Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-K
(Mark One)
/ / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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, including zip code)
011 44 (1534) 607700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange on
Title of each class which registered
American Depositary Shares, each representing None
ten Ordinary Shares of $0.05 par value per share
Ordinary Shares of $0.05 par value per share *
*Not for trading, but only in connection with the registration of American
Depositary Shares, pursuant to the requirements of the Securities and Exchange
Commission.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ |X|] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ |X|]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [ |X|]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the closing sale price of the Ordinary Shares on June
30, 2004 as reported on the London Stock Exchange (using an exchange rate of
(pound)1.00 = $1.81) was $8,222,898. Ordinary Shares held by each current
executive officer and director and by each person who is known by the registrant
to own 5% or more of the outstanding Ordinary Shares have been excluded from
this computation in that such persons may be deemed to be affiliates of the
registrant. This determination is not necessarily conclusive that these persons
are affiliates of the registrant.
As of March 23, 2005, the registrant had outstanding 64,439,073 Ordinary
Shares, $0.05 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive proxy statement for its Annual General Meeting
of Shareholders to be held on August 10, 2005, is incorporated by reference in
Part III of this Form 10-K.
TABLE OF CONTENTS
PART I Page
Item 1. Business............................................................ 1
Item 2. Properties.......................................................... 6
Item 3. Legal Proceedings................................................... 6
Item 4. Submission of Matters to a Vote of Security Holders................. 6
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities....................... 7
Item 6. Selected Financial Data............................................. 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......... 24
Item 8. Financial Statements and Supplementary Data......................... 25
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................ 67
Item 9A. Controls and Procedures............................................. 67
PART III
Item 10. Directors and Executive Officers of the Registrant.................. 67
Item 11. Executive Compensation.............................................. 68
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters...................... 68
Item 13. Certain Relationships and Related Transactions...................... 68
Item 14. Principal Accountant Fees and Services.............................. 69
PART IV
Item 15. Exhibits and Financial Statement Schedules ......................... 69
Signatures ................................................................... 80
Exhibit Index.................................................................. 81
As used herein, the terms "registrant," "Company," "we," "us" and "our"
refer to Berkeley Technology Limited. Except as the context otherwise requires,
the term "Group" refers collectively to the registrant and its subsidiaries.
Forward-Looking Statements and Factors That May Affect Future Results
Statements contained in this Annual Report on Form 10-K that are not
historical facts, including, but not limited to, statements found in Item 1
"Business," Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Item 7A "Quantitative and Qualitative Disclosures
About Market Risk," are forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Such forward-looking statements are based on current expectations, estimates,
forecasts and projections about the industries in which we operate, management's
current beliefs and assumptions made by management. Words such as "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates," "goals,"
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions that are
difficult to predict. Future outcomes and results may differ materially from
what is expressed or forecasted in such forward-looking statements. We undertake
no obligation to update any forward-looking statements, whether as a result of
new information, future developments or otherwise.
PART I
Item 1. BUSINESS
OVERVIEW
We are a financial services company based in Jersey, Channel Islands,
specializing in venture capital and consulting.
We evolved from a financial consulting business, The Berkeley Consulting
Group, formed in 1977. That business focused on financial consulting services
and venture capital finance for U.S. high technology companies from non-U.S.
institutional financing sources. The Company was incorporated in 1985 in Jersey,
Channel Islands. We obtained a listing on the London Stock Exchange ("LSE") in
that same year and our Ordinary Shares currently trade under the symbol "BEK.L."
Since 1985, we grew with the establishment of life insurance and annuity
businesses in both the U.S. and Jersey, and through acquisitions in the
financial advisory services and asset management areas. In 2002, we lost
management control of our U.S. life insurance business due to the dilution in
the level of the life insurance company's capital arising from bond and equity
losses in poor market conditions. We continue to service the policyholders of
London Pacific Assurance Limited ("LPAL") in Jersey, but new policies have not
been sold since July 2002 to avoid the capital requirements related to the sales
of new policies. In 2003, we sold two of our operating businesses: Berkeley
Capital Management ("BCM"), our U.S. based asset management company; and London
Pacific Advisory Services, Inc. and its affiliates, our U.S. based online
investment consulting service. We now focus on our venture capital and
consulting business. We are working with North American technology companies
that are looking to grow their businesses or to expand their investor base
overseas, primarily in Europe and Japan.
American Depositary Receipts ("ADRs") representing our Ordinary Shares
began trading in the U.S. market in 1992. We obtained a listing on The Nasdaq
Stock MarketSM in 1993 and in November 1999 migrated to the New York Stock
Exchange ("NYSE") where our ADRs traded under the symbol "LDP." During 2002, our
ADR price fell below the minimum required by the NYSE; consequently, our ADRs
were withdrawn from listing and registration on the NYSE. Our ADRs currently
trade on the Over-the-Counter ("OTC") Bulletin Board under the symbol
"BKLYY.PK."
1
During the second quarter of 2002, we completed a one-for-ten reverse split
of our ADRs. Effective from the opening of business on June 24, 2002, each ADR
represents ten Ordinary Shares.
We currently have offices in Jersey (Channel Islands) and San Francisco,
California.
BUSINESS SEGMENTS
We currently have two business segments that we operate through our
subsidiaries: life insurance and annuities, and venture capital and consulting.
Our principal operating subsidiaries, by business segment and location, are set
forth below:
Principal Subsidiaries Business Segment Location
- ------------------------------------------- ------------------------------ --------------------------
London Pacific Assurance Limited Life insurance and annuities Jersey, Channel Islands
Berkeley International Capital Corporation Venture capital and consulting San Francisco, California
Berkeley International Capital Limited Venture capital Guernsey, Channel Islands
See Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations by Business Segment" and Note 18
to the Consolidated Financial Statements in Item 8 of this Form 10-K for a
summary of our financial information by business segment and geographical
location.
Life Insurance and Annuities
Our U.S. life insurance company, London Pacific Life & Annuity Company
("LPLA"), was established in 1989 and provided tax advantaged annuity products.
By the end of 2001, LPLA grew to approximately $2.3 billion in assets; however,
during 2002, the life insurance and annuities segment suffered from the adverse
conditions in the bond and equity markets. On July 2, 2002, we announced that
further declines in the value of LPLA's investment portfolio, due to persistent
negative events in the equity and bond markets, continued to erode significantly
the statutory capital of LPLA and that we were unsuccessful in concluding a
transaction to enhance the capital of LPLA. Subsequently, LPLA was placed under
regulatory control and rehabilitation based on LPLA's statutory capital and
surplus as of June 30, 2002. On August 6, 2002, on petition of the Commissioner
of Insurance of the State of North Carolina (the "Commissioner") with the
consent of LPLA and unanimous approval of its board of directors, the Superior
Court of Wake County in the State of North Carolina ordered the Commissioner to
take possession and control of all of the property, books and accounts,
documents and other records of LPLA. Based on this court order, we no longer
exercise control over LPLA. As a result of this event, we deconsolidated LPLA
and recorded a charge to earnings in 2002 of $38.5 million for losses resulting
from this disposition. 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.
London Pacific Assurance Limited
Formed in 1999, our Jersey, Channel Islands insurance subsidiary, LPAL, has
principally been engaged in marketing and servicing investment oriented
insurance products. LPAL sold Sterling, U.S. dollar and Euro guaranteed return
bonds in its home market of Jersey, Channel Islands, and in the U.K., Guernsey,
Isle of Man and other permitted jurisdictions. The products guarantee both
capital and yield for the duration of the investment period, which are typically
three or five years. From LPAL's start of operations in the first quarter of
2000 through the end of June 2002, LPAL generated premiums totaling $135.0
million. LPAL generated sales directly to the public and through financial
intermediaries in the Channel Islands, U.K., Isle of Man and other international
locations.
On July 2, 2002, we announced that LPAL would discontinue writing new
policies effective immediately. The decision to discontinue the issuance of
policies was made to avoid the increased capital requirements created by
additional policyholder liabilities. Subsequent to this announcement and other
announcements relating to the Company and LPLA, LPAL policy surrenders increased
substantially. The number of policyholders fell from 2,603 at June 30, 2002 to
925 at December 31, 2002. The primary financial impact of
2
the high level of surrenders was the reduction in the level of capital required
to support the policyholder liabilities. The number of policyholders continued
to decline to 480 at December 31, 2004; however, much of the decline during 2003
and 2004 was attributable to policy maturities rather than policy surrenders.
We have no plans currently for LPAL to write new policies.
Investment Portfolio
LPAL's portfolio strategy has been to at least match the level of
policyholder liabilities with corporate bonds and cash. On December 31, 2004,
policyholder liabilities totaled $21.2 million and the market value of LPAL's
corporate bonds, cash and accrued interest totaled $31.8 million. In addition,
LPAL's portfolio included listed equities valued at $0.5 million and private
equities valued at $0.8 million at December 31, 2004.
See Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Life Insurance and Annuities" for additional information
on LPAL's investment portfolio and its effect on the profitability of the
insurance segment.
Competition
LPAL operates in a highly competitive environment. The industry consists of
a large number of companies, many of which have greater financial resources,
more diversified product lines and larger staffs than those of LPAL. An
expanding number of other financial services companies also market insurance
products or offer competing products. Competition is based on a number of
factors, including product pricing, service provided to distributors and
policyholders, and ratings.
We believe LPAL could compete again in the future but its distribution
capability may be significantly weakened due to the ongoing discontinuation of
sales activity, as well as the negative publicity associated with the loss of
management control of LPLA. LPAL has had little pro-active contact with sales
agents since the decision to discontinue issuing policies.
Venture Capital and Consulting
Berkeley International Capital Corporation ("BICC") and Berkeley
International Capital Limited ("BICL") comprise our venture capital and
consulting business. In past years, our venture capital and consulting
subsidiaries focused primarily on U.S. high technology companies, with
investments generally ranging from $5 million to $25 million.
Subsequent to the rehabilitation proceedings involving LPLA in August 2002,
we have not made any further venture capital investments. Our current venture
capital strategy is focused on identifying opportunities where we can assist
private technology companies in locating investment capital. In select
situations, we may also invest our own capital. Our consulting activities are
continuing to grow as we add new clients who engage us to assist them with their
European and Asian business strategies.
Berkeley International Capital Corporation
BICC is primarily responsible for our activities in the venture capital and
consulting areas. Currently, this involves working with North American
technology companies that are looking to grow their businesses or to expand
their investor base overseas, primarily in Europe and Japan. We advise on
overseas operations, assist in locating partners, customers and investment
capital, and occasionally will take principal positions where the case is
compelling and the timeframe for realization could be relatively short.
Typically, BICC seeks a retainer (monthly or upfront depending on the
nature of the assignment) from its North American technology company clients for
its consulting work, and a "success fee" upon the successful conclusion of its
assignment. The consulting work may involve assistance in the preparation of a
business plan; market research; strategy development; identification of
customers and/or investor prospects;
3
introductory meetings with prospective customers or investors; and assistance in
the implementation of the chosen strategy or transaction.
BICC currently provides its services to a small number of clients, and is
in discussions with additional prospects. As an example of its work, BICC has
been engaged by a North American telecommunications equipment company to develop
a business strategy for penetration of the European and Japanese markets. This
engagement has involved detailed market and prospect research and meetings with
potential clients that may lead to substantial business for the client company.
Another example of BICC's work is an engagement involving the preparation of a
business plan, reviewing financing structures and introducing investors who
could finance a European sales and customer support initiative for a U.S.
telecommunications equipment company.
BICC has a long history and experience in both the U.S. technology industry
and the overseas investment and business markets. It is well positioned to
benefit from the globalization forces that are at work in the industry and that
are challenging so many young technology companies. It can also provide overseas
investors and businesses with the access they desire to U.S. businesses,
technologies and potential sources of funding.
Over the past 25 years, BICC arranged over $1.9 billion of placements in
the private capital markets. Placements were typically arranged in later stage
technology companies, which were near alpha test of their product and needed to
scale up their engineering, marketing and sales infrastructure. Within this
strategy, BICC has been able to identify many promising young technology
companies that have grown in prominence in their fields and gone on to
successful public offerings or acquisition transactions. Many of the companies
are headquartered in close proximity to BICC's offices which allows for easier
access to the companies' management. Most of these companies specialize in
telecommunications (both central office and customer premises), data
communications, software, semiconductors and knowledge learning. These
placements included investments in 3Com, Acuson, Adaptec, Altera, America
Online, Atmel, Cadence Design Systems, Cirrus Logic, Cypress Semiconductor,
Flextronics, IDT, Linear Technology, LSI Logic, Nellcor, Oracle, PMC Sierra and
Packeteer, Inc.
The private technology investments arranged by BICC and currently held by
LPAL are Agility Communications, Inc. and Alacritech, Inc.
Due to the loss of control of LPLA in 2002, BICC no longer receives fees
from LPLA. Fees earned by BICC from LPLA during 2002 were $2.9 million.
Berkeley International Capital Limited
BICL, formed in 1988 and based in Guernsey, Channel Islands, takes
principal positions in connection with private equity transactions arranged by
its sister company, BICC. These private equity positions may become listed
equity securities pursuant to IPOs or in connection with the acquisition of the
private issuing company by a listed company. As of December 31, 2003, BICL held
$3.4 million of such positions in listed equity securities. During 2004, BICL
sold all of its listed equity securities.
Competition
Our venture capital and consulting business faces competition primarily
from commercial banks, investment banks, venture capital firms, insurance
companies, hedge funds and consulting firms, many of which have substantially
greater financial resources. The marketplace for venture capital and consulting
is highly competitive, and demand for services is also influenced by economic
and stock market conditions. The pool of capital seeking opportunities to invest
in later stage technology companies has contracted over the last several years,
but we believe demand continues for high value technology companies.
4
Discontinued Operations
Berkeley Capital Management
On May 7, 2003, we completed the sale of substantially all of the assets
and operations of BCM to a company majority-owned by funds under the management
of Putnam Lovell NBF Private Equity. BCM was our asset management subsidiary
based in San Francisco, California, managing equity, balanced and bond accounts
for institutional clients and for the wrap fee programs of major brokerage
houses. At the time of the sale, BCM's assets under management were
approximately $1.2 billion.
London Pacific Advisors
On June 5, 2003, we completed the sale of all of the outstanding stock of
London Pacific Advisory Services, Inc., London Pacific Securities, Inc. and LPA
Insurance Agency, Inc. together with the associated assets of the advisory
business held within London Pacific Technologies, Inc. and LP Advisors, Inc.
(collectively, "LPA"). LPA provided web-based investment consulting, investment
management and back-office services to independent financial advisors and large
institutional clients. At the time of the sale, LPA's assets under management,
consulting or administration were approximately $2.6 billion.
REGULATION
Life Insurance and Annuities - London Pacific Assurance Limited
LPAL is regulated by the Jersey Financial Services Commission ("JFSC").
Under Article 6 of the Insurance Business (Jersey) Law 1996, LPAL is permitted
to conduct long-term insurance business. LPAL is required to submit annual
audited financial statements (prepared under United States generally accepted
accounting principles as permitted by regulation), and an audited annual filing
to the JFSC in the format consistent with that required by the Financial
Services Authority in the United Kingdom. The annual filing submitted by LPAL
must be accompanied by a Certificate from the Appointed Actuary that based on
sufficiently prudent assumptions, assets are sufficient to cover all
liabilities. The annual filing contains a report from the Appointed Actuary on
the matching of investments to liabilities.
The JFSC sets out the conditions with which LPAL must comply and determines
the reporting requirements and the frequency of reporting. These conditions
require that: (i) LPAL must hold, at all times, approved assets at least equal
to the long-term insurance fund plus the required minimum solvency margin, (ii)
the margin of solvency must be the greater of (pound)50,000 or 2.5% of the value
of the long-term business fund, and (iii) assets equal to not less than 90% of
liabilities must be placed with approved independent custodians. As of December
31, 2004, LPAL met all of these conditions.
LPAL is also required under the insurance laws to appoint an actuary. The
actuary must be qualified as defined under the laws and is required to supervise
the long-term insurance fund. No transfers, except in satisfaction of long-term
insurance business liabilities, including dividends, are permitted from the
long-term insurance fund without written consent from the actuary.
Group
Our Chief Financial Officer and in-house attorney are responsible for
managing our subsidiaries' compliance with applicable regulatory requirements.
Although the scope of regulation and form of supervision to which our
subsidiaries are subject, as described above, may vary from jurisdiction to
jurisdiction, the applicable laws and regulations often are complex and
generally grant broad discretion to supervisory authorities in adopting
regulations and supervising regulated activities. Our continuing ability to
engage in businesses in the jurisdictions in which our subsidiaries currently
operate is dependent upon compliance with the rules and regulations promulgated
from time to time by the appropriate authorities in each of these jurisdictions.
The burden of such regulation weighs equally upon all companies carrying on
activities similar to those of our subsidiaries, and we do not consider such
regulations to adversely affect the competitive position of our subsidiaries.
5
EMPLOYEES
As of December 31, 2004, we had 15 employees. The breakdown by business
segment was as follows: venture capital and consulting, 6; life insurance and
annuities, 4; and corporate, 5. Due to the decrease in the size and complexity
of the Group and in order to decrease our operating costs, we reduced our staff
during January 2005. As of March 23, 2005, we have 10 employees as follows:
venture capital and consulting, 5; life insurance and annuities, 2; and
corporate, 3.
None of our employees are covered by a collective bargaining agreement and
we have not experienced any work stoppages.
Item 2. PROPERTIES
We currently operate from two offices located in Jersey (Channel Islands)
and San Francisco, California, consisting of approximately 3,000 and 3,800
square feet, respectively. We lease both offices. These leases expire in
September 2010 and October 2005, respectively. Our life insurance and annuities
segment operations, as well as our head office corporate activities, are carried
out in the Jersey office. Our venture capital and consulting operations, as well
as our U.S. corporate activities, are carried out in the San Francisco office.
The Jersey office is too large for our current level of business and staffing,
and we are currently evaluating sublease options as well as alternative office
space in Jersey.
See Note 12 to the Consolidated Financial Statements in Item 8 of this Form
10-K for further information regarding our leases.
Item 3. LEGAL PROCEEDINGS
On August 6, 2002, on petition of the Commissioner of Insurance of the
State of North Carolina (the "Commissioner"), with the consent of LPLA and
unanimous approval of its board of directors, the Superior Court of Wake County
in the State of North Carolina ordered the Commissioner to take possession and
control of all the property, books and accounts, documents and other records of
LPLA. LPLA and its officers, directors, agents, employees and all other persons
were enjoined from disposing of LPLA's property and from transacting LPLA's
business except with the consent of the Commissioner. The Court appointed the
Commissioner as rehabilitator of LPLA. Based on the court order, we no longer
exercise control over LPLA. For further information see Item 1 above.
On March 8, 2005, we were made aware of a complaint filed by SunGard
Business Systems Inc. ("SunGard") in the U.S. District Court in Philadelphia.
The Company and certain of its subsidiaries are named parties. SunGard's
complaint alleges losses and a claim for indemnification resulting from, among
other things, alleged breaches of representations and warranties contained in
the sale and purchase agreement of our advisory services business dated May 9,
2003. After consultation with our legal advisors, we believe that this claim is
without merit, and we will defend the matter vigorously.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to our shareholders during the quarter ended
December 31, 2004.
6
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
The principal trading market for our Ordinary Shares is the LSE, under the
symbol "BEK.L," on which such shares have been listed since February 1985. ADSs,
each representing ten Ordinary Shares, are evidenced by ADRs for which The Bank
of New York is the Depositary. Our ADSs have traded in the United States from
September 1992 through August 1993 on the OTC Bulletin Board, from September
1993 through November 1999 on The Nasdaq Stock MarketSM under the symbol "LPGL,"
from November 1999 through July 3, 2002 on the NYSE under the symbol "LDP," from
July 12, 2002 through June 15, 2003 on the OTC Bulletin Board under the symbol
"LDPGY.PK" and since June 16, 2003 on the OTC Bulletin Board under the symbol
"BKLYY.PK." As of December 31, 2004, there were 64,439,073 Ordinary Shares
outstanding and 1,373,414 ADSs outstanding, representing 13,734,140 Ordinary
Shares or 21.3% of the outstanding Ordinary Shares. ADS holders may exercise
their voting rights through the ADR Depositary.
In June 2002, we completed a one-for-ten reverse split of our ADSs. On June
24, 2002, every ten of our ADSs issued and outstanding were converted and
reclassified into one post-split ADS. Consequently, effective from the opening
of business on June 24, 2002, each ADS is equal to ten Ordinary Shares.
Fractional new ADSs were sold by the Depositary Bank and paid in cash to the ADR
holders. This ADS split did not affect our Ordinary Shares listed on the LSE.
On July 3, 2002, the NYSE halted trading of our ADRs in response to the
administrative actions taken by the North Carolina Department of Insurance
relating to LPLA (see Item 1 "Business" above). On July 9, 2002, trading of the
ADRs was suspended and the securities were withdrawn from listing and
registration on the NYSE. As a result of the delisting, the liquidity of our
common stock and its price were adversely affected. These actions may limit our
ability to raise additional capital in the future, and there is no assurance
that a significant trading market for the ADRs will develop. If an active
trading market does not develop, ADR holders may be unable to sell their ADRs.
Subsequent to the delisting, the ability of ADR holders to buy and sell is
limited to trading on the OTC Bulletin Board. Shares traded on the OTC market
generally experience lower trading volume than those traded on the organized
exchanges. The trading volume of the ADRs has decreased substantially since the
NYSE delisting and the transfer of the ADRs to the OTC Bulletin Board.
The following table shows, for the quarters indicated, the reported highest
and lowest middle market quotations (which represent an average of bid and asked
prices) for our Ordinary Shares on the LSE, based on its Daily Official List,
and the high and low trade price information of the ADSs as obtained from the
OTC Bulletin Board:
LSE OTC Bulletin Board
Pounds Per U.S. Dollars
Ordinary Share Per ADS
------------------------- -------------------------
High Low High Low
---------- ---------- ---------- ----------
2003:
First quarter................................................. 0.08 0.04 1.15 0.50
Second quarter................................................ 0.16 0.08 2.50 1.00
Third quarter................................................. 0.17 0.11 2.60 1.45
Fourth quarter................................................ 0.16 0.13 2.40 1.80
7
LSE OTC Bulletin Board
Pounds Per U.S. Dollars
Ordinary Share Per ADS
------------------------- -------------------------
High Low High Low
---------- ---------- ---------- ----------
2004:
First quarter................................................. 0.15 0.14 2.60 2.00
Second quarter................................................ 0.15 0.14 2.55 2.25
Third quarter................................................. 0.14 0.11 2.60 2.05
Fourth quarter................................................ 0.13 0.10 2.10 1.70
Holders
As of February 28, 2005, we had approximately 1,514 Ordinary shareholders
of record and 64 ADS holders of record. Because many Ordinary Shares and ADSs
are held by brokers and various institutions on behalf of other holders, we are
unable to estimate the total number of beneficial holders represented by these
holders of record.
Dividends
Until 2002, we paid dividends on our Ordinary Shares in every year since we
became listed on the LSE in 1985. Dividends on our Ordinary Shares were paid
twice a year. In view of our requirement to conserve cash in order to meet the
operating needs and growth opportunities of the business, we did not pay an
interim or final dividend for 2003 or an interim dividend for 2004. Our Board of
Directors will not be recommending a final dividend for the year 2004.
Holders of ADSs are entitled to receive dividends paid, if any, on our
Ordinary Shares through the ADR Depositary.
Under current practice, holders of ADSs who are residents of the United
States for tax purposes receive the net dividend (the gross dividend less the
associated Jersey income tax). See "Taxation - Taxation of Dividends" below.
Currently, Jersey does not have exchange control restrictions on the
payment of dividends on the Ordinary Shares or on the conduct of the Group's
operations. See Note 9 to the Consolidated Financial Statements in Item 8 of
this Form 10-K for details regarding regulatory restrictions on dividends.
TAXATION
The following summary of certain Jersey and U.S. tax consequences regarding
share ownership is based on law and published practice as of February 28, 2005,
and is subject to any changes in Jersey and U.S. law or published practice or in
the establishment of any double taxation convention between Jersey and the U.S.
occurring after that date. The summary is not a complete analysis or listing of
all the possible tax consequences and does not address the tax implications for
special classes of holders, such as banks, insurance companies and dealers in
securities. The summary also does not address U.S. state income tax
consequences. Owners of Ordinary Shares and ADSs should consult their own tax
advisors as to the tax consequences of such ownership.
There is no double tax treaty or similar convention between the U.S. and
Jersey. For the purposes of the U.S. Internal Revenue Code of 1986, as amended,
it is assumed that beneficial owners of ADSs, in accordance with the terms of
the Deposit Agreement, will be treated as the owners of the underlying Ordinary
Shares represented by the ADSs.
8
Taxation of Dividends
Dividends are declared gross in U.S. dollars. Dividends paid by the Company
are treated as having suffered Jersey income tax at the standard rate (currently
20%) on the gross amount thereof.
Charities, superannuation funds and certain assurance companies in the
U.K., together with individual investors who are Commonwealth citizens or
citizens of a member state of the European Community, may be entitled to a full
or partial repayment of the Jersey income tax credit suffered on distributions,
on submission of a claim to the Jersey Comptroller of Income Tax. Shareholders
who are unsure of their tax position should consult their tax advisor.
Generally, the net dividend paid to a holder or owner who is a U.S.
citizen, a U.S. resident, a U.S. domestic corporation or a trust or estate whose
income is subject to U.S. federal income taxation regardless of source (a "U.S.
holder") will be included in gross income and treated as foreign source dividend
income for U.S. federal income tax purposes to the extent payment is made out of
the Company's current or accumulated earnings and profits as determined under
U.S. federal income tax principles. Such dividends generally will not be
eligible for the "dividends received" deduction permitted to be taken by U.S.
corporations.
However, special rules apply for purposes of determining the dividend
income and potential foreign tax credits available to a U.S. corporation that
controls 10% or more of the Company's voting stock. Any such shareholder should
consult its tax advisor with respect to the U.S. interest in the Company.
Taxation of Capital Gains
Currently, there are no Jersey taxes levied on capital gains. A U.S. holder
that sells or exchanges an ADR or Ordinary Share will generally recognize a gain
or loss for U.S. federal income tax purposes, in an amount equal to the
difference between the amount realized and the holder's tax basis in either the
ADS represented by the ADR or the Ordinary Share. Such a gain or loss will
generally be a capital gain or loss if the ADR or the Ordinary Share was a
capital asset in the hands of the U.S. holder and will generally be a long-term
capital gain or loss if the ADR or Ordinary Share was held for more than one
year (including, in the case of an ADR, the period during which the Ordinary
Shares surrendered in exchange therefore were held). In general, the long-term
capital gain of a non-corporate U.S. holder is subject to a maximum tax rate of
20% if the ADRs or Ordinary Shares were sold before May 6, 2003. Under certain
conditions, an 18% capital gains tax rate is available if the holder made a
certain election for shares held on December 31, 2000. If the ADRs or Ordinary
Shares were sold after May 5, 2003, the maximum tax rate is 15%.
Backup Withholding Tax
A U.S. holder may be subject to U.S. backup withholding tax (currently at a
rate of 30%) with respect to dividends received or gross proceeds from the sale
of ADRs or Ordinary Shares unless the holder provides a taxpayer identification
number and certain certifications or otherwise establishes an exemption from
backup withholding. Certain classes of persons, such as corporations, are exempt
from backup withholding. Backup withholding is not an additional tax; the amount
withheld may be credited against the holder's U.S. federal income tax liability,
and a refund of any excess may be obtained from the U.S. Internal Revenue
Service.
Estate and Gift Tax
No death, estate, gift, inheritance or capital transfer taxes are levied in
Jersey.
Stamp Duty and Stamp Duty Reserve Tax
No U.K. stamp duty should be payable on any transfer of an Ordinary Share,
or of an ADS, provided it is executed and retained outside the U.K. Therefore, a
transfer of an ADS in the United States would not ordinarily give rise to a U.K.
stamp duty charge.
9
An instrument transferring Ordinary Shares, or an ADS, could be subject to
U.K. stamp duty if its execution relates to anything done or to be done in the
U.K. For example, a U.K. stamp duty may apply if such instrument is executed in
the U.K. or is brought into the U.K. after execution. If the transfer is on a
sale then the rate of stamp duty will be 0.5% of the consideration given. This
charge is rounded up to the nearest (pound)5. Gifts and other transfers which
are neither sales, nor made in contemplation of a sale, are not subject to this
charge. Instead, they will either be exempt or subject to a fixed duty of
(pound)5 per transfer.
A transfer from the Depositary to an ADS holder of the underlying Ordinary
Shares may be subject to a fixed stamp duty of (pound)5 if the instrument of
transfer relates to anything done or to be done in the U.K. For example, a fixed
stamp duty of (pound)5 may apply if such transfer is executed in the U.K. or is
to be brought into the U.K. after execution. A transfer of Ordinary Shares from
the Depositary directly to a purchaser on behalf of an ADS holder may be subject
to a stamp duty at a rate of 0.5% of the consideration (rounded up to the
nearest (pound)5) if execution of the instrument of transfer relates to anything
done or to be done in the U.K.; for example, if such transfer is executed in the
U.K. or is to be brought into the U.K. after execution.
U.K. stamp duty reserve tax will not be payable on an agreement to transfer
the Ordinary Shares or ADSs.
EQUITY COMPENSATION PLANS
Information regarding our equity compensation plans is presented in Item 12
of this Form 10-K.
WARRANTS
On November 11, 2002, we agreed to grant 1,933,172 warrants to subscribe
for our Ordinary Shares to Bank of Scotland in connection with the extension of
our credit facility (which was fully repaid and terminated in June 2003). The
warrants were granted on February 14, 2003 and have an exercise price of
(pound)0.1143 (based on the average of the closing prices of the Ordinary Shares
over the trading days from November 1, 2002 through November 11, 2002), which
was higher than the market price of (pound)0.09 on November 11, 2002. These
warrants are exercisable at any time prior to February 14, 2010. At the time of
grant, the Company determined the fair value of the warrants to be approximately
$251,000 which was charged to earnings over the loan period.
10
Item 6. SELECTED FINANCIAL DATA
The following is a summary of selected financial data for the Group. This
data should be read in conjunction with the audited consolidated financial
statements, and the notes thereto, presented in Item 8 "Financial Statements and
Supplementary Data" of this Form 10-K. ADS amounts have been restated to reflect
the one-for-ten reverse split in June 2002.
Years Ended/As of December 31,
---------------------------------------------------------------
2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- -----------
(In thousands, except per share and ADS data)
Operating Results
Revenues from continuing operations, including net realized
and change in net unrealized investment gains and losses $ (5,759) $ 9,198 $ (33,337) $ (194,376) $ 87,700
Income (loss) from continuing operations before income
taxes................................................ (11,851) 1,047 (54,478) (221,033) 66,784
Income tax expense (benefit) on continuing operations... 290 (42) 1,291 2,107 1,156
Income (loss) from discontinued operations.............. - 9,965 (154,678) (180,194) (51,774)
Income tax expense (benefit) on discontinued operations. - 38 (4,943) (58,550) (18,603)
Net income (loss)....................................... (12,141) 11,016 (205,504) (344,784) 32,457
Basic earnings (loss) per share:
Continuing operations................................ (0.24) 0.02 (1.10) (4.38) 1.29
Discontinued operations.............................. - 0.20 (2.95) (2.38) (0.65)
----------- ----------- ----------- ----------- -----------
Total basic earnings (loss) per share................... (0.24) 0.22 (4.05) (6.76) 0.64
Diluted earnings (loss) per share:
Continuing operations................................ (0.24) 0.02 (1.10) (4.38) 1.08
Discontinued operations.............................. - 0.20 (2.95) (2.38) (0.55)
----------- ----------- ----------- ----------- -----------
Total diluted earnings (loss) per share................. (0.24) 0.22 (4.05) (6.76) 0.53
Basic earnings (loss) per ADS:
Continuing operations................................ (2.39) 0.21 (10.99) (43.77) 12.92
Discontinued operations.............................. - 1.96 (29.50) (23.85) (6.53)
----------- ----------- ----------- ----------- -----------
Total basic earnings (loss) per ADS..................... (2.39) 2.17 (40.49) (67.62) 6.39
Diluted earnings (loss) per ADS:
Continuing operations................................ (2.39) 0.21 (10.99) (43.77) 10.81
Discontinued operations.............................. - 1.94 (29.50) (23.85) (5.46)
----------- ----------- ----------- ----------- -----------
Total diluted earnings (loss) per ADS................... (2.39) 2.15 (40.49) (67.62) 5.35
Financial Position
Cash and total investments (continuing operations)...... 43,279 61,944 69,378 262,058 455,721
Total assets............................................ 44,707 63,513 80,217 2,539,126 2,562,988
Bank debt............................................... - - 9,314 36,874 35,556
Guarantees under bank facility.......................... - - 10,590 - -
Shareholders' equity.................................... 22,893 34,897 21,486 221,653 567,742
Book value per share (1)................................ 0.45 0.69 0.42 4.37 11.00
Book value per ADS (1).................................. 4.51 6.88 4.23 43.68 109.98
Ordinary Share and ADS Data
Ordinary Shares outstanding as of December 31........... 64,439 64,439 64,439 64,439 64,433
Weighted-average shares used in:
Basic earnings per share calculation................. 50,754 50,754 50,753 50,984 50,795
Diluted earnings per share calculation............... 50,754 51,188 50,753 50,984 60,728
Total dividends per share relating to the year (gross).. $ - $ - $ - $ 0.16 $ 0.29
Total dividends per ADS relating to the year............ $ - $ - $ - $ 1.28 $ 2.32
Market price per share on December 31................... (pound)0.11 (pound)0.14 (pound)0.055 (pound)2.60 (pound)5.53
Market price per ADS on December 31..................... $ 1.70 $ 2.51 $ 0.50 $ 39.60 $ 75.60
Market capitalization as of December 31................. $ 13,115 $ 16,148 $ 5,706 $ 244,611 $ 530,431
(1) Based on the net asset value of the Group after deducting the cost of the shares held by the employee benefit trusts,
and on the number of shares outstanding excluding the shares held by the employee benefit trusts.
11
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the audited
consolidated financial statements, and the notes thereto, presented in Item 8
"Financial Statements and Supplementary Data" of this Form 10-K. The
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States. This item should also be
read in conjunction with the "Forward-Looking Statements and Factors That May
Affect Future Results" which are set forth below and in our other filings with
the SEC.
Forward-Looking Statements and Factors That May Affect Future Results
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this Form 10-K contain
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking statements are based on
current expectations, estimates, forecasts and projections about the industries
in which we operate, management's current beliefs and assumptions made by
management. Words such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates," "goals," variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions that are difficult to predict. Future outcomes and
results may differ materially from what is expressed or forecasted in such
forward-looking statements. We undertake no obligation to update any
forward-looking statements, whether as a result of new information, future
developments or otherwise.
Factors that could cause or contribute to deviations from the
forward-looking statements include those discussed in this section, elsewhere in
this Form 10-K and in our other filings with the SEC. The factors include, but
are not limited to, (i) the risks described in Item 7A "Quantitative and
Qualitative Disclosures About Market Risk," (ii) variations in demand for our
products and services, (iii) the success of our new products and services, (iv)
significant changes in net cash flows in or out of our businesses, (v)
fluctuations in the performance of debt and equity markets worldwide, (vi) the
enactment of adverse state, federal or foreign regulation or changes in
government policy or regulation (including accounting standards) affecting our
operations, (vii) the effect of economic conditions and interest rates in the
U.S., the U.K. or internationally, (viii) the ability of our subsidiaries to
compete in their respective businesses, (ix) our ability to attract and retain
key personnel, and (x) actions by governmental authorities that regulate our
businesses, including insurance commissions.
12
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
Income before income taxes for our reportable operating segments, based on
management's internal reporting structure, is as follows:
Years Ended December 31,
-------------------------------------
2004 2003 2002
----------- ----------- -----------
(In thousands)
Income (loss) from continuing operations before income taxes
by operating segment:
Life insurance and annuities (1)......................................... $ (8,091) $ 1,577 $ (19,637)
Venture capital and consulting (2)....................................... (1,365) 3,571 (28,149)
----------- ----------- -----------
(9,456) 5,148 (47,786)
Reconciliation of segment amounts to consolidated amounts:
Interest and other fee income............................................ 125 53 531
Corporate expenses....................................................... (2,415) (3,478) (5,869)
Goodwill amortization and write-offs..................................... - - (389)
Interest expense......................................................... (105) (676) (965)
----------- ----------- -----------
Consolidated income (loss) from continuing operations before
income taxes........................................................... $ (11,851) $ 1,047 $ (54,478)
----------- ----------- -----------
----------- ----------- -----------
(1) Netted against the revenues (investment income) of the life insurance and annuities segment are management
fees paid to BCM (discontinued operations) of $5,000 and $39,000 in 2003 and 2002, respectively.
(2) Included in the revenues of the venture capital and consulting segment are management fees from LPLA (discontinued
operations) of $2,908,000 in 2002.
Business segment data contained in Note 18 to the Consolidated Financial
Statements in Item 8 of this Form 10-K should be read in conjunction with this
discussion. A detailed discussion of the results for each reportable segment
follows.
13
Life Insurance and Annuities
Certain information regarding our life insurance and annuities segment's
results of operations (continuing operations only) is as follows:
Years Ended December 31,
-------------------------------------
2004 2003 2002
----------- ----------- -----------
(In thousands)
Revenues and net investment gains (losses):
Investment income........................................................ $ 1,295 $ 1,834 $ 6,059
Insurance policy charges................................................. 4 6 1,155
Net realized investment gains (losses)................................... 1,273 (38,329) (114,325)
Change in net unrealized investment gains and losses on
trading securities.................................................... (8,331) 40,947 97,762
----------- ----------- -----------
Total revenues and net investment gains (losses)......................... (5,759) 4,458 (9,349)
Expenses:
Amounts credited on insurance policyholder accounts...................... 1,358 1,922 6,031
Amortization of deferred policy acquisition costs........................ - - 2,952
General and administrative expenses...................................... 974 959 1,305
----------- ----------- -----------
Total expenses........................................................... 2,332 2,881 10,288
----------- ----------- -----------
Income (loss) from continuing operations before income taxes............. $ (8,091) $ 1,577 $ (19,637)
----------- ----------- -----------
----------- ----------- -----------
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 85% of
LPAL's $140.2 million in policyholder liabilities as of June 30, 2002 have been
surrendered or have matured as of December 31, 2004. Policyholder liabilities as
of December 31, 2004 were $21.2 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.
2004 compared to 2003
In 2004, LPAL contributed a loss before income taxes of $8.1 million to our
overall loss from continuing operations before income taxes, compared to income
before income taxes of $1.6 million in 2003. Net realized investment gains in
2004 were $1.3 million compared to net realized investment losses of $38.3
million in 2003. The loss from the change in net unrealized investment gains and
losses was $8.3 million in 2004, compared to a gain of $40.9 million in 2003. In
2004, the spread between investment income and amounts credited to policyholders
increased by $25,000 and general and administrative expenses remained flat at
$1.0 million, each as compared to 2003.
LPAL did not generate any premiums during 2004 or 2003. LPAL discontinued
selling new policies on July 2, 2002 as a result of the events described above.
14
Interest and dividend income on investments was $1.3 million in 2004,
compared with $1.8 million in 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 December 31, 2003.
During 2004, LPAL used $9.8 million of bond proceeds and cash to meet its
policy maturities and redemptions. Following this reduction, and further
expected bond realizations and maturities required to meet 2005 policy
maturities, interest income is expected to decline to approximately $1.2 million
for 2005.
Policyholder liabilities as of December 31, 2004 were $21.2 million of
which $6.3 million is scheduled to mature during 2005. LPAL expects to meet
these maturities by a combination of cash of approximately $9.7 million held at
the beginning of January 2005, the proceeds from maturing bonds which are
estimated to be $11.1 million during 2005, and estimated interest income to be
received during 2005 of $1.2 million. In the absence of significant redemptions,
policyholder liabilities are projected to be approximately $15.2 million at the
end of 2005. Investment income should equal approximately 112% of the projected
$1.0 million to be credited to policies, and operating expenses are expected to
be approximately $0.8 million during 2005. In January 2005, LPAL sold its
remaining listed equity securities for $0.4 million.
Net investment losses totaled $7.1 million in 2004, compared to net
investment gains of $2.6 million in 2003. Net investment losses in 2004 were
comprised of net realized investment gains of $1.3 million and $8.3 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 $0.5 million as of December 31, 2004.
LPAL sold its remaining Packeteer, Inc. holding during 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 $3.4 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 $33.1 million as of December 31, 2004,
compared to $47.9 million as of December 31, 2003, primarily due to policyholder
benefits paid of $9.8 million and net investment losses of $7.1 million during
2004. On total average invested assets in 2004, the average net return,
including both realized and unrealized investment gains and losses, was -15.3%,
compared with 8.9% in 2003.
Amounts credited on policyholder accounts decreased by $0.5 million in 2004
to $1.4 million, compared to $1.9 million in 2003. This decrease was primarily
due to policy maturities since December 31, 2003. The average rate credited to
policyholders was 5.6% in 2004, compared with 5.9% in 2003.
2003 compared to 2002
In 2003, LPAL contributed income before income taxes of $1.6 million to our
overall income from continuing operations before income taxes, compared to a
loss before taxes of $19.6 million in 2002. Net realized investment losses in
2003 were $38.3 million compared to net realized investment losses of $114.3
million in 2002. The gain from the change in net unrealized investment gains and
losses was $40.9 million in 2003, compared to $97.8 million in 2002. In 2003,
the spread between investment income and amounts credited to policyholders
decreased by $0.1 million; amortization of deferred policy acquisition costs
("DPAC") decreased by $3.0 million with the write-off of the DPAC asset in 2002;
and general and administrative expenses decreased by $0.3 million, each as
compared to 2002. Policy surrender charge income in 2003 decreased by $1.1
million compared to 2002.
LPAL did not generate any premiums during 2003, compared to $6.5 million of
premiums during 2002. LPAL discontinued selling new policies on July 2, 2002 as
a result of the events described above.
Interest and dividend income on investments was $1.8 million in 2003,
compared with $6.1 million in 2002. This $4.3 million decrease was primarily due
to a decline in the level of invested bonds.
15
Net investment gains totaled $2.6 million in 2003, compared to net
investment losses of $16.6 million in 2002. Net investment gains in 2003 were
comprised of net realized investment losses of $38.3 million and $40.9 million
in gains from the change in net realized gains and losses on the listed equity
securities held in the trading portfolio. The trading portfolio increased from
$8.9 million as of December 31, 2002 to $13.5 million as of December 31, 2003.
LPAL sold certain trading positions during 2003, which resulted in net realized
losses of $20.8 million based on an aggregate original cost of $23.7 million and
one of LPAL's trading positions was acquired by a larger listed company, in
exchange for $0.6 million of stock in the acquiring company, which resulted in a
realized loss of $12.8 million based on an original cost of $13.4 million. These
disposals represented shares held in companies that had completed initial public
offerings of their securities. These realized losses were increased by
other-than-temporary impairment charges totaling $4.7 million on two private
equity security holdings in our available-for-sale investment portfolio.
Total invested assets (defined as total assets excluding DPAC and other
assets) decreased to $47.9 million as of December 31, 2003, compared to $51.6
million as of December 31, 2002, primarily due to the decrease in investments
used to pay out maturing policies and the $4.7 million reduction in the value of
two private equity investments that became other-than-temporarily impaired,
partially offset by increases in the value of the trading portfolio. On total
average invested assets in 2003, the average net return, including both realized
and unrealized investment gains and losses, was 8.9%, compared with -9.1% in
2002.
Policy surrender charge income decreased to $6,000 in 2003, from $1.2
million in 2002. Policy surrenders decreased significantly during 2003 due to
the high volume of surrenders during the second half of 2002.
Amounts credited on policyholder accounts decreased by $4.1 million in 2003
to $1.9 million, compared to $6.0 million in 2002. The decrease was primarily
due to substantial increases in policyholder surrenders in the second half of
2002 together with policy maturities in the last nine months of 2003. The
average rate credited to policyholders was 5.9% in 2003, compared with 6.1% in
2002.
There was no DPAC amortization in 2003 due to the acceleration of DPAC
amortization to fully write-off DPAC as of September 30, 2002. The reasons for
the write-off in 2002 were the discontinuance of new business at the beginning
of the third quarter of 2002 and the lack of interest spread on the remaining
block of business.
General and administrative expenses decreased by $0.3 million to $1.0
million in 2003 due to decreases in staff compensation and back office expenses.
16
Venture Capital and Consulting
Certain information regarding our venture capital and consulting segment's
results of operations is as follows:
Years Ended December 31,
-------------------------------------
2004 2003 2002
----------- ----------- -----------
(In thousands)
Revenues and net investment gains (losses):
Management fees.......................................................... $ - $ - $ 2,908
Consulting fees.......................................................... 490 - -
Net realized investment gains (losses) (1)............................... 2,010 (2,107) (44,130)
Change in net unrealized investment gains and losses on
trading securities (1)................................................ (2,625) 6,794 16,703
----------- ----------- -----------
Total revenues and net investment gains (losses)......................... (125) 4,687 (24,519)
Operating expenses....................................................... 1,240 1,116 3,630
----------- ----------- -----------
Income (loss) from continuing operations before income taxes............. $ (1,365) $ 3,571 $ (28,149)
----------- ----------- -----------
----------- ----------- -----------
(1) Net realized investment losses of $1,603,000 were recorded during 2002 by the venture capital and consulting segment,
related to intersegmental investment sales to the life insurance and annuities segment. These net realized investment
losses were offset by corresponding reclassification adjustments in unrealized investment gains and losses on trading
securities for the same amounts. These gains and losses have been eliminated in our consolidated financial statements.
2004 compared to 2003
In 2004, the venture capital and consulting segment contributed a loss
before income taxes of $1.4 million to our overall loss from continuing
operations before income taxes, compared to income before taxes of $3.6 million
in 2003. The 2003 results were attributable primarily to net realized and
unrealized investment gains and losses on listed equity securities. During 2004,
we began earning fee income again by advising a small number of North American
technology companies. Consulting fees of $490,000 were earned; however, this
income did not cover all of the operating expenses of the segment.
The change in net unrealized gains and losses in the listed equity trading
portfolio during 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 $0.1 million as of December 31, 2004. We sold
most of our trading positions during 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 operations.
Operating expenses in 2004 were $1.2 million, compared to $1.1 million in
2003. The $0.1 million increase was attributable primarily to additional staff
costs, reflecting the additional resources required to redevelop our venture
capital and consulting business.
2003 compared to 2002
In 2003, the venture capital and consulting segment contributed income
before income taxes of $3.6 million to our overall income from continuing
operations before income taxes, compared to a loss before taxes of $28.1 million
in 2002. The income and loss in those years, respectively, were attributable
primarily to net realized and unrealized investment gains and losses on listed
equity securities. These positions in listed equity securities resulted from
privately held technology companies, in which the venture capital and consulting
segment had an equity interest, completing initial public offerings or being
acquired by publicly traded companies in stock-for-stock acquisitions.
17
The change in net unrealized gains and losses in the listed equity trading
portfolio during 2003 was a gain of $6.8 million, which was partially offset by
net realized losses of $2.1 million. The trading portfolio decreased from $7.6
million as of December 31, 2002 to $3.4 million as of December 31, 2003. We sold
certain trading positions during 2003 which resulted in net realized losses of
$1.9 million based on an aggregate original cost of $11.0 million. These
realized losses were increased by other-than-temporary impairment write-downs of
$0.2 million on two private investments. All intersegmental investment gains and
losses, other than those arising from sales to LPLA (discontinued operations),
have been eliminated in our consolidated statements of operations.
The venture capital and consulting segment earned portfolio management fees
from LPLA of $2.9 million in 2002. Due to the events described above in the
section entitled "Life Insurance and Annuities," BICC has not received fees from
the management of LPLA's investment portfolio since early 2002.
Operating expenses in 2003 were $1.1 million, compared to $3.6 million in
2002. The $2.5 million decrease was attributable primarily to lower staff costs,
reflecting the reduction in business and staffing during the second half of
2002.
Corporate and Other
2004 compared to 2003
Corporate expenses decreased by $1.1 million to $2.4 million in 2004, as
compared to $3.5 million for 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 borrowing costs in 2004, compared to $0.7 million in 2003.
However, we did pay $0.1 million in interest during 2004 related to an
additional tax liability as discussed in Note 10 to the Consolidated Financial
Statements in Item 8 of this Form 10-K.
2003 compared to 2002
Corporate expenses decreased by $2.4 million to $3.5 million in 2003, as
compared to $5.9 million for 2002. This decrease primarily was due to decreases
in staff compensation and bank facility costs.
The amount of interest income we earned (excluding the life insurance and
annuities segment) decreased by $0.5 million to $53,000 in 2003 as compared with
2002, primarily due to the decrease in our holdings of cash and cash
equivalents, as well as lower interest rates. The amount of interest expense we
incurred (excluding the life insurance and annuities segment) decreased by $0.3
million to $0.7 million in 2003 as compared with 2002, due to the impact of
lower bank borrowings which was largely offset by the accelerated amortization
of bank facility costs (restructuring fees and the value of warrants issued to
the Bank of Scotland) in the second quarter of 2003, resulting from the early
repayment of the bank facility.
Consolidated Income (Loss) from Continuing Operations Before Income Taxes
2004 compared to 2003
Our consolidated loss from continuing operations before income taxes was
$11.9 million in 2004, compared to income from continuing operations before
income taxes of $1.0 million in 2003. This change was primarily due to net
realized and unrealized investment losses of $7.7 million in 2004, compared to
net realized and unrealized investment gains of $7.3 million in 2003.
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 and consulting
operations.
18
Due to the sales of almost all of our listed equity securities during 2004,
our results will no longer be significantly impacted by equity market
volatility.
2003 compared to 2002
Consolidated income from continuing operations before income taxes was $1.0
million in 2003, compared to a loss from continuing operations before income
taxes of $54.5 million in 2002. This dramatic change primarily was due to net
realized and unrealized investment gains of $7.3 million in 2003, compared to
net realized and unrealized investment losses of $44.0 million in 2002.
Income Taxes
We are subject to taxation on our income in all countries in which we
operate based upon the taxable income arising in each country. However, realized
gains on certain investments are exempt from Jersey and Guernsey taxation. We
are subject to income tax in Jersey at a rate of 20%. In the United States, we
are subject to both federal and California taxes at rates up to 34% and 8.84%,
respectively.
2004 compared to 2003 (continuing operations)
The $0.3 million tax expense for 2004 is largely our California tax
liability related to tax years 1998 and 1999 as described in Note 10 to the
Consolidated Financial Statements in Item 8 of this Form 10-K. Other than these
taxes and $7,000 of other tax expense, primarily 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 2004; 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.
2003 compared to 2002 (continuing operations)
On income from continuing operations before income taxes of $1.0 million
for 2003, we had an income tax benefit of $42,000. This was largely attributable
to income of $2.6 million contributed by the Jersey and Guernsey operations
during the year, which primarily consisted of realized losses and unrealized
investment gains for which no tax benefits or expense will be realized. Although
$1.5 million of losses were contributed by our U.S. subsidiaries for 2003, we
did not recognize any U.S. tax benefits due to the 100% valuation allowances
that we have provided for all deferred tax assets.
2003 (disposal of discontinued operations)
We recorded $36,000 of income tax expense on book gains totaling $11.7
million from the sales of BCM and LPA. Income taxes based on statutory tax rates
applied to the taxable gains on these sales were approximately $4.9 million.
However, due to net operating losses in the U.S. tax groups in the current and
prior years, and capital loss carryovers from prior years, we were able to
offset all of the taxes related to the gains on the sale of BCM and LPA, except
for a small amount of federal alternative minimum tax. A portion of the capital
loss carryovers from prior years which we utilized to offset the current year
taxable gains resulted from the loss of control of LPLA in 2002.
Discontinued Operations
There were no results to report for discontinued operations for 2004, as we
completed the sales of BCM and LPA in the second quarter of 2003.
Our consolidated statement of operations for 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. In the first six
months of 2002, prior to the loss of management control over LPLA, we recorded
an after-tax loss from operations of LPLA of $104.8 million. We recorded
impairment losses totaling $27.9 million related to LPLA in the third quarter of
2002, and recognized $10.6 million in our statement of operations for LPLA's net
unrealized
19
losses on available-for-sale securities, net of deferred policy acquisition cost
amortization adjustments and deferred income taxes. For further information see
Note 3 to the Consolidated Financial Statements in Item 8 of this Form 10-K.
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 2002 and 2003, our accounting policies relating to consolidation,
deconsolidation and the reporting of discontinued operations became very
important to the portrayal of our financial condition and results of operations.
These critical accounting policies are described below.
Determination of Fair Values of Investments
When a quoted market price is available for a security, we use this price
in the determination of fair value. If a quoted market price is not available
for a security, management estimates the security's fair value based on
valuation methodologies as described below.
We hold investments in privately held equity securities, primarily
convertible preferred stock in venture capital companies doing business in
various segments of technology industries. Venture capital investing entails
making investments in companies that are developing products or services for
large emerging markets with the belief that these investments will yield
superior returns if these companies are successful. These investments are
normally held for a number of years. When we make these investments, most of the
companies are still developing the products they intend to bring to market or
are in the early stages of product sales. Venture capital companies are net
consumers of cash and often dependent upon additional financing to execute their
business plans. These investments involve substantial risk and the companies
generally lack meaningful historical financial results used in traditional
valuation models. The process of pricing these securities range from fierce
competitive bidding between financial institutions to existing investors
negotiating prices with the company without outside investor validation.
Investments in convertible preferred stock come with rights that vary
dramatically both from company to company and between rounds of financing within
the same company. These rights, such as anti-dilution, redemption, liquidation
preferences and participation, bear directly on the price an investor is willing
to pay for a security. The returns on these investments are generally realized
through an initial public offering of the company's shares or, more commonly,
through the company's acquisition by a public company.
One of the factors affecting fair value is the amount of time before a
company requires additional financing to support its operations. Management
believes that companies that are financed to the estimated point of operational
profitability or for a period greater than one year will most likely return
value to the investor through an acquisition between a willing buyer and seller,
as the company does not need to seek financing from an opportunistic investor or
insider in an adverse investment environment. If a particular company needs
capital in the near term, management considers a range of factors in its fair
value analysis, including our ability to recover our investment through
surviving liquidation preferences. Management's valuation methodologies also
include fundamental analysis that evaluates the investee company's progress in
developing products, building intellectual property portfolios and securing
customer relationships, as well as overall industry conditions, conditions in
and prospects for the investee's geographic region, and overall equity market
conditions. This is combined with analysis of comparable acquisition
transactions and values to determine if the security's liquidation preferences
will ensure full recovery of our investment in a likely acquisition outcome. In
its valuation analysis, management also considers the most recent transaction in
a company's shares.
The determination of fair values of investments requires the application of
significant judgment. It is possible that the factors evaluated by management
and fair values will change in subsequent periods, especially with respect to
our privately held equity securities in technology companies, resulting in
material impairment charges in future periods.
20
Other-than-temporary Impairments
Management performs an ongoing review of all investments in the portfolio
to determine if there are any declines in fair value that are
other-than-temporary.
Since our listed equity securities are classified as trading securities,
impairment adjustments are not required as any change in the market value of
these securities between reporting periods is included in earnings.
In relation to our equity securities that do not have a readily
determinable fair value and are classified as available-for-sale, factors
considered in impairment reviews include: (i) the length of time and extent to
which estimated fair values have been below cost and the reasons for the
decline, (ii) the investee's recent financial performance and condition,
earnings trends and future prospects, (iii) the market condition of either the
investee's geographic area or industry as a whole, and (iv) concerns regarding
the investee's ability to continue as a going concern (such as the inability to
obtain additional financing). If the evidence supports that a decline in fair
value is other-than-temporary, then the investment is reduced to its estimated
fair value, which becomes its new cost basis, and a realized loss is reflected
in earnings.
We determine that a fixed maturity security is impaired when it is probable
that we will not be able to collect amounts due (principal and interest)
according to the security's contractual terms. We make this determination by
considering all available facts and circumstances, including our intent and
ability to continue to hold the investment to maturity. The factors we consider
include: (i) the length of time and extent to which the market values have been
below amortized cost and the reasons for the decline, (ii) the issuer's recent
financial performance and condition, earnings trends and future prospects in the
near to mid-term, (iii) changes in the issuer's debt rating and/or regulatory
actions or other events that may effect the issuer's operations, (iv) the market
condition of either the issuer's geographic area or industry as a whole, and (v)
factors that raise doubt about the issuer's ability to continue as a going
concern. If the evidence supports that a decline in fair value is
other-than-temporary, then the fixed maturity security is written down to its
quoted market value, if such a value is available. If a readily determinable
fair value does not exist, then the fixed maturity security is written down to
management's estimate of its fair value, which is based on the valuation
methodologies described above. Write-downs are recorded as realized losses and
included in earnings.
The evaluations for other-than-temporary impairments require the
application of significant judgment. It is possible that the impairment factors
evaluated by management and fair values will change in subsequent periods,
especially with respect to privately held equity securities in technology
companies, resulting in material impairment charges in future periods.
Life Insurance Policy Liabilities
We account for life insurance policy liabilities in accordance with
Statement of Financial Accounting Standards No. 97, "Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains
and Losses from the Sale of Investments." We account for life insurance policy
liabilities for deferred annuities as investment-type insurance products and we
record these liabilities at accumulated value (premiums received, plus accrued
interest to the balance sheet date, less withdrawals and assessed fees).
Contingent Liabilities
As discussed in Note 12 to the Consolidated Financial Statements in Item 8
of this Form 10-K, 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.
21
Consolidation, Deconsolidation and Reporting of Discontinued Operations
Our consolidated financial statements include the accounts of the Company,
its subsidiaries (with the exception of LPLA which was deconsolidated during
2002, and BCM and LPA which were deconsolidated during the first half of 2003,
as discussed below), the Employee Share Option Trust and the Agent Loyalty
Opportunity Trust (collectively, the "Group"). Significant subsidiaries included
in the continuing operations of the Group and discussed in this Form 10-K
include London Pacific Assurance Limited and Berkeley International Capital
Corporation. All intercompany transactions and balances are eliminated in
consolidation except for intercompany transactions between continuing and
discontinued operations principally related to investment management fees from
LPLA (the discontinued operations) to the continuing operations in 2002. Our
consolidated balance sheet is presented in an unclassified format as the
majority of the Group's assets relate to its continuing life insurance and
annuities business.
In accordance with Statement of Financial Accounting Standard No. 144
("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets,"
if a long-lived asset or "component of an entity" (a reportable segment, an
operating segment, a reporting unit, a subsidiary or an asset group) is disposed
of by sale or by abandonment, then the results of operations of that component
of an entity shall be reported in discontinued operations if both of the
following conditions are met: (i) the operations and cash flows of the component
have been eliminated from the ongoing operations of the entity, and (ii) the
entity will not have any significant continuing involvement in the operations of
the component.
During the third quarter of 2002, our U.S. life insurance company, LPLA,
was placed under regulatory control and rehabilitation by the North Carolina
insurance regulators. As we no longer exercise control over LPLA, we
deconsolidated LPLA and recorded a charge to earnings in the third quarter of
2002 of approximately $38.5 million for losses resulting from the disposition of
LPLA. We will not regain control or receive any benefit from LPLA in the future.
As such, in accordance with SFAS 144, the results of operations of LPLA
(pre-habilitation) and the impairment losses discussed above have been reported
in discontinued operations for 2002.
Due to the sale of both BCM and LPA during the second quarter of 2003, we
report the results of operations in the statement of operations under
discontinued operations for the prior periods. 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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 2 to the Consolidated Financial Statements in Item 8 of this Form
10-K for a summary of recently issued accounting pronouncements.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents increased during 2004 by $5.1 million from
$14.4 million as of December 31, 2003 to $19.5 million as of December 31, 2004.
This increase in cash and cash equivalents resulted from $9.8 million and $5.1
million of cash provided by operating activities and investing activities,
respectively, partially offset by $9.8 million of cash used in financing
activities. Cash provided by operating activities primarily resulted from the
sale of trading securities. Cash provided by investing activities primarily
related to the maturity of corporate bonds held by LPAL. Cash used in financing
activities related to insurance policyholder benefits paid by LPAL. As of
December 31, 2004, our cash and cash equivalents, excluding the amount held by
LPAL, amounted to $9.8 million, a decrease of $0.7 million from December 31,
2003. Excluding LPAL's investments, we also held $0.1 million of listed equity
securities which could be sold within a short period of time as of December 31,
2004, compared to $3.4 million as of December 31, 2003 and $7.7 million as of
December 31, 2002.
22
Shareholders' equity decreased during 2004 by $12.0 million from $34.9
million at December 31, 2003 to $22.9 million as of December 31, 2004, primarily
due to the net loss for the period of $12.1 million. As of December 31, 2004 and
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 2004, LPAL continued to service its existing policyholders. During this
period, policy surrenders totaled $0.5 million and policy maturities totaled
$9.3 million. Policyholder liabilities were $21.2 million as of December 31,
2004, compared to $28.1 million as of December 31, 2003. We do not expect
significant surrender activity during 2005; however, approximately $6.3 million
of policyholder liabilities are scheduled to mature during this period. LPAL has
sufficient liquid resources to fund these maturities. As of December 31, 2004,
LPAL had cash of $9.7 million, accrued interest receivable of $0.7 million and
corporate bonds of $21.4 million.
In prior periods, LPAL held listed equity securities at levels such that
fluctuations in the market value of these listed equity securities could have
had a significant impact on LPAL's statutory capital level. As of December 31,
2003, LPAL held $13.5 million of listed equity securities. Following the sale of
LPAL's remaining Packeteer, Inc. common stock holding during 2004, and the sale
of LPAL's remaining $0.5 million of listed equity holdings in January 2005,
fluctuations in the market value of LPAL's listed equity securities will no
longer have an impact on LPAL's required statutory capital level.
As of December 31, 2004, we had no bank borrowings, guarantee obligations,
material commitments outstanding for capital expenditures or additional funding
for private equity portfolio companies.
As of December 31, 2004, we had $9.8 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
consulting and corporate activities) over at least the next 12 months.
In order to reduce operating costs and to conserve cash, and in light of
the decrease in the size and complexity of our continuing operations, we reduced
our staff in the Jersey, Channel Islands office by four in January 2005. Due to
employee severance costs, the impact of the staff cost reductions will not be
fully realized on an annual basis until 2006. In addition, we have implemented
or are in the process of implementing other cost reductions. We project the
total cost savings from all of our actions will be approximately $1.0 million in
2006.
CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS
The following table aggregates our expected contractual obligations and
commitments subsequent to December 31, 2004.
2006 - 2008 - Beyond
Contractual obligations (1) 2005 2007 2009 2009 Total
- ------------------------------------- ----------- ----------- ----------- ----------- -----------
(In thousands)
Deferred annuity policy maturities........... $ 6,354 $ 15,754 $ 141 $ - $ 22,249
Capital lease commitments (2)................ 7 - - - 7
Operating lease commitments (3).............. 212 257 257 64 790
----------- ----------- ----------- ----------- -----------
Total contractual cash obligations........... $ 6,573 $ 16,011 $ 398 $ 64 $ 23,046
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
(1) Does not include other commitments for the purchase of goods and services which in the aggregate are immaterial.
(2) Includes amounts classified as interest.
(3) Includes commitments related to our Jersey office lease which expires in September 2010. We are currently evaluating
sublease options as well as alternative office space in Jersey for which no commitment has been entered into as of the
date of filing of this Form 10-K.
23
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The nature of our businesses exposes us to market risk. Market risk is the
risk of loss that may occur when changes in interest rates and public equity
prices adversely affect the value of invested assets.
Interest Rate Risk
LPAL is subject to risk from interest rate fluctuations when payments due
to policyholders are not matched in respect of amount and duration with income
from investments. LPAL attempts to minimize this risk by ensuring that payments
and income are matched as closely as possible while also maximizing investment
returns. LPAL has not used derivative financial instruments as part of its
investment strategy.
For LPAL's business, the amount of policyholder liabilities is unaffected
by changes in interest rates. Given the existing policy and bond maturity
profiles, and that bonds will generally be held to maturity and early policy
redemptions are protected by a market value adjustment and surrender penalty,
the bonds and policies carry minimal interest rate risk. Interest income earned
on excess cash is expected to yield less than $0.3 million during the next 12
months. Movements in market interest rates will not have any material impact on
our consolidated results.
Equity Price Risk
We are exposed to equity price risk on our holdings of listed equity
securities. Changes in the level or volatility of equity prices affect the value
of our listed equity securities. These changes in turn directly affect our
consolidated net income because our holdings of listed equity securities are
marked to market, with changes in their market value recognized in the statement
of operations for the period in which the changes occur. These listed equity
securities represent investments that were originally made as private equity
investments in high technology companies that subsequently completed an initial
public offering. The performance of these listed equity securities can be highly
volatile; however, we monitor them and seek to sell them over a period of time.
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 was only $0.6 million as of December 31, 2004.
During January 2005, we sold all but $0.1 million of the listed equity
securities held as of December 31, 2004. At this level, there is a greatly
reduced equity price risk and fluctuations in the market value of our remaining
listed equity securities should not have a material impact on our earnings in
future periods.
As of December 31, 2004, we held $0.8 million in private corporate equity
securities of technology companies for which liquid markets do not exist.
Private equity prices do not fluctuate directly with public equity markets, but
significant market movements may trigger a review for other-than-temporary
adjustment of the carrying values of our private equity securities. The risks
inherent in these private equity investments relate primarily to the viability
of the investee companies. We try to mitigate these risks in various ways,
including performing extensive due diligence prior to making an investment, and
regularly reviewing the progress of the investee companies.
For additional information relating to our financial risk profile, see Note
13 to the Consolidated Financial Statements in Item 8 of this Form 10-K.
24
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm..................... 26
Consolidated Balance Sheets as of December 31, 2004 and 2003................ 27
Consolidated Statements of Operations for the Years Ended
December 31, 2004, 2003 and 2002........................................ 28
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004, 2003 and 2002........................................ 30
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 2004, 2003 and 2002............................ 32
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2004, 2003 and 2002........................................ 33
Notes to Consolidated Financial Statements.................................. 34
25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders of
Berkeley Technology Limited
Jersey, Channel Islands
We have audited the accompanying consolidated balance sheets of Berkeley
Technology Limited (the "Company") as of December 31, 2004 and 2003 and the
related consolidated statements of operations, changes in shareholders' equity,
cash flows, and comprehensive income for each of the three years in the period
ended December 31, 2004. We have also audited the schedules on pages 74 to 79 in
Item 15 (the "Schedules"). These financial statements and the Schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and the Schedules based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Berkeley
Technology Limited at December 31, 2004 and 2003, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, the Schedules as of
December 31, 2004 and 2003, and for each of the three years in the period ended
December 31, 2004, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects,
the information set forth therein.
/s/ BDO Seidman, LLP
San Francisco, California
February 8, 2005
26
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 31,
------------------------
2004 2003
----------- -----------
ASSETS
Investments (principally of life insurance subsidiary):
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $21,341 and $25,403
as of December 31, 2004 and 2003, respectively)............................ $ 21,377 $ 25,393
Equity securities:
Trading, at fair value (cost: $586 and $4,544 as of December 31,
2004 and 2003, respectively)............................................... 552 16,882
Available-for-sale, at estimated fair value (cost: $850 and $4,262 as of
December 31, 2004 and 2003, respectively).................................. 850 4,262
----------- -----------
Total investments................................................................. 22,779(1) 46,537
Cash and cash equivalents......................................................... 19,495(1) 14,408
Cash held in escrow............................................................... 1,005 999
Accrued investment income......................................................... 737 926
Property and equipment, net....................................................... 70 117
Other assets...................................................................... 621 526
----------- -----------
Total assets...................................................................... $ 44,707 $ 63,513
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Life insurance policy liabilities................................................. $ 21,229 $ 28,054
Accounts payable and accruals..................................................... 585 562
----------- -----------
Total liabilities................................................................. 21,814 28,616
----------- -----------
Commitments and contingencies (See Note 12)
Shareholders' equity:
Ordinary shares, $0.05 par value per share: 86,400,000 shares authorized;
64,439,073 shares issued and outstanding as of December 31, 2004
and 2003....................................................................... 3,222 3,222
Additional paid-in capital........................................................ 68,615 68,615
Retained earnings................................................................. 14,929 27,070
Employee benefit trusts, at cost (13,684,881 shares as of December 31,
2004 and 2003)................................................................. (63,571) (63,571)
Accumulated other comprehensive loss.............................................. (302) (439)
----------- -----------
Total shareholders' equity........................................................ 22,893 34,897
----------- -----------
Total liabilities and shareholders' equity........................................ $ 44,707 $ 63,513
----------- -----------
----------- -----------
(1) Includes $22,687 of investments and $9,658 of cash and cash equivalents in the Company's insurance
subsidiary (London Pacific Assurance Limited ("LPAL")) which are not currently available to fund the operations
or commitments of the Company or its other subsidiaries.
See accompanying Notes which are an integral part of these Consolidated
Financial Statements.
27
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPEARTIONS
(In thousands, except per share and ADS amounts)
Years Ended December 31,
-------------------------------------
2004 2003 2002(1)
----------- ----------- -----------
Continuing operations:
Revenues:
Investment income............................................................ $ 1,397 $ 1,887 $ 6,590
Insurance policy charges..................................................... 4 6 1,155
Consulting and other fee income.............................................. 513 - 2,908 (2)
Net realized investment gains (losses)....................................... 4,700 (15,312) (21,507)
Change in net unrealized investment gains and losses on trading
securities................................................................ (12,373) 22,617 (22,483)
----------- ----------- -----------
(5,759) 9,198 (33,337)
Expenses:
Amounts credited on insurance policyholder accounts.......................... 1,358 1,922 6,031
Amortization of deferred policy acquisition costs............................ - - 2,952
Operating expenses........................................................... 4,629 5,553 10,804
Goodwill amortization and write-offs......................................... - - 389
Interest expense............................................................. 105 676 965
----------- ----------- -----------
6,092 8,151 21,141
----------- ----------- -----------
Income (loss) from continuing operations before income taxes................. (11,851) 1,047 (54,478)
Income tax expense (benefit)................................................. 290 (42) 1,291
----------- ----------- -----------
Income (loss) from continuing operations..................................... (12,141) 1,089 (55,769)
Discontinued operations:
Loss from discontinued operations, net of income
tax expense (benefit) of $0, $2 and $(4,943), respectively................ - (1,758) (111,203)
Income (loss) on disposal of discontinued operations, net of income
tax expense of $0, $36 and $0, respectively............................... - 11,685 (38,532)
----------- ----------- -----------
Income (loss) on discontinued operations..................................... - 9,927 (149,735)
----------- ----------- -----------
Net income (loss)............................................................ $ (12,141) $ 11,016 $ (205,504)
----------- ----------- -----------
----------- ----------- -----------
(1) Reclassifications have been made related to discontinued operations - see Note 3.
(2) Amount represents revenues earned from an entity included in discontinued operations.
See accompanying Notes which are an integral part of these Consolidated
Financial Statements.
28
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
(In thousands, except per share and ADS amounts)
Years Ended December 31,
-------------------------------------
2004 2003 2002(1)
----------- ----------- -----------
Basic earnings (loss) per share and ADS:
Basic earnings (loss) per share:
Continuing operations........................................................ $ (0.24) $ 0.02 $ (1.10)
Discontinued operations...................................................... - 0.20 (2.95)
----------- ----------- -----------
$ (0.24) $ 0.22 $ (4.05)
----------- ----------- -----------
----------- ----------- -----------
Basic earnings (loss) per ADS:
Continuing operations........................................................ $ (2.39) $ 0.21 $ (10.99)
Discontinued operations...................................................... - 1.96 (29.50)
----------- ----------- -----------
$ (2.39) $ 2.17 $ (40.49)
----------- ----------- -----------
----------- ----------- -----------
Diluted earnings (loss) per share and ADS:
Diluted earnings (loss) per share:
Continuing operations........................................................ $ (0.24) $ 0.02 $ (1.10)
Discontinued operations...................................................... - 0.20 (2.95)
----------- ----------- -----------
$ (0.24) $ 0.22 $ (4.05)
----------- ----------- -----------
----------- ----------- -----------
Diluted earnings (loss) per ADS:
Continuing operations........................................................ $ (2.39) $ 0.21 $ (10.99)
Discontinued operations...................................................... - 1.94 (29.50)
----------- ----------- -----------
$ (2.39) $ 2.15 $ (40.49)
------------ ------------------------
------------ ------------------------
(1) Reclassifications have been made related to discontinued operations - see Note 3.
See accompanying Notes which are an integral part of these Consolidated
Financial Statements.
29
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
-------------------------------------
2004 2003 2002 (1)
----------- ----------- -----------
Cash flows from continuing operating activities:
Net income (loss)............................................................ $ (12,141) $ 1,089 $ (55,769)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization................................................ 53 79 460
Amortization of deferred policy acquisition costs............................ - - 2,952
Deferred income tax expense.................................................. - - 2,898
Amounts credited on insurance policyholder accounts.......................... 1,358 1,922 6,031
Net realized investment losses (gains)....................................... (4,700) 15,312 21,507
Change in net unrealized investment gains and losses
on trading securities..................................................... 12,373 (22,617) 22,483
Net amortization of investment premiums and discounts........................ 572 313 289
Net changes in operating assets and liabilities:
Trading equity securities................................................. 12,009 11,879 32,623
Accrued investment income ................................................ 189 (26) 2,314
Deferred policy acquisition costs......................................... - - (250)
Other assets.............................................................. (112) 733 391
Life insurance policy liabilities......................................... (4) (6) 4
Accounts payable, accruals and other liabilities.......................... 174 (804) (3,196)
Income taxes payable...................................................... 17 (26) (3,034)
Other operating cash flows................................................... (6) 223 (471)
----------- ----------- -----------
Net cash provided by continuing operations................................... 9,782 8,071 29,232
----------- ----------- -----------
Write-off of doubtful receivables from discontinued operations............... - - (15,614)
Capital paid in to discontinued operations................................... - (523) (3,050)
Amounts due to discontinued operations....................................... - - (2,793)
----------- ----------- -----------
Net cash used in discontinued operations..................................... - (523) (21,457)
----------- ----------- -----------
Net cash provided by operating activities.................................... 9,782 7,548 7,775
----------- ----------- -----------
Cash flows from investing activities:
Payment of guarantee obligations............................................. - (10,836) -
Purchases of held-to-maturity fixed maturity securities...................... - - (2,828)
Purchases of available-for-sale fixed maturity securities.................... - (17,096) (7,447)
Purchases of available-for-sale equity securities............................ (15) - -
Proceeds from sale and maturity of available-for-sale fixed
maturity securities....................................................... 5,060 24,595 96,884
Proceeds from sale of available-for-sale equity securities................... 75 9 -
Proceeds from disposal of discontinued operations............................ - 16,148 -
Capital expenditures......................................................... (5) (4) (16)
----------- ----------- -----------
Net cash provided by investing activities ................................... 5,115 12,816 86,593
----------- ----------- -----------
(1) Reclassifications have been made related to discontinued operations - see Note 3.
See accompanying Notes which are an integral part of these Consolidated
Financial Statements.
30
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
Years Ended December 31,
-------------------------------------
2004 2003 2002 (1)
----------- ----------- -----------
Cash flows from financing activities:
Insurance policyholder contract deposits..................................... - - 6,827
Insurance policyholder benefits paid......................................... (9,824) (12,330) (117,063)
Proceeds from disposal of shares by the employee benefit trusts.............. - - 43
Dividends paid............................................................... - - (2,032)
Proceeds from issuance of notes payable...................................... - - 2,440
Repayments of notes payable.................................................. - (9,314) (30,000)
----------- ----------- -----------
Net cash used in financing activities........................................ (9,824) (21,644) (139,785)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents......................... 5,073 (1,280) (45,417)
Cash and cash equivalents at beginning of year (2)........................... 14,408 15,308 60,571
Foreign currency translation adjustment...................................... 14 380 154
----------- ----------- -----------
Cash and cash equivalents at end of year (2), (3)............................ $ 19,495 $ 14,408 $ 15,308
----------- ----------- -----------
----------- ----------- -----------
Supplemental disclosure of cash flow information: (2)
Cash paid (received) during the year for:
Interest..................................................................... $ 105 $ 501 $ 956
Income taxes (net of amounts recovered)...................................... $ 274 $ (51) $ 1,408
Supplemental disclosure of non-cash investing activities:
Exchange of available-for-sale equity securities for trading equity
securities................................................................ $ 98 $ 3 $ 22
(1) Reclassifications have been made related to discontinued operations - see Note 3.
(2) Amounts reflect continuing operations only. Does not include $1,005 of cash held in escrow as of December 31, 2004.
(3) The amount for December 31, 2004 includes $9,658 in the Company's insurance subsidiary (LPAL) which is not currently
available to fund the operations or commitments of the Company or its other subsidiaries.
See accompanying Notes which are an integral part of these Consolidated
Financial Statements.
31
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except per share and ADS amounts)
Accumulated
Other
Ordinary Shares Additional Employee Compre- Total
-------------------- Paid-in Retained Benefit hensive Shareholders'
Number Amount Capital Earnings Trusts Loss Equity
--------- --------- --------- --------- --------- --------- ---------
Balance as of January 1, 2002 64,439 $ 3,222 $ 68,346 $ 223,590 $ (63,599) $ (9,906) $ 221,653
Net loss........................ - - - (205,504) - - (205,504)
Change in net unrealized
gains and losses on
available-for-sale securities - - - - - 7,853 7,853
Foreign currency translation
adjustment................... - - - - - (560) (560)
Exercise of employee share
options, including income
tax effect................... - - 3 - 28 - 31
Warrants issued to bank......... - - 30 - - - 30
Net realized gains on
disposal of shares held by
the employee benefit trusts.. - - 15 - - - 15
Cash dividends ($0.04 net
per share and $0.40 per
ADS)......................... - - - (2,032) - - (2,032)
--------- --------- --------- --------- --------- --------- ---------
Balance as of
December 31, 2002............ 64,439 $ 3,222 $ 68,394 $ 16,054 $ (63,571) $ (2,613) $ 21,486
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income...................... - $ - $ - $ 11,016 $ - $ - $ 11,016
Change in net unrealized
gains and losses on
available-for-sale securities - - - - - 1,886 1,886
Foreign currency translation
adjustment................... - - - - - 288 288
Warrants issued to bank......... - - 221 - - - 221
--------- --------- --------- --------- --------- --------- ---------
Balance as of
December 31, 2003............ 64,439 $ 3,222 $ 68,615 $ 27,070 $ (63,571) $ (439) $ 34,897
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net loss........................ - $ - $ - $ (12,141) $ - $ - $ (12,141)
Change in net unrealized
gains and losses on
available-for-sale securities - - - - - 46 46
Foreign currency translation
adjustment................... - - - - - 91 91
--------- --------- --------- --------- --------- --------- ---------
Balance as of
December 31, 2004............ 64,439 $ 3,222 $ 68,615 $ 14,929 $ (63,571) $ (302) $ 22,893
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
See accompanying Notes which are an integral part of these Consolidated
Financial Statements.
32
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Years Ended December 31,
-------------------------------------
2004 2003 2002
----------- ----------- -----------
Net income (loss)............................................................ $ (12,141) $ 11,016 $ (205,504)
Other comprehensive income, net of deferred income taxes:
Foreign currency translation adjustments, net of income taxes of $0.......... 91 288 (560)
Change in net unrealized gains and losses related to continuing operations:
Unrealized holding gains and losses on available-for-sale securities...... 64 54 (1,116)
Reclassification adjustment for gains and losses included in
net income (loss)....................................................... (18) 1,832 366
Deferred policy acquisition cost amortization adjustments................. - - (551)
Change in net unrealized gains and losses related to discontinued operations:
Change in net unrealized gains and losses on available-for-sale
securities.............................................................. - - 5,744
Deferred policy acquisition cost amortization adjustments................. - - (8,044)
Deferred income taxes..................................................... - - 805
Reclassification adjustment for losses of discontinued
operations included in net income (loss)................................ - - 10,649
----------- ----------- -----------
Other comprehensive income................................................... 137 2,174 7,293
----------- ----------- -----------
Comprehensive income (loss).................................................. $ (12,004) $ 13,190 $ (198,211)
----------- ----------- -----------
----------- ----------- -----------
See accompanying Notes which are an integral part of these Consolidated
Financial Statements.
33
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Material Events
The Ordinary Shares of Berkeley Technology Limited (the "Company" and
together with its subsidiaries, the "Group") are traded on the London Stock
Exchange and on the Over-the-Counter ("OTC") Bulletin Board in the U.S. in the
form of American Depositary Shares ("ADSs"), which are evidenced by American
Depositary Receipts ("ADRs"). During the second quarter of 2002, the Company
completed a one-for-ten reverse split of its ADSs. Each ADS represents ten
Ordinary Shares.
On 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 statement of operations 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 statement of
operations 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 March 8, 2005, the Company was made aware of a complaint filed by
SunGard with the U.S. District Court in Philadelphia naming the Company and
certain of its subsidiaries as parties. The complaint alleges that SunGard
sustained losses equal to at least $7.2 million and seeks indemnification from
the Company resulting from, among other things, alleged breaches of
representations and warranties contained in the sale and purchase agreement.
After consultation with its legal advisors, the Group's management believes that
this claim is without merit, and the Group will defend the matter vigorously. No
provision for this contingent liability has been included in the Group's
financial statements as of December 31, 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.
34
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared by
the Company in conformity with United States generally accepted accounting
principles ("U.S. GAAP"). These consolidated financial statements include the
accounts of the Company, its subsidiaries (with the exception of BCM and LPA as
discussed above in Note 1 "Material Events"), the Employee Share Option Trust
("ESOT") and the Agent Loyalty Opportunity Trust ("ALOT"). Significant
subsidiaries included in the continuing operations of the Group and discussed in
this document include London Pacific Assurance Limited and Berkeley
International Capital Corporation. All intercompany transactions and balances
have been eliminated in consolidation except for intercompany transactions
between continuing and discontinued operations which are disclosed in Note 3 and
Note 18 below.
During the second quarter of 2002, the Company completed a one-for-ten
reverse split of its ADSs. On June 24, 2002, every ten of the Company's ADSs
issued and outstanding were converted and reclassified into one post-split ADS.
Consequently, effective from the opening of business on June 24, 2002, each ADS
is equal to ten Ordinary Shares. All earnings (loss) per ADS amounts disclosed
in these financial statements have been restated to reflect this split.
The consolidated balance sheet is presented in an unclassified format as
the majority of the Group's assets relate to its continuing life insurance and
annuities business. The Group's other business is venture capital and
consulting.
The Company is incorporated under the laws of Jersey, Channel Islands. Its
Ordinary Shares are traded on the London Stock Exchange and in the U.S. on the
OTC Bulletin Board in the form of ADSs, which are evidenced by ADRs. Pursuant to
the regulations of the U.S. Securities and Exchange Commission ("SEC"), the
Company is considered a U.S. domestic registrant and must file financial
statements prepared under U.S. GAAP.
Cash and Cash Equivalents
The Group considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents.
Investments
The Group's investments consist of fixed maturity and equity securities.
Fixed maturity securities are classified as either available-for-sale or
held-to-maturity, and equity securities are classified as either trading or
available-for-sale. The investments are accounted for as follows:
i) available-for-sale securities are recorded at fair value, with changes
in unrealized gains and losses excluded from net income, but reported
net of applicable income taxes and adjustments to deferred policy
acquisition cost amortization as a separate component of accumulated
other comprehensive income;
ii) held-to-maturity securities are recorded at amortized cost unless
these securities become other-than-temporarily impaired; and
iii) trading securities are recorded at fair value with changes in
unrealized gains and losses included in net income.
35
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
When a quoted market price is available for a security, the Group uses this
price in the determination of fair value. If a quoted market price is not
available for a security, management estimates the security's fair value based
on appropriate valuation methodologies. Management's valuation methodologies
include fundamental analysis that evaluates the investee company's progress in
developing products, building intellectual property portfolios and securing
customer relationships, as well as overall industry conditions, conditions in
and prospects for the investee's geographic region, overall equity market
conditions, and the level of financing already secured and available. This is
combined with analysis of comparable acquisition transactions and values to
determine if the security's liquidation preferences will ensure full recovery of
the Group's investment in a likely acquisition outcome. In its valuation
analysis, management also considers the most recent transaction in a company's
shares.
Amortization of premiums and accretion of discounts on fixed maturity
securities are reflected in earnings over the contractual terms of the
investments in a manner that produces a constant effective yield. Realized gains
and losses on securities are included in net income using the specific
identification method. Any other-than-temporary declines in the fair value of
available-for-sale or held-to-maturity securities, below the cost or amortized
cost basis, are recognized as realized losses in the consolidated statements of
operations. The cost basis of such securities is adjusted to reflect the
write-down recorded.
Deferred Policy Acquisition Costs
Policy acquisition costs are the costs of producing life insurance and
annuity business: principally commissions and certain marketing expenses which
vary with, and are primarily related to, the acquisition of new business. Policy
acquisition costs are deferred and amortized over the estimated lives of the
policies in relation to their estimated future gross profits. Amortization is
adjusted in the current year when estimates of total profits to be realized from
a group of products are revised.
Deferred policy acquisition costs are adjusted for the change in
amortization that would have been recorded if fixed maturity securities
classified as available-for-sale had been sold at their stated aggregate fair
value and the proceeds reinvested at current yields. The impact of this
adjustment is included in accumulated other comprehensive income within
shareholders' equity.
From July 2, 2002, the Company's life insurance subsidiary, LPAL,
discontinued writing new policies. As of September 30, 2002, all deferred policy
acquisition costs were written off.
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost less
accumulated depreciation. Depreciation is calculated on a straight-line basis at
rates sufficient to write-off such assets over their estimated useful lives on
the following basis:
Furniture and equipment - five years
Computer equipment, including software - three to five years
Leasehold improvements - life of lease
Assets held under capital leases are included in property, equipment and
leasehold improvements and are depreciated over their estimated useful lives.
The future obligations under these leases are included in accounts payable and
accruals. Interest paid on capital leases is charged to the statement of
operations over the periods of the leases.
36
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Goodwill
Goodwill is recorded at acquisition of subsidiaries. Goodwill at
acquisition arises where the consideration given exceeds the fair value
attributed to the separable net assets. All goodwill on acquisitions was
capitalized until January 1, 2002, and amortized on a straight-line basis over
its estimated useful economic life, generally 25 years. Beginning January 1,
2002, goodwill is no longer amortized, but is regularly evaluated for impairment
and any impairment losses are recognized in the consolidated statement of
operations. All unamortized goodwill in the continuing operations was
written-off as of the end of 2002.
Life Insurance Policy Liabilities, Revenues and Expenses
Life insurance policy liabilities, premium revenues and related expenses
are accounted for in accordance with Statement of Financial Accounting Standards
No. 97, "Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sale of
Investments," as follows:
i) Life insurance policy liabilities for deferred annuities are accounted
for as investment-type insurance products and are recorded at accumulated value
(premiums received, plus accrued interest to the balance sheet date, less
withdrawals and assessed fees).
ii) Revenues for investment-type insurance products consist of charges
assessed against policy account values for surrenders.
iii) Benefits for investment-type insurance products are charged to expense
when incurred and reflect the claim amounts in excess of the policy account
balance. Expenses for investment-type products include the interest credited to
the policy account balance.
Revenue Recognition
Interest income is accounted for on an accrual basis. Dividends are
accounted for when declared.
Listed equity securities received as a result of an acquisition of one of
the Group's investee companies by a publicly traded company that are held in
escrow by an escrow agent, are recognized in the financial statements when the
transaction is completed. Reductions are made to the number of shares of listed
equity securities held in escrow that are carried in the financial statements as
claims are made by the acquiring company against the escrow, or if evidence
exists that a claim is probable.
Fees relating to venture capital activities are recognized in income when
the investment transaction is completed. Fees for consulting services are
recognized in income on an accrual basis, based upon when services are
performed.
Stock Based Compensation
The Company accounts for stock based compensation issued to employees in
accordance with Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees," and related interpretations which
recognizes compensation expense based upon the intrinsic value of the stock
options as of the date of grant. The Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 123 ("SFAS
123"), "Accounting for Stock Based Compensation," which encourages, but does not
require, companies to recognize compensation expense for grants of stock options
based on their fair value. The Company has elected, as permitted by SFAS 123, to
adopt the disclosure requirement of SFAS 123 and to continue to account for
stock based compensation under APB 25.
37
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO 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:
Years Ended December 31,
-------------------------------------
2004 2003 2002
----------- ----------- -----------
(In thousands, except per share
and ADS amounts)
Net income (loss) as reported................................................ $ (12,141) $ 11,016 $ (205,504)
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. (190) (145) (796)
----------- ----------- -----------
Pro forma net income (loss).................................................. $ (12,331) $ 10,871 $ (206,300)
----------- ----------- -----------
----------- ----------- -----------
Basic earnings (loss) per share:
As reported.................................................................. (0.24) 0.22 (4.05)
Pro forma.................................................................... (0.24) 0.21 (4.06)
Basic earnings (loss) per ADS:
As reported.................................................................. (2.39) 2.17 (40.49)
Pro forma.................................................................... (2.43) 2.14 (40.65)
Diluted earnings (loss) per share:
As reported.................................................................. (0.24) 0.22 (4.05)
Pro forma.................................................................... (0.24) 0.21 (4.06)
Diluted earnings (loss) per ADS:
As reported.................................................................. (2.39) 2.15 (40.49)
Pro forma.................................................................... (2.43) 2.12 (40.65)
Weighted-average fair value of options granted
at market price during year............................................... - - 0.23
Weighted-average fair value of options granted
at less than market price during year..................................... - - -
38
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The pro forma disclosures shown above were calculated for all options
granted after December 31, 1994 using a Black-Scholes option pricing model with
the following assumptions:
2004 (1) 2003 (1) 2002
----------- ----------- -----------
Expected dividend yield (2).................................................. - - -
Expected stock price volatility.............................................. - - 125%
Risk-free interest rate...................................................... - - 3.95%
Weighted-average expected life (in years).................................... - - 5
(1) No grants were made in 2003 and 2004.
(2) Future dividends were not assumed, as dividends have not been paid since 2001.
Income Taxes
The Group accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." Under SFAS 109, the Group recognizes taxes payable or refundable for the
current year, and deferred tax assets and liabilities due to temporary
differences in the basis of assets and liabilities between amounts recorded for
financial statement and tax purposes.
The Group provides a valuation allowance for deferred income tax assets if
it is more likely than not that some portion of the deferred income tax asset
will not be realized. The Group includes in income any increase or decrease in a
valuation allowance that results from a change in circumstances that causes a
change in judgment about the realization of the related deferred income tax
asset.
The Group includes in additional paid-in capital the tax benefit on share
options exercised during the period to the extent that such exercises result in
a permanent difference between financial statement and tax basis compensation
expense.
Earnings Per Share and ADS
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share." This
statement requires the presentation of basic and diluted earnings per share.
Basic earnings per share is calculated by dividing net income or loss by the
weighted-average number of Ordinary Shares outstanding during the applicable
period, excluding shares held by the ESOT and the ALOT which are regarded as
treasury stock for the purposes of this calculation. The Company has issued
employee share options, which are considered potential common stock under SFAS
128. The Company has also issued Ordinary Share warrants to the Bank of Scotland
in connection with the Company's bank facility (now terminated), which are also
considered potential common stock under SFAS 128. Diluted earnings per share is
calculated by dividing net income by the weighted-average number of Ordinary
Shares outstanding during the applicable period as adjusted for these
potentially dilutive options and warrants which are determined based on the
"Treasury Stock Method."
39
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Foreign Currencies
The Group uses the (pound) sterling as the functional currency for LPAL and
the U.S. dollar as the functional currency for the Company and all other
significant subsidiaries. Foreign exchange gains and losses resulting from the
remeasurement of foreign currency assets and liabilities into an entity's
functional currency are included in other operating expense in the consolidated
statements of operations. For entities using a (pound) sterling functional
currency, assets and liabilities denominated in foreign currencies are
translated into U.S. dollars at the prevailing exchange rates at the balance
sheet date and income and expense items are translated to U.S. dollars at
average exchange rates in effect during the period. The resulting translation
adjustment is shown as a separate component of other comprehensive income in
shareholders' equity. Foreign currency transaction gains and losses are recorded
in the results of operations, and were not material in all periods presented.
Comprehensive Income
Comprehensive income consists of net income; changes in unrealized gains
and losses on available-for-sale securities, net of income taxes and deferred
policy acquisition cost amortization adjustments; and foreign currency
translation gains or losses arising on the translation of the Group's non-U.S.
dollar based subsidiaries.
Recently Issued Accounting Pronouncements
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123 (revised 2004) ("SFAS 123R"), "Share-Based Payment." SFAS 123R
is a revision of SFAS 123 and supersedes APB 25. Among other items, SFAS 123R
eliminates the use of APB 25 and the intrinsic value method of accounting, and
requires companies to recognize the cost of employee services received in
exchange for awards of equity instruments, based on the grant date fair value of
those awards, in the financial statements. The effective date of SFAS 123R is
the first reporting period beginning after June 15, 2005, which is third quarter
2005 for calendar year companies, although early adoption is allowed. SFAS 123R
permits companies to adopt its requirements using either a "modified
prospective" method, or a "modified retrospective" method. Under the "modified
prospective" method, compensation cost is recognized in the financial statements
beginning with the effective date, based on the requirements of SFAS 123R for
all share-based payments granted after that date, and based on the requirements
of SFAS 123 for all unvested awards granted prior to the effective date of SFAS
123R. Under the "modified retrospective" method, the requirements are the same
as under the "modified prospective" method, but also permits entities to restate
financial statements of previous periods based on proforma disclosures made in
accordance with SFAS 123.
The Company currently utilizes a standard option-pricing model (i.e.,
Black-Scholes) to measure the fair value of stock options granted to its
employees. While SFAS 123R permits entities to continue to use such a model, the
standard also permits the use of a "lattice" model. The Company has not yet
determined which model it will use to measure the fair value of employee stock
options upon the adoption of SFAS 123R.
SFAS 123R also requires that the benefits associated with the tax
deductions in excess of recognized compensation cost be reported as a financing
cash flow, rather than as an operating cash flow as required under current
literature. This requirement will reduce net operating cash flows and increase
net financing cash flows in periods after the effective date. These future
amounts cannot be estimated, because they depend on, among other things, when
employees exercise stock options.
The Company currently expects to adopt SFAS 123R effective July 1, 2005;
however, the Company has not yet determined which of the aforementioned adoption
methods it will use.
40
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 153 ("SFAS 153"), "Exchanges of Nonmonetary Assets." The
provisions of SFAS 153 are effective for nonmonetary asset exchanges occurring
in fiscal periods beginning after June 15, 2005. The provisions of this
statement should be applied prospectively, and eliminates the exception from
fair value measurement for nonmonetary exchanges of similar productive assets in
paragraph 21(b) of APB Opinion No. 29, "Accounting for Nonmonetary
Transactions," and replaces it with an exception for exchanges that do not have
commercial substance. The adoption of this accounting pronouncement is not
expected to have a material effect on the Company's consolidated financial
statements.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of these consolidated financial statements as well as
the reported amount of revenues and expenses during this reporting period.
Actual results could differ from these estimates. Certain estimates such as fair
value and actuarial assumptions have a significant impact on the gains and
losses recorded on investments and balance of life insurance policy liabilities.
Note 3. Discontinued Operations
(a) London Pacific Life & Annuity Company ("LPLA")
As previously disclosed in the Company's 2002 and 2003 audited consolidated
financial statements and notes thereto, included in the Company's Annual Reports
on Form 10-K, the Company, with the unanimous approval of LPLA's board of
directors, ceded control of LPLA to the North Carolina insurance regulators on
August 6, 2002. In connection therewith, the Company deconsolidated LPLA and
recorded a charge to earnings of $38.5 million during the third quarter of 2002.
Although LPLA was placed under regulatory control and rehabilitation (and
subsequently in July 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), the Company will not regain control or receive
any benefit from LPLA in the future. As such, in accordance with Statement of
Financial Accounting Standard No. 144 ("SFAS 144"), "Accounting for the
Impairment or Disposal of Long Lived Assets," the results of operations of LPLA
(pre-rehabilitation) have been reported in discontinued operations. Under SFAS
144, the results of operations of a discontinued business, and any impairment
losses related to a discontinued business, are reported separately in the
statement of operations under discontinued operations for the current and prior
periods.
41
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of LPLA's pre-tax operating results (pre-rehabilitation) for the
year ended December 31, 2002 is shown below.
Year Ended
December 31,
2002 (1)
------------
(In thousands)
Revenues:
Investment income before intercompany management fee expense..................................... $ 62,453
Intercompany management fee expense (2).......................................................... (3,632)
Other income..................................................................................... 4,176
Net realized and change in net unrealized investment gains and losses............................ (97,618)
------------
Total revenues and net investment losses......................................................... (34,621)
Expenses:
Interest credited on insurance policyholder accounts............................................. 56,133
Amortization of deferred policy acquisition costs................................................ 17,145
Other expenses................................................................................... 4,593
------------
Total expenses................................................................................... 77,871
------------
Loss before income taxes......................................................................... $ (112,492)
------------
------------
(1) Though the Group did not lose control of LPLA until August 6, 2002, the Group was not able to obtain LPLA's financial
results on a U.S. GAAP basis for the period July 1, 2002 up to August 6, 2002. Therefore, the Group's consolidated
statement of operations includes LPLA's results only through June 30, 2002. These results are reflected as discontinued
operations in the consolidated statement of operations.
(2) Fees in the amount of $2,908,000 for the year ended December 31, 2002 were paid to and included in the revenues
of the venture capital and consulting business segment of continuing operations. The remaining fees were paid to
the asset management business segment of discontinued operations.
The loss on disposal of discontinued operations, net of tax, was recorded
in the third quarter of 2002 and reported in the Group's Form 10-Q as follows:
(In thousands)
Net unrealized losses on available-for-sale securities, net of
deferred policy acquisition cost amortization adjustments and deferred income taxes........... $ 10,649
Impairment on long-lived assets (LPLA's net assets).............................................. 12,269
Write-off of doubtful receivables from LPLA...................................................... 15,614
------------
38,532
Income tax benefit............................................................................... -
------------
Net loss on disposal of discontinued operations.................................................. $ 38,532
------------
------------
Previously, LPLA had been included in the Group's life insurance and
annuities business segment.
42
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(b) Berkeley Capital Management
As described in Note 1 "Material Events," the Group entered into a
definitive agreement to sell substantially all of the assets and operations of
BCM on March 7, 2003, and on May 7, 2003 completed the sale. In connection
therewith, the Company deconsolidated BCM as of March 31, 2003 in accordance
with SFAS 144. The Company does not expect to receive any material amounts of
income from its asset management segment in the foreseeable future. The results
of operations of BCM for the prior periods and, in addition for 2002, the
results of Berkeley International Limited ("BIL") (the remainder of the asset
management segment in that period) have been reported in discontinued
operations.
A summary of BCM's pre-tax operating results (including the results of the
remainder of the asset management segment for the prior periods from BIL) for
the years ended December 31, 2003 and 2002 is shown below.
Years Ended
December 31,
------------------------
2003 (2) 2002
----------- -----------
(In thousands)
Revenues:
Asset management fees.................................................................. $ 1,364 $ 4,493
Intercompany management fee income (1)................................................. 5 763
----------- -----------
Total revenues......................................................................... 1,369 5,256
Operating expenses..................................................................... 1,403 4,643
----------- -----------
Income (loss) before income taxes...................................................... $ (34) $ 613
----------- -----------
----------- -----------
(1) Fees were paid from and included in the net revenues of the life insurance and annuities business segment
of continuing operations (LPAL) of $5,000 and $39,000 for the years ended December 31, 2003 and 2002, respectively.
For the year ended December 31, 2002, these fees also include $724,000 received from LPLA (discontinued operations).
(2) Partial year up to sale completion.
The $7,949,000 gain on sale of discontinued operations, net of tax of $0,
was recorded in the second quarter of 2003 and reported in the Group's Form 10-Q
for that quarter.
Previously, BCM was included in the Group's asset management business
segment.
(c) London Pacific Advisors
As described in Note 1 "Material Events," the Group entered into a
definitive agreement to sell the LPA business on May 9, 2003 and on June 5, 2003
completed the sale. In connection therewith, the Company reports the results of
operations of LPA for the prior periods as discontinued operations in accordance
with SFAS 144.
43
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of LPA's pre-tax operating results for the years ended December
31, 2003 and 2002 is shown below.
Years Ended
December 31,
------------------------
2003 (1) 2002
----------- -----------
(In thousands)
Revenues:
Investment income...................................................................... $ 4 $ 18
Gross financial advisory services fees................................................. 5,820 16,184
Payments due to independent advisors................................................... (3,477) (10,029)
----------- -----------
Total net revenues..................................................................... 2,347 6,173
Expenses............................................................................... 4,069 10,440
----------- -----------
Loss before income taxes............................................................... $ (1,722) $ (4,267)
----------- -----------
----------- -----------
(1) Partial year up to sale completion.
The $3,772,000 gain on sale of discontinued operations, and tax expense on
the gain of $36,000, were recorded in the second quarter of 2003 and reported in
the Group's Form 10-Q for that quarter.
Previously, LPA was included in the Group's financial advisory services
business segment.
Note 4. Investments
Summary Cost and Fair Value Information
Fixed Maturity Securities
An analysis of fixed maturity securities is as follows:
December 31,
-----------------------------------------------------------------------------------------------
2004 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.......... $ 19,117 $ 65 $ (29) $ 19,153 $ 18,354 $ 48 $ (89) $ 18,313
Corporate debt securities... 2,224 1 (1) 2,224 7,049 33 (2) 7,080
--------- --------- --------- --------- --------- --------- --------- ---------
Total fixed maturity
securities .............. $ 21,341 $ 66 $ (30) $ 21,377 $ 25,403 $ 81 $ (91) $ 25,393
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
As of December 31, 2004, there were no non-income producing fixed maturity
securities for the twelve months preceding December 31, 2004.
44
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Contractual Maturities
The amortized cost and estimated fair value of fixed maturity securities as
of December 31, 2004 by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities as certain issuers have the
right to call and certain borrowers have the right to prepay obligations without
penalty.
Available-for-Sale
------------------------
Estimated
Amortized Fair
Cost Value
----------- -----------
(In thousands)
Due in one year or less........................................................... $ 11,329 $ 11,301
Due after one year through five years............................................. 10,012 10,076
----------- -----------
$ 21,341 $ 21,377
----------- -----------
----------- -----------
Equity Securities
Equity securities are comprised of available-for-sale and trading
securities. An analysis of equity securities is as follows:
December 31,
-----------------------------------------------------------------------------------------------
2004 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.............. $ 850 $ - $ - $ 850 $ 4,262 $ - $ - $ 4,262
--------- --------- --------- --------- --------- --------- --------- ---------
Total available-for-sale
equity securities....... 850 - - 850 4,262 - - 4,262
Trading securities......... 586 20 (54) 552 4,544 12,546 (208) 16,882
--------- --------- --------- --------- --------- --------- --------- ---------
Total equity securities.... $ 1,436 $ 20 $ (54) $ 1,402 $ 8,806 $ 12,546 $ (208) $ 21,144
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Trading securities are carried at fair value with changes in net unrealized
gains and losses of $(12,373,000), $22,617,000 and $(22,483,000) included in the
income and losses for the years ended December 31, 2004, 2003 and 2002,
respectively. During 2002, the loss from the change in net unrealized gains and
losses on trading securities included a reclassification adjustment of
$8,761,000 related to securities purchased from LPLA at above the Group's
original cost.
45
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Investment Concentration and Risk
As of December 31, 2004, the Group's investment portfolio did not include
any individual investments which represented more than 10% of shareholders'
equity as of that date.
As of December 31, 2004, the Company's Jersey based life insurance
subsidiary, LPAL, owned 100% of the Group's $21.4 million in fixed maturity
securities, 99% of the Group's $0.9 million in available-for-sale private equity
securities, and 84% of the Group's $0.6 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.
As of December 31, 2003, equity securities held by the Group included an
investment in Packeteer, Inc. of $16,336,000 which represented more than 10% of
shareholders' equity as of that date. During 2004, the Group sold its investment
in Packeteer, Inc.
Fixed maturity securities considered less than investment grade
approximated 1.4% and 1.2% of total fixed maturity securities as of December 31,
2004 and 2003, respectively.
46
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net Unrealized Gains (Losses) on Available-for-Sale Securities
Net unrealized gains on fixed maturity securities classified as
available-for-sale as of December 31, 2004 totaled $36,000. There were no
related deferred policy acquisition cost adjustments or income taxes. As of
December 31, 2003, for continuing operations, the net unrealized losses on fixed
maturity securities classified as available-for-sale were $10,000.
There were no net unrealized losses on equity securities classified as
available-for-sale as of December 31, 2004 or 2003.
Changes in net unrealized gains and losses on available-for-sale securities
included in other comprehensive income for the years ended December 31, 2002,
2003 and 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, 2001.. $ (8,118) $ (1,631) $ (9,749)
Changes during the year ended December 31, 2002 for continuing operations:
Unrealized holding gains and losses on available-for-sale securities......... (116) (1,000) (1,116)
Reclassification adjustment for gains and losses included in net loss........ (878) 1,244 366
Increase in amortization of deferred policy acquisition costs................ (551) - 551
Changes during the year ended December 31, 2002 for discontinued operations:
Change in net unrealized gains and losses on available-for-sale securities... 16,584 (10,840) 5,744
Increase in amortization of deferred policy acquisition costs................ (8,044) - (8,044)
Decrease (increase) in deferred income tax liabilities....................... (2,989) 3,794 805
Reclassification adjustment for losses of discontinued operations included
in net loss................................................................. 3,966 6,683 10,649
----------- ----------- -----------
Net unrealized losses on available-for-sale securities as of December 31, 2002.. (146) (1,750) (1,896)
Changes during the year ended December 31, 2003 for continuing operations:
Unrealized holding gains and losses on available-for-sale securities......... 54 - 54
Reclassification adjustment for gains and losses included in net income...... 82 1,750 1,832
----------- ----------- -----------
Net unrealized losses on available-for-sale securities as of December 31, 2003.. (10) - (10)
Changes during the year ended December 31, 2004 for continuing operations:
Unrealized holding gains and losses on available-for-sale securities......... 64 - 64
Reclassification adjustment for gains and losses included in net loss........ (18) - (18)
----------- ----------- -----------
Net unrealized gains on available-for-sale securities as of December 31, 2004... $ 36 $ - $ 36
----------- ----------- -----------
----------- ----------- -----------
47
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net Investment Income
The details of investment income, net of investment expenses, are as
follows:
Years Ended December 31,
-------------------------------------
2004 2003 2002
----------- ----------- -----------
(In thousands)
Interest on fixed maturity securities........................................ $ 1,131 $ 1,611 $ 5,972
Interest on cash and cash equivalents........................................ 268 280 629
----------- ----------- -----------
Gross investment income...................................................... 1,399 1,891 6,601
Investment expenses.......................................................... (2) (4) (11)
----------- ----------- -----------
1,397 1,887 6,590
Amounts credited on insurance policyholder accounts.......................... (1,358) (1,922) (6,031)
----------- ----------- -----------
Net investment income (loss)................................................. $ 39 $ (35) $ 559
----------- ----------- -----------
----------- ----------- -----------
Investment expenses included costs of investment administration, primarily
custodial fees.
Realized Gains and Losses
Information about gross and net realized gains and losses on securities
transactions is as follows:
Years Ended December 31,
-------------------------------------
2004 2003 2002
----------- ----------- -----------
(In thousands)
Realized gains (losses) on securities transactions:
Fixed maturities, available-for-sale:
Gross gains............................................................... $ - $ 43 $ 1,798
Gross losses ............................................................. - (286) (15,611)
----------- ----------- ----------
Net realized losses on fixed maturities, available-for-sale.................. - (243) (13,813)
----------- ----------- -----------
Fixed maturities, held-to-maturity:
Gross losses.............................................................. - - (2,125)
----------- ----------- -----------
Equity securities, trading:
Gross gains............................................................... 8,219 4,874 5,601
Gross losses.............................................................. (265) (15,237) (1,629)
----------- ----------- -----------
Net realized gains (losses) on equity securities, trading.................... 7,954 (10,363) 3,972
----------- ----------- -----------
Equity securities, available-for-sale:
Gross gains............................................................... 121 9 -
Gross losses.............................................................. (3,375) (4,715) (9,541)
----------- ----------- -----------
Net realized losses on equity securities, available-for-sale................. (3,254) (4,706) (9,541)
----------- ----------- -----------
Net realized investment gains (losses) on securities transactions............ $ 4,700 $ (15,312) $ (21,507)
----------- ----------- -----------
----------- ----------- -----------
48
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During 2004, the Group's management determined that one private equity
investment in a technology company was other-than-temporarily impaired and
consequently recorded a realized loss of $3.4 million in the consolidated
statement of operations.
During 2003, the Group's management determined that three private equity
investments in technology companies were other-than-temporarily impaired and
consequently recorded realized losses totaling $4.7 million in the consolidated
statement of operations.
Note 5. Property and Equipment
Property and equipment are carried at cost and consisted of the following:
December 31,
------------------------
2004 2003
----------- -----------
(In thousands)
Property, equipment and leasehold improvements.................................... $ 743 $ 1,549
Accumulated depreciation.......................................................... (673) (1,432)
----------- -----------
Property and equipment, net....................................................... $ 70 $ 117
----------- -----------
----------- -----------
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 were
due to be released with accrued interest in December 2004, less any amounts
related to indemnification matters as set out in the sale and purchase
agreement. As discussed above in Note 1 "Material Events," the Company was made
aware on March 8, 2005 of SunGard's complaint with respect to alleged losses in
an amount equal to at least $7.2 million resulting from, among other things,
alleged breaches of representations and warranties contained in the sale and
purchase agreement. SunGard is also seeking indemnification from the Company.
After consultation with its legal advisors, the Group's management believes that
this claim is without merit, and the Group will defend the matter vigorously.
Due to this indemnification claim by SunGard, the $1.0 million in cash held in
escrow was not released to the Group in December 2004 as scheduled. The Company
has not made any reserve against the $1.0 million in escrow.
Note 7. Other Assets
An analysis of other assets is as follows:
December 31,
------------------------
2004 2003
----------- -----------
(In thousands)
Prepayments....................................................................... $ 422 $ 499
Receivables:
Income tax refund receivable................................................... - 17
Fee income receivable.......................................................... 175 7
Other receivables.............................................................. 24 3
----------- -----------
Total other assets................................................................ $ 621 $ 526
----------- -----------
----------- -----------
49
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 8. Life Insurance Policy Liabilities
An analysis of life insurance policy liabilities is as follows:
December 31,
------------------------
2004 2003
----------- -----------
(In thousands)
Deferred annuities - policyholder contract deposits............................... $ 21,091 $ 27,896
Other policy claims and benefits.................................................. 138 158
----------- -----------
$ 21,229 $ 28,054
----------- -----------
----------- -----------
The liability for future policy benefits and policyholder contract deposits
was determined based on the following assumptions:
Interest Rate Assumptions
Guaranteed reset rates were 3.0% for seven year annuity products issued in
2002. For three and five year annuity products, credited interest rates
generally ranged from 3.75% to 7.40% in 2004, 3.30% to 7.40% in 2003, and from
3.30% to 7.40% in 2002.
Mortality Assumptions
Assumed mortality rates were based on standard tables commonly used in the
U.K. life insurance industry, namely the AM80 table for male lives and the AF80
table for female lives.
Withdrawal Assumptions
Withdrawal charges on deferred annuities generally ranged from 1% to 7%,
grading to zero over a period of up to 7 years.
Note 9. Statutory Financial Information and Restrictions
LPAL is regulated by the Jersey Financial Services Commission ("JFSC") and
under Article 6 of the Insurance Business (Jersey) Law 1996 is permitted to
conduct long-term insurance business. The JFSC requires LPAL to submit annual
audited financial statements (prepared under U.S. GAAP which is permitted), and
an audited annual filing in the format consistent with that required by the
Financial Services Authority in the United Kingdom. The annual filing submitted
by LPAL to the JFSC must be accompanied by a Certificate from the Appointed
Actuary that based on sufficiently prudent assumptions, assets are sufficient to
cover all liabilities. The annual filing contains a report from the Appointed
Actuary on the matching of investments to liabilities.
The JFSC sets out the conditions with which LPAL must comply and determines
the reporting requirements and the frequency of reporting. These conditions
require that: (i) LPAL must hold, at all times, approved assets at least equal
to the long-term insurance fund plus the required minimum solvency margin, (ii)
the margin of solvency must be the greater of (pound)50,000 or 2.5% of the value
of the long-term business fund, and (iii) assets equal to not less than 90% of
liabilities must be placed with approved independent custodians. As of December
31, 2004, LPAL met all of these conditions.
50
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
LPAL is also required under the insurance laws to appoint an actuary. The
actuary must be qualified as defined under Jersey law and is required to
supervise the long-term insurance fund. No transfers, except in satisfaction of
long-term insurance business liabilities, including dividends, are permitted
from the long-term insurance fund without written consent from the actuary.
Note 10. Income Taxes
The Group is subject to taxation on its income in all countries in which it
operates based upon the taxable income arising in each country. However,
realized gains on certain investments are exempt from Jersey and Guernsey
taxation. This and other tax benefits which may not recur have reduced the tax
charge in 2004, 2003 and 2002.
The Group is subject to income tax in Jersey at a rate of 20%. In the
United States, the Group is subject to both federal and California taxes charged
at rates up to 34% and 8.84%, respectively.
A breakdown of the Group's book income (loss) from continuing operations
before income taxes by tax jurisdiction follows:
Years Ended December 31,
-------------------------------------
2004 2003 2002
----------- ----------- -----------
(In thousands)
Income (loss) from continuing operations before income taxes:
Jersey, Guernsey and United Kingdom.......................................... $ (11,049) $ 2,570 $ (52,804)
United States................................................................ (802) (1,523) (1,674)
----------- ----------- -----------
Total income (loss) from continuing operations before income taxes........... $ (11,851) $ 1,047 $ (54,478)
----------- ----------- -----------
----------- ----------- -----------
51
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The provision for income taxes differs from the amount computed by applying
the Jersey, Channel Islands statutory income tax rate of 20% to income (loss)
from continuing operations before income taxes. The sources and tax effects of
the difference are as follows:
Years Ended December 31,
-------------------------------------
2004 2003 2002
----------- ----------- -----------
(In thousands)
Income taxes computed at Jersey statutory income tax rate of 20%............. $ (2,370) $ 209 $ (10,896)
Realized and unrealized investment losses (gains) not subject to taxation
in Jersey................................................................. 1,412 (474) 4,880
Other losses not deductible in Jersey........................................ 619 896 2,664
Losses not deductible (income not taxable) in Guernsey....................... 144 (962) 2,970
Taxes on income (benefits on losses) at higher than 20% statutory
Jersey rate:
Net income (loss) on continuing operations in the U.S..................... (183) (348) (382)
Adjustment of prior years' provisions........................................ (308) (33) (1,542)
Increase in valuation allowance.............................................. 941 47,962 23,958
Less: valuation allowance related to discontinued operations................. - (52,238) (20,768)
Utilization of U.S. capital loss carryforwards for which a full valuation
allowance had been provided in prior years................................ - 4,100 -
Other........................................................................ 35 846 407
----------- ----------- -----------
Actual tax expense (benefit) for continuing operations ...................... $ 290 $ (42) $ 1,291
----------- ----------- -----------
----------- ----------- -----------
The components of the actual tax expense (benefit) for continuing
operations are as follows:
Years Ended December 31,
-------------------------------------
2004 2003 2002
----------- ----------- -----------
(In thousands)
Jersey, Guernsey and United Kingdom:
Current tax benefit....................................................... $ - $ (33) $ (671)
Deferred tax expense...................................................... - - -
United States:
Current tax expense (benefit)............................................. 290 (9) (903)
Deferred tax expense...................................................... - - 2,865
----------- ----------- -----------
Total actual tax expense (benefit)........................................... $ 290 $ (42) $ 1,291
----------- ----------- -----------
----------- ----------- -----------
The components of the actual tax expense (benefit) for discontinued
operations are as follows:
Years Ended December 31,
-------------------------------------
2004 2003 2002
----------- ----------- -----------
(In thousands)
United States:
Current tax expense (benefit)............................................. $ - $ 38 $ (8,159)
Deferred tax expense...................................................... - - 3,216
----------- ----------- -----------
$ - $ 38 $ (4,943)
----------- ----------- -----------
----------- ----------- -----------
52
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Group recognizes assets and liabilities for the deferred tax
consequences of temporary differences between the tax basis of assets and
liabilities and their reported amounts in the financial statements. These
temporary differences will result in taxable or deductible amounts in future
years when the reported amounts of assets and liabilities are recovered or
settled. The deferred income tax assets are reviewed periodically for
recoverability and valuation allowances are provided as necessary. Deferred
income tax assets and liabilities are disclosed net in the consolidated
financial statements when they arise within the same tax jurisdiction and tax
return.
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets and deferred income tax liabilities
are presented below. As of both December 31, 2003 and December 31, 2004, full
valuation allowances were provided on the net deferred tax assets of both U.S.
tax groups due to the uncertainty of generating future taxable income or capital
gains to benefit from the deferred tax assets.
December 31,
------------------------
2004 2003
----------- -----------
(In thousands)
U.S. subsidiaries (continuing operations):
Deferred income tax assets:
Net operating loss carryforwards.................................................. $ 9,061 $ 8,082
Capital loss carryforwards........................................................ 67,283 67,288
Unrealized losses on investments.................................................. 7 -
Deferred compensation............................................................. 7 9
Other assets...................................................................... 2 53
Valuation allowance............................................................... (76,323) (75,382)
----------- -----------
Deferred income tax assets, net of valuation allowance............................ 37 50
Deferred income tax liabilities:
Deferred capital gains............................................................ (36) -
Depreciation, amortization and other.............................................. (1) -
Other liabilities ................................................................ - (50)
----------- -----------
(37) (50)
----------- -----------
Net deferred income tax assets - U.S. subsidiaries
(continuing operations)........................................................ $ - $ -
----------- -----------
----------- -----------
As of December 31, 2004, the U.S. subsidiaries of continuing operations had
pre-tax federal net operating loss carryforwards of approximately $22.8 million
expiring as follows: approximately $1.3 million in 2011, and approximately $21.5
million from 2020 to 2024. These subsidiaries have California net operating loss
carryforwards of approximately $14.8 million expiring from 2012 to 2014. In
addition, these subsidiaries have federal capital loss carryforwards of $157.3
million ($156.0 million for California purposes) that expire in 2007. The Group
has recorded a full valuation allowance for the deferred tax assets arising from
these carryforward amounts as of December 31, 2004.
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. On September 29, 2004, new legislation was
passed which
53
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. In November 2004, the Group
filed amended tax returns for 1998 and 1999 in which it made an election to take
an 80% dividends received deduction on qualified dividends received from its
life insurance subsidiary. The Group paid additional California taxes of
$283,000 plus interest of $105,000. In January 2005, the FTB acknowledged
receipt of the amended tax returns and the additional taxes and interest paid,
and informed the Group that based on the FTB's calculations, the Group is due a
refund of approximately $4,000.
Note 11. Shareholders' Equity
The Company has authorized 86,400,000 Ordinary Shares with a par value of
$0.05 per share. As of December 31, 2004 and 2003, there were 64,439,073
Ordinary Shares issued and outstanding.
No dividends were declared and paid in 2003 or 2004. A final dividend for
2001 was declared and paid during 2002 of $0.05 gross per Ordinary Share ($0.04
net of 20% Jersey tax) and $0.40 per ADS (net of 20% Jersey tax), or $2,032,000,
in total.
Accumulated other comprehensive income (loss) consists of two components,
foreign currency translation adjustments and net unrealized gains and losses on
available-for-sale securities. Accumulated foreign currency translation
adjustments were $(338,000), $(429,000) and $(717,000) as of December 31, 2004,
2003 and 2002, respectively. The net unrealized gains (losses) on
available-for-sale securities after deferred policy acquisition cost
amortization adjustments and income taxes were $36,000, $(10,000) and
$(1,896,000) as of December 31, 2004, 2003 and 2002, respectively. None of these
amounts related to discontinued operations.
The Group has two share incentive plans as described in Note 14 "Share
Incentive Plans." Under the terms of these plans, shares of the Company may be
purchased in the open market and held in trust. These shares are owned by the
employee benefit trusts, which are subsidiaries of the Company for financial
reporting purposes.
Changes in the number of shares held by The London Pacific Group 1990
Employee Share Option Trust ("ESOT") and the Agent Loyalty Opportunity Trust
("ALOT") were as follows:
Years Ended December 31,
-----------------------------------------------------------------------
2004 2003 2002
--------------------- ----------------------- ---------------------
ESOT ALOT ESOT ALOT ESOT ALOT
--------- --------- --------- --------- --------- ---------
(In thousands)
Shares held as of January 1........... 13,247 438 13,247 438 12,260 438
Purchased............................. - - - - - -
Exercised............................. - - - - (13) -
--------- --------- --------- --------- --------- ---------
Shares held as of December 31......... 13,247(1) 438 13,247(1) 438 13,247(1) 438
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
(1) 834,000 shares are held in ADR form.
54
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Warrants
On November 11, 2002, the Company agreed to grant 1,933,172 warrants to
subscribe for the Company's Ordinary Shares to Bank of Scotland in connection
with the extension of the Group's credit facility (which was fully repaid and
terminated in June 2003). The warrants were granted on February 14, 2003 and
have an exercise price of (pound)0.1143 (based on the average of the closing
prices of the Ordinary Shares over the trading days from November 1, 2002
through November 11, 2002), which was higher than the market price of
(pound)0.09 on November 11, 2002. These warrants are exercisable at any time
prior to February 14, 2010 and their fair value was determined to be $251,125,
based on a risk-free rate of 2.80%, volatility of 179% and a dividend yield of
zero. The Company recognized $30,625 of expense relating to these warrants in
2002. The balance of $220,500 was recognized as an expense in 2003, with the
corresponding entries to additional paid-in capital.
Note 12. Commitments and Contingencies
Lease Commitments
The Group leases office equipment under a capital lease with an original
term in excess of one year. The Group also leases office space under operating
leases. Total rent expense on operating leases in the continuing operations was
$288,000, $407,000 and $400,000 for the years ended December 31, 2004, 2003 and
2002, respectively.
Future minimum lease payments required under capital and non-cancellable
operating leases with terms of one year or more, as of December 31, 2004, were
as follows:
Capital Operating
Leases Leases(1)
----------- -----------
(In thousands)
2005.............................................................................. $ 7 $ 212
2006.............................................................................. - 128
2007.............................................................................. - 129
2008.............................................................................. - 128
2009.............................................................................. - 129
2010 and thereafter .............................................................. - 64
----------- -----------
Total............................................................................. 7 $ 790
-----------
-----------
Less amounts representing interest................................................ -
-----------
Present value of net minimum lease payments....................................... $ 7
-----------
-----------
(1) Includes commitments related to the Group's Jersey office lease which expires in September 2010. Management
is currently evaluating sublease options as well as alternative office space in Jersey for which no commitment has
been entered into as of the date of filing of this Form 10-K.
Commitments eliminated following the disposals of BCM and LPA during 2003
(as described in Note 3 "Discontinued Operations") for operating and capital
lease commitments were approximately $1.9 million and $0.1 million,
respectively.
55
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Guarantees
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others - an interpretation of FASB
Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34." The
following is a summary of the Company's agreements that the Company has
determined are within the scope of FIN 45.
Under its Memorandum and Articles of Association, the Company has agreed to
indemnify its officers and directors for certain events or occurrences arising
as a result of the officer or director serving in such capacity. The maximum
potential amount of future payments the Company could be required to make under
these indemnification agreements is unlimited. However, the Company maintains
directors and officers liability insurance that limits the Company's exposure
and enables it to recover a portion of any future amounts paid. As a result of
its insurance coverage, the Company believes the estimated fair value of these
indemnification agreements is minimal and has no liabilities recorded for these
agreements as of December 31, 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
December 31, 2004.
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,
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 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. This matter has now been resolved as discussed above in Note 10 "Income
Taxes."
As discussed above in Note 1 "Material Events" and in Note 6 "Cash Held in
Escrow," on March 8, 2005, the Company was made aware of a complaint filed by
SunGard and SunGard's claim for indemnification with respect to alleged losses
in an amount equal to at least $7.2 million resulting from, among other things,
alleged breaches of representations and warranties contained in the sale and
purchase agreement. After consultation with its legal advisors, the Group's
management believes that this claim is without merit, and the Group will defend
the matter vigorously. As such, no provision for this contingent liability has
been included in the Group's financial statements as of December 31, 2004.
56
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 13. Fair Value of Financial Instruments
Substantially all financial instruments used in the Group's trading and
investing activities are carried at fair value or amounts that approximate fair
value. Fair value is based generally on listed market prices or broker-dealer
price quotations. To the extent that prices are not readily available, estimated
fair value is based on valuation methodologies performed by management, which
evaluate company, industry, geographical and overall equity market factors that
would influence the security's fair value.
With the exception of the fixed maturity securities classified as
held-to-maturity, which are held at amortized cost, the carrying values of the
Group's financial assets are equal to estimated fair value. (The Group did not
hold any fixed maturity securities classified as held-to-maturity as of December
31, 2004 and 2003.)
Considerable judgment is required in interpreting market data used to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that could be realized in a
current market exchange. The use of different market assumptions or estimation
methodologies may have a material effect on the estimated fair value amounts.
The carrying values and estimated fair values of the Group's financial
instruments were as follows:
December 31,
--------------------------------------------------
2004 2003
------------------------ ------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----------- ----------- ----------- -----------
(In thousands)
Financial assets:
Cash and cash equivalents........................ $ 19,495 $ 19,495 $ 14,408 $ 14,408
Cash held in escrow.............................. 1,005 1,005 999 999
Investments:
Fixed maturities:
Available-for-sale........................ 21,377 21,377 25,393 25,393
Equity securities:
Trading................................... 552 552 16,882 16,882
Available-for-sale........................ 850 850 4,262 4,262
Financial liabilities:
Life insurance policy liabilities................ 21,229 20,982 28,054 27,758
The following methods and assumptions were used by the Group in estimating
the fair value of the financial instruments presented:
Cash, Cash Equivalents and Cash Held in Escrow: The carrying amounts
reported in the consolidated balance sheet for these instruments approximated
fair value.
Fixed Maturity Securities: Fair values for actively traded fixed maturity
securities classified as available-for-sale were generally based upon quoted
market prices. Fair values for private corporate debt securities were based on
the results of valuation methodologies performed by management.
57
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Equity Securities:
a) Trading Securities: Fair values for equity securities classified as trading
were based on quoted market prices.
b) Available-for-Sale Securities: Fair values for equity securities classified
as available-for-sale were based upon the results of management's valuation
methodologies, including analysis of company, industry, geographical and overall
equity market factors which influence fair value.
Life Insurance Policy Liabilities: The balance sheet caption "life insurance
policy liabilities" includes investment-type insurance contracts (i.e., deferred
annuities). The estimated fair values of deferred annuity policies were based on
their account values after deduction of surrender charges.
Note 14. Share Incentive Plans
The Group has two share incentive plans for employees, agents and directors
of Berkeley Technology Limited and its subsidiaries that provide for the
issuance of share options and stock appreciation rights.
Employee Share Option Trust
The London Pacific Group 1990 Employee Share Option Trust ("ESOT"), which
was approved by shareholders in 1990, provides for the granting of share options
to employees and directors. The objectives of this plan include retaining the
best personnel and providing for additional performance incentives. Options are
generally granted with an exercise price equal to the fair market value of the
underlying shares at the date of grant. Such grants to employees are generally
exercisable in four equal annual installments beginning one year from the date
of grant, subject to employment continuation, and expire seven or ten years from
the date of grant. Such grants to directors are fully vested on the date of
grant and expire seven or ten years from the date of the grant.
The ESOT may purchase shares of the Company in the open market, funded each
year by a loan from the Company or its subsidiaries. While the loan is limited
up to an annual maximum of 5% of the consolidated net assets of the Group, the
ESOT is not limited as to the number of options that may be granted. The loan is
secured by the shares held in the trust, is interest free, and is eliminated in
the consolidated financial statements. The ESOT has waived its entitlement to
dividends on any shares held. See Note 11 "Shareholders' Equity" for a summary
of the share activity within the ESOT.
Share option activity for the years ended December 31, 2004, 2003 and 2002
was as follows:
2004 2003 2002
------------------------ ------------------------ ------------------------
Weighted- Weighted- Weighted-
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
(Options in thousands) Options Price Options Price Options Price
----------- ----------- ----------- ----------- ----------- -----------
Outstanding as of January 1...................... 8,945 $ 3.10 13,575 $ 3.10 13,263 $ 4.59
Granted.......................................... - - - - 5,165 0.32
Exercised........................................ - - - - (13) 3.26
Forfeited........................................ (2,005) 3.46 (2,517) 3.12 (4,496) 4.35
Expired.......................................... - - (2,113) 3.09 (344) 2.42
----------- ----------- ----------- ----------- ----------- -----------
Outstanding as of December 31.................... 6,940 $ 3.00 8,945 $ 3.10 13,575 $ 3.10
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
58
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2004 2003 2002
------------------------ ------------------------ ------------------------
Weighted- Weighted- Weighted-
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
(Options in thousands) Options Price Options Price Options Price
----------- ----------- ----------- ----------- ----------- -----------
Options exercisable as of December 31............ 5,685 $ 3.57 7,046 $ 3.82 9,297 $ 4.13
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
The Group accounts for stock based compensation using the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees."
See Note 2 "Summary of Significant Accounting Policies" for a
reconciliation of net income (loss) as reported and as adjusted under SFAS 123.
Summary information about the Group's share options outstanding as of
December 31, 2004 is as follows:
Options Outstanding Options Exercisable
------------------------------------------------- --------------------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ------------ --------------- ----------- ------------ --------------- -----------
(In thousands) (Years) (In thousands)
$ 0.10 - $0.50 2,770 7.58 $0.32 1,535 $0.33
0.51 - 5.00 1,925 1.48 3.37 1,925 3.37
5.01 - 10.00 2,165 6.24 5.42 2,145 5.42
10.01 - 21.00 80 5.68 21.00 80 21.00
- -------------------- ------------- ----------- ------------ --------------- ------------
$ 0.10 -$21.00 6,940 5.45 $3.00 5,685 $3.57
- -------------------- ------------- ----------- ------------ --------------- ------------
- -------------------- ------------- ----------- ------------ --------------- ------------
Agent Loyalty Opportunity Trust
The Agent Loyalty Opportunity Trust ("ALOT") provides for the granting of
stock appreciation rights ("SARs") on the Company's Ordinary Shares to agents of
LPLA. The ALOT was established in 1997 without shareholders' approval. Each
award unit entitles the holder to cash compensation equal to the difference
between the Company's prevailing share price and the exercise price. The award
units are exercisable in four equal annual installments commencing on the first
anniversary of the date of grant and are forfeited upon termination of the
agency contract. Vesting of the award in any given year is also contingent on
the holder of the award surpassing a predetermined benchmark tied to sales and
persistency. The SARs expire seven years from the date of grant. Given that LPLA
is in liquidation (see Note 3 "Discontinued Operations" and Note 12 "Commitments
and Contingencies"), the status of these awards is unclear.
The ALOT may purchase Ordinary Shares in the open market, funded by a loan
from a Group subsidiary. The loan is secured by the shares held in the trust and
bears interest based upon the trust's net income before interest for each
financial period. The trust receives dividends on all Ordinary Shares held. The
loan, interest income and dividend income are eliminated in the consolidated
financial statements. See Note 3 "Discontinued Operations' Equity" for a summary
of the share activity within the ALOT.
59
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SAR activity for the years ended December 31, 2004, 2003 and 2002 was as
follows:
2004 2003 2002
------------------------ ------------------------ ------------------------
Weighted- Weighted- Weighted-
Number Average Number Average Number Average
of Award Exercise of Award Exercise of Award Exercise
(Award units in thousands) Units Price units Price Units Price
----------- ----------- ----------- ----------- ----------- -----------
Outstanding as of January 1...................... 388 $ 3.73 388 $ 3.73 404 $ 3.73
Granted.......................................... - - - - - -
Exercised........................................ - - - - - -
Forfeited........................................ - - - - (16) 3.88
Expired.......................................... (98) 3.35 - - - -
----------- ----------- ----------- ----------- ----------- -----------
Outstanding as of December 31.................... 290 $ 3.85 388 $ 3.73 388 $ 3.73
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Award units exercisable as of December 31........ 187 $ 3.76 284 $ 3.62 284 $ 3.62
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Summary information about the Group's SARs outstanding as of December 31,
2004 is as follows:
Award Units Outstanding Award Units Exercisable
------------------------------------------------- -----------------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ------------------ --------------- ----------- ------------ -------------- ------------
(In thousands) (Years) (In thousands)
$ 3.35 211 0.25 $3.35 145 $3.35
5.19 79 1.28 5.19 42 5.19
- ------------------- --------------- ---------- ------------- -------------- ------------
$3.35 - $5.19 290 0.53 $3.85 187 $3.76
- ------------------- --------------- ---------- ------------- -------------- ------------
- ------------------- --------------- ---------- ------------- -------------- ------------
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation, an Interpretation of APB Opinion No. 25," which was
effective for all awards granted after July 1, 2000.
Compensation expense relating to award grants in the ALOT was accounted for
under APB 25, prior to the issuance of FIN 44. Thus, no expense was recognized
at the grant dates because all awards were made with an exercise price equal to
the prevailing market value. Instead, compensation expense would be recognized
upon exercise of the awards; however, no awards have been exercised since 2001.
60
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 15. Pension Plans
Jersey Plan
Until early 2004, the Group provided a defined benefit pension plan for its
Jersey, Channel Islands, employees. This plan was terminated and the plan assets
were to be distributed to the participants of the plan on a pro rata basis to
their accrued benefit entitlements under the plan. The plan will be dissolved
when the final participant is paid their pro rata amount, expected to be by the
end of March 2005. The Group will not have any ongoing liabilities in respect of
the plan following its dissolution.
The Group made contributions of $15,000, $148,000 and $731,000 to the trust
in 2004, 2003 and 2002, respectively. Assets held by the trust were $2,272,000
as of December 31, 2003.
U.K. Plan
The Group provides a defined contribution plan for its U.K. employees.
There is currently one participant in the plan. The Group has no ongoing
liabilities associated with the plan. Contributions of $49,000, $41,000 and
$143,000 were made by the Group to the plan in 2004, 2003 and 2002,
respectively. Of the 2002 contribution, $94,000 was offset by a salary waiver.
Note 16. Earnings Per Share and ADS
Earnings (loss) per ADS are equivalent to ten times earnings (loss) per
Ordinary Share, following the one-for-ten reverse split in June 2002.
A reconciliation of the numerators and denominators for the basic and
diluted earnings (loss) per share calculations in accordance with Statement of
Financial Accounting Standard No. 128 ("SFAS 128"), "Earnings per Share," is as
follows:
Years Ended December 31,
-------------------------------------
2004 2003 2002
----------- ----------- -----------
(In thousands, except share, per share
and ADS amounts)
Income (loss) from continuing operations............................... $ (12,141) $ 1,089 $ (55,769)
Income (loss) on discontinued operations............................... - 9,927 (149,735)
----------- ----------- -----------
Net income (loss)...................................................... $ (12,141) $ 11,016 $ (205,504)
----------- ----------- -----------
----------- ----------- -----------
61
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31,
-------------------------------------
2004 2003 2002
----------- ----------- -----------
(In thousands, except share, per share
and ADS amounts)
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 50,753,084
----------- ----------- -----------
Basic earnings (loss) per share:
Continuing operations.................................................. $ (0.24) $ 0.02 $ (1.10)
Discontinued operations................................................ - 0.20 (2.95)
----------- ----------- -----------
$ (0.24) $ 0.22 $ (4.05)
----------- ----------- -----------
----------- ----------- -----------
Basic earnings (loss) per ADS:
Continuing operations.................................................. $ (2.39) $ 0.21 $ (10.99)
Discontinued operations................................................ - 1.96 (29.50)
----------- ----------- -----------
$ (2.39) $ 2.17 $ (40.49)
----------- ----------- -----------
----------- ----------- -----------
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 50,753,084
Effect of dilutive securities (warrants and employee share options) ... - 433,706 -
----------- ----------- -----------
Weighted-average number of Ordinary Shares used in diluted
earnings per share calculations..................................... 50,754,192 51,187,898 50,753,084
----------- ----------- -----------
----------- ----------- -----------
Diluted earnings (loss) per share:
Continuing operations.................................................. $ (0.24) $ 0.02 $ (1.10)
Discontinued operations................................................ - 0.20 (2.95)
----------- ----------- -----------
$ (0.24) $ 0.22 $ (4.05)
----------- ----------- -----------
----------- ----------- -----------
Diluted earnings (loss) per ADS:
Continuing operations.................................................. $ (2.39) $ 0.21 $ (10.99)
Discontinued operations................................................ - 1.94 (29.50)
----------- ----------- -----------
$ (2.39) $ 2.15 $ (40.49)
----------- ----------- -----------
----------- ----------- -----------
As the Company recorded a net loss for the years ended December 31, 2004
and 2002, the calculations of diluted earnings per share for these years do not
include potentially dilutive employee share options and warrants issued to the
Bank of Scotland as they are anti-dilutive and, if included, would have resulted
in a reduction of the net loss per share. If the Company had reported net income
for the years ended December 31, 2004 and 2002, there would have been an
additional 650,913 and 347,258 shares, respectively, included in the
calculations of diluted earnings per share for these years.
62
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 17. Transactions with Related Parties
The Group paid legal fees of approximately $36,000, $76,000 and $130,000
during 2004, 2003 and 2002, respectively, to a law firm of which one of its
directors, Victor A. Hebert, is a member.
Note 18. Business Segment and Geographical Information
The Company's reportable operating segments are classified according to its
remaining businesses of life insurance and annuities, and venture capital and
consulting.
Due to the sales of BCM and LPA in 2003 (see Note 1 "Material Events"), the
results of operations of the Company's asset management and financial advisory
segments (up to their disposal dates) have been classified as discontinued
operations for the years ended December 31, 2003 and 2002. Due to the loss of
control of LPLA (see Note 3 "Discontinued Operations"), the results of
operations of LPLA (through June 30, 2002) have been included in discontinued
operations for the year ended December 31, 2002.
Intercompany transfers between reportable operating segments are accounted
for at prices which are designed to be representative of unaffiliated third
party transactions. During the year ended December 31, 2002, the venture capital
and consulting segment generated portfolio management fees from LPLA
(discontinued operations) of $2,908,000. These portfolio management fees are
included in the revenues of continuing operations and have not been eliminated
in the consolidated financial statements. These management fees were approved by
the insurance regulatory body in LPLA's U.S. state of domicile.
The venture capital and consulting segment recorded net realized investment
losses in the amount of $1,603,000 during 2002 related to intersegmental
investment sales to the life insurance and annuities segment. These net realized
investment losses were offset by a corresponding reclassification adjustment in
unrealized investment gains and losses on trading securities for the same
amount. These gains and losses have been eliminated in the Company's
consolidated financial statements.
Summary revenue and investment gain (loss) information by geographic
segment, based on the domicile of the Group company generating those revenues,
is as follows:
Years Ended December 31,
-------------------------------------
2004 2003 2002
----------- ----------- -----------
(In thousands)
Jersey................................................................. $ (5,715) $ 4,220 $ (22,517)
Guernsey............................................................... (720) 4,926 (13,636)
United States.......................................................... 676 52 2,816
----------- ----------- -----------
Consolidated revenues and net investment gains (losses)
for continuing operations.......................................... $ (5,759) $ 9,198 $ (33,337)
----------- ----------- -----------
----------- ----------- -----------
63
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Total assets by geographic segment were as follows:
December 31,
------------------------
2004 2003
----------- -----------
(In thousands)
Jersey............................................................................. $ 37,273 $ 50,677
Guernsey........................................................................... 14 3,408
United States...................................................................... 7,420 9,428
----------- -----------
Consolidated total assets - continuing operations.................................. $ 44,707 $ 63,513
----------- -----------
- ----------- -----------
Revenues and income (loss) before income taxes for the Company's reportable
operating segments included in continuing operations, based on management's
internal reporting structure, were as follows:
Years Ended December 31,
-------------------------------------
2004 2003 2002
----------- ----------- -----------
(In thousands)
Revenues:
Life insurance and annuities (1)....................................... $ (5,759) $ 4,458 $ (9,349)
Venture capital and consulting (2)..................................... (125) 4,687 (24,519)
----------- ----------- -----------
(5,884) 9,145 (33,868)
Reconciliation of segment amounts to consolidated amounts:
Interest and other fee income.......................................... 125 53 531
----------- ----------- -----------
Consolidated revenues and net investment gains and losses
for continuing operations.......................................... $ (5,759) $ 9,198 $ (33,337)
----------- ----------- -----------
----------- ----------- -----------
Income (loss) from continuing operations before income taxes:
Life insurance and annuities (1)....................................... $ (8,091) $ 1,577 $ (19,637)
Venture capital and consulting (2)..................................... (1,365) 3,571 (28,149)
----------- ----------- -----------
(9,456) 5,148 (47,786)
Reconciliation of segment amounts to consolidated amounts:
Interest and other fee income.......................................... 125 53 531
Corporate expenses..................................................... (2,415) (3,478) (5,869)
Goodwill write-offs.................................................... - - (389)
Interest expense....................................................... (105) (676) (965)
----------- ----------- -----------
Consolidated income (loss) from continuing operations
before income taxes................................................ $ (11,851) $ 1,047 $ (54,478)
----------- ----------- -----------
----------- ----------- -----------
(1) Netted against the revenues (investment income) of the life insurance and annuities segment are management fees
paid to BCM (discontinued operations) of $5,000 and $39,000 in 2003 and 2002, respectively.
(2) Included in the revenues of the venture capital and consulting segment are management fees from LPLA (discontinued operations)
of $2,908,000 in 2002.
64
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Assets attributable to each of the Company's reportable operating segments,
based on management's reporting structure, were as follows:
December 31,
------------------------
2004 2003
----------- -----------
(In thousands)
Assets:
Life insurance and annuities....................................................... $ 33,142 $ 47,929
Venture capital and consulting..................................................... 92 3,442
Corporate and other................................................................ 11,473 12,142
----------- -----------
Consolidated total assets - continuing operations.................................. $ 44,707 $ 63,513
----------- -----------
----------- -----------
Note 19. Selected Quarterly Financial Information (Unaudited)
Unaudited quarterly financial information (in thousands, except per share
and ADS amounts) is as follows:
2004
---------------------------------------------------------------
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
----------- ----------- ----------- ----------- -----------
Continuing operations:
Revenues including net investment gains (losses)........ $ (5,021) $ 2,081 $ (2,498) $ (321) $ (5,759)
Income (loss) before income taxes....................... (6,683) 478 (3,913) (1,733) (11,851)
Net income (loss)....................................... (6,690) 195 (3,913) (1,733) (12,141)
Basic earnings (loss) per share:
Continuing operations................................... $ (0.13) $ - $ (0.08) $ (0.03) $ (0.24)
Discontinued operations................................. - - - - -
----------- ----------- ----------- ----------- -----------
$ (0.13) $ - $ (0.08) $ (0.03) $ (0.24)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Basic earnings (loss) per ADS:
Continuing operations................................... $ (1.32) $ 0.04 $ (0.77) $ (0.34) $ (2.39)
Discontinued operations................................. - - - - -
----------- ----------- ----------- ----------- -----------
$ (1.32) $ 0.04 $ (0.77) $ (0.34) $ (2.39)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Diluted earnings (loss) per share:
Continuing operations................................... $ (0.13) $ - $ (0.08) $ (0.03) $ (0.24)
Discontinued operations................................. - - - - -
----------- ----------- ----------- ----------- -----------
$ (0.13) $ - $ (0.08) $ (0.03) $ (0.24)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Diluted earnings (loss) per ADS:
Continuing operations................................... $ (1.32) $ 0.04 $ (0.77) $ (0.34) $ (2.39)
Discontinued operations................................. - - - - -
----------- ----------- ----------- ----------- -----------
$ (1.32) $ 0.04 $ (0.77) $ (0.34) $ (2.39)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
65
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2003
---------------------------------------------------------------
First Second Third Fourth Full
Quarter (1) Quarter Quarter Quarter Year
----------- ----------- ----------- ----------- -----------
Continuing operations:
Revenues including net investment gains (losses)........ $ 1,524 $ 7,829 $ (4,617) $ 4,462 $ 9,198
Income (loss) before income taxes....................... (865) 5,448 (6,349) 2,813 1,047
Net income (loss)....................................... (872) 5,443 (6,346) 2,864 1,089
Discontinued operations:
Net (income) loss....................................... (982) 10,909 - - 9,927
Total continuing and discontinued operations:
Net (income) loss....................................... (1,854) 16,352 (6,346) 2,864 11,016
Basic earnings (loss) per share:
Continuing operations................................... $ (0.02) $ 0.11 $ (0.13) $ 0.06 $ 0.02
Discontinued operations................................. (0.02) 0.21 - - 0.20
----------- ----------- ----------- ----------- -----------
$ (0.04) $ 0.32 $ (0.13) $ 0.06 $ 0.22
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Basic earnings (loss) per ADS:
Continuing operations................................... $ (0.17) $ 1.07 $ (1.25) $ 0.56 $ 0.21
Discontinued operations................................. (0.20) 2.15 - - 1.96
----------- ----------- ----------- ----------- -----------
$ (0.37) $ 3.22 $ (1.25) $ 0.56 $ 2.17
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Diluted earnings (loss) per share:
Continuing operations................................... $ (0.02) $ 0.11 $ (0.13) $ 0.06 $ 0.02
Discontinued operations................................. (0.02) 0.21 - - 0.20
----------- ----------- ----------- ----------- -----------
$ (0.04) $ 0.32 $ (0.13) $ 0.06 $ 0.22
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Diluted earnings (loss) per ADS:
Continuing operations................................... $ (0.13) $ 1.05 $ (1.25) $ 0.56 $ 0.21
Discontinued operations................................. (0.20) 2.13 - - 1.94
----------- ----------- ----------- ----------- -----------
$ (0.37) $ 3.19 $ (1.25) $ 0.56 $ 2.15
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
(1) Reclassifications have been made related to discontinued operations - see Note 3.
Due to the method required by SFAS 128 to calculate per share and ADS
amounts, the quarterly per share and ADS amounts do not total to the full year
per share and ADS amounts.
66
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
BDO International and BDO Seidman, LLP were appointed by the Board of
Directors as the Company's independent auditors with effect from July 31, 2002.
BDO International transferred their business from a partnership to a limited
liability partnership ("LLP") with effect from January 1, 2004. All non-U.S.
audit services are now provided by BDO Stoy Hayward, LLP, who were re-appointed
as the Company's auditors on January 28, 2004.
Item 9A. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in our filings under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the periods specified in the rules and forms of the SEC. Such
information is accumulated and communicated to our management, including our
chief executive officer and chief financial officer, as appropriate, to allow
timely decisions regarding required disclosure. Our management, including the
chief executive officer and the chief financial officer, recognizes that any set
of controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives.
As of the end of the period covered by this annual report on Form 10-K, we
carried out an evaluation, under the supervision and with the participation of
our management, including our chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on this evaluation, our chief executive officer
and chief financial officer concluded that our disclosure controls and
procedures were effective as of the end of the period covered by this annual
report on Form 10-K.
There were no changes in our internal controls over financial reporting
during the quarter ended December 31, 2004 that materially affected, or that
could reasonably likely materially affect, our internal controls over financial
reporting.
PART III
Certain information required by Part III is omitted from this Form 10-K and
is incorporated by reference to our definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on August 10, 2005 (the "Proxy Statement"),
which will be filed with the SEC not later than 120 days after the end of the
fiscal year covered by this Form 10-K.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are as follows:
Arthur I. Trueger, Executive Chairman: Mr. Trueger, age 56, is the founder
and a principal shareholder of Berkeley Technology Limited. He has worked for us
for more than 28 years and holds A.B., M.A. and J.D. degrees from the University
of California.
Ian K. Whitehead, Chief Financial Officer: Mr. Whitehead, age 50, has held
the position of Chief Financial Officer of Berkeley Technology Limited since he
joined us in 1990. Mr. Whitehead is a member of the Institute of Chartered
Accountants in England and Wales.
Information regarding our directors is incorporated by reference to the
sections entitled "Proposal 2 - Election of Director" and "Board of Directors
and Committees" in the Proxy Statement.
67
Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, is incorporated by reference to the section
entitled "Other Information About Directors and Executive Officers" in the Proxy
Statement.
Information regarding our Code of Ethics, adopted on November 12, 2003, is
incorporated by reference to the section entitled "Code of Ethics" in the Proxy
Statement.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
sections entitled "Executive Compensation" and "Directors' Compensation" in our
Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information regarding security ownership of certain beneficial owners
and management is incorporated by reference to the section entitled "Information
Regarding Beneficial Ownership of Principal Shareholders, Directors and
Executive Officers" in our Proxy Statement.
The following table is a summary of selected information for our equity
compensation plans as of December 31, 2004.
Number of Shares
Number of Shares to Weighted-Average Remaining Available for
be Issued Upon Exercise Exercise Price of Future Issuance Under
of Outstanding Options, Outstanding Options, Equity Compensation
Warrants and Rights Warrants and Rights Plans
----------------------- -------------------- ----------------------
Equity compensation plans
approved by shareholders............. 6,939,500 (1) $3.00 (1)
Equity compensation plans not
approved by shareholders............. 290,500 (1) 3.85 (1)
--------------- --------
Total................................... 7,230,000 $3.03
--------------- --------
--------------- --------
(1) Our equity compensation plans do not contain a limit on the number of options that may be granted to employees.
However, the plans do not allow for the issuance of previously authorized and unissued shares to meet the obligations
of the plans upon an employee option exercise. When an option is granted, the trust that administers the plan borrows
funds from us or one of our subsidiaries and uses those funds to purchase the number of shares underlying the option grant.
The maximum loan allowed in any given year is equal to 5% of consolidated net assets as of the end of the previous fiscal year.
Information regarding the features of the equity compensation plan not
approved by shareholders is incorporated by reference to Note 14 to the
Consolidated Financial Statements in Item 8 of this Form 10-K.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
section entitled "Other Information About Directors and Executive Officers" in
our Proxy Statement.
68
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference to the
section entitled "Report of the Audit Committee of the Board of Directors" in
our Proxy Statement.
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as a part of this Form 10-K:
1. Financial Statements: Page
The following consolidated financial statements of us and subsidiaries are included in Item 8:
Reports of Independent Certified Public Accountants.......................................... 26
Consolidated Balance Sheets as of December 31, 2004 and 2003................................. 27
Consolidated Statements of Operations for the Years Ended
December 31, 2004, 2003 and 2002......................................................... 28
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004, 2003 and 2002......................................................... 30
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended
December 31, 2004, 2003 and 2002......................................................... 32
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2004, 2003 and 2002......................................................... 33
Notes to the Consolidated Financial Statements............................................... 34
2. Financial Statement Schedules:
The following financial statement schedules of Berkeley Technology Limited and subsidiaries are included in this
Form 10-K immediately following Item 15 and should be read in conjunction with the consolidated financial statements
and notes thereto included in Item 8:
Schedule I - Summary of Investments - Other Than Investments in Related
Parties.................................................................................. 74
Schedule II - Condensed Financial Information of Registrant
Condensed Balance Sheets as of December 31, 2004 and 2003................................ 75
Condensed Statements of Operations for the Years Ended
December 31, 2004, 2003 and 2002...................................................... 76
Condensed Statements of Cash Flows for the Years Ended
December 31, 2004, 2003 and 2002...................................................... 77
Note to Condensed Financial Statements................................................... 78
Schedule III - Supplementary Insurance Information........................................... 79
69
All other financial statement schedules required by Regulation S-X have
been omitted because they are not applicable or the required information is
included in the applicable consolidated financial statements or notes thereto in
Item 8 "Financial Statements and Supplementary Data" of this Form 10-K.
3. Exhibits:
The following exhibits of Berkeley Technology Limited and subsidiaries are
filed herewith or incorporated by reference as indicated below:
Exhibit
Number Description
- -------- -----------------
3.(I).1 Memorandum and Articles of Association of Berkeley Technology Limited,
as amended and restated on April 18, 2000 (filed previously as Exhibit
3.(I) to our Form 10-Q for the quarter ended June 30, 2000).
3.(I).2 Certificate of Incorporation on Change of Name dated June 12, 2003
(filed previously as Exhibit 3.(I).2 to our Form 10-K for the year
ended December 31, 2003).
4.1 Specimen Ordinary Share certificate (filed previously as Exhibit 4.1
to our Form 10-K for the year ended December 31, 2000).
4.2 Form of Deposit Agreement dated September 25, 1992, as amended and
restated as of November 24, 1993, as further amended and restated as
of March 14, 2000, among us, The Bank of New York as Depositary, and
all Owners and Holders from time to time of American Depositary
Receipts issued thereunder (filed previously as Exhibit A to our
Registration Statement on Form F-6 (Registration No. 333-11658) dated
March 14, 2000).
4.3 Letter Agreement dated August 25, 1992 between The Bank of New York
and us covering the Basic Administration Charge relating to the
Deposit Agreement (shown above as Exhibit 4.2) (filed previously as
Exhibit 3.8 to our Post-Effective Amendment No. 2 to our Registration
Statement on Form 20-F/A dated August 31, 1993).
4.4 Form of Deposit Agreement as amended and restated as of June 24, 2002,
among us, The Bank of New York as Depositary, and all Owners and
Holders from time to time of American Depositary Receipts issued
thereunder (filed previously as Exhibit 4.4 to our Form 10-Q for the
quarter ended June 30, 2002).
4.5 Warrant Agreement dated February 14, 2003 between us and the Governor
and Company of the Bank of Scotland relating to the Term Loan and
Guarantee Facility dated December 20, 2002 (filed previously as
Exhibit 4.5 to our Form 10-Q for the quarter ended March 31, 2003).
4.6 Specimen Ordinary Share certificate, as amended on June 12, 2003
(filed previously as Exhibit 4.6 to our Form 10-K for the year ended
December 31, 2003).
10.1.1 Multicurrency Term Facility Agreement dated May 2, 2000 between us and
the Governor and Company of the Bank of Scotland (filed previously as
Exhibit 10.1.1 to our Form 10-Q for the quarter ended September 30,
2000).
10.1.2 Term Loan and Guarantee Facility of up to $23,000,000, dated December
20, 2002 between us and the Governor and Company of the Bank of
Scotland (filed previously as Exhibit 10.1.2 to our Form 10-K for the
year ended December 31, 2002).
70
10.1.3 Stock Pledge Agreement dated January 29, 2003 between Berkeley
International Capital Limited and the Governor and Company of the Bank
of Scotland, relating to the Term Loan and Guarantee Facility dated
December 20, 2002 (filed previously as Exhibit 10.1.3 to our Form 10-Q
for the quarter ended March 31, 2003).
10.1.4 Stock Pledge Agreement dated February 7, 2003 between Berkeley
International Capital Limited and the Governor and Company of the Bank
of Scotland, relating to the Term Loan and Guarantee Facility dated
December 20, 2002 (filed previously as Exhibit 10.1.4 to our Form 10-Q
for the quarter ended March 31, 2003).
10.1.5 Stock Pledge Agreement dated February 19, 2003 between Berkeley (USA)
Holdings Limited and the Governor and Company of the Bank of Scotland,
relating to the Term Loan and Guarantee Facility dated December 20,
2002 (filed previously as Exhibit 10.1.5 to our Form 10-Q for the
quarter ended March 31, 2003).
10.1.6 Security Agreement dated February 28, 2003 between us and the Governor
and Company of the Bank of Scotland relating to the Term Loan and
Guarantee Facility dated December 20, 2002 (filed previously as
Exhibit 10.1.6 to our Form 10-Q for the quarter ended March 31, 2003).
10.2.1 Settlement dated February 16, 1990 among (1) us, (2) John Gerald
Patrick Wheeler and (3) Ian Walter Strang, constituting The London
Pacific Group 1990 Employee Share Option Trust (filed previously as
Exhibit 3.2 to our Post-Effective Amendment No. 2 to Registration
Statement on Form 20-F/A dated August 31, 1993).
10.2.2 Executed Instrument dated March 18, 1994 among (1) John Gerald Patrick
Wheeler, (2) Ian Walter Strang and (3) Richard John Pirouet, relating
to The London Pacific Group 1990 Employee Share Option Trust (filed
previously as Exhibit 3.2.1 to our Annual Report on Form 20-F dated
June 10, 1994).
10.2.3 Executed Instrument dated September 27, 1994 among (1) Ian Walter
Strang, (2) Richard John Pirouet and (3) Clive Aubrey Charles Chaplin,
relating to The London Pacific Group 1990 Employee Share Option Trust
(filed previously as Exhibit 3.2.2 to our Annual Report on Form 20-F
dated June 29, 1995).
10.2.4 Executed Instrument dated March 3, 1995 among (1) Ian Walter Strang,
(2) Richard John Pirouet and (3) Clive Aubrey Charles Chaplin,
relating to The London Pacific Group 1990 Employee Share Option Trust
(filed previously as Exhibit 3.2.3 to our Annual Report on Form 20-F
dated June 29, 1995).
10.2.5 Executed Instrument dated August 22, 1996 among (1) Richard John
Pirouet, (2) Clive Aubrey Charles Chaplin and (3) Ronald William
Green, relating to The London Pacific Group 1990 Employee Share Option
Trust (filed previously as Exhibit 3.2.4 to our Annual Report on Form
20-F dated June 30, 1997).
10.2.6 Executed Instrument dated August 29, 1998 among (1) Richard John
Pirouet, (2) Clive Aubrey Charles Chaplin, (3) Ronald William Green
and (4) Victor Aloysius Hebert, relating to The London Pacific Group
1990 Employee Share Option Trust (filed previously as Exhibit 3.2.5 to
our Annual Report on Form 20-F dated June 30, 1999).
10.2.7 Executed Instrument dated May 31, 2000 among (1) Richard John Pirouet,
(2) Clive Aubrey Charles Chaplin, (3) Ronald William Green and (4)
Victor Aloysius Hebert, relating to The London Pacific Group 1990
Employee Share Option Trust (filed previously as Exhibit 10.2.1 to our
Form 10-Q for the quarter ended September 30, 2000).
71
10.2.8 Executed Instrument dated May 31, 2000 among (1) Richard John Pirouet,
(2) Clive Aubrey Charles Chaplin, (3) Ronald William Green, (4) Victor
Aloysius Hebert and (5) Christopher Byrne, relating to The London
Pacific Group 1990 Employee Share Option Trust (filed previously as
Exhibit 10.2.2 to our Form 10-Q for the quarter ended September 30,
2000).
10.3.1(1) Agreement dated July 1, 1990 between us and Ian Kenneth Whitehead
(filed previously as Exhibit 10.3.1 to our Form 10-K for the year
ended December 31, 2000).
10.3.2(1) London Pacific Advisers Limited Retirement Scheme confirmation dated
December 5, 2000 for Ian Kenneth Whitehead (filed previously as
Exhibit 10.3.3 to our Form 10-K for the year ended December 31, 2001).
10.4.1 Settlement dated May 23, 1997 among BG Services Limited and A.L.O.T.
Trustee Limited establishing Agent Loyalty Opportunity Trust (filed
previously as Exhibit 10.4.1 to our Form 10-K for the year ended
December 31, 2001).
10.4.2 Executed Deed dated July 16, 1997 by A.L.O.T. Trustee Limited relating
to Agent Loyalty Opportunity Trust (filed previously as Exhibit 10.4.2
to our Form 10-K for the year ended December 31, 2001).
10.4.3 Executed Deed dated August 13, 1997 by A.L.O.T. Trustee Limited
relating to Agent Loyalty Opportunity Trust (filed previously as
Exhibit 10.4.3 to our Form 10-K for the year ended December 31, 2001).
10.4.4 Executed Deed dated August 20, 1998 by A.L.O.T. Trustee Limited
relating to Agent Loyalty Opportunity Trust (filed previously as
Exhibit 10.4.4 to our Form 10-K for the year ended December 31, 2001).
10.4.5 Executed Deed of Amendment and Appointment dated December 11, 2001
among Berkeley International Capital Limited and A.L.O.T. Trustee
Limited relating to Agent Loyalty Opportunity Trust (filed previously
as Exhibit 10.4.5 to our Form 10-K for the year ended December 31,
2001).
10.5 Asset Purchase Agreement dated March 7, 2003 between Berkeley Capital
Management ("BCM"), Berkeley (USA) Holdings Limited and Berkeley
Capital Management LLC relating to the sale of substantially all of
the assets and operations of BCM (filed previously as Exhibit 10.5 to
our Form 10-Q for the quarter ended March 31, 2003).
10.6 Purchase Agreement, dated May 9, 2003, for the acquisition of London
Pacific Advisory Services, Inc. and London Pacific Securities, Inc. by
SunGard Business Systems Inc. (filed previously as Exhibit 10.6 to our
Form 10-Q for the quarter ended June 30, 2003).
14.1 Code of Ethics (filed previously as Exhibit 14.1 to our Form 10-K for
the year ended December 31, 2003).
21 Subsidiaries of the Company as of March 23, 2005.
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.
72
32.2 Certification by the Company's Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
__________
(1) Management contract or compensatory arrangement filed in response to Item
15(a)(3) of the instructions to Form 10-K.
(b) Our exhibits are listed in Item 15(a)(3) above.
(c) Our financial statement schedules follow on pages 74 through 79.
73
SCHEDULE I - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
As of December 31, 2004
Column A Column B Column C Column D
Amount at
Which Shown
in Consolidated
Fair Balance
Type of Investments Cost (1) Value Sheet (2)
- --------------------------------------------------------------- -------------- -------------- ---------------
(In thousands)
Fixed maturity securities:
Bonds:
United States government and government
agencies and authorities................................... $ - $ - $ -
States, municipalities and political subdivisions............ - - -
Foreign governments.......................................... - - -
Public utilities............................................. - - -
Convertibles and bonds with warrants attached................ - - -
All other corporate bonds.................................... 21,341 21,377 21,377
Redeemable preferred stock...................................... - - -
-------------- -------------- ---------------
Total fixed maturity securities................................. 21,341 $ 21,377 21,377
-------------- -------------- ---------------
--------------
Equity securities:
Common stocks:
Industrial, miscellaneous and all other...................... 592 $ 558 558
Non-redeemable preferred stocks................................. 844 844 844
-------------- -------------- ---------------
Total equity securities......................................... 1,436 $ 1,402 1,402
-------------- -------------- ---------------
--------------
Total investments............................................... $ 22,777 $ 22,779
-------------- ---------------
-------------- ---------------
(1) Cost of fixed maturity securities is original cost, reduced by other-than-temporary impairments, repayments
and adjusted for amortization of premiums and accretion of discounts. Cost of equity securities is original cost,
reduced by other-than-temporary impairments.
(2) Differences between amounts reflected in Column B or Column C and amounts at which shown in the consolidated
balance sheet reflected in Column D result from the application of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Fixed maturity securities are classified as
either available-for-sale or held-to-maturity. Available-for-sale securities are recorded at fair value, with changes
in unrealized gains and losses excluded from net income, but reported net of applicable taxes and adjustments to deferred
policy acquisition cost amortization as a separate component of comprehensive income. Held-to-maturity securities are
recorded at amortized cost.
74
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BERKELEY TECHNOLOGY LIMITED
CONDENSED BALANCE SHEETS
December 31,
--------------------------------
2004 2003
--------------- --------------
(In thousands, except share amounts)
ASSETS
Cash and cash equivalents......................................................... $ 3,943 $ 2,496
Investment in subsidiaries........................................................ (67,677) (57,714)
Intercompany balances............................................................. 87,152 121,636
Other assets...................................................................... 187 247
-------------- --------------
Total assets...................................................................... $23,605 $66,665
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accruals..................................................... $ 379 $ 299
Intercompany balances............................................................. 333 31,469
-------------- --------------
Total liabilities................................................................. 712 31,768
-------------- --------------
Commitments and contingencies
Shareholders' equity:
Ordinary shares, $0.05 par value per share: 86,400,000 shares authorized;
64,439,073 shares issued and outstanding as of December 31, 2004
and 2003....................................................................... 3,222 3,222
Additional paid-in capital........................................................ 68,615 68,615
Retained earnings................................................................. 14,929 27,070
Employee benefit trusts, at cost (13,684,881 shares as of December 31,
2004 and 2003)................................................................. (63,571) (63,571)
Accumulated other comprehensive loss.............................................. (302) (439)
-------------- --------------
Total shareholders' equity........................................................ 22,893 34,897
-------------- --------------
Total liabilities and shareholders' equity........................................ $ 23,605 $ 66,665
-------------- --------------
-------------- --------------
See accompanying Note to Condensed Financial Statements.
75
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
BERKELEY TECHNOLOGY LIMITED
CONDENSED STATEMENTS OF OPERATIONS
Years Ended December 31,
--------------------------------------
2004 2003 2002(1)
----------- ----------- ----------
(In thousands)
Revenues:
Investment income............................................................ $ 44 $ 8 $ 128
Interest and fees from subsidiaries, net (2)................................. - - 307
Net realized investment losses............................................... - (246) (10,827)
----------- ----------- -----------
44 (238) (10,392)
Expenses:
Staff costs.................................................................. 626 833 2,277
Escrow release............................................................... - - (100)
Other operating expenses..................................................... 1,459 2,584 2,840
----------- ----------- -----------
2,085 3,417 5,017
----------- ----------- -----------
Loss before income tax benefit and equity in
undistributed net income (loss) of subsidiaries........................... (2,041) (3,655) (15,409)
Income tax benefit........................................................... - - (683)
----------- ----------- -----------
Loss before equity in undistributed net income (loss) of
subsidiaries.............................................................. (2,041) (3,655) (14,726)
Equity in undistributed net income (loss) of subsidiaries (2)................ (10,100) 14,671 (190,317)
----------- ----------- -----------
Income (loss) from continuing operations..................................... (12,141) 11,016 (205,043)
----------- ----------- -----------
Discontinued operations:
Loss on disposal of discontinued operations, net of income tax
benefit of $0............................................................. - - (461)
----------- ----------- -----------
Loss on discontinued operations.............................................. - - (461)
----------- ----------- -----------
Net income (loss)............................................................ $ (12,141) $ 11,016 $ (205,504)
----------- ----------- -----------
----------- ----------- -----------
(1) Reclassifications have been made related to discontinued operations - see Note 3 to the Consolidated Financial
Statements in Item 8 of Form 10-K for the year ended December 31, 2004.
(2) Eliminated on consolidation.
See accompanying Note to Condensed Financial Statements.
76
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
BERKELEY TECHNOLOGY LIMITED
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
---------------------------------------
2004 2003 2002(1)
----------- ----------- -----------
(In thousands)
Cash flows from continuing operating activities:
Net income (loss)............................................................ $ (12,141) $ 11,016 $ (205,043)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Equity in undistributed net (income) loss of subsidiaries.................... 10,100 (14,671) 190,317
Net realized investment losses............................................... - 246 10,827
Taxes........................................................................ - - (2,162)
Other operating cash flows................................................... 140 489 (532)
----------- ----------- -----------
Net cash used in operating activities ....................................... (1,901) (2,920) (6,593)
----------- ----------- -----------
Cash flows from investing activities:
Payment of guarantee obligations............................................. - (10,836) -
Advances to subsidiaries..................................................... (195) (144) -
----------- ----------- -----------
Net cash used in investing activities........................................ (195) (10,980) -
----------- ----------- -----------
Cash flows from financing activities:
Dividends paid............................................................... - - (2,032)
Repayments from subsidiaries................................................. 3,543 16,369 155
----------- ----------- -----------
Net cash provided by (used in) financing activities ......................... 3,543 16,369 (1,877)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents......................... 1,447 2,469 (8,470)
Cash and cash equivalents at beginning of year............................... 2,496 27 8,497
----------- ----------- -----------
Cash and cash equivalents at end of year..................................... $ 3,943 $ 2,496 $ 27
----------- ----------- -----------
----------- ----------- -----------
(1) Reclassifications have been made related to discontinued operations - see Note 3 to the Consolidated Financial
Statements in Item 8 of Form 10-K for the year ended December 31, 2004.
See accompanying Note to Condensed Financial Statements.
77
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
BERKELEY TECHNOLOGY LIMITED
NOTE TO CONDENSED FINANCIAL STATEMENTS
Note 1. Basis of Presentation and Significant Accounting Policies
The accompanying financial statements comprise a condensed presentation of
financial position, results of operations and cash flows of Berkeley Technology
Limited (the "Company") on a separate company basis. These condensed financial
statements do not include the accounts of the Company's subsidiaries, but
instead include the Company's investment in those subsidiaries, stated at
amounts which are equal to the Company's equity in the subsidiaries' net assets.
The consolidated financial statements of the Company and its subsidiaries are
included in Item 8 of this Form 10-K for the year ended December 31, 2004.
Additional information about the significant accounting policies applied by
the Company and its subsidiaries is included in Note 2 to the Consolidated
Financial Statements in Item 8 of this Form 10-K for the year ended December 31,
2004.
78
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
Life Insurance and Annuities Segment (Continuing Operations)
Years Ended/As of December 31,
---------------------------------------
2004 2003 2002(1)
----------- ----------- -----------
(In thousands)
Deferred policy acquisition costs.......................................... $ - $ - $ -
Future policy benefits, losses, claims and loss expenses (2)............... 21,229 28,054 35,441
Unearned premiums.......................................................... N/A N/A N/A
Other policy claims and benefits payable (2)............................... - - -
Premium revenue (3)........................................................ 4 6 1,155
Net investment income (4).................................................. 1,295 1,834 6,060
Benefits, claims, losses and settlement expenses........................... N/A N/A N/A
Amortization of deferred policy acquisition costs.......................... - - 2,952
Other operating expenses................................................... 974 959 1,294
Premiums written........................................................... N/A N/A N/A
- ---------------------------
(1) Reclassifications have been made related to discontinued operations - see Note 3 to the Consolidated Financial
Statements in Item 8 of this Form 10-K for the year ended December 31, 2004.
(2) For additional disclosure regarding life insurance policy liabilities, see Note 8 to the Consolidated Financial
Statements in Item 8 of this Form 10-K for the year ended December 31, 2004.
(3) Insurance policy charges.
(4) Expenses related to the management and administration of investments have been netted with investment income in the
determination of net investment income.
79
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BERKELEY TECHNOLOGY LIMITED
(Registrant)
By /s/ Arthur I. Trueger
Date: March 23, 2005 Arthur I. Trueger
Executive Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Arthur I. Trueger
Date: March 23, 2005 Arthur I. Trueger
Executive Chairman
(Principal Executive Officer)
/s/ Ian K. Whitehead
Date: March 23, 2005 Ian K. Whitehead
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Victor A. Hebert
Date: March 23, 2005 Victor A. Hebert
Deputy Chairman and Non-Executive Director
/s/ Harold E. Hughes, Jr.
Date: March 23, 2005 Harold E. Hughes, Jr.
Non-Executive Director
/s/ Trenchard
Date: March 23, 2005 The Viscount Trenchard
Non-Executive Director
80
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
EXHIBIT INDEX FOR THE ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2004
Exhibit
Number Description
- ------- -----------------
3.(I).1 Memorandum and Articles of Association of Berkeley Technology Limited,
as amended and restated on April 18, 2000 (filed previously as Exhibit
3.(I) to our Form 10-Q for the quarter ended June 30, 2000).
3.(I).2 Certificate of Incorporation on Change of Name dated June 12, 2003
(filed previously as Exhibit 3.(I).2 to our Form 10-K for the year
ended December 31, 2003).
4.1 Specimen Ordinary Share certificate (filed previously as Exhibit 4.1
to our Form 10-K for the year ended December 31, 2000).
4.2 Form of Deposit Agreement dated September 25, 1992, as amended and
restated as of November 24, 1993, as further amended and restated as
of March 14, 2000, among us, The Bank of New York as Depositary, and
all Owners and Holders from time to time of American Depositary
Receipts issued thereunder (filed previously as Exhibit A to our
Registration Statement on Form F-6 (Registration No. 333-11658) dated
March 14, 2000).
4.3 Letter Agreement dated August 25, 1992 between The Bank of New York
and us covering the Basic Administration Charge relating to the
Deposit Agreement (shown above as Exhibit 4.2) (filed previously as
Exhibit 3.8 to our Post-Effective Amendment No. 2 to our Registration
Statement on Form 20-F/A dated August 31, 1993).
4.4 Form of Deposit Agreement as amended and restated as of June 24, 2002,
among us, The Bank of New York as Depositary, and all Owners and
Holders from time to time of American Depositary Receipts issued
thereunder (filed previously as Exhibit 4.4 to our Form 10-Q for the
quarter ended June 30, 2002).
4.5 Warrant Agreement dated February 14, 2003 between us and the Governor
and Company of the Bank of Scotland relating to the Term Loan and
Guarantee Facility dated December 20, 2002 (filed previously as
Exhibit 4.5 to our Form 10-Q for the quarter ended March 31, 2003).
4.6 Specimen Ordinary Share certificate, as amended on June 12, 2003
(filed previously as Exhibit 4.6 to our Form 10-K for the year ended
December 31, 2003).
10.1.1 Multicurrency Term Facility Agreement dated May 2, 2000 between us and
the Governor and Company of the Bank of Scotland (filed previously as
Exhibit 10.1.1 to our Form 10-Q for the quarter ended September 30,
2000).
10.1.2 Term Loan and Guarantee Facility of up to $23,000,000, dated December
20, 2002 between us and the Governor and Company of the Bank of
Scotland (filed previously as Exhibit 10.1.2 to our Form 10-K for the
year ended December 31, 2002).
10.1.3 Stock Pledge Agreement dated January 29, 2003 between Berkeley
International Capital Limited and the Governor and Company of the Bank
of Scotland, relating to the Term Loan and Guarantee Facility dated
December 20, 2002 (filed previously as Exhibit 10.1.3 to our Form 10-Q
for the quarter ended March 31, 2003).
81
10.1.4 Stock Pledge Agreement dated February 7, 2003 between Berkeley
International Capital Limited and the Governor and Company of the Bank
of Scotland, relating to the Term Loan and Guarantee Facility dated
December 20, 2002 (filed previously as Exhibit 10.1.4 to our Form 10-Q
for the quarter ended March 31, 2003).
10.1.5 Stock Pledge Agreement dated February 19, 2003 between Berkeley (USA)
Holdings Limited and the Governor and Company of the Bank of Scotland,
relating to the Term Loan and Guarantee Facility dated December 20,
2002 (filed previously as Exhibit 10.1.5 to our Form 10-Q for the
quarter ended March 31, 2003).
10.1.6 Security Agreement dated February 28, 2003 between us and the Governor
and Company of the Bank of Scotland relating to the Term Loan and
Guarantee Facility dated December 20, 2002 (filed previously as
Exhibit 10.1.6 to our Form 10-Q for the quarter ended March 31, 2003).
10.2.1 Settlement dated February 16, 1990 among (1) us, (2) John Gerald
Patrick Wheeler and (3) Ian Walter Strang, constituting The London
Pacific Group 1990 Employee Share Option Trust (filed previously as
Exhibit 3.2 to our Post-Effective Amendment No. 2 to Registration
Statement on Form 20-F/A dated August 31, 1993).
10.2.2 Executed Instrument dated March 18, 1994 among (1) John Gerald Patrick
Wheeler, (2) Ian Walter Strang and (3) Richard John Pirouet, relating
to The London Pacific Group 1990 Employee Share Option Trust (filed
previously as Exhibit 3.2.1 to our Annual Report on Form 20-F dated
June 10, 1994).
10.2.3 Executed Instrument dated September 27, 1994 among (1) Ian Walter
Strang, (2) Richard John Pirouet and (3) Clive Aubrey Charles Chaplin,
relating to The London Pacific Group 1990 Employee Share Option Trust
(filed previously as Exhibit 3.2.2 to our Annual Report on Form 20-F
dated June 29, 1995).
10.2.4 Executed Instrument dated March 3, 1995 among (1) Ian Walter Strang,
(2) Richard John Pirouet and (3) Clive Aubrey Charles Chaplin,
relating to The London Pacific Group 1990 Employee Share Option Trust
(filed previously as Exhibit 3.2.3 to our Annual Report on Form 20-F
dated June 29, 1995).
10.2.5 Executed Instrument dated August 22, 1996 among (1) Richard John
Pirouet, (2) Clive Aubrey Charles Chaplin and (3) Ronald William
Green, relating to The London Pacific Group 1990 Employee Share Option
Trust (filed previously as Exhibit 3.2.4 to our Annual Report on Form
20-F dated June 30, 1997).
10.2.6 Executed Instrument dated August 29, 1998 among (1) Richard John
Pirouet, (2) Clive Aubrey Charles Chaplin, (3) Ronald William Green
and (4) Victor Aloysius Hebert, relating to The London Pacific Group
1990 Employee Share Option Trust (filed previously as Exhibit 3.2.5 to
our Annual Report on Form 20-F dated June 30, 1999).
10.2.7 Executed Instrument dated May 31, 2000 among (1) Richard John Pirouet,
(2) Clive Aubrey Charles Chaplin, (3) Ronald William Green and (4)
Victor Aloysius Hebert, relating to The London Pacific Group 1990
Employee Share Option Trust (filed previously as Exhibit 10.2.1 to our
Form 10-Q for the quarter ended September 30, 2000).
10.2.8 Executed Instrument dated May 31, 2000 among (1) Richard John Pirouet,
(2) Clive Aubrey Charles Chaplin, (3) Ronald William Green, (4) Victor
Aloysius Hebert and (5) Christopher Byrne, relating to The London
Pacific Group 1990 Employee Share Option Trust (filed previously as
Exhibit 10.2.2 to our Form 10-Q for the quarter ended September 30,
2000).
82
10.3.1(1) Agreement dated July 1, 1990 between us and Ian Kenneth Whitehead
(filed previously as Exhibit 10.3.1 to our Form 10-K for the year
ended December 31, 2000).
10.3.2(1) London Pacific Advisers Limited Retirement Scheme confirmation dated
December 5, 2000 for Ian Kenneth Whitehead (filed previously as
Exhibit 10.3.3 to our Form 10-K for the year ended December 31, 2001).
10.4.1 Settlement dated May 23, 1997 among BG Services Limited and A.L.O.T.
Trustee Limited establishing Agent Loyalty Opportunity Trust (filed
previously as Exhibit 10.4.1 to our Form 10-K for the year ended
December 31, 2001).
10.4.2 Executed Deed dated July 16, 1997 by A.L.O.T. Trustee Limited relating
to Agent Loyalty Opportunity Trust (filed previously as Exhibit 10.4.2
to our Form 10-K for the year ended December 31, 2001).
10.4.3 Executed Deed dated August 13, 1997 by A.L.O.T. Trustee Limited
relating to Agent Loyalty Opportunity Trust (filed previously as
Exhibit 10.4.3 to our Form 10-K for the year ended December 31, 2001).
10.4.4 Executed Deed dated August 20, 1998 by A.L.O.T. Trustee Limited
relating to Agent Loyalty Opportunity Trust (filed previously as
Exhibit 10.4.4 to our Form 10-K for the year ended December 31, 2001).
10.4.5 Executed Deed of Amendment and Appointment dated December 11, 2001
among Berkeley International Capital Limited and A.L.O.T. Trustee
Limited relating to Agent Loyalty Opportunity Trust (filed previously
as Exhibit 10.4.5 to our Form 10-K for the year ended December 31,
2001).
10.5 Asset Purchase Agreement dated March 7, 2003 between Berkeley Capital
Management ("BCM"), Berkeley (USA) Holdings Limited and Berkeley
Capital Management LLC relating to the sale of substantially all of
the assets and operations of BCM (filed previously as Exhibit 10.5 to
our Form 10-Q for the quarter ended March 31, 2003).
10.6 Purchase Agreement, dated May 9, 2003, for the acquisition of London
Pacific Advisory Services, Inc. and London Pacific Securities, Inc. by
SunGard Business Systems Inc. (filed previously as Exhibit 10.6 to our
Form 10-Q for the quarter ended June 30, 2003).
14.1 Code of Ethics (filed previously as Exhibit 14.1 to our Form 10-K for
the year ended December 31, 2003).
21 Subsidiaries of the Company as of March 23, 2005.
31.1 Certification by the Company's Executive Chairman pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification by the Company's Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification by the Company's Executive Chairman pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification by the Company's Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
____________
(1) Management contract or compensatory arrangement filed in response to Item
15(a)(3) of the instructions to Form 10-K.
83