KeyTech Limited reported net income of $15.1 million for the financial year ended March 31 2002 - but without the introduction of the Contributory Pension Act 2000 the company would have recorded a net loss of $644,090, a Royal Gazette analysis shows.

And although the company's annual report states how this was done, it takes some translation of the company's accounts to work out exactly how the company managed to turn a loss of $644,090 into a profit of $15.1 million.

The accounting came to light following KeyTech's announcement of a financial restructuring plan which was intended to reduce debt and increase the percentage of Bermudian shareholders.

In a letter to chairman of KeyTech's board, Dr. James King, before the proposal was passed, one overseas investor assessed the company's book value of $49.63 a share according to the company's March 31 annual report and said: "This does not include the $10 per share "surplus available" in the terminated defined benefit plan which you seem to be using as a source of funds to keep reported earnings at levels which minimise scrutiny from write-offs of poorly conceived investment policies."

When the new pension legislation was passed, KeyTech employees were given the option of remaining in the old pension plan or investing in a new plan.

The company then put their old pension plan into run-off, which left the company with surplus cash of $36 million.

Following consultation with its actuaries, KeyTech were told that of the $36 million about $14.5 million could be released and used by the company.

The rest was retained to provide for existing pension plan holders and other commitments, or according to the annual report as an "appropriate reserve for possible adverse investment and actuarial experience in the future."

Under the company's "net benefit plan expense statement," a total of $15,742,000 became available for the company to use.

Of this $15,742,000, a total of $8,004,172 was used as "Provisions against investments and loan to GSN."

This meant that the $8 million was used to eliminate losses stemming from investments in foreign companies which had performed poorly.

Part of the money was also used as a loan to GSN, a telecommunications company in Curacao. (See story on KeyTech investments) The remaining cash of $7,737,828 was recorded on the company's profit and loss account as "Other Income". On KeyTech's Profit and Loss account the company recorded Net Income (before noted items) of $7,607,979 for the year ending March 31, 2002.

Added to this figure was $7,832 from the non-controlling interest in a subsidiary as well as the "Other Income" of $7,737,828 from the cash released from the company's discontinued pension plan. There were also two items that recorded losses for the year and so were subtracted from the Net Income, namely equity losses in affiliates of $184,609 and investment losses of $71,120.

So while the company recorded $15,097,910 in net income for the financial year, if the $15,742,000 cash that became available from the discontinued pension plan had not been used, the company would have actually recorded a loss in net income for the year ending March 31, 2002, of $644,090.

While there was nothing illegal about using the cash to bolster the company's balance sheet, the massive cash injection helped the company remain profitable in a difficult year in the telecommunications industry.

In the chairman's report in KeyTech's annual report for 200002, chairman Dr. King said: "KeyTech Limited continued to be profitable during 200002 in spite of a year of unprecedented change in the Telecommunications industry."

Dr. King also said in his report: "The Company has delivered to its shareholders increased Net Income in 2002, from $12.9 million in 2001 ($5.98 per share) to $15.1 million in 2002 ($7.04 per share).

"This increase has been achieved through a solid operating performance, and an increase in Other Income of $8.7 million."

Dr. King mentions the "Other Income" in his report when he said: "During the year, the Trustees of the BTC pension fund obtained actuarial advice regarding the surplus value of assets in the fund that could be released back to the Company. The return of assets to the Company is reflected in Other Income."

Another shareholder who sent a letter to as many shareholders as possible explaining why the plan was unfair, raised the point of interest rate and funding cost.

The shareholder said: "We believe the company would be better advised to use its cash resources of over $45 million to redeem the notes, which we believe would significantly enhance the earnings of the company. If interest rates on the $24 million cash resources run at some 4 percent, the interest in saving in using the cash to retire debt would be approximately $900,000 per year resulting in an EPS (earnings per share) enhancement of 6 percent. The saving would total $8.5 million over the remainder of the life of the BTC 7.75 percent notes."

Concerning cash resources the shareholder said: "We are concerned that the company will have no debt if these proposals are implemented in full but will retain cash and near cash of over $45 million. We fail to either understand why this cash is required and are concerned as to its use in the future. The Board has made provisions against poor investments of some $8 million in the last Report and Accounts."

KeyTech alerted shareholders to where the surplus cash came from and was used. The annual report said at the bottom of pages 7, 8 and 9 that: "The accompanying notes are an integral part of these consolidated financial statements."

The accompanying notes outline the details of the terminated pension plan as well as overseas investments.