PART I
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 telecommunications equipment companies in dealing with large incumbent European and Japanese telecommunications companies. Our objective is to use consulting revenues and expense reimbursements to finance the development of large telecommunications company relationships, which could eventually lead to equity based transactions, with fees or direct investment opportunities for the Group. We are also considering the possibility of new venture funds in partnership with international sources of capital.
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.
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 in locating investment capital. In select situations, we may also invest our own capital. Our consulting activities are continuing to grow as we add new clients who engage us to assist them with their European and Asian business strategies.
Berkeley International Capital Corporation
BICC is primarily responsible for our activities in the venture capital and consulting areas. Currently, this involves working with North American technology companies that are looking to grow their businesses or to expand their investor base overseas, primarily in Europe and Japan. We advise on overseas operations, assist in locating partners, customers and investment capital, and occasionally will take principal positions where the case is compelling and the timeframe for realization could be relatively short.
Typically, BICC seeks a retainer (monthly or upfront depending on the nature of the assignment) from its North American technology company clients for its consulting work, and a "success fee" upon the successful conclusion of its assignment. The consulting work may involve assistance in the preparation of a business plan; market research; strategy development; identification of customers and/or investor prospects; introductory meetings with prospective customers or investors; and assistance in the implementation of the chosen strategy or transaction.
BICC currently provides its services to four clients, and is in discussions with additional prospects. 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 26 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, takes principal positions in connection with private equity transactions arranged by its sister company, BICC. These private equity positions may become listed equity securities pursuant to IPOs or in connection with the acquisition of the private issuing company by a listed company. As of December 31, 2003, BICL held $3.4 million of such positions in listed equity securities. During 2004, BICL sold all of its listed equity securities.
Competition
Our venture capital and consulting business faces competition primarily from commercial banks, investment banks, venture capital firms, insurance companies, hedge funds and consulting firms, many of which have substantially greater financial resources. The marketplace for venture capital and consulting is highly competitive, and demand for services is also influenced by economic and stock market conditions. The pool of capital seeking opportunities to invest in later stage technology companies has contracted over the last several years, but we believe demand continues for high value technology companies.
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 347 at December 31, 2005; however, much of the decline during 2003, 2004 and 2005 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, 2005, policyholder liabilities totaled $13.6 million and the market value of LPAL's corporate bonds, cash and accrued interest totaled $23.7 million. In addition, LPAL's portfolio included private equities valued at $0.8 million at December 31, 2005.
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, 2005, LPAL met all of these conditions.
LPAL is also required under the insurance laws to appoint an actuary. The actuary must be qualified as defined under the laws and is required to supervise the long-term insurance fund. No transfers, except in satisfaction of long-term insurance business liabilities, including dividends, are permitted from the long-term insurance fund without written consent from the actuary.
Group
Our Chief Financial Officer and in-house attorney are responsible for managing our subsidiaries' compliance with applicable regulatory requirements. Although the scope of regulation and form of supervision to which our subsidiaries are subject, as described above, may vary from jurisdiction to jurisdiction, the applicable laws and regulations often are complex and generally grant broad discretion to supervisory authorities in adopting regulations and supervising regulated activities. Our continuing ability to engage in businesses in the jurisdictions in which our subsidiaries currently operate is dependent upon compliance with the rules and regulations promulgated from time to time by the appropriate authorities in each of these jurisdictions. The burden of such regulation weighs equally upon all companies carrying on activities similar to those of our subsidiaries, and we do not consider such regulations to adversely affect the competitive position of our subsidiaries.
EMPLOYEES
As of December 31, 2005, 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. 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. Our objective is to use consulting revenues and expense reimbursements to finance the development of large telecommunications company relationships which will eventually lead to equity based transactions, with fees or direct investment opportunities for our Group. There is also the possibility of new venture funds raised in partnership with international sources of capital leading to management fees and carried interests. However, 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. UNRESOLVED STAFF COMMENTS
None.
I
