these securities between reporting periods is included in earnings.
In relation to our equity securities that do not have a readily
determinable fair value and are classified as available-for-sale, factors
considered in impairment reviews include: (i) the length of time and extent to
which estimated fair values have been below cost and the reasons for the
decline, (ii) the investee's recent financial performance and condition,
earnings trends and future prospects, (iii) the market condition of either the
investee's geographic area or industry as a whole, and (iv) concerns regarding
the investee's ability to continue as a going concern (such as the inability to
obtain additional financing). If the evidence supports that a decline in fair
value is other-than-temporary, then the investment is reduced to its estimated
fair value, which becomes its new cost basis, and a realized loss is reflected
in earnings.
We determine that a fixed maturity security is impaired when it is probable
that we will not be able to collect amounts due (principal and interest)
according to the security's contractual terms. We make this determination by
considering all available facts and circumstances, including our intent and
ability to continue to hold the investment to maturity. The factors we consider
include: (i) the length of time and extent to which the market values have been
below amortized cost and the reasons for the decline, (ii) the issuer's recent
financial performance and condition, earnings trends and future prospects in the
near to mid-term, (iii) changes 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.
29
The evaluations for other-than-temporary impairments require the
application of significant judgment. It is possible that the impairment factors
evaluated by management and fair values will change in subsequent periods,
especially with respect to privately held equity securities in technology
companies, resulting in material impairment charges in future periods.
Life Insurance Policy Liabilities
We account for life insurance policy liabilities in accordance with
Statement of Financial Accounting Standards No. 97, "Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains
and Losses from the Sale of Investments." We account for life insurance policy
liabilities for deferred annuities as investment-type insurance products and we
record these liabilities at accumulated value (premiums received, plus accrued
interest to the balance sheet date, less withdrawals and assessed fees).
Contingent Liabilities
As discussed above in Note 8 "Commitments and Contingencies" to our
unaudited condensed consolidated financial statements, we are involved in
various matters that may or may not result in a loss to the Group. We account
for contingent liabilities in accordance with Statement of Financial Accounting
Standards No. 5, "Accounting for Contingencies." As such, in situations where we
believe that a loss is probable and where we can reasonably estimate the amount
of the loss, we will recognize that estimated loss in our financial statements.
Because of the uncertainties that exist, we cannot predict the outcome of the
pending matters with certainty. Actual results may differ from our estimates,
and the ultimate outcome of these matters could have a significant impact on our
results of operations and financial position.
Consolidation, Deconsolidation and Reporting of Discontinued Operations
Our unaudited condensed consolidated financial statements include the
accounts of the Company, its subsidiaries (with the exception of BCM and LPA
which were deconsolidated during the first half of 2003, as discussed below),
the Employee Share Option Trust and the Agent Loyalty Opportunity Trust
(collectively, the "Group"). Significant subsidiaries included in the continuing
operations of the Group and discussed in this report include London Pacific
Assurance Limited and Berkeley International Capital Corporation. All
intercompany transactions and balances are eliminated in consolidation except
for intercompany transactions between continuing and discontinued operations.
Our unaudited condensed consolidated balance sheet is presented in an
unclassified format as the majority of the Group's assets relate to its
continuing life insurance and annuities business.
In accordance with SFAS 144, if a long-lived asset or "component of an
entity" (a reportable segment, an operating segment, a reporting unit, a
subsidiary or an asset group) is disposed of by sale or by abandonment, then the
results of operations of that component of an entity shall be reported in
discontinued operations if both of the following conditions are met: (i) the
operations and cash flows of the component have been eliminated from the ongoing
operations of the entity, and (ii) the entity will not have any significant
continuing involvement in the operations of the component.
Due to the sale of both BCM and LPA during the second quarter of 2003, we
report the results of operations in the income statement under discontinued
operations for the prior period. We do not expect to receive any material
amounts of income, including earnouts related to the sale of LPA, from our asset
management or financial advisory services segments in the foreseeable future.
Liquidity and Capital Resources
Our cash and cash equivalents increased during the first nine months of
2004 by $3.9 million to $18.3 million. This increase in cash and cash
equivalents resulted from $5.1 million and $6.1 million of cash provided by
investing activities and operating activities, respectively, partially offset by
$7.3 million of cash used in financing activities. Cash provided by investing
activities primarily related to the maturity of corporate bonds
30
held by LPAL. Cash provided by operating activities primarily resulted from the
sale of trading securities. Cash used in financing activities related to
insurance policyholder benefits paid by LPAL. As of September 30, 2004, our cash
and cash equivalents, excluding the amount held by LPAL, amounted to $10.8
million, an increase of $0.2 million from December 31, 2003. Excluding LPAL's
investments, we also held $0.05 million of listed equity securities which could
be sold within a short period of time as of September 30, 2004, compared to $3.4
million as of December 31, 2003.
Shareholders' equity decreased during the first nine months of 2004 by
$10.4 million from $34.9 million at December 31, 2003 to $24.5 million at
September 30, 2004, primarily due to the net loss for the period of $10.4
million. As of September 30, 2004 and December 31, 2003, $63.6 million of our
Ordinary Shares, at cost, held by the employee benefit trusts have been netted
against shareholders' equity.
As discussed above in "Results of Operations by Business Segment - Life
Insurance and Annuities," LPAL discontinued issuing new policies in July 2002.
During the first nine months of 2004, LPAL continued to service its existing
policyholders. During this period, policy surrenders totaled $0.4 million and
policy maturities totaled $6.3 million. Policyholder liabilities were $22.1
million as of September 30, 2004, compared to $28.1 million as of December 31,
2003. We do not expect significant surrender activity during the remaining three
months of 2004; however, approximately $2.2 million of policyholder liabilities
are scheduled to mature during this period. LPAL has sufficient liquid resources
to fund these maturities. As of September 30, 2004, LPAL had cash of $7.6
million and amounts due from brokers of $4.3 million.
LPAL's $22.1 million in policyholder liabilities will continue to mature
over the next several years. As of September 30, 2004, LPAL's corporate bonds,
cash, broker receivables and accrued interest totaled $32.7 million, listed
equity securities were $0.4 million and the book value of private equity
securities was $1.8 million. Following the sale of LPAL's remaining Packeteer,
Inc. common stock holding during the first nine months of 2004, fluctuations in
the market value of LPAL's listed equity securities will no longer have a
significant impact on LPAL's required statutory capital level.
As of September 30, 2004, we had no bank borrowings, guarantee obligations,
material commitments outstanding for capital expenditures or additional funding
for private equity portfolio companies.
As of September 30, 2004, we had $10.8 million of cash and cash
equivalents, excluding cash held by our life insurance and annuities segment. We
believe that this cash balance is sufficient to fund our operations (venture
capital and corporate activities) over at least the next 12 months.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The nature of our businesses exposes us to market risk. Market risk is the
risk of loss that may occur when changes in interest rates and public equity
prices adversely affect the value of invested assets.
Interest Rate Risk
LPAL is subject to risk from interest rate fluctuations when payments due
to policyholders are not matched in respect of amount and duration with income
from investments. LPAL attempts to minimize this risk by ensuring that payments
and income are matched as closely as possible while also maximizing investment
returns. LPAL has not used derivative financial instruments as part of its
investment strategy. Exposure to interest rate risk is estimated by performing
sensitivity tests to changes in interest rates.
For LPAL's business, the amount of policyholder liabilities is unaffected
by changes in interest rates. Given the existing policy and bond maturity
profiles, and that bonds will generally be held to maturity and early policy
redemptions are protected by a market value adjustment and surrender penalty,
the bonds and policies carry minimal interest rate risk. Interest income earned
on excess cash is expected to yield less than $0.2 million during the next 12
months. Movements in market interest rates will not have any material impact on
this amount.
31
Equity Price Risk
We are exposed to equity price risk on our holdings of listed equity
securities. Changes in the level or volatility of equity prices affect the value
of our listed equity securities. These changes in turn directly affect our
consolidated net income because our holdings of listed equity securities are
marked to market, with changes in their market value recognized in the income
statement for the period in which the changes occur. These listed equity
securities represent investments that were originally made as private equity
investments in high technology companies that subsequently completed an initial
public offering. The performance of these listed equity securities can be highly
volatile; however, we monitor them and seek to sell them over a period of time.
Prior to September 30, 2004, we held levels of listed equity securities
which exposed us to significant equity price risk and resulting volatility in
our reported earnings. Subsequent to the sale of our remaining holding in
Packeteer, Inc. common stock on September 30, 2004, the market value of our
listed equity trading portfolio is now only $0.4 million. At this level, there
is greatly reduced equity price risk and fluctuations in the market value of our
listed equity securities should not have a material impact on our earnings in
future periods. If the fair value of our listed equity securities, as of
September 30, 2004 and December 31, 2003, which totaled $0.4 million and $16.9
million, respectively, had abruptly increased or decreased by 50%, the fair
value of our listed equity portfolio would have increased or decreased by $0.2
million and $8.5 million, respectively.
As of September 30, 2004, we held $1.8 million in private corporate equity
securities of technology companies for which liquid markets do not exist.
Private equity prices do not fluctuate directly with public equity markets, but
significant market movements may trigger a review for other-than-temporary
adjustment of the carrying values of our private equity securities. The risks
inherent in these private equity investments relate primarily to the viability
of the investee companies. We try to mitigate these risks in various ways,
including performing extensive due diligence prior to making an investment, and
regularly reviewing the progress of the investee companies.
Item 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in our filings under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the periods specified in the rules and forms of the SEC. Such
information is accumulated and communicated to our management, including our
chief executive officer and chief financial officer, as appropriate, to allow
timely decisions regarding required disclosure. Our management, including the
chief executive officer and the chief financial officer, recognizes that any set
of controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives.
As of the end of the period covered by this quarterly report on Form 10-Q,
we carried out an evaluation, under the supervision and with the participation
of our management, including our chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on such evaluation, our chief executive officer
and chief financial officer concluded that our disclosure controls and
procedures 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 quarterly
report on Form 10-Q.
32
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATERIALS TO A VOTE OF SECURITY HOLDERS
On August 4, 2004, we held our annual general meeting of the shareholders
where the following matters were submitted to a vote and approved:
(1) To receive the report of the directors and the financial statements
for the year ended December 31, 2003, together with the report of the
independent auditors thereon; votes received for: 36,509,172, against:
56,229. There were 36,510 abstentions.
(2) For the re-election of one director, The Viscount Trenchard; votes
received for: 36,343,837, against: 190,364. There were 67,710
abstentions. Directors whose term of office continued, and who were
not up for re-election at this annual general meeting, include Mr.
Arthur I. Trueger, Mr. Victor A. Hebert, Mr. Harold E. Hughes, Jr. and
Mr. John Clennett.
(3) To re-appoint BDO Stoy Hayward, LLP and BDO Seidman, LLP as
independent auditors of the Company and to authorize the directors to
fix their remuneration; votes received for: 36,379,692, against:
148,559. There were 73,660 abstentions.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)EXHIBITS
The following exhibits are filed herewith:
Exhibit
Number Description
- ------- -----------------
31.1 Certification by the Company's Executive Chairman pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification by the Company's Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification by the Company's Executive Chairman pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification by the Company's Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K:
We filed one current report on Form 8-K during the third quarter of 2004 as
follows:
(1) The Form 8-K filed on August 5, 2004 announcing our financial results
for the quarter ended June 30, 2004.
33
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BERKELEY TECHNOLOGY LIMITED
(Registrant)
Date: November 2, 2004 By: /s/ Ian K. Whitehead
Ian K. Whitehead
Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer of the Registrant)
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BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
EXHIBIT INDEX FOR THE QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2004
Exhibit
Number Description
- ------- ----------------
31.1 Certification by the Company's Executive Chairman pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification by the Company's Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification by the Company's Executive Chairman pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification by the Company's Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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