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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 0-21874
Berkeley Technology Limited
(Exact name of registrant as specified in its charter)
______________________
Jersey, Channel Islands Not applicable
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
Minden House, 6 Minden Place
St. Helier, Jersey JE2 4WQ
Channel Islands
(Address of principal executive offices)
(Zip Code)
011 44 (1534) 607700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ____ No |X|
As of May 13, 2005, the registrant had outstanding 64,439,073 Ordinary
Shares, par value $0.05 per share.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Page
Item 1. Financial Statements:
Unaudited Condensed Consolidated Balance Sheets as of March 31, 2005 and
December 31, 2004............................................................................ 3
Unaudited Condensed Consolidated Statements of Operations for the three months
ended March 31, 2005 and 2004................................................................ 4
Unaudited Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2005 and 2004................................................................ 5
Unaudited Consolidated Statement of Changes in Shareholders' Equity for the three months
ended March 31, 2005......................................................................... 6
Unaudited Consolidated Statements of Comprehensive Income for the three months
ended March 31, 2005 and 2004................................................................ 7
Notes to Unaudited Condensed Consolidated Financial Statements................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 24
Item 4. Controls and Procedures.......................................................................... 25
PART II
OTHER INFORMATION
Item 1. Legal Proceedings................................................................................ 26
Item 6. Exhibits......................................................................................... 26
Signature ................................................................................................. 27
Exhibit Index............................................................................................... 28
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
March 31, December 31,
2005 2004
------------ ------------
ASSETS
Investments (principally of life insurance subsidiary):
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $24,087 and $21,341
as of March 31, 2005 and December 31, 2004, respectively).................. $ 24,033 $ 21,377
Held-to-maturity, at amortized cost (fair value: $8,220 and $0
as of March 31, 2005 and December 31, 2004, respectively).................. 8,289 -
Equity securities:
Trading, at fair value (cost: $102 and $586 as of March 31, 2005
and December 31, 2004, respectively)....................................... 46 552
Available-for-sale, at estimated fair value (cost: $850 as of
March 31, 2005 and December 31, 2004)...................................... 850 850
------------ ------------
Total investments................................................................. 33,218(1) 22,779
Cash and cash equivalents......................................................... 6,498(1) 19,495
Cash held in escrow............................................................... 1,009 1,005
Accrued investment income......................................................... 1,017 737
Other assets...................................................................... 502 691
------------ ------------
Total assets...................................................................... $ 42,244 $ 44,707
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Life insurance policy liabilities................................................. $ 19,891 $ 21,229
Accounts payable and accruals..................................................... 700 585
------------ ------------
Total liabilities................................................................. 20,591 21,814
------------ ------------
Commitments and contingencies (see Note 6)
Shareholders' equity:
Ordinary shares, $0.05 par value per share: 86,400,000 shares authorized;
64,439,073 shares issued and outstanding as of March 31, 2005 and
December 31, 2004.............................................................. 3,222 3,222
Additional paid-in capital........................................................ 67,660 68,615
Retained earnings................................................................. 13,770 14,929
Employee benefit trusts, at cost (13,522,381 and 13,684,881 shares
as of March 31, 2005 and December 31, 2004, respectively)...................... (62,598) (63,571)
Accumulated other comprehensive loss.............................................. (401) (302)
------------ ------------
Total shareholders' equity........................................................ 21,653 22,893
------------ ------------
Total liabilities and shareholders' equity........................................ $ 42,244 $ 44,707
------------ ------------
------------ ------------
(1) Includes $24,877 of investments and $5,596 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 Unaudited Condensed
Consolidated Financial Statements.
3
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share and ADS amounts)
Three Months Ended
March 31,
------------ ------------
2005 2004
------------ ------------
Revenues:
Investment income................................................................. $ 397 $ 357
Insurance policy charges.......................................................... - 2
Consulting and other fee income................................................... 143 97
Net realized investment losses.................................................... (43) (644)
Change in net unrealized investment gains and losses on trading securities........ (22) (4,833)
------------ ------------
475 (5,021)
Expenses:
Amounts credited on insurance policyholder accounts............................... 290 384
Operating expenses................................................................ 1,339 1,278
------------ ------------
1,629 1,662
------------ ------------
Loss before income tax expense.................................................... (1,154) (6,683)
Income tax expense................................................................ 5 7
------------ ------------
Net loss.......................................................................... $ (1,159) $ (6,690)
------------ ------------
------------ ------------
Basic and diluted loss per share and ADS:
Basic and diluted loss per share.................................................. $ (0.02) $ (0.13)
------------ ------------
------------ ------------
Basic and diluted loss per ADS.................................................... $ (0.23) $ (1.32)
------------ ------------
------------ ------------
See accompanying Notes which are an integral part of these Unaudited Condensed
Consolidated Financial Statements.
4
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
March 31,
------------ ------------
2005 2004
------------ ------------
Net cash provided by (used in) operating activities............................... $ (171) $ 113
Cash flows from investing activities:
Purchases of held-to-maturity fixed maturity securities........................... (8,510) -
Purchases of available-for-sale fixed maturity securities......................... (5,122) -
Purchases of available-for-sale equity securities................................. - (15)
Proceeds from maturity of held-to-maturity fixed maturity securities.............. 200 -
Proceeds from sale and maturity of available-for-sale fixed maturity securities... 1,911 3,098
Other investing cash flows........................................................ - (2)
------------ ------------
Net cash provided by (used in) investing activities............................... (11,521) 3,081
------------ ------------
Cash flows from financing activities:
Insurance policyholder benefits paid.............................................. (1,309) (4,137)
Proceeds from disposal of shares by the employee benefit trusts................... 18 -
------------ ------------
Net cash used in financing activities............................................. (1,291) (4,137)
------------ -----------
Net decrease in cash and cash equivalents......................................... (12,983) (943)
Cash and cash equivalents at beginning of period (1).............................. 19,495 14,408
Foreign currency translation adjustment........................................... (14) 79
------------ ------------
Cash and cash equivalents at end of period (1), (2)............................... $ 6,498 $ 13,544
------------ ------------
------------ ------------
(1) Does not include $1,009 of cash held in escrow as of March 31, 2005.
(2) The amount for March 31, 2005 includes $5,596 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 Unaudited Condensed
Consolidated Financial Statements.
5
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
Accumulated
Other
Ordinary Shares Additional Employee Compre- Total
-------------------- Paid-in Retained Benefit hensive Shareholders'
Number Amount Capital Earnings Trusts Loss Equity
--------- --------- ---------- ---------- ---------- ----------- ----------
Balance as of
December 31, 2004............ 64,439 $ 3,222 $ 68,615 $ 14,929 $ (63,571) $ (302) $ 22,893
Net loss........................ - - - (1,159) - - (1,159)
Exercise of employee share
options, including income
tax effect................... - - (955) - 973 - 18
Change in net unrealized
gains and losses on
available-for-sale securities - - - - - (90) (90)
Foreign currency translation
adjustment................... - - - - - (9) (9)
--------- --------- ---------- ---------- ---------- ----------- ----------
Balance as of
March 31, 2005............... 64,439 $ 3,222 $ 67,660 $ 13,770 $ (62,598) $ (401) $ 21,653
--------- --------- ---------- ---------- ---------- ----------- ----------
--------- --------- ---------- ---------- ---------- ----------- ----------
See accompanying Notes which are an integral part of these Unaudited Condensed
Consolidated Financial Statements.
6
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three Months Ended
March 31,
------------ ------------
2005 2004
------------ ------------
Net loss.......................................................................... $ (1,159) $ (6,690)
Other comprehensive income (loss), net of deferred income taxes:
Foreign currency translation adjustments, net of income taxes of $0............... (9) 53
Change in net unrealized gains and losses:
Unrealized holding gains and losses on available-for-sale securities........... (88) (8)
Reclassification adjustment for gains and losses included in net loss.......... (2) (6)
Deferred income taxes.......................................................... - -
------------ ------------
Other comprehensive income (loss)................................................. (99) 39
------------ ------------
Comprehensive loss................................................................ $ (1,258) $ (6,651)
------------ ------------
------------ ------------
See accompanying Notes which are an integral part of these Unaudited Condensed
Consolidated Financial Statements.
7
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
As used herein, the terms "registrant," "Company," "we," "us" and "our"
refer to Berkeley Technology Limited. Except as the context otherwise requires,
the term "Group" refers collectively to the registrant and its subsidiaries.
Note 1. Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated financial statements are unaudited
and have been prepared by the Company in conformity with United States generally
accepted accounting principles ("U.S. GAAP"). These unaudited condensed
consolidated financial statements include the accounts of the Company, its
subsidiaries, the Employee Share Option Trust ("ESOT") and the Agent Loyalty
Opportunity Trust ("ALOT"). Significant subsidiaries included in the operations
of the Group and discussed in this document include London Pacific Assurance
Limited ("LPAL") and Berkeley International Capital Corporation ("BICC"). All
intercompany transactions and balances have been eliminated in consolidation.
Certain information and note disclosures normally included in the Company's
annual consolidated financial statements have been condensed or omitted. In the
opinion of management, the unaudited condensed consolidated financial statements
reflect all adjustments (consisting of normal recurring accruals) which are
necessary for a fair statement of the results for the interim periods presented.
While the Company's management believes that the disclosures presented are
adequate to make the information not misleading, these unaudited condensed
consolidated financial statements should be read in conjunction with the audited
financial statements and related notes for the year ended December 31, 2004,
which are contained in the Company's Annual Report on Form 10-K, filed with the
U.S. Securities and Exchange Commission ("SEC") on March 23, 2005. The December
31, 2004 condensed balance sheet data was derived from audited financial
statements but does not include all disclosures required by U.S. GAAP.
The results for the three month period ended March 31, 2005 are not
indicative of the results to be expected for the full fiscal year.
The unaudited condensed consolidated balance sheets are presented in an
unclassified format as the majority of the Group's assets relate to its life
insurance and annuities business. The Group's other business is venture capital
and consulting.
The Company is incorporated under the laws of Jersey, Channel Islands. Its
Ordinary Shares are traded on the London Stock Exchange and in the U.S. on the
Over-the-Counter Bulletin Board in the form of American Depositary Shares
("ADSs"), which are evidenced by American Depositary Receipts ("ADRs"). Pursuant
to the regulations of the SEC, the Company is considered a U.S. domestic
registrant and must file financial statements prepared under U.S. GAAP.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of these unaudited condensed consolidated financial
statements as well as the reported amount of revenues and expenses during this
reporting period. Actual results could differ from these estimates. Certain
estimates such as fair value and actuarial assumptions have a significant impact
on the gains and losses recorded on investments and balance of life insurance
policy liabilities.
8
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Share Incentive Plan
The Company accounts for stock based compensation issued to employees in
accordance with Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees," and related interpretations, which
recognizes compensation expense based upon the intrinsic value of the stock
options as of the date of grant. The Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 123 ("SFAS
123"), "Accounting for Stock Based Compensation," which encourages, but does not
require, companies to recognize compensation expense for grants of stock options
based on their fair value. The Company has elected, as permitted by SFAS 123, to
adopt the disclosure requirement of SFAS 123 and to continue to account for
stock based compensation under APB 25.
Had compensation expense for the Company's ESOT activity been determined
based upon the fair value method in accordance with SFAS 123, the Company's
consolidated net loss and loss per share and ADS would have been increased or
decreased to the pro forma amounts as reflected below:
Three Months Ended
March 31,
------------ ------------
2005 2004
------------ ------------
(In thousands, except per
share and ADS amounts)
Net loss as reported.............................................................. $ (1,159) $ (6,690)
Add: Stock based employee compensation expense included in
reported 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..... 56(1) (49)
------------ ------------
Pro forma net loss................................................................ $ (1,103) $ (6,739)
------------ ------------
------------ ------------
Basic and diluted loss per share:
As reported....................................................................... (0.02) (0.13)
Pro forma......................................................................... (0.02) (0.13)
Basic and diluted loss per ADS:
As reported....................................................................... (0.23) (1.32)
Pro forma......................................................................... (0.22) (1.33)
(1) Compensation expense was negative for the three month period ended March 31, 2005 due to the reversal of $85,000 in
compensation expense recognized in prior periods primarily related to the forfeiture during the first quarter of 2005
of all of the unvested and out-of-the-money vested options held by employees who terminated employment during the first
quarter of 2005.
The pro forma disclosures shown above were calculated for all options
granted after December 31, 1994 using a Black-Scholes option pricing model. No
option grants were made during 2004 or in the first quarter of 2005.
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
9
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
awards of equity instruments, based on the grant date fair value of those
awards, in the financial statements. 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. On April 14, 2005, the SEC approved a new rule that delays the
effective date of SFAS 123R. Under the SEC's rule, SFAS 123R is now effective
for the Company beginning January 1, 2006. The Company has not yet determined
which of the aforementioned adoption methods it will use.
Emerging Issues Task Force Issue No. 03-1 ("EITF 03-1"), "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments," was
issued and is effective March 31, 2004. EITF 03-1 provides guidance for
determining the meaning of "other-than-temporarily impaired" and its application
to certain debt and equity securities within the scope of Statement of Financial
Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments
in Debt and Equity Securities," and investments accounted for under the cost
method. The guidance requires that investments which have declined in value due
to credit concerns or solely due to changes in interest rates must be recorded
as other-than-temporarily impaired unless the Company can assert and demonstrate
its intention to hold the security for a period of time sufficient to allow for
a recovery of fair value up to or beyond the cost of the investment which might
mean maturity. This issue also requires disclosures assessing the ability and
intent to hold investments in instances in which an investor determines that an
investment with a fair value less than cost is not other-than-temporarily
impaired. On September 30, 2004, the FASB decided to delay the effective date
for the measurement and recognition guidance contained in EITF 03-1. This delay
does not suspend the requirement to recognize other-than-temporary impairments
as required by existing authoritative literature. The disclosure guidance in
EITF 03-1 was not delayed. Management continues to closely monitor the effect of
implementing EITF 03-1, but does not believe the Group has any
"other-than-temporarily impaired" securities at March 31, 2005. As of that date,
75% of the Group's $32.3 million in fixed maturity securities will mature by
March 31, 2006 and it is management's intent to hold these securities to
maturity.
Note 2. 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 Bank of Scotland in
connection with the Company's bank facility (now terminated), which are also
considered potential common stock under SFAS 128. Diluted earnings per share is
calculated by dividing net income by the weighted-average number of Ordinary
Shares outstanding during the applicable period as adjusted for these
potentially dilutive options and warrants which are determined based on the
"Treasury Stock Method." As the Company recorded a net loss for both of the
three month periods ended March 31, 2005 and 2004, the calculations of diluted
loss per share for these periods do not include potentially dilutive employee
share options and warrants issued to the Bank of Scotland as they are
anti-dilutive and, if included, would have resulted in a reduction of the net
loss per share. If the Company had reported net income for both of the three
month periods ended March 31, 2005 and 2004, there would have been an additional
117,139 and 862,058 shares, respectively, included in the calculations of
diluted earnings per share for these periods.
10
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of the numerators and denominators for the basic and
diluted earnings (loss) per share calculations is as follows:
Three Months Ended
March 31,
------------ ------------
2005 2004
------------ ------------
(In thousands, except share,
per share and ADS amounts)
Net loss.......................................................................... $ (1,159) $ (6,690)
------------ ------------
------------ ------------
Basic and diluted loss per share and ADS:
Weighted average number of Ordinary Shares outstanding,
excluding shares held by the employee benefit trusts............................ 50,916,692 50,754,192
------------ ------------
Basic and diluted loss per share.................................................. $ (0.02) $ (0.13)
------------ ------------
------------ ------------
Basic and diluted loss per ADS.................................................... $ (0.23) $ (1.32)
------------ ------------
------------ ------------
Note 3. Investments
The Group's investments consist of fixed maturity and equity securities.
Fixed maturity securities are classified as either available-for-sale or
held-to-maturity, and equity securities are classified as either trading or
available-for-sale. The investments are accounted for as follows:
i) available-for-sale securities are recorded at fair value, with changes
in unrealized gains and losses excluded from net income, but reported
net of applicable income taxes and adjustments to deferred policy
acquisition cost amortization as a separate component of accumulated
other comprehensive income;
ii) held-to-maturity securities are recorded at amortized cost unless
these securities become other-than-temporarily impaired; and
iii) trading securities are recorded at fair value with changes in
unrealized gains and losses included in net income.
When a quoted market price is available for a security, the Group uses this
price to determine fair value. If a quoted market price is not available for a
security, management estimates the security's fair value based on appropriate
valuation methodologies.
For a discussion of the Company's accounting policies with respect to the
determination of fair value of investments and other-than-temporary impairments,
see the section entitled "Critical Accounting Policies" in Part I, Item 2
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" below. The Group's private securities primarily consist of
convertible preferred stock holdings in technology companies. Management
periodically reviews financial information with respect to the issuers of equity
securities held by the Group. In addition, management maintains contact with the
management of these issuers through ongoing dialogue to examine the issuers'
future plans and prospects.
The Group's fixed maturity securities are principally comprised of U.S. and
non-U.S. corporate debt and U.S. government agency securities. Generally, quoted
market prices are available for these securities.
11
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fixed Maturity Securities
An analysis of fixed maturity securities is as follows:
March 31, 2005 December 31, 2004
-------------------------------------------------- --------------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(In thousands)
Available-for-Sale:
Non-U.S. corporate
debt securities......... $ 18,681 $ 24 $ (29) $ 18,676 $ 19,117 $ 65 $ (29) $ 19,153
Corporate debt securities.. 5,406 - (49) 5,357 2,224 1 (1) 2,224
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
$ 24,087 $ 24 $ (78) $ 24,033 $ 21,341 $ 66 $ (30) $ 21,377
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Held-to-Maturity:
U.S. government agency
securities.............. $ 1,144 $ - $ (1) $ 1,143 $ - $ - $ - $ -
Corporate debt securities.. 7,145 - (68) 7,077 - - - -
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
$ 8,289 $ - $ (69) $ 8,220 $ - $ - $ - $ -
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total fixed maturity
securities.............. $ 32,376 $ 24 $ (147) $ 32,253 $ 21,341 $ 66 $ (30) $ 21,377
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Equity Securities
Equity securities are comprised of available-for-sale and trading
securities. An analysis of equity securities is as follows:
March 31, 2005 December 31, 2004
-------------------------------------------------- --------------------------------------------------
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 $ 850 $ - $ - $ 850
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total available-for-sale
equity securities....... 850 - - 850 850 - - 850
Trading securities......... 102 - (56) 46 586 20 (54) 552
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total equity securities.... $ 952 $ - $ (56) $ 896 $ 1,436 $ 20 $ (54) $ 1,402
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Trading securities are carried at fair value with changes in net unrealized
gains and losses of $(22,000) and $(4,833,000) included in the losses for the
three month periods ended March 31, 2005 and 2004, respectively.
12
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Investment Concentration and Risk
As of March 31, 2005, fixed maturity securities held by the Group included
investments in Ford Motor Credit ("FMC") of $6,106,000 and General Motors
Acceptance Corp. ("GMAC") of $6,097,000. These two corporate issuers represented
more than 10% of shareholders' equity as of March 31, 2005. However, both of
these holdings are short-term: the FMC bonds will mature on February 1, 2006 and
the GMAC bonds will mature on January 15, 2006.
As of March 31, 2005, the Company's Jersey based life insurance subsidiary,
LPAL, owned 74% of the Group's $32.3 million in fixed maturity securities, 99%
of the Group's $0.9 million in available-for-sale private equity securities, and
none of the Group's $46,000 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.
Fixed maturity securities considered less than investment grade
approximated 0.9% of total fixed maturity securities as of March 31, 2005. On
May 5, 2005, one of the two major credit rating agencies in the U.S. downgraded
the long-term credit ratings of Ford Motor Co. and General Motors Corp. As
discussed above, the Group's FMC and GMAC holdings, which total $12.2 million in
aggregate, representing 37.8% of total fixed maturity securities as of March 31,
2005, will mature in early 2006. As the Group intends to hold these securities
to maturity, the Group's management does not believe that the credit rating
downgrades will adversely impact the repayment of principal in full at maturity
of these bonds.
Net Unrealized Gains (Losses) on Available-for-Sale Securities
Net unrealized gains and (losses) on fixed maturity securities classified
as available-for-sale as of March 31, 2005 and December 31, 2004 totaled
$(54,000) and $36,000, respectively. There were no related deferred policy
acquisition cost adjustments or income taxes.
There were no unrealized gains or losses on equity securities classified as
available-for-sale as of March 31, 2005 and December 31, 2004, respectively.
Changes in net unrealized gains and losses on available-for-sale securities
included in other comprehensive income for the period ended March 31, 2005 were
as follows:
Net Unrealized Gains (Losses)
----------------------------------------
Fixed
Maturity Equity
Securities Securities Total
------------ ------------ ------------
(In thousands)
Net unrealized gains on available-for-sale securities as of
December 31, 2004......................................................... $ 36 $ - $ 36
Changes during the three month period ended March 31, 2005:
Unrealized holding gains and losses on available-for-sale securities...... (88) - (88)
Reclassification adjustment for gains and losses included in net
income (loss).......................................................... (2) - (2)
------------ ------------ ------------
Net unrealized losses on available-for-sale securities as of
March 31, 2005............................................................ $ (54) $ - $ (54)
------------ ------------ ------------
------------ ------------ ------------
13
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Realized Gains and Losses
Information about gross and net realized gains and losses on securities
transactions is as follows:
Three Months Ended
March 31,
------------ ------------
2005 2004
------------ ------------
(In thousands)
Realized gains (losses) on securities transactions:
Equity securities, trading:
Gross gains.................................................................... $ 22 $ 1,231
Gross losses................................................................... (65) -
------------ ------------
Net realized gains (losses) on equity securities, trading......................... (43) 1,231
------------ ------------
Equity securities, available-for-sale:
Gross losses................................................................... - (1,875)
------------ ------------
Net realized investment losses on securities transactions......................... $ (43) $ (644)
------------ ------------
------------ ------------
Note 4. Cash Held in Escrow
Cash held in escrow consists of the proceeds from the sale of London
Pacific Advisors ("LPA") to SunGard Business Systems Inc. ("SunGard") 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. 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
is defending the matter vigorously. See Part II, Item 1 "Legal Proceedings"
below for further information. 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 5. Other Assets
An analysis of other assets is as follows:
March 31, December 31,
2005 2004
------------ ------------
(In thousands)
Property, equipment and leasehold improvements, net............................... $ 59 $ 70
Prepayments....................................................................... 325 422
Receivables:
Fee income receivable.......................................................... 93 175
Other receivables ............................................................. 25 24
------------ ------------
Total other assets................................................................ $ 502 $ 691
------------ ------------
------------ ------------
14
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 6. Commitments and Contingencies
As previously disclosed in the Company's 2002, 2003 and 2004 audited
consolidated financial statements, and notes thereto, included in the Company's
Annual Report on Form 10-K for each of those years, the Company's primary
insurance company, London Pacific Life & Annuity Company ("LPLA"), in August
2002 was placed under regulatory control and rehabilitation based on LPLA's
statutory capital and surplus as of June 30, 2002. On July 9, 2004, a court
order was issued approving a plan of liquidation for LPLA and also approving
exchange agreements which give policyholders the option of exchanging their
existing policies for new policies in another insurance company. In the course
of the administration of LPLA in rehabilitation, in November 2002, the North
Carolina Department of Insurance ("NCDOI") requested information concerning the
history of a limited number of investments in securities of portfolio companies.
These portfolio investments have been associated with LPLA for more than seven
years, and involve intercompany transfers. The history of their investment
performance and ownership is complex. 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.
As discussed above in Note 4 "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 is defending the matter vigorously.
As such, no provision for this contingent liability has been included in the
Group's financial statements as of March 31, 2005, nor has the Company made any
reserve against the $1.0 million held in escrow. See Part II, Item 1 "Legal
Proceedings" below for further information.
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 March 31, 2005.
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
March 31, 2005.
15
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7. Business Segment and Geographical Information
The Company's reportable operating segments are classified according to its
businesses of life insurance and annuities, and venture capital and consulting.
Intercompany transfers between reportable operating segments are accounted
for at prices which are designed to be representative of unaffiliated third
party transactions.
Summary revenue and investment gain (loss) information by geographic
segment, based on the domicile of the Group company generating those revenues,
is as follows:
Three Months Ended
March 31,
------------ ------------
2005 2004
------------ ------------
(In thousands)
Jersey............................................................................ $ 310 $ (4,400)
Guernsey.......................................................................... 15 (731)
United States..................................................................... 150 110
------------ ------------
Consolidated revenues and net investment gains and losses......................... $ 475 $ (5,021)
------------ ------------
------------ ------------
Revenues and income (loss) before income tax expense for the Company's
reportable operating segments, based on management's internal reporting
structure, were as follows:
Three Months Ended
March 31,
------------ ------------
2005 2004
------------ ------------
(In thousands)
Revenues and net investment gains and losses:
Life insurance and annuities ..................................................... $ 296 $ (4,405)
Venture capital management........................................................ 98 (642)
------------ ------------
394 (5,047)
Reconciliation of segment amounts to consolidated amounts:
Interest and other fee income .................................................... 81 26
------------ ------------
Consolidated revenues and net investment gains and losses......................... $ 475 $ (5,021)
------------ ------------
------------ ------------
Loss before income taxes:
Life insurance and annuities ..................................................... $ (433) $ (5,045)
Venture capital management........................................................ (211) (971)
------------ ------------
(644) (6,016)
Reconciliation of segment amounts to consolidated amounts:
Interest and other fee income..................................................... 81 26
Corporate expenses................................................................ (591) (693)
------------ ------------
Consolidated loss before income tax expense ...................................... $ (1,154) $ (6,683)
------------ ------------
------------ ------------
16
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As used herein, the terms "registrant," "Company," "we," "us" and "our"
refer to Berkeley Technology Limited. Except as the context otherwise requires,
the term "Group" refers collectively to the registrant and its subsidiaries.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the unaudited condensed
consolidated financial statements, and the notes thereto, included in this
quarterly report, and the December 31, 2004 audited consolidated financial
statements, and the notes thereto, included in our Annual Report on Form 10-K
filed with the SEC on March 23, 2005. The unaudited condensed consolidated
financial statements are prepared in accordance with U.S. GAAP. This item should
also be read in conjunction with the "Forward-Looking Statements and Factors
That May Affect Future Results" which are set forth below and in our other
filings with the SEC.
Forward-Looking Statements and Factors That May Affect Future Results
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this report contain forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Such forward-looking statements are based on current
expectations, estimates, forecasts and projections about the industries in which
we operate, management's current beliefs and assumptions made by management.
Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," "goals," variations of such words and similar expressions are
intended to identify such forward-looking statements. These statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions that are difficult to predict. Future outcomes and results may
differ materially from what is expressed or forecasted in such forward-looking
statements. We undertake no obligation to update any forward-looking statements,
whether as a result of new information, future developments or otherwise.
Factors that could cause or contribute to deviations from the
forward-looking statements include those discussed in this section, elsewhere in
this report and in our other filings with the SEC. The factors include, but are
not limited to, (i) the risks described in Item 3 "Quantitative and Qualitative
Disclosures About Market Risk," (ii) variations in demand for our products and
services, (iii) the success of our new products and services, (iv) significant
changes in net cash flows in or out of our businesses, (v) fluctuations in the
performance of debt and equity markets worldwide, (vi) the enactment of adverse
state, federal or foreign regulation or changes in government policy or
regulation (including accounting standards) affecting our operations, (vii) the
effect of economic conditions and interest rates in the U.S., the U.K. or
internationally, (viii) the ability of our subsidiaries to compete in their
respective businesses, (ix) our ability to attract and retain key personnel, and
(x) actions by governmental authorities that regulate our businesses, including
insurance commissions.
17
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
Life Insurance and Annuities
Certain information regarding our life insurance and annuities segment's
results of operations is as follows:
Three Months Ended
March 31,
------------ ------------
2005 2004
------------ ------------
(In thousands)
Revenues and net investment gains (losses):
Investment income................................................................. $ 321 $ 338
Insurance policy charges ......................................................... - 2
Net realized investment losses.................................................... (43) (1,256)
Change in net unrealized investment gains and losses on trading securities ....... 18 (3,489)
------------ ------------
Total revenues and net investment losses.......................................... 296 (4,405)
Expenses:
Amounts credited on insurance policyholder accounts .............................. 290 384
General and administrative expenses .............................................. 439 256
------------ ------------
Total expenses.................................................................... 729 640
------------ ------------
Loss before income tax expense.................................................... $ (433) $ (5,045)
------------ ------------
------------ ------------
As previously disclosed in our 2002, 2003 and 2004 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 86% of LPAL's $140.2 million in policyholder
liabilities as of June 30, 2002 have been surrendered or have matured as of
March 31, 2005. Policyholder liabilities as of March 31, 2005 were $19.9
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.
First quarter of 2005 compared to first quarter of 2004
In the first quarter of 2005, LPAL contributed a loss before income taxes
of $0.4 million to our overall loss before income taxes, compared to a loss
before income taxes of $5.0 million in the first quarter of 2004. Net realized
investment losses in the first quarter of 2005 were $43,000 compared to net
realized investment losses of $1.3 million in the first quarter of 2004. The
gain from the change in net unrealized investment gains and losses was $18,000
in the first quarter of 2005, compared to a loss of $3.5 million in the first
quarter of 2004. In the first quarter of 2005, the spread between investment
income and amounts credited to policyholders increased by $77,000; and general
and administrative expenses, excluding employee severance costs of $293,000,
decreased by $110,000, each as compared to the first quarter of 2004.
18
LPAL did not generate any premiums during the first quarter of 2005 or
2004. LPAL discontinued selling new policies on July 2, 2002 as a result of the
events described above.
The spread between investment income and amounts credited to policyholders
improved during the first quarter of 2005 compared to the first quarter of 2004,
from negative $46,000 to positive $31,000. Interest credited on policyholder
accounts decreased by $0.1 million in the first quarter of 2005 to $0.3 million,
compared with $0.4 million in the first quarter of 2004. This decrease was
primarily due to policy maturities. The average rate credited to policyholders
was 5.5% during the first quarter of 2005, the same as in the first quarter of
2004. Interest income on investments remained level at $0.3 million in the first
quarter of 2005, compared to the first quarter of 2004. Though some of LPAL's
corporate bonds investments have matured since the first quarter of 2004,
matching policy maturities, the level of corporate bonds held by LPAL has
increased from $22.8 million at March 31, 2004 to $24.0 million at March 31,
2005. LPAL sold all of its $9.5 million of listed equity securities held at
March 31, 2004 by the end of the first quarter of 2005, and has reinvested most
of the proceeds in corporate bonds.
Net investment losses totaled $25,000 in the first quarter of 2005,
compared to net investment losses of $4.7 million in the first quarter of 2004.
As discussed above, during 2004, LPAL held significant levels of listed equity
securities, causing LPAL's results to be impacted by equity market volatility.
As LPAL no longer holds these listed equity securities, LPAL's equity market
risk has been reduced significantly.
Total invested assets decreased to $31.5 million as of March 31, 2005,
compared to $33.1 million as of December 31, 2004, primarily due to policyholder
benefits paid of $1.3 million during the first quarter of 2005. On total average
invested assets in the first quarter of 2005, the average annualized net return,
including both realized and unrealized investment gains and losses, was 3.8%,
compared with -40.1% in the first quarter of 2004.
Policyholder liabilities as of March 31, 2005 were $19.9 million of which
$5.5 million is scheduled to mature during the remaining nine months of 2005.
The maturity profile of LPAL's corporate bond portfolio has been structured to
match approximately the maturity profile of LPAL's policies. In the absence of
significant redemptions, policyholder liabilities are projected to be
approximately $15.1 million at the end of 2005.
Included in general and administrative expenses for the first quarter of
2005 are $293,000 of employee severance costs. In order to reduce operating
costs and to conserve cash, and in light of the decrease in the size of LPAL's
operations, LPAL reduced its staff in January 2005. Excluding the $293,000 of
employee severance costs, general and administrative expenses for the first
quarter of 2005 were $146,000, compared to $256,000 for the first quarter of
2004. This decrease was primarily due to lower staff costs.
19
Venture Capital and Consulting
Certain information regarding our venture capital and consulting segment's
results of operations is as follows:
Three Months Ended
March 31,
------------ ------------
2005 2004
------------ ------------
(In thousands)
Revenues and net investment gains (losses):
Consulting fees................................................................... $ 138 $ 90
Net realized investment gains..................................................... - 441
Change in net unrealized investment gains and losses on trading securities........ (40) (1,173)
------------ ------------
Total revenues and net investment gains (losses).................................. 98 (642)
Operating expenses................................................................ 309 329
------------ ------------
Loss before income tax expense.................................................... $ (211) $ (971)
------------ ------------
------------ ------------
First quarter of 2005 compared to first quarter of 2004
In the first quarter of 2005, the venture capital and consulting segment
contributed a loss before income taxes of $0.2 million to our overall loss
before income taxes, compared to a loss before income taxes of $1.0 million in
the first quarter of 2004. The loss in the first quarter of 2005 was
attributable partly to an excess of operating expenses over consulting fee
income and partly to unrealized investment losses on listed equity securities.
The results in the first quarter of 2004 were attributable primarily to net
realized and unrealized investment losses on listed equity securities. These
positions in listed equity securities resulted from privately held technology
companies, in which the venture capital and consulting segment had an equity
interest, completing initial public offerings or being acquired by publicly
traded companies in stock-for-stock acquisitions. At March 31, 2004, the venture
capital and consulting segment held $2.0 million of listed equity securities. By
the end of the third of quarter of 2004, all but one listed equity holding were
sold, thereby significantly reducing this segment's equity market risk.
The change in net unrealized gains and losses in the listed equity trading
portfolio during the first quarter of 2005 was a loss of $40,000. The trading
portfolio, now consisting of only one listed equity security, decreased from
$85,000 as of December 31, 2004 to $45,000 as of March 31, 2005.
The venture capital and consulting segment earned consulting fees of
$138,000 during the first quarter of 2005 compared to $90,000 in the first
quarter of 2004, by advising a small number of North American technology
companies that are looking to grow their businesses or to expand their investor
base overseas, primarily in Europe and Japan. BICC advises on overseas
operations, assists 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 completion of its assignment.
Corporate and Other
First quarter of 2005 compared to first quarter of 2004
Included in corporate expenses for the first quarter of 2005 are $80,000 of
employee severance costs. In order to reduce our operating costs and to conserve
cash, and in light of the decrease in the size and complexity of our continuing
operations, we reduced our corporate staff in January 2005. In addition, we have
implemented or are in the process of implementing other cost reductions.
Excluding the $80,000 of employee severance costs, corporate expenses for the
first quarter of 2005 were $0.5 million, compared to $0.7 million in
20
the first quarter of 2004. This decrease primarily was due to lower staff costs
as well as professional services fees.
Consolidated Loss Before Income Tax Expense
First quarter of 2005 compared to first quarter of 2004
Our consolidated loss before income tax expense was $1.2 million in the
first quarter of 2005, compared to a loss before income tax expense of $6.7
million in the first quarter of 2004. This lower loss was due primarily to net
realized and unrealized investment losses of $0.1 million in the first quarter
of 2005, compared to net realized and unrealized investment losses of $5.5
million in the first quarter of 2004.
Due to the sales of almost all of our listed equity securities during 2004
and the first quarter of 2005, our results will no longer be significantly
impacted by equity market volatility.
Subsequent to the completion of the sales of our asset management and
financial advisory services businesses 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.
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.
First quarter of 2005
Although our loss before income tax expense was $1.2 million for the first
quarter of 2005, we recorded income tax expense of $5,000 for the period, due to
minimum California taxes. While $0.8 million of losses were contributed by our
Jersey and Guernsey operations during the period, we did not recognize any tax
benefits due to the uncertainty surrounding their recovery before expiry.
Although $0.3 million of losses were contributed by our U.S. subsidiaries during
the period, we did not recognize any U.S. tax benefits due to the 100% valuation
allowances that we have provided for all deferred tax assets.
CRITICAL ACCOUNTING POLICIES
Management has identified those accounting policies that are most important
to the accurate portrayal of our financial condition and results of operations
and that require management's most complex or subjective judgments, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain. These most critical accounting policies pertain to our
investments, life insurance policy liabilities and contingent liabilities. These
critical accounting policies are described below.
Determination of Fair Values of Investments
When a quoted market price is available for a security, we use this price
in the determination of fair value. If a quoted market price is not available
for a security, management estimates the security's fair value based on
valuation methodologies as described below.
We hold investments in privately held equity securities, primarily
convertible preferred stock in venture capital companies doing business in
various segments of technology industries. Venture capital investing entails
making investments in companies that are developing products or services for
large emerging markets with the belief that these investments will yield
superior returns if these companies are successful. These investments are
normally held for a number of years. When we make these investments, most of the
21
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.
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 we
consider 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)
22
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 6 to our Unaudited Condensed Consolidated Financial
Statements, we are involved in various matters that may or may not result in a
loss to the Group. We account for contingent liabilities in accordance with
Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies." As such, in situations where we believe that a loss is probable
and where we can reasonably estimate the amount of the loss, we will recognize
that estimated loss in our financial statements. Because of the uncertainties
that exist, we cannot predict the outcome of the pending matters with certainty.
Actual results may differ from our estimates, and the ultimate outcome of these
matters could have a significant impact on our results of operations and
financial position.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents decreased during the first quarter of 2005 by
$13.0 million to $6.5 million. This decrease in cash and cash equivalents
resulted from $11.5 million, $1.3 million and $0.2 million of cash used in
investing activities, financing activities and operating activities,
respectively. Cash used in financing activities related to insurance
policyholder benefits paid by LPAL. Cash used in investing activities primarily
related to the purchase of fixed maturity securities by the Group and LPAL,
partly offset by the maturity of corporate bonds held by LPAL. Cash used by
operating activities primarily resulted from the $1.2 million operating loss for
the quarter to March 31, 2005, partly offset by the sale of trading securities
and accrued expenses. As of March 31, 2005, our cash and cash equivalents,
excluding the amount held by LPAL, amounted to $0.9 million, a decrease of $8.9
million from December 31, 2004. We purchased $8.5 million in corporate bonds and
U.S. government agency securities during the first quarter of 2005 in order to
increase our yields on our liquid resources. All of these securities will mature
on or before February 1, 2006.
Shareholders' equity decreased during the first quarter of 2005 by $1.2
million from $22.9 million at December 31, 2004 to $21.7 million at March 31,
2005, due to the net loss for the period of $1.2 million. As of March 31, 2005
and December 31, 2004, $62.6 million and $63.6 million, respectively, of our
Ordinary Shares, at cost, held by the employee benefit trusts have been netted
against shareholders' equity.
As discussed above in "Results of Operations by Business Segment - Life
Insurance and Annuities," LPAL discontinued issuing new policies in July 2002.
During the first quarter of 2005, LPAL continued to service its existing
policyholders. During this period, policy surrenders totaled $31,000 and policy
maturities totaled $1.3 million. Policyholder liabilities were $19.9 million as
of March 31, 2005, compared to $21.2 million
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as of December 31, 2004. We do not expect significant surrender activity during
the remaining nine months of 2005; however, approximately $5.5 million of
policyholder liabilities are scheduled to mature during this period. LPAL has
sufficient liquid resources to fund these maturities. As of March 31, 2005, LPAL
had cash of $5.6 million, accrued interest receivable of $0.9 million and
corporate bonds of $24.0 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. 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 March 31, 2005, we had no bank borrowings, guarantee obligations,
material commitments outstanding for capital expenditures or additional funding
for private equity portfolio companies.
As of March 31, 2005, we had $0.9 million of cash and cash equivalents and
$8.3 million in short-term bonds, excluding cash and bonds held by our life
insurance and annuities segment. We believe that this cash balance and the bond
maturity proceeds are sufficient to fund our operations (venture capital and
corporate activities) over at least the next 12 months. As discussed below in
Part II, Item 1 "Legal Proceedings," we are involved in certain legal
proceedings for which we have incurred and will incur attorneys' fees and other
costs. The amount of such future fees and costs is currently unknown, though we
believe that our cash and liquid resources are sufficient to cover these costs,
in addition to our normal operating expenses, over at least the next 12 months.
As of March 31, 2005, we had $1.0 million of cash held in escrow related to
our sale of LPA to SunGard as discussed above in Note 4 "Cash Held in Escrow."
Due to the legal proceedings described below in Part II, Item 1, the release of
the escrow amount is currently uncertain. We have not made any reserve against
this $1.0 million held in escrow.
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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The nature of our businesses exposes us to market risk. Market risk is the
risk of loss that may occur when changes in interest rates and public equity
prices adversely affect the value of invested assets.
Interest Rate Risk
LPAL is subject to risk from interest rate fluctuations when payments due
to policyholders are not matched in respect of amount and duration with income
from investments. LPAL attempts to minimize this risk by ensuring that payments
and income are matched as closely as possible while also maximizing investment
returns. LPAL has not used derivative financial instruments as part of its
investment strategy.
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 in LPAL is expected to yield less than $0.3 million during the
full year 2005, therefore movements in market interest rates should not have a
material impact on our consolidated results.
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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 (loss) 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 March 31, 2005, 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.
Item 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in our filings under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the periods specified in the rules and forms of the SEC. Such
information is accumulated and communicated to our management, including our
chief executive officer and chief financial officer, as appropriate, to allow
timely decisions regarding required disclosure. Our management, including the
chief executive officer and the chief financial officer, recognizes that any set
of controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives.
As of the end of the period covered by this quarterly report on Form 10-Q,
we carried out an evaluation, under the supervision and with the participation
of our management, including our chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on such evaluation, our chief executive officer
and chief financial officer concluded that our disclosure controls and
procedures were effective as of the end of the period covered by this quarterly
report on Form 10-Q.
There were no changes in our internal controls over financial reporting
during the quarter ended March 31, 2005 that materially affected, or that could
reasonably likely materially affect, our internal controls over financial
reporting.
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On March 8, 2005, we were made aware of a complaint filed by SunGard
Business Systems Inc. ("SunGard") on February 17, 2005 in the U.S. District
Court in Philadelphia. The Company and certain of its subsidiaries are named
parties. SunGard's complaint alleges losses in an amount equal to at least $7.2
million 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 financial advisory services business dated May 9,
2003. After consultation with our legal advisors, we believe that this claim is
without merit, and we are defending the matter vigorously. As such, we do not
believe that any provision in our financial statements is warranted.
On April 27, 2005, we filed a complaint against SunGard and certain of its
affiliates in California Superior Court in San Francisco ("the Court") accusing
SunGard of, among other things, wrongful conduct and seeking payment of $1.0
million of the initial purchase consideration from the sale transaction which is
currently held in an escrow account, up to $8.0 million in additional earnout
payments, and further damages for SunGard's prior wrongful actions. We are also
asking the Court to award us compensatory, exemplary and punitive damages. On
the same date, we filed in the U.S. District Court in Philadelphia a motion to
dismiss, for lack of subject matter jurisdiction, SunGard's complaint against
us.
On May 11, 2005, we became aware that SunGard had voluntarily dismissed its
federal action and filed a new complaint in the court of Common Pleas, Chester
County, Pennsylvania. This latter complaint alleges essentially the same claims
against the same parties in SunGard's now dismissed federal action.
Costs relating to the above matters are recognized in our statement of
operations as they are incurred.
Item 6. EXHIBITS
The following exhibits are filed herewith:
Exhibit
Number Description
- ------- ---------------
31.1 Certification by the Company's Executive Chairman pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification by the Company's Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification by the Company's Executive Chairman pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification by the Company's Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BERKELEY TECHNOLOGY LIMITED
(Registrant)
Date: May 13, 2005 By: /s/ Ian K. Whitehead
Ian K. Whitehead
Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer of the Registrant)
27
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
EXHIBIT INDEX FOR THE QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2005
Exhibit
Number Description
- ------- -----------------
31.1 Certification by the Company's Executive Chairman pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification by the Company's Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification by the Company's Executive Chairman pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification by the Company's Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
28