Item 1. BUSINESS
OVERVIEW
We are a financial services company based in Jersey, Channel Islands, with an office in San Francisco, specializing in venture capital and consulting primarily in the telecommunications industry. We represent Silicon Valley and other telecommunications equipment companies in dealing with large incumbent European and Japanese telecommunications companies.
The impact of poor equity and bond market conditions in 2001 and 2002 resulted in a significant contraction of our operations and capital base. 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 sale of new policies. All but $0.1 million in policyholder liabilities are scheduled to mature by mid-2007.
The Company was incorporated in 1985 in Jersey, Channel Islands and is listed on the London Stock Exchange ("LSE"). Our Ordinary Shares currently trade under the symbol "BEK.L." American Depositary Receipts ("ADRs") representing our Ordinary Shares began trading in the U.S. market in 1992. Our ADRs currently trade on the Over-the-Counter ("OTC") Bulletin Board under the symbol "BKLYY.PK." Each ADR represents ten Ordinary Shares.
BUSINESS SEGMENTS
We currently have two business segments that we operate through our subsidiaries: venture capital and consulting, and life insurance and annuities. Our principal operating subsidiaries, by business segment and location, are set forth below:
See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations by Business Segment" and Note 17 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.
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.
After the impact of equity and bond losses in 2001 and 2002 on our operations and capital base, 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 to grow their business and in locating investment 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 and assist in locating partners, customers and investment capital.
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; introductory meetings with prospective customers or investors; and assistance in the implementation of the chosen strategy or transaction.
As an example of its work, BICC was engaged by a North American telecommunications equipment company to develop a business strategy for penetration of the European and Japanese markets. This engagement 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 27 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.
Of the private technology investments arranged by BICC, one investment, Alacritech, Inc., is currently held by LPAL.
Berkeley International Capital Limited
BICL, formed in 1988 and based in Guernsey, Channel Islands, previously held principal positions in connection with private equity transactions arranged by its sister company, BICC. Some of these private equity positions became 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.
Life Insurance and Annuities
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, 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 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 75 at December 31, 2006; however, much of the decline during 2003 through 2006 was attributable to policy maturities rather than policy surrenders.
We have no plans currently for LPAL to write new policies.
LPAL's strategy for its investment portfolio has been to at least match the level of policyholder liabilities with corporate bonds and cash. At December 31, 2006, policyholder liabilities totaled $3.6 million and the market value of LPAL's corporate bonds, cash and accrued interest totaled $13.6 million. In addition, LPAL's portfolio included private equities valued at $0.8 million at December 31, 2006.
REGULATION
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, 2006, 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 and prior approval from the JFSC.
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.
EMPLOYEES
As of December 31, 2006, we had 9 employees. The breakdown by business segment is as follows: venture capital and consulting, 4; 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 1A.
Item 1A. RISK FACTORS
Ability to Rebuild Our Venture Capital and Consulting Business
There is a risk that we will not be able to rebuild our venture capital and consulting business significantly over the next two to three years. The venture capital and consulting market is highly competitive with significantly larger participants, and thus there is no assurance that we will be successful in our strategy.
Lack of Profitable Operations in Recent Years
There is a risk that we will not be able to return to profitability after a period of operating losses in recent years. We are earning consulting revenues and investment income, and we have reduced operating costs considerably. However, operating losses in future periods will continue to erode our available capital base.
Lack of Liquidity for Our Shares and ADRs
The Company's ADRs are not traded on a major stock exchange. Our ADRs can be bought or sold on the OTC Bulletin Board, but liquidity is extremely limited. Our Ordinary Shares are listed on the London Stock
Exchange, but liquidity is also limited. Due to this lack of liquidity, there is a risk that our shares or ADRs cannot be sold without an adverse affect on the price.
Item 1B.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2.
Item 2. PROPERTIES
We currently operate from two offices located in Jersey (Channel Islands) and San Francisco, California, consisting of approximately 400 and 3,800 square feet, respectively. We lease both offices. These leases expire in September 2010 and October 2008, 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, at approximately 3,000 square feet, was too large for our current level of business and staffing, and therefore in June 2006, we entered into a sublease agreement for the remaining term of our lease for the entire office space except for approximately 400 square feet through July 2007.
See Note 11 to the Consolidated Financial Statements in Item 8 of this Form 10-K for further information regarding our leases.
Item 3.
Item 3. LEGAL PROCEEDINGS
There are no legal proceedings pending against the Group.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to our shareholders during the quarter ended December 31, 2006.
PART II
Item 5.
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 New York Stock Exchange ("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, 2006, there were 64,439,073 Ordinary Shares outstanding of which 12,901,640, or 20.0%, were represented by 1,290,164 ADSs. 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 9, 2002, trading of our ADRs was suspended and the securities were withdrawn from listing and registration on the NYSE due to a fall in price below the minimum permitted by 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:
Holders
As of February 28, 2007, we had approximately 1,336 Ordinary shareholders of record and 67 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 2005 or an interim dividend for 2006. Our Board of Directors will not be recommending a final dividend for the year 2006.
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 8 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, 2007, 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.
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 not resident in Jersey, 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.
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 may 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.
SHARE PERFORMANCE GRAPH
The graph presented below compares the yearly change in the Company's cumulative total return on ADRs for the five years ended December 31, 2006, with the cumulative total returns of the S&P 500 Index and the S&P Insurance Index. The comparison assumes $100 was invested on December 31, 2001 in each of the Company ADRs, the stocks included in the S&P 500 Index, and the stocks included in the S&P Insurance Index. It also assumes reinvestment of all dividends.
This performance graph shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Berkeley Technology Limited with the Securities and Exchange Commission ("SEC").
Comparison of Five-Year Cumulative Total Return
[GRAPH]
Item 6.
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.
Item 7.
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
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 and cash equivalents in LPAL and in the remainder of the Group is expected to be approximately $0.6 million during 2007, therefore movements in market interest rates should not have a material impact on our consolidated results.
Equity Price Risk
In prior years, we held levels of listed equity securities which exposed us to significant equity price risk and resulting volatility in our reported earnings. By the end of September 2006, we had sold all of our listed equity holdings and thus we are no longer exposed to equity price risk on listed equity securities.
As of December 31, 2006, 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 12 to the Consolidated Financial Statements in Item 8
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2006 and 2005 and the related consolidated statements of operations, cash flows, changes in shareholders' equity and comprehensive income for each of the three years in the period ended December 31, 2006. We have also audited the schedules on pages 62 to 67 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included 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, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment."
Also, in our opinion, the Schedules present fairly in all material respects, the information set forth therein.
/s/ BDO Seidman, LLP San Francisco, California March 20, 2007
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)
See accompanying Notes which are an integral part of these Consolidated Financial Statements.
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share and ADS amounts)
See accompanying Notes which are an integral part of these Consolidated Financial Statements.
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
See accompanying Notes which are an integral part of these Consolidated Financial Statements.
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (In thousands)
See accompanying Notes which are an integral part of these Consolidated Financial Statements.
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands, except per share and ADS amounts)
See accompanying Notes which are an integral part of these Consolidated Financial Statements.
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands)
See accompanying Notes which are an integral part of these Consolidated Financial Statements.
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2006
As used herein, the terms "registrant" and "Company" refer to Berkeley Technology Limited. Except as the context otherwise requires, the term "Group" refers collectively to the registrant and its subsidiaries.
Note 1. 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, 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 ("LPAL") and Berkeley International Capital Corporation ("BICC"). All intercompany transactions and balances have been eliminated in consolidation.
The consolidated balance sheet is 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 OTC Bulletin Board in the form of American Depositary Shares ("ADSs"), which are evidenced by American Depositary Receipts ("ADRs"). Each ADS represents ten Ordinary Shares. 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 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. Management's valuation methodologies include fundamental analysis
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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.
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenue Recognition
Interest income is accounted for on an accrual basis. Dividends are accounted for when declared.
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.
Share Based Compensation
Equity compensation plan
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. 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 to 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 grant.
Share based compensation expense
On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004) ("SFAS 123R"), "Share-Based Payment," which establishes standards for the accounting of transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on accounting for transactions where an entity obtains employee services in share based payment transactions. SFAS 123R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments, including share options, based on the fair value of the award on the grant date, and to recognize it as compensation expense over the period the employee is required to provide service in exchange for the award, usually the vesting period. SFAS 123R supersedes the Company's previous accounting under Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," and related interpretations, for periods beginning in fiscal 2006. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB 107") relating to SFAS 123R. The Company has applied the provisions of SAB 107 in its adoption of SFAS 123R.
The Company adopted SFAS 123R using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company's fiscal year 2006. The Company's consolidated financial statements as of and for the year ended December 31, 2006 reflect the impact of SFAS 123R. In accordance with the modified prospective transition method, the Company's consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R.
In November 2005, the Financial Accounting Standards Board ("FASB") issued Staff Position No. FAS 123(R)-3 ("FSP 123R-3"), "Transition Election Related to Accounting for the Tax Effects of Share-Based Payments." The Company has elected to adopt the alternative transition method provided in FSP 123R-3 for calculating the tax effects of share based compensation under SFAS 123R. The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool ("APIC pool") related to the tax effects of share based compensation, and for determining the subsequent impact on the APIC pool and consolidated statements of cash flows of the tax effects of share based compensation awards that are outstanding upon adoption of SFAS 123R.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SFAS 123R requires companies to estimate the fair value of share based payment awards on the date of grant using an option pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company's consolidated statement of operations. Prior to the adoption of SFAS 123R, the Company accounted for share based awards to employees and directors using the intrinsic value method in accordance with APB 25, as allowed under Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation." Under the intrinsic value method, no share based compensation expense had been recognized in the Company's consolidated statement of operations.
Share based compensation expense recognized in the Company's consolidated statement of operations for the year ended December 31, 2006 includes compensation expense for share options granted prior to, but not yet vested as of December 31, 2005, based on the fair value estimated as of the date of grant in accordance with the provisions of SFAS 123R. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Share based compensation expense calculated in accordance with SFAS 123R is to be based on awards ultimately expected to vest, and therefore the expense should be reduced for estimated forfeitures. The Company's estimated forfeiture rate for the year ended December 31, 2006 of zero percent is based upon the short remaining vesting periods of the option grants (only one option grant is not fully vested at the end of 2006) and because all of the unvested options relate to longstanding employees. In the Company's pro forma information required to be disclosed under SFAS 123 for the periods prior to 2006, the Company accounted for forfeitures as they occurred.
SFAS 123R requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options to be classified as financing cash flows. Due to the Company's loss position, and as the Company had no tax deductions related to share option exercises, there were no such tax benefits during the year ended December 31, 2006. Prior to the adoption of SFAS 123R, those tax benefits would have been reported as operating cash flows had the Company received any tax benefits related to share option exercises.
The fair value of share option grants to employees is calculated using the Black-Scholes option pricing model, even though this model was developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which differ significantly from the Company's share options. The Black-Scholes model also requires subjective assumptions, including future share price volatility and expected time to exercise, which greatly affect the calculated values. The expected term of options granted is derived from historical data on employee exercises and post-vesting employment termination behavior. The risk-free rate is based on the U.S. Treasury rates in effect during the corresponding period of grant. The expected volatility is based on the historical volatility of the Company's share price. These factors could change in the future, which would affect the share based compensation expense in future periods, if the Company, through the ESOT, should grant additional share options.
Valuation and expense information under SFAS 123R
The estimated fair value of share option compensation awards to employees, as calculated using the Black-Scholes option pricing model as of the date of grant, is amortized using the straight-line method over the vesting period of the options. For the year ended December 31, 2006, compensation expense related to employee share options under SFAS 123R totaled $58,000, and is included in operating expenses in the accompanying statement of operations.
The table below reflects the proforma net loss and basic and diluted loss per share and ADS for the years ended December 31, 2005 and 2004:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During 2006, there were no option grants, exercises or forfeitures. During 2006, 1,060,000 options expired and 653,750 options vested. At December 31, 2006, there were 5,225,000 options outstanding with a weighted average exercise price of $2.59. Of these options, 4,475,000 were exercisable at December 31, 2006, and these have a weighted average exercise price of $3.00. The remaining 750,000 options were unvested at December 31, 2006. These unvested options have a weighted average exercise price of $0.15. As of December 31, 2006, total unrecognized compensation expense related to unvested share options was $36,000, which is expected to be recognized ratably over 2007, 2008 and the first half of 2009.
During the three year period ended December 31, 2006, only one option grant was made in the second quarter of 2005. The 1,000,000 options granted in May 2005 were valued using the Black-Scholes option pricing model with the following assumptions: expected share price volatility of 34%, risk-free interest rate of 3.89%, weighted average expected life of 6.25 years and expected dividend yield of zero percent. These options were granted at an exercise price equal to the market price of the shares, or $61,500.
For additional information relating to the Company's employee share options, see Note 13 "Share Incentive Plans" below.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income Taxes
The Group accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." Under SFAS 109, the Group recognizes taxes payable or refundable for the current year, and deferred tax assets and liabilities due to temporary differences in the basis of assets and liabilities between amounts recorded for financial statement and tax purposes.
The Group provides a valuation allowance for deferred income tax assets if it is more likely than not that some portion of the deferred income tax asset will not be realized. The Group includes in income any increase or decrease in a valuation allowance that results from a change in circumstances that causes a change in judgment about the realization of the related deferred income tax asset.
The Group includes in additional paid-in capital the tax benefit on share options exercised during the period to the extent that such exercises result in a permanent difference between financial statement and tax basis compensation expense.
Earnings Per Share and ADS
The Company calculates earnings per share in accordance with Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share." This statement requires the presentation of basic and diluted earnings per share. Basic earnings per share is calculated by dividing net income or loss by the weighted-average number of Ordinary Shares outstanding during the applicable period, excluding shares held by the ESOT and the ALOT which are regarded as treasury stock for the purposes of this calculation. The Company has issued employee share options, which are considered potential common stock under SFAS 128. The Company has also issued Ordinary Share warrants to the Bank of Scotland in connection with the Company's bank facility (now terminated), which are also considered potential common stock under SFAS 128. Diluted earnings per share is calculated by dividing net income by the weighted-average number of Ordinary Shares outstanding during the applicable period as adjusted for these potentially dilutive options and warrants which are determined based on the "Treasury Stock Method."
Foreign Currencies
The Group uses the (pound) sterling as the functional currency for LPAL and the U.S. dollar as the functional currency for the Company and all other significant subsidiaries. Foreign exchange gains and losses resulting from the remeasurement of foreign currency assets and liabilities into an entity's functional currency are included in other operating expense in the consolidated statements of 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 foreign currency translation gains or losses arising on the translation of the Group's non-U.S. dollar based subsidiaries.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Recently Issued Accounting Pronouncements
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 154 ("SFAS 154"), "Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3." The statement requires retrospective application to prior periods' financial statements for a voluntary change in accounting principle unless it is deemed impracticable. It also requires that a change in the method of depreciation, amortization, or depletion for long-lived, non-financial assets be accounted for as a change in accounting estimate rather than a change in accounting principle. The adoption of SFAS 154 did not have any impact on the Company's consolidated financial statements.
In September 2005, the American Institute of Certified Public Accountants issued Statement of Position 05-1 ("SOP 05-1"), "Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts." SOP 05-1 provides guidance on accounting by insurance enterprises for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in 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." SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. Under SOP 05-1, modifications that result in a substantially unchanged contract will be accounted for as a continuation of the replaced contract. A replacement contract that is substantially changed will be accounted for as an extinguishment of the replaced contract resulting in a release of unamortized deferred acquisition costs, unearned revenue and deferred sales inducements associated with the replaced contract. The guidance in SOP 05-1 will be applied prospectively and is effective for internal replacements occurring in fiscal years beginning after December 15, 2006. Because the Company is not replacing insurance policies, the Company's management does not expect any impact on the Company's consolidated financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109." FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company's management does not expect the adoption of FIN 48 to have a material effect on its consolidated financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 ("SFAS 157"), "Fair Value Measurements," which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. Earlier adoption is permitted, provided the company has not yet issued financial statements, including for interim periods, for that fiscal year. The Company's management is currently evaluating the impact of SFAS 157, but does not expect the adoption of SFAS 157 to have a material impact on its consolidated financial position, results of operations or cash flows.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 ("SAB 108"), "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements." SAB 108 provides guidance on how prior year misstatements should be considered when quantifying misstatements in the current year financial statements. SAB 108 requires registrants to quantify
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
misstatements using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 does not change the guidance in SAB 99, "Materiality," when evaluating the materiality of misstatements. SAB 108 is effective for fiscal years ending after November 15, 2006. Upon initial application, SAB 108 permits a one-time cumulative effect adjustment to beginning retained earnings. The adoption of SAB 108 did not have any impact on the Company's consolidated financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 ("SFAS 159"), "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No 115." SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted, provided the company also elects to apply the provisions of SFAS 157. The Company's management is currently evaluating the impact of SFAS 159, but does not expect the adoption of SFAS 159 to have a material impact on its consolidated financial position, results of operations or cash flows.
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 2. Discontinued Operations
The $1.0 million loss on discontinued operations recorded in 2006 resulted from the write-off of the $1.0 million of cash held in escrow which was part of the proceeds from the sale of London Pacific Advisors ("LPA") in June 2003 held back to cover any of the Group's indemnity obligations. See Note 4 "Cash Held in Escrow" below for further information.
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3. Investments
Summary Cost and Fair Value Information
Fixed Maturity Securities
An analysis of fixed maturity securities is as follows:
As of December 31, 2006, there were no non-income producing fixed maturity securities for the twelve months preceding December 31, 2006.
Contractual Maturities
The amortized cost and estimated fair value of fixed maturity securities as of December 31, 2005 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.
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Equity Securities
Equity securities are comprised of available-for-sale and trading securities. An analysis of equity securities is as follows:
Trading securities are carried at fair value with changes in net unrealized gains and losses of $18,000, $17,000 and $(12,373,000) included in the income and losses for the years ended December 31, 2006, 2005 and 2004, respectively.
Investment Concentration and Risk
As of December 31, 2006, fixed maturity securities held by the Group included investments in British Telecom of $3,017,000, AOL Time Warner of $2,002,000, General Mills of $2,000,000 and Cadbury Schweppes of $1,996,000. These four corporate issuers each represented more than 10% of shareholders' equity as of December 31, 2006. However, the General Mills bond matured on February 15, 2007 and the Group received repayment of principal in full and all interest due on this bond. The remaining bonds will mature on or before July 16, 2007.
As of December 31, 2006, the Company's Jersey based life insurance subsidiary, LPAL, owned 75% of the Group's $12.0 million in fixed maturity securities and 100% of the Group's $0.8 million in available-for-sale private equity 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 and the Jersey Financial Services Commission ("JFSC"). 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 (excluding split-rated securities) approximated 0.0% and 30.2% of total fixed maturity securities as of December 31, 2006 and 2005, respectively. The Group held $12.0 million in fixed maturity securities considered less than investment grade as of December 31, 2005. These holdings were repaid in full at maturity in early 2006.
Net Unrealized Gains (Losses) on Available-for-Sale Securities
Net unrealized gains (losses) on fixed maturity securities classified as available-for-sale as of December 31, 2006 and 2005 totaled $(14,000) and $20,000, respectively. There were no related income taxes.
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
There were no net unrealized losses on equity securities classified as available-for-sale as of December 31, 2006 or 2005.
Changes in net unrealized gains and losses on available-for-sale securities included in other comprehensive income for the years ended December 31, 2004, 2005 and 2006 were as follows:
Net Investment Income
The details of investment income, net of investment expenses, are as follows:
Investment expenses included costs of investment administration, primarily custodial fees.
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Realized Gains and Losses
Information about gross and net realized gains and losses on securities transactions is as follows:
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. There were no such impairments recorded in 2005 or 2006.
Subsequent to December 31, 2006, the Company received a $1.2 million payment representing a partial distribution resulting from the settlements achieved in the WorldCom, Inc. securities litigation. LPAL held certain WorldCom, Inc. publicly traded bonds which it sold at a loss in 2002. The $1.2 million payment will be recognized in the first quarter of 2007 in the Company's consolidated statement of operations as a realized gain, which reverses part of the realized loss recorded in 2002. The Company expects to receive an additional $0.4 million as a final distribution later in 2007. Since these payments are for LPAL's account, they are not available to fund the operations or commitments of the Company or its other subsidiaries.
Note 4. Cash Held in Escrow
Cash held in escrow at December 31, 2005 consisted of $1.0 million of the cash proceeds from the sale of LPA to SunGard Business Systems Inc. ("SunGard") on June 5, 2003 which were held back to cover any of the Group's indemnity obligations. As disclosed in the Company's 2005 Annual Report on Form 10-K and in its 2006 Quarterly Reports on Form 10-Q, in February 2005, SunGard filed a lawsuit against the Company and certain of its subsidiaries alleging breaches of representations and warranties contained in the sale and purchase agreement. Subsequently, in April 2005, the Company filed a lawsuit against SunGard and certain of its affiliates accusing SunGard of wrongful conduct. In August 2006, the Company and SunGard entered into a settlement agreement covering the above actions. All lawsuits against each other were dismissed and the Company agreed to forego the $1.0 million escrow account, including accrued interest on the account.
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accordingly, the $1.0 million of cash held in escrow (and $56,000 of interest earned on the escrow account) was written off as of June 30, 2006. The write-off of the $1.0 million original escrow amount has been shown as a loss on discontinued operations, and the write-off of the $56,000 of interest earned has been netted against investment income, in the Company's consolidated statement of operations for 2006.
Note 5. Property and Equipment
Property and equipment are carried at cost and consisted of the following:
Note 6. Other Assets
An analysis of other assets is as follows:
Note 7. Life Insurance Policy Liabilities
An analysis of life insurance policy liabilities is as follows:
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The liability for future policy benefits and policyholder contract deposits was determined based on the following assumptions:
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 8. Statutory Financial Information and Restrictions
LPAL is regulated by the 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, 2006, 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 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 and the JFSC.
Note 9. 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 2006, 2005 and 2004.
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 at rates up to 34% and 8.84%, respectively.
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A breakdown of the Group's book loss before income taxes by tax jurisdiction follows:
The provision for income taxes differs from the amount computed by applying the Jersey, Channel Islands statutory income tax rate of 20% to the loss before income taxes. The sources and tax effects of the difference are as follows:
The components of the actual tax expense were as follows:
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, 2006 and December 31, 2005, 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.
As of December 31, 2006, the Group's U.S. subsidiaries have pre-tax federal net operating loss carryforwards of approximately $13.4 million expiring as follows: approximately $1.3 million in 2011, and approximately $12.1 million from 2020 to 2026. These subsidiaries have California net operating loss carryforwards of approximately $10.9 million expiring from 2012 to 2016. In addition, these subsidiaries have federal capital loss carryforwards of $157.2 million ($155.9 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, 2006, due to the uncertainty of generating future taxable income or capital gains to benefit from the deferred tax assets.
Note 10. Shareholders' Equity
The Company has authorized 86,400,000 Ordinary Shares with a par value of $0.05 per share. As of December 31, 2006 and 2005, there were 64,439,073 Ordinary Shares issued and outstanding.
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
No dividends were declared and paid in 2004, 2005 or 2006.
Accumulated other comprehensive 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 $(404,000), $(383,000) and $(338,000) as of December 31, 2006, 2005 and 2004, respectively. The net unrealized gains (losses) on available-for-sale securities after deferred income taxes were $(14,000), $20,000 and $36,000 as of December 31, 2006, 2005 and 2004, respectively.
The Group has two share incentive plans as described in Note 13 "Share Incentive Plans" below. 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:
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 11. Commitments and Contingencies
Lease Commitments
The Group leases office space under operating leases. Total rent expense under these operating leases was $207,000 (net of sublease income of $46,000), $230,000 and $288,000 for the years ended December 31, 2006, 2005 and 2004, respectively. The Group had no capital leases as of December 31, 2006.
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Future minimum lease payments required under non-cancellable operating leases with terms of one year or more, as of December 31, 2006, were as follows:
Approximately 64% of the Jersey office lease commitments are covered by a sublease to a third party.
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, 2006.
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, 2006.
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 12. Fair Value of Financial Instruments
Substantially all financial instruments used in the Group's trading and investing activities are carried at fair value or amounts that approximate fair value. Fair value is based generally on listed market prices or broker-dealer price quotations. To the extent that prices are not readily available, estimated fair value is based on valuation methodologies performed by management, which evaluate company, industry, geographical and overall equity market factors that would influence the security's fair value.
With the exception of the fixed maturity securities classified as held-to-maturity, which are held at amortized cost, the carrying values of the Group's financial assets are equal to estimated fair value.
Considerable judgment is required in interpreting market data used to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions or estimation methodologies may have a material effect on the estimated fair value amounts.
The carrying values and estimated fair values of the Group's financial instruments were as follows:
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 and held-to-maturity were generally based upon quoted market prices. Fair values for private corporate debt securities were based on the results of valuation methodologies performed by management.
Equity Securities:
a) Trading Securities: Fair values for equity securities classified as trading were based on quoted market prices.
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 13. 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 10 "Shareholders' Equity" for a summary of the share activity within the ESOT.
Share option activity for the years ended December 31, 2006, 2005 and 2004 was as follows:
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
See Note 1 "Summary of Significant Accounting Policies" for information regarding the Group's accounting for share based compensation.
Summary information about the Group's share options outstanding as of December 31, 2006 is as follows:
Agent Loyalty Opportunity Trust
The Agent Loyalty Opportunity Trust ("ALOT") was established in 1997 (without shareholders' approval) to provide for the granting of stock appreciation rights ("SARs") on the Company's Ordinary Shares to agents of the Company's former U.S. life insurance subsidiary. Each award unit entitled the holder to cash compensation equal to the difference between the Company's prevailing share price and the exercise price. The award units were exercisable in four equal annual installments commencing on the first anniversary of the date of grant and were forfeited upon termination of the agency contract. Vesting of the award in any given year was also contingent on the holder of the award surpassing a predetermined benchmark tied to sales and persistency. The SARs expired seven years from the date of grant. The 79,000 awards outstanding at December 31, 2005 expired in April 2006.
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 10 "Shareholders' Equity" for a summary of the share activity within the ALOT.
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SAR activity for the years ended December 31, 2006, 2005 and 2004 was as follows:
Note 14. 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 distributed to the participants of the plan on a pro rata basis to their accrued benefit entitlements under the plan. The plan was dissolved in March 2005. The Group does not have any ongoing liabilities in respect of the plan following its dissolution.
The Group made contributions of $0, $0 and $15,000 to the trust in 2006, 2005 and 2004, respectively.
U.K. Plan
The Group provides a defined contribution plan for its U.K. employees. There is currently one participant in the plan. The Group has no ongoing liabilities associated with the plan. Contributions of $161,000, $154,000 and $49,000 were made by the Group to the plan in 2006, 2005 and 2004, respectively. Of the 2006 and 2005 contributions, $111,000 and $105,000, respectively, were offset by a salary waiver.
Note 15. 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:
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As the Company recorded a net loss for the years ended December 31, 2006, 2005 and 2004, 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, 2006, 2005 and 2004, there would have been an additional 8,125, 66,397 and 650,913 shares, respectively, included in the calculations of diluted earnings per share for these years.
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 16. Transactions with Related Parties
The Group paid legal fees of approximately $1,000, $60,000 and $36,000 during 2006, 2005 and 2004, respectively, to a law firm of which one of its directors, Victor A. Hebert, is a member.
Note 17. 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.
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:
Total assets by geographic segment were as follows:
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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:
Assets attributable to each of the Company's reportable operating segments, based on management's reporting structure, were as follows:
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 18. Selected Quarterly Financial Information (Unaudited)
Unaudited quarterly financial information (in thousands, except per share and ADS amounts) is as follows:
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Due to the method required by SFAS 128 to calculate per share and ADS amounts, the quarterly per share and ADS amounts do not necessarily total to the full year per share and ADS amounts.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A.
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, 2006 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 September 18, 2007 (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.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are as follows:
Arthur I. Trueger, Executive Chairman: Mr. Trueger, age 58, is the founder and a principal shareholder of Berkeley Technology Limited. He has worked for us for more than 30 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 52, 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 our Proxy Statement.
Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is incorporated by reference to the section entitled "Other Information About Directors and Executive Officers" in our 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 our Proxy Statement.
Item 11.
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.
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, 2006.
Information regarding the features of the equity compensation plan not approved by shareholders is incorporated by reference to Note 13 to the Consolidated Financial Statements in Item 8 of this Form 10-K.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the section entitled "Other Information About Directors and Executive Officers" in our Proxy Statement.
Item 14.
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.
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as a part of this Form 10-K:
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:
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 (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 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).
10.1.2 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).
10.1.3 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).
10.1.4 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).
10.1.5 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).
10.1.6 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).
10.1.7 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).
10.1.8 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).
10.2.1(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).
10.2.2(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).
10.3.1 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).
10.3.2 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).
10.3.3 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).
10.3.4 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).
10.3.5 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).
10.4 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).
10.5 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, 2007.
31.1 Certification by the Company's Executive Chairman pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Company's Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification by the Company's Executive Chairman pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification by the Company's Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- ----------
(1) Management contract or compensatory arrangement filed in response to Item 15(a)(3) of the instructions to Form 10-K.
(b) Our exhibits are listed in Item 15(a)(3) above.
(c) Our financial statement schedules follow on pages 62 through 67.
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
As of December 31, 2006
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BERKELEY TECHNOLOGY LIMITED CONDENSED BALANCE SHEETS
See accompanying Note to Condensed Financial Statements.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
BERKELEY TECHNOLOGY LIMITED CONDENSED STATEMENTS OF OPERATIONS
See accompanying Note to Condensed Financial Statements.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
BERKELEY TECHNOLOGY LIMITED CONDENSED STATEMENTS OF CASH FLOWS
See accompanying Note to Condensed Financial Statements.
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, 2006.
Additional information about the significant accounting policies applied by the Company and its subsidiaries is included in Note 1 to the Consolidated Financial Statements in Item 8 of this Form 10-K for the year ended December 31, 2006.
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
Life Insurance and Annuities Segment
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, 2007 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, 2007 Arthur I. Trueger Executive Chairman (Principal Executive Officer)
/s/ Ian K. Whitehead Date: March 23, 2007 Ian K. Whitehead Chief Financial Officer (Principal Financial and Accounting Officer)
/s/ Victor A. Hebert Date: March 23, 2007 Victor A. Hebert Deputy Chairman and Non-Executive Director
/s/ Harold E. Hughes, Jr. Date: March 23, 2007 Harold E. Hughes, Jr. Non-Executive Director
/s/ Trenchard Date: March 23, 2007 The Viscount Trenchard Non-Executive Director
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
EXHIBIT INDEX FOR THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2006
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 (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 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).
10.1.2 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).
10.1.3 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).
10.1.4 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).
10.1.5 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).
10.1.6 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).
10.1.7 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).
10.1.8 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).
10.2.1(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).
10.2.2(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).
10.3.1 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).
10.3.2 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).
10.3.3 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).
10.3.4 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).
10.3.5 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).
10.4 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).
10.5 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, 2007.
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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(1) Management contract or compensatory arrangement filed in response to Item 15(a)(3) of the instructions to Form 10-K.