UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2007
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 0-21874
Berkeley Technology Limited
(Exact name of registrant as specified in its charter)
----------------------
Jersey, Channel Islands Not applicable
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
Minden House, 6 Minden Place
St. Helier, Jersey JE2 4WQ
Channel Islands
(Address of principal executive offices)
(Zip Code)
011 44 (1534) 607700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ____ No |X|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes ____ No |X|
As of August 14, 2007, the registrant had outstanding 64,439,073 Ordinary
Shares, par value $0.05 per share.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Page
Item 1. Financial Statements:
Unaudited Condensed Consolidated Balance Sheets as of June 30, 2007 and
December 31, 2006............................................................................ 3
Unaudited Condensed Consolidated Statements of Operations for the three and six months
ended June 30, 2007 and 2006................................................................. 4
Unaudited Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2007 and 2006................................................................. 5
Unaudited Consolidated Statement of Changes in Shareholders' Equity for the six months
ended June 30, 2007.......................................................................... 6
Unaudited Consolidated Statements of Comprehensive Income for the three and six months
ended June 30, 2007 and 2006................................................................. 7
Notes to Unaudited Condensed Consolidated Financial Statements................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk ...................................... 25
Item 4. Controls and Procedures.......................................................................... 26
PART II
OTHER INFORMATION
Item 1A. Risk Factors..................................................................................... 27
Item 6. Exhibits......................................................................................... 27
Signature ................................................................................................. 28
Exhibit Index .............................................................................................. 29
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
June 30, December 31,
2007 2006
------------ ------------
ASSETS
Investments (principally of life insurance subsidiary):
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $1,000 and $9,021
as of June 30, 2007 and December 31, 2006, respectively)................... $ 999 $ 9,007
Held-to-maturity, at amortized cost (fair value: $0 and $3,004 as of
June 30, 2007 and December 31, 2006, respectively)......................... - 3,009
Equity securities:.............................................................
Available-for-sale, at estimated fair value (cost: $844 as of
June 30, 2007 and December 31, 2006)....................................... 844 844
------------ ------------
Total investments................................................................. 1,843(1) 12,860
Cash and cash equivalents......................................................... 14,676(1) 6,707
Accrued investment income......................................................... 34 304
Other assets...................................................................... 549 366
------------ ------------
Total assets...................................................................... $17,102 $20,237
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Life insurance policy liabilities................................................. $ 189 $ 3,640
Accounts payable and accruals..................................................... 574 674
------------ ------------
Total liabilities................................................................. 763 4,314
------------ ------------
Commitments and contingencies (see Note 7)
Shareholders' equity:
Ordinary shares, $0.05 par value per share: 86,400,000 shares authorized;
64,439,073 shares issued and outstanding as of June 30, 2007 and
December 31, 2006.............................................................. 3,222 3,222
Additional paid-in capital........................................................ 67,745 67,718
Retained earnings................................................................. 8,370 7,999
Employee benefit trusts, at cost (13,522,381 shares as of
June 30, 2007 and December 31, 2006)........................................... (62,598) (62,598)
Accumulated other comprehensive loss.............................................. (400) (418)
------------ ------------
Total shareholders' equity........................................................ 16,339 15,923
------------ ------------
Total liabilities and shareholders' equity........................................ $ 17,102 $ 20,237
------------ ------------
------------ ------------
<FN>
(1) Includes $1,843 of investments and $10,311 of cash and cash equivalents in the Company's insurance subsidiary
(London Pacific Assurance Limited ("LPAL")) which are not currently available to fund the operations or
commitments of the Company or its other subsidiaries.
</FN>
See accompanying Notes which are an integral part of these Unaudited Condensed
Consolidated Financial Statements.
3
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share and ADS amounts)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
Revenues:
Investment income................................................. $ 205 $ 284 $ 436 $ 638
Insurance policy charges.......................................... - 2 - 2
Consulting and other fee income................................... 365 160 570 314
Net realized investment gains..................................... - - 1,198 -
Change in net unrealized investment gains and losses
on trading securities.......................................... - (33) - 24
---------- ---------- ---------- ----------
570 413 2,204 978
Expenses:
Amounts credited on insurance policyholder accounts............... 10 137 40 307
Operating expenses................................................ 867 1,294 1,791 2,410
---------- ---------- ---------- ----------
877 1,431 1,831 2,717
---------- ---------- ---------- ----------
Income (loss) from continuing operations
before income tax expense...................................... (307) (1,018) 373 (1,739)
Income tax expense................................................ - - 2 5
---------- ---------- ---------- ----------
Income (loss) from continuing operations.......................... (307) (1,018) 371 (1,744)
Discontinued operations:
Loss on disposal of discontinued operations,
net of income tax expense (benefit) of $0...................... - (1,000) - (1,000)
---------- ---------- ---------- ----------
Loss on discontinued operations................................... - (1,000) - (1,000)
---------- ---------- ---------- ----------
Net income (loss)................................................. $ (307) $ (2,018) $ 371 $ (2,744)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic and diluted earnings (loss) per share:
Continuing operations............................................. $ (0.01) $ (0.02) $ 0.01 $ (0.03)
Discontinued operations........................................... - (0.02) - (0.02)
---------- ---------- ---------- ----------
$ (0.01) $ (0.04) $ 0.01 $ (0.05)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic and diluted earnings (loss) per ADS:
Continuing operations............................................. $ (0.06) $ (0.20) $ 0.07 $ (0.34)
Discontinued operations........................................... - (0.20) - (0.20)
---------- ---------- ---------- ----------
$ (0.06) $ (0.40) $ 0.07 $ (0.54)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
See accompanying Notes which are an integral part of these Unaudited Condensed
Consolidated Financial Statements.
4
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
June 30,
------------------------------
2007 2006
------------ ------------
Net cash used in operating activities............................................. $ (733) $ (544)
Cash flows from investing activities:
Purchases of held-to-maturity fixed maturity securities........................... - (3,035)
Purchases of available-for-sale fixed maturity securities......................... - (9,082)
Proceeds from maturity of held-to-maturity fixed maturity securities.............. 3,000 7,000
Proceeds from sale and maturity of available-for-sale fixed maturity securities... 8,000 8,701
Partial proceeds from WorldCom, Inc. securities litigation settlement............. 1,198 -
------------ ------------
Net cash provided by investing activities......................................... 12,198 3,584
------------ ------------
Cash flows from financing activities:
Insurance policyholder benefits paid.............................................. (3,510) (5,603)
------------ ------------
Net cash used in financing activities ............................................ (3,510) (5,603)
------------ ------------
Net increase (decrease) in cash and cash equivalents ............................. 7,955 (2,563)
Cash and cash equivalents at beginning of period.................................. 6,707 10,039
Foreign currency translation adjustment .......................................... 14 229
------------ ------------
Cash and cash equivalents at end of period (1).................................... $ 14,676 $ 7,705
------------ ------------
------------ ------------
<FN>
(1) The amount for June 30, 2007 includes $10,311 in the Company's insurance subsidiary (LPAL) which is not currently
available to fund the operations or commitments of the Company or its other subsidiaries.
</FN>
See accompanying Notes which are an integral part of these Unaudited Condensed
Consolidated Financial Statements.
5
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
Accumulated
Other
Ordinary Shares Additional Employee Compre- Total
------------------- Paid-in Retained Benefit hensive Shareholders'
Number Amount Capital Earnings Trusts Loss Equity
-------- -------- --------- --------- ---------- ---------- -----------
Balance as of
December 31, 2006............ 64,439 $ 3,222 $ 67,718 $ 7,999 $ (62,598) $ (418) $ 15,923
Net income ..................... - - - 371 - - 371
Share based compensation,
including income tax
effect of $0................. - - 27 - - - 27
Change in net unrealized
gains and losses on
available-for-sale securities. - - - - - 13 13
Foreign currency translation
adjustment................... - - - - - 5 5
-------- -------- --------- --------- ---------- ---------- ----------
Balance as of June 30, 2007..... 64,439 $ 3,222 $ 67,745 $ 8,370 $ (62,598) $ (400) $ 16,339
-------- -------- --------- --------- ---------- ---------- ----------
-------- -------- --------- --------- ---------- ---------- ----------
See accompanying Notes which are an integral part of these Unaudited Condensed
Consolidated Financial Statements.
6
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
Net income (loss)................................................. $ (307) $ (2,018) $ 371 $ (2,744)
Other comprehensive income (loss), net of deferred
income taxes:
Foreign currency translation adjustments, net of income
taxes of $0.................................................... 6 (16) 5 (14)
Change in net unrealized gains and losses:
Unrealized holding gains and losses on available-for-sale
securities................................................... 4 (29) 13 (67)
Reclassification adjustment for gains and losses included
in net income (loss)......................................... - (4) - 10
Deferred income taxes.......................................... - - - -
---------- ---------- ---------- ----------
Other comprehensive income (loss)................................. 10 (49) 18 (71)
---------- ---------- ---------- ----------
Comprehensive income (loss)....................................... $ (297) $ (2,067) $ 389 $ (2,815)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
See accompanying Notes which are an integral part of these Unaudited Condensed
Consolidated Financial Statements.
7
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
As used herein, the terms "registrant," "Company," "we," "us" and "our"
refer to Berkeley Technology Limited. Except as the context otherwise requires,
the term "Group" refers collectively to the registrant and its subsidiaries.
Note 1. Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated financial statements are unaudited
and have been prepared by the Company in conformity with United States generally
accepted accounting principles ("U.S. GAAP"). These unaudited condensed
consolidated financial statements include the accounts of the Company, its
subsidiaries, the Employee Share Option Trust ("ESOT") and the Agent Loyalty
Opportunity Trust ("ALOT"). Significant subsidiaries included in the operations
of the Group and discussed in this document include London Pacific Assurance
Limited ("LPAL") and Berkeley International Capital Corporation ("BICC"). All
intercompany transactions and balances have been eliminated in consolidation.
Certain information and note disclosures normally included in the Company's
annual consolidated financial statements have been condensed or omitted. In the
opinion of management, the unaudited condensed consolidated financial statements
reflect all adjustments (consisting of normal recurring accruals) which are
necessary for a fair statement of the results for the interim periods presented.
While the Company's management believes that the disclosures presented are
adequate to make the information not misleading, these unaudited condensed
consolidated financial statements should be read in conjunction with the audited
financial statements and related notes for the year ended December 31, 2006,
which are contained in the Company's Annual Report on Form 10-K, filed with the
U.S. Securities and Exchange Commission ("SEC") on March 23, 2007. The December
31, 2006 condensed balance sheet data was derived from audited financial
statements but does not include all disclosures required by U.S. GAAP.
The results for the six month period ended June 30, 2007 are not indicative
of the results to be expected for the full fiscal year.
The unaudited condensed consolidated balance sheets are presented in an
unclassified format as the majority of the Group's assets relate to its life
insurance and annuities business. The Group's other business is venture capital
and consulting.
The Company is incorporated under the laws of Jersey, Channel Islands. Its
Ordinary Shares are traded on the London Stock Exchange and in the U.S. on the
Over-the-Counter Bulletin Board in the form of American Depositary Shares
("ADSs"), which are evidenced by American Depositary Receipts ("ADRs"). Each ADS
represents ten Ordinary Shares. Pursuant to the regulations of the SEC, the
Company is considered a U.S. domestic registrant and must file financial
statements prepared under U.S. GAAP.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of these unaudited condensed consolidated financial
statements as well as the reported amount of revenues and expenses during this
reporting period. Actual results could differ from these estimates. Certain
estimates such as fair value and actuarial assumptions have a significant impact
on the gains and losses recorded on investments and the balance of life
insurance policy liabilities.
8
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Recently Issued Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board ("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.
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 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 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, there was no impact on the Company's
consolidated financial statements upon adoption of SOP 05-1.
9
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2. Earnings Per Share and ADS
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share." This
statement requires the presentation of basic and diluted earnings per share.
Basic earnings per share is calculated by dividing net income or loss by the
weighted-average number of Ordinary Shares outstanding during the applicable
period, excluding shares held by the ESOT and the ALOT which are regarded as
treasury stock for the purposes of this calculation. The Company has issued
employee share options, which are considered potential common stock under SFAS
128.
The Company has also issued Ordinary Share warrants to 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." As the Company recorded a net loss for both of the
three month periods ended June 30, 2007 and 2006, and for the six month period
ended June 30, 2006, the calculations of diluted loss per share for these
periods do not include potentially dilutive employee share options and warrants
issued to the Bank of Scotland as they are anti-dilutive and, if included, would
have resulted in a reduction of the net loss per share. If the Company had
reported net income for both of the three month periods ended June 30, 2007 and
2006, and for the six month period ended June 30, 2006, there would have been an
additional 409,091, 16,250 and 8,125 shares, respectively, included in the
calculations of diluted earnings per share for these periods.
Earnings (loss) per ADS is equivalent to ten times earnings (loss) per
Ordinary Share.
10
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of the numerators and denominators for the basic and
diluted earnings (loss) per share calculations is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
(In thousands, except share,
per share and ADS amounts)
Income (loss) from continuing operations.......................... $ (307) $ (1,018) $ 371 $ (1,744)
Loss on discontinued operations................................... - (1,000) - (1,000)
---------- ---------- ---------- ----------
Net income (loss)................................................. $ (307) $ (2,018) $ 371 $ (2,744)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic earnings (loss) per share and ADS:
Weighted-average number of Ordinary Shares outstanding,
excluding shares held by the employee benefit trusts........... 50,916,692 50,916,692 50,916,692 50,916,692
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic earnings (loss) per share:
Continuing operations............................................. $ (0.01) $ (0.02) $ 0.01 $ (0.03)
Discontinued operations........................................... - (0.02) - (0.02)
---------- ---------- ---------- ----------
$ (0.01) $ (0.04) $ 0.01 $ (0.05)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic earnings (loss) per ADS:
Continuing operations............................................. $ (0.06) $ (0.20) $ 0.07 $ (0.34)
Discontinued operations........................................... - (0.20) - (0.20)
---------- ---------- ---------- ----------
$ (0.06) $ (0.40) $ 0.07 $ (0.54)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted earnings (loss) per share and ADS:
Weighted-average number of Ordinary Shares outstanding,
excluding shares held by the employee benefit trusts........... 50,916,692 50,916,692 50,916,692 50,916,692
Effect of dilutive securities (warrants and employee share
options)....................................................... - - 204,546 -
---------- ---------- ---------- ----------
Weighted-average number of Ordinary Shares used in
diluted earnings per share calculations........................ 50,916,692 50,916,692 51,121,238 50,916,692
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted earnings (loss) per share:
Continuing operations............................................. $ (0.01) $ (0.02) $ 0.01 $ (0.03)
Discontinued operations........................................... - (0.02) - (0.02)
---------- ---------- ---------- ----------
$ (0.01) $ (0.04) $ 0.01 $ (0.05)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted earnings (loss) per ADS:
Continuing operations............................................. $ (0.06) $ (0.20) $ 0.07 $ (0.34)
Discontinued operations........................................... - (0.20) - (0.20)
---------- ---------- ---------- ----------
$ (0.06) $ (0.40) $ 0.07 $ (0.54)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
11
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3. Investments
The Group's investments consist of fixed maturity and equity securities.
Fixed maturity securities are classified as either available-for-sale or
held-to-maturity, and equity securities are classified as either trading or
available-for-sale. The investments are accounted for as follows:
i) available-for-sale securities are recorded at fair value, with changes
in unrealized gains and losses excluded from net income, but reported
net of applicable income taxes and adjustments to deferred policy
acquisition cost amortization as a separate component of accumulated
other comprehensive income;
ii) held-to-maturity securities are recorded at amortized cost unless
these securities become other-than-temporarily impaired; and
iii) trading securities are recorded at fair value with changes in
unrealized gains and losses included in net income.
When a quoted market price is available for a security, the Group uses this
price to determine fair value. If a quoted market price is not available for a
security, management estimates the security's fair value based on appropriate
valuation methodologies.
For a discussion of the Company's accounting policies with respect to the
determination of fair value of investments and other-than-temporary impairments,
see the section entitled "Critical Accounting Policies" in Part I, Item 2
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" below. The Group's private securities primarily consist of
convertible preferred stock holdings in technology companies. Management
periodically reviews financial information with respect to the issuers of equity
securities held by the Group. In addition, management maintains contact with the
management of these issuers through ongoing dialogue to examine the issuers'
future plans and prospects.
Fixed Maturity Securities
The Group's fixed maturity securities are comprised of U.S. and non-U.S.
corporate debt securities. Generally, quoted market prices are available for
these securities.
An analysis of fixed maturity securities is as follows:
June 30, 2007 December 31, 2006
---------------------------------------------- ----------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(In thousands)
Available-for-Sale:
Non-U.S. corporate
debt securities......... $ - $ - $ - $ - $ 4,017 $ - $ (6) $ 4,011
Corporate debt securities.. 1,000 - (1) 999 5,004 - (8) 4,996
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
1,000 - (1) 999 9,021 - (14) 9,007
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Held-to-Maturity:
Corporate debt securities.. - - - - 3,009 - (5) 3,004
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
- - - - 3,009 - (5) 3,004
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total fixed maturity securities $ 1,000 $ - $ (1) $ 999 $ 12,030 $ - $ (19) $ 12,011
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
12
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Investment Concentration and Risk
As of June 30, 2007, the Group held one investment grade fixed maturity
security with a book value of $999,000 which represents less than 10% of the
Group's shareholders' equity as of June 30, 2007.
As of June 30, 2007, the Company's Jersey based life insurance subsidiary,
LPAL, owned 100% of the Group's $1.8 million in investments, including a private
corporate equity security valued at $0.8 million. Subsequent to June 30, 2007,
LPAL invested $1.0 million in another private corporate equity security. LPAL is
a regulated insurance company, and as such it must meet stringent capital
adequacy requirements and it may not make any distributions without the consent
of LPAL's independent actuary. LPAL's investments are therefore not currently
available to fund the operations or commitments of the Company or its other
subsidiaries.
Realized Gains and Losses
In the first quarter of 2007, the Company reported realized investment
gains of $1,198,000, 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.
This payment 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. However, such an amount and receipt is uncertain at this time. Since these
payments are for LPAL's account, they are not available to fund the operations
or commitment of the Company or its other subsidiaries.
Note 4. Other Assets
An analysis of other assets is as follows:
June 30, December 31,
2007 2006
------------ ------------
(In thousands)
Property, equipment and leasehold improvements, net............................... $ 14 $ 17
Prepayments....................................................................... 123 195
Receivables:
Due from broker................................................................ - 1
Fee income receivable.......................................................... 376 169
Other receivables.............................................................. 70 18
Allowance for doubtful accounts................................................ (34) (34)
------------ ------------
Total other assets................................................................ $ 549 $ 366
------------ ------------
------------ ------------
Note 5. 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.
13
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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.
Share based compensation expense recognized in the Company's consolidated
statement of operations for the first quarter of 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. No share options were granted
during all of 2006. Share based compensation expense for the second quarter and
first six months of 2007 includes compensation expense for share options granted
prior to, but not yet vested as of December 31, 2006, as well as compensation
expense for 4.5 million share options granted on March 27, 2007. 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 of zero percent for both the three month periods ended June 30,
2007 and 2006, and for both the six months ended June 30, 2007 and 2006, is
based upon the fact that all unvested options relate to longstanding employees
and directors.
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 first six months of 2007
or 2006.
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.
14
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Valuation and expense information under SFAS 123R
The estimated fair value of share option compensation awards to employees
and directors, 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 three months ended June 30, 2007 and 2006,
compensation expense related to share options under SFAS 123R totaled $22,000
and $15,000, respectively, and is included in operating expenses in the
accompanying statement of operations. For the six months ended June 30, 2007 and
2006, compensation expense related to share options under SFAS 123R totaled
$27,000 and $47,000, respectively.
During the first quarter of 2007, as noted above, 4,500,000 options were
granted with an exercise price equal to the fair market value of the underlying
shares on the grant date which was $0.10. There were no new option grants during
the second quarter of 2007. At June 30, 2007, there were 9,725,000 options
outstanding with a weighted average exercise price of $1.44. Of these options,
4,725,000 were exercisable at June 30, 2007, and these have a weighted average
exercise price of $2.85. The remaining 5,000,000 options were unvested at June
30, 2007. These unvested options have a weighted average exercise price of
$0.11. As of June 30, 2007, total unrecognized compensation expense related to
unvested share options was $297,000, of which $43,000 is expected to be
recognized during the remainder of 2007 and the balance of $254,000 is expected
to be recognized over 2008 through 2011.
The weighted-average fair value of share based payments was estimated using
a Black-Scholes option pricing model with the following assumptions:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2007 2006 (1) 2007 2006 (1)
---------- ---------- ---------- ----------
Expected stock price volatility................................... - - 66% -
Risk-free interest rate........................................... - - 4.52% -
Expected term (in years).......................................... - - 6.25 -
Dividend yield.................................................... - - - -
<FN>
(1) No grants were made in the three months ended June 30, 2007 and 2006, and in
the six months ended June 30, 2006.
</FN>
For additional information relating to the Group's Ordinary Share options,
see Note 13 to the Company's consolidated financial statements included in its
Form 10-K for the year ended December 31, 2006.
Note 6. Income Taxes
In June 2006, the FASB issued Interpretation No. 48 ("FIN 48"), "Accounting
for Uncertainty in Income Taxes." FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial statements
in accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." This interpretation 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. FIN
48 also provides guidance on de-recognition of tax benefits, classification on
the balance sheet, interest and penalties, accounting in interim periods,
disclosure and transition. The Company adopted FIN 48 effective on January 1,
2007.
The Company's management believes that its income tax positions would be
sustained upon examination by appropriate taxing authorities based on the
technical merits of such positions, and therefore the Company has not provided
for any unrecognized tax benefits at the adoption date. In general, the
Company's tax returns remain subject to examination by taxing authorities for
the tax years 2002 through 2006.
15
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7. Commitments and Contingencies
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 June 30, 2007.
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 sometime 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
June 30, 2007.
Note 8. Business Segment and Geographical Information
The Company's reportable operating segments are classified according to its
businesses of venture capital and consulting, and life insurance and annuities.
Intercompany transfers between reportable operating segments are accounted
for at prices which are designed to be representative of unaffiliated third
party transactions.
Summary revenue and investment gain (loss) information by geographic
segment, based on the domicile of the Group company generating those revenues,
is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
(In thousands)
Jersey............................................................ $ 155 $ 263 $ 1,527 $ 535
Guernsey.......................................................... 21 26 47 55
United States..................................................... 394 124 630 388
---------- ---------- ---------- ----------
Consolidated revenues and net investment gains and
losses......................................................... $ 570 $ 413 $ 2,204 $ 978
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
16
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenues and income (loss) for continuing operations before income tax
expense for the Company's reportable operating segments, based on management's
internal reporting structure, were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
(In thousands)
Revenues and net investment gains and losses:
Venture capital and consulting ................................... $ 365 $ 123 $ 570 $ 330
Life insurance and annuities ..................................... 147 252 1,511 523
---------- ---------- ---------- ----------
512 375 2,081 853
Reconciliation of segment amounts to consolidated amounts:
Interest and other fee income..................................... 58 38 123 125
---------- ---------- ---------- ----------
Consolidated revenues and net investment gains
and losses..................................................... $ 570 $ 413 $ 2,204 $ 978
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Income (loss) before income taxes:
Venture capital and consulting ................................... $ 27 $ (127) $ (130) $ (173)
Life insurance and annuities ..................................... (1) (63) 1,150 (144)
---------- ---------- ---------- ----------
26 (190) 1,020 (317)
Reconciliation of segment amounts to consolidated amounts:
Interest and other fee income .................................... 58 38 123 125
Corporate expenses ............................................... (391) (866) (770) (1,547)
---------- ---------- ---------- ----------
Consolidated income (loss) from continuing operations
before income tax expense...................................... $ (307) $ (1,018) $ 373 $ (1,739)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
17
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As used herein, the terms "registrant," "Company," "we," "us" and "our"
refer to Berkeley Technology Limited. Except as the context otherwise requires,
the term "Group" refers collectively to the registrant and its subsidiaries.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the unaudited condensed
consolidated financial statements, and the notes thereto, included in this
quarterly report, and the December 31, 2006 audited consolidated financial
statements, and the notes thereto, included in our 2006 Annual Report on Form
10-K filed with the SEC on March 23, 2007. The unaudited condensed consolidated
financial statements are prepared in accordance with U.S. GAAP. This item should
also be read in conjunction with the "Forward-Looking Statements and Factors
That May Affect Future Results" which are set forth below and in our other
filings with the SEC.
Forward-Looking Statements and Factors That May Affect Future Results
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this report contain forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Such forward-looking statements are based on current
expectations, estimates, forecasts and projections about the industries in which
we operate, management's current beliefs and assumptions made by management.
Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," "goals," variations of such words and similar expressions are
intended to identify such forward-looking statements. These statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions that are difficult to predict. Future outcomes and results may
differ materially from what is expressed or forecasted in such forward-looking
statements. We undertake no obligation to update any forward-looking statements,
whether as a result of new information, future developments or otherwise.
Factors that could cause or contribute to deviations from the
forward-looking statements include those discussed in this section, elsewhere in
this report and in our other filings with the SEC. The factors include, but are
not limited to, (i) the risks described in Item 3 "Quantitative and Qualitative
Disclosures About Market Risk," (ii) variations in demand for our products and
services, (iii) the success of our new products and services, (iv) significant
changes in net cash flows in or out of our businesses, (v) fluctuations in the
performance of debt and equity markets worldwide, (vi) the enactment of adverse
state, federal or foreign regulation or changes in government policy or
regulation (including accounting standards) affecting our operations, (vii) the
effect of economic conditions and interest rates in the U.S., the U.K. or
internationally, (viii) the ability of our subsidiaries to compete in their
respective businesses, (ix) our ability to attract and retain key personnel, and
(x) actions by governmental authorities that regulate our businesses, including
insurance commissions.
18
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
Venture Capital and Consulting
Certain information regarding our venture capital and consulting segment's
results of operations is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
(In thousands)
Revenues and net investment gains (losses):
Consulting fees................................................... $ 365 $ 156 $ 570 $ 306
Change in net unrealized investment gains and losses on
trading securities............................................. - (33) - 24
---------- ---------- ---------- ----------
Total revenues and net investment gains (losses).................. 365 123 570 330
Operating expenses................................................ 338 250 700 503
---------- ---------- ---------- ----------
Income (loss) from continuing operations
before income tax expense..................................... $ 27 $ (127) $ (130) $ (173)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Second quarter of 2007 compared to second quarter of 2006
In the second quarter of 2007, the venture capital and consulting segment
contributed income before income taxes of $27,000 to our overall loss from
continuing operations before income taxes, compared to a loss before income
taxes of $127,000 in the second quarter of 2006. The improved results for the
second quarter of 2007 were attributable primarily to higher consulting fee
income.
The venture capital and consulting segment earned consulting fees of
$365,000 during the second quarter of 2007, an increase of $209,000 from the
second quarter of 2006, due to an increase in the number of consulting clients.
BICC works with Silicon Valley telecommunications equipment and application
software companies in dealing with large incumbent European telecommunications
companies. It also represents strategic investors operating in the
telecommunications industry seeking to invest in Silicon Valley firms at the
forefront of technology innovation.
Operating expenses increased by $88,000 to $338,000 in the second quarter
of 2007 compared to the second quarter of 2006, primarily due to higher staff
costs allocated to this segment. During 2006, some employees who are normally
dedicated to the venture capital and consulting segment spent part of their time
on certain corporate matters. During the second quarter of 2007, these employees
were able to focus more fully on venture capital and consulting activities.
In prior years, this segment's results were significantly impacted by
fluctuations in the market value of its portfolio of listed equity securities.
As of the end of the third quarter of 2006, all listed equity investments had
been sold, and our results are no longer impacted by equity market volatility.
First six months of 2007 compared to first six months of 2006
In the first six months of 2007, the venture capital and consulting segment
contributed a loss before income taxes of $130,000 to our overall income before
income taxes, compared to a loss before income taxes of $173,000 in the first
six months of 2006. The lower loss for the first six months of 2007 was
attributable primarily to higher consulting fee income, partially offset by an
increase in operating expenses.
Consulting fees increased by $264,000 to $570,000 for the first six months
of 2007 due to an increase in the number of consulting clients.
19
Operating expenses in this segment increased by $197,000 for the first six
months of 2007 compared to the first six months of 2006 primarily due to higher
staff costs allocated to this segment. During the first half of 2006, some
employees who are normally dedicated to the venture capital and consulting
segment spent part of their time on certain corporate matters. During 2007,
these employees were able to focus more fully on venture capital and consulting
activities.
Life Insurance and Annuities
Certain information regarding our life insurance and annuities segment's
results of operations is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
(In thousands)
Revenues and net investment gains (losses):
Investment income................................................. $ 147 $ 250 $ 313 $ 521
Insurance policy charges.......................................... - 2 - 2
Net realized investment losses.................................... - - 1,198 -
Change in net unrealized investment gains and losses on
trading securities............................................. - - - -
---------- ---------- ---------- ----------
Total revenues and net investment gains (losses).................. 147 252 1,511 523
Expenses:
Amounts credited on insurance policyholder accounts............... 10 137 40 307
General and administrative expenses............................... 138 178 321 360
---------- ---------- ---------- ----------
Total expenses.................................................... 148 315 361 667
---------- ---------- ---------- ----------
Income (loss) from continuing operations
before income tax expense..................................... $ (1) $ (63) $ 1,150 $ (144)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
LPAL's policyholder liabilities fell during the second quarter of 2007 by
$1.8 million to $0.2 million due to maturing policies. LPAL now focuses on
managing the remaining block of policyholder liabilities.
Second quarter of 2007 compared to second quarter of 2006
In the second quarter of 2007, LPAL contributed a loss before income taxes
of $1,000 to our overall loss before income taxes, compared to a loss of $63,000
in the second quarter of 2006.
Interest income on investments declined by $103,000 to $147,000 in the
second quarter of 2007, primarily due to the decline in the level of LPAL's
corporate bond investments, which was consistent with the decline in
policyholder liabilities since the second quarter of 2006. The level of
corporate bonds held by LPAL decreased from $14.6 million at June 30, 2006 to
$1.0 million at June 30, 2007. Interest credited on policyholder accounts
decreased by $127,000 to $10,000 in the second quarter of 2007, compared with
the second quarter of 2006. This decrease was primarily due to policy maturities
since the second quarter of 2006. The average rate credited to policyholders was
4.4% during the second quarter of 2007, compared with 5.1% during the second
quarter of 2006.
Total invested assets decreased to $12.2 million as of June 30, 2007,
compared with $13.9 million as of March 31, 2007 primarily due to policyholder
benefits paid of $1.8 million during the second quarter of 2007. On total
average invested assets in the second quarter of 2007, the average annualized
net return was 4.6%, compared with 4.8% in the second quarter of 2006.
20
Policyholder liabilities as of June 30, 2007 were $189,000. There are only
four policies remaining totaling $144,000. These are scheduled to mature in
2009. The balance of $45,000 relates to two death claims which are pending
payment.
General and administrative expenses declined by $40,000 to $138,000 in the
second quarter of 2007 compared to the second quarter of 2006. This decrease was
due primarily to reduced facilities costs subsequent to the sublease of our
Jersey office in mid-2006 and to reduced staff costs due to the reduction in
staff in January 2007.
First six months of 2007 compared to first six months of 2006
In the first six months of 2007, LPAL contributed income before income
taxes of $1.2 million to our overall income before income taxes, compared to a
loss before income taxes of $0.1 million in the first six months of 2006.
Interest income on investments declined by $208,000 to $313,000 in the
first six months of 2007, primarily due to the decline in the level of LPAL's
corporate bond investments, which was consistent with the decline in
policyholder liabilities since the first half of 2006. The level of corporate
bonds held by LPAL decreased from $14.6 million at June 30, 2006 to $1.0 million
at June 30, 2007. Interest credited on policyholder accounts decreased by
$267,000 to $40,000 in the first six months of 2007, compared with the first six
months of 2006. This decrease was primarily due to policy maturities since the
end of the second quarter of 2006. The average rate credited to policyholders
was 4.3% during the first six months of 2007, compared with 5.2% during the
first six months of 2006.
Total invested assets decreased to $12.2 million as of June 30, 2007,
compared with $14.5 million as of December 31, 2006 primarily due to
policyholder benefits paid of $3.5 million during the first six months of 2007.
On total average invested assets in the first six months of 2007, the average
annualized net return was 22.5%, compared with 4.4% in the first six months of
2006. Realized investment gains for the first six months of 2007 were $1.2
million. This amount was received in January 2007 and represented 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. This payment reverses part of the realized loss
recorded in 2002. LPAL expects to receive an additional $0.4 million as a final
distribution later in 2007. However, such an amount and receipt is uncertain at
this time.
Policyholder liabilities as of June 30, 2007 were $189,000. There are only
four policies remaining totaling $144,000. These are scheduled to mature in
2009. The balance of $45,000 relates to two death claims which are pending
payment.
Included in general and administrative expenses for the first six months
of 2007 are $44,000 of employee severance costs. Excluding the $44,000 of
employee severance costs, general and administrative expenses for the first six
months of 2007 were $277,000, compared to $360,000 for the first six months of
2006. This $83,000 decrease was due primarily to lower staff costs as well as to
lower facilities costs subsequent to the sublease of our Jersey office space in
mid-2006.
Corporate and Other
Second quarter of 2007 compared to second quarter of 2006
Corporate expenses decreased by $0.5 million to $0.4 million in the
second quarter of 2007, compared to the second quarter of 2006. This decrease
was due primarily to $0.2 million of losses associated with the sublease of our
Jersey office recorded in 2006, and due to the settlement of the SunGard
litigation matter during 2006 which resulted in lower legal fees and lower staff
cost allocations to the corporate segment in the second quarter of 2007.
21
First six months of 2007 compared to first six months of 2006
Corporate expenses decreased by $0.8 million to $0.8 million in the first
six months of 2007, compared to the first six months of 2006. This decrease was
due primarily to losses associated with the sublease of our Jersey office
recorded in 2006, and due to the settlement of the SunGard litigation matter
during 2006 which resulted in lower legal fees and lower staff cost allocations
to the corporate segment in the first six months of 2007.
Consolidated Income (Loss) from Continuing Operations Before Income Tax Expense
Second quarter of 2007 compared to second quarter of 2006
Our consolidated loss from continuing operations before income tax expense
was $0.3 million in the second quarter of 2007, compared to a loss of $1.0
million in the second quarter of 2006. This lower loss was due primarily to a
$0.2 million increase in consulting fee income and a $0.4 million decrease in
operating expenses. As discussed above, in the second quarter of 2006 there were
losses of $0.2 million associated with the sublease of our Jersey office and
$0.2 million of legal fees related to the SunGard litigation matter.
We continue to pursue opportunities to grow the business in the future,
however, there is no guarantee that we will be successful in redeveloping our
venture capital and consulting operations.
First six months of 2007 compared to first six months of 2006
Our consolidated income from continuing operations before income tax
expense was $0.4 million in the first six months of 2007, compared to a loss of
$1.7 million in the first six months of 2006. The improved results for the first
six months of 2007 were due primarily to the $1.2 million realized gain from the
partial settlement proceeds from the WorldCom, Inc. securities litigation, the
$0.25 million increase in consulting fee income, and the $0.6 million decrease
in operating expenses. The decrease in operating expenses was primarily
attributable to the non-recurring losses related to the Jersey office sublease
and the legal fees related to the SunGard litigation matter in the first six
months of 2006.
Income Taxes
We are subject to taxation on our income in all countries in which we
operate based upon the taxable income arising in each country. However, realized
gains on certain investments are exempt from Jersey and Guernsey taxation. We
are subject to income tax in Jersey at a rate of 20%. In the United States, we
are subject to both federal and California taxes at rates up to 34% and 8.84%,
respectively.
Second quarter of 2007 compared to second quarter of 2006
We had no tax expense and recorded no tax benefits in the second quarter of
2007, though we had a $0.3 million loss before income taxes. Although $0.3
million of losses were contributed by our Jersey and Guernsey operations during
the second quarter of 2006, we did not recognize any tax benefits due to the
uncertainty surrounding their recovery before expiry. Losses of $30,000 were
contributed by our U.S. subsidiaries during the period; however, we did not
recognize any U.S. tax benefits due to the 100% valuation allowances that we
have provided for all deferred tax assets.
First six months of 2007 compared to first six months of 2006
We recorded only $2,000 of tax expense in the first six months of 2007,
related to minimum California taxes. Net income of $0.6 million was contributed
by our Jersey and Guernsey operations during the period, which included $1.2
million of untaxed investment gains related to the partial WorldCom, Inc.
litigation settlement. Losses of $0.3 million were contributed by our U.S.
subsidiaries during the period; however, we did not recognize any U.S. tax
benefits due to the 100% valuation allowances that we have provided for all
deferred tax assets.
22
Discontinued Operations
Second quarter (and first six months) of 2007 compared to second quarter (and
first six months) of 2006
The $1.0 million loss on discontinued operations for the second quarter of
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 LPA in June 2003 held back to
cover any of the Group's indemnity obligations (see Note 4 "Cash Held in Escrow"
of our Consolidated Financial Statements included in our Form 10-K for the year
ended December 31, 2006).
CRITICAL ACCOUNTING POLICIES
Management has identified those accounting policies that are most important
to the accurate portrayal of our financial condition and results of operations
and that require management's most complex or subjective judgments, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain. These most critical accounting policies pertain to our
investments and life insurance policy liabilities, and are described below.
Determination of Fair Values of Investments
When a quoted market price is available for a security, we use this price
in the determination of fair value. If a quoted market price is not available
for a security, management estimates the security's fair value based on
valuation methodologies as described below.
We hold investments in privately held equity securities, primarily
convertible preferred stock in venture capital companies doing business in
various segments of technology industries. Venture capital investing entails
making investments in companies that are developing products or services for
large emerging markets with the belief that these investments will yield
superior returns if these companies are successful. These investments are
normally held for a number of years. When we make these investments, most of the
companies are still developing the products they intend to bring to market or
are in the early stages of product sales. Venture capital financed companies are
net consumers of cash and often dependent upon additional financing to execute
their business plans. These investments involve substantial risk and the
companies generally lack meaningful historical financial results used in
traditional valuation models. The process of pricing these securities range from
fierce competitive bidding between financial institutions to existing investors
negotiating prices with the company without outside investor validation.
Investments in convertible preferred stock come with rights that vary
dramatically both from company to company and between rounds of financing within
the same company. These rights, such as anti-dilution, redemption, liquidation
preferences and participation, bear directly on the price an investor is willing
to pay for a security. The returns on these investments are generally realized
through an initial public offering of the company's shares or, more commonly,
through the company's acquisition by a public company.
One of the factors affecting fair value is the amount of time before a
company requires additional financing to support its operations. Management
believes that companies that are financed to the estimated point of operational
profitability or for a period greater than one year will most likely return
value to the investor through an acquisition between a willing buyer and seller,
as the company does not need to seek financing from an opportunistic investor or
insider in an adverse investment environment. If a particular company needs
capital in the near term, management considers a range of factors in its fair
value analysis, including our ability to recover our investment through
surviving liquidation preferences. Management's valuation methodologies also
include fundamental analysis that evaluates the investee company's progress in
developing products, building intellectual property portfolios and securing
customer relationships, as well as overall industry conditions, conditions in
and prospects for the investee's geographic region, and overall equity market
conditions. This is combined with analysis of comparable acquisition
transactions and values to determine if the security's liquidation preferences
will ensure full recovery of our investment in a likely acquisition outcome. In
its valuation analysis, management also considers the most recent transaction in
a company's shares.
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The determination of fair values of investments requires the application of
significant judgment. It is possible that the factors evaluated by management
and fair values will change in subsequent periods, especially with respect to
our privately held equity securities in technology companies, resulting in
material impairment charges in future periods.
Other-than-temporary Impairments
Management performs an ongoing review of all investments in the portfolio
to determine if there are any declines in fair value that are
other-than-temporary.
In relation to our equity securities that do not have a readily
determinable fair value and are classified as available-for-sale, factors we
consider in impairment reviews include: (i) the length of time and extent to
which estimated fair values have been below cost and the reasons for the
decline, (ii) the investee's recent financial performance and condition,
earnings trends and future prospects, (iii) the market condition of either the
investee's geographic area or industry as a whole, and (iv) concerns regarding
the investee's ability to continue as a going concern (such as the inability to
obtain additional financing). If the evidence supports that a decline in fair
value is other-than-temporary, then the investment is reduced to its estimated
fair value, which becomes its new cost basis, and a realized loss is reflected
in earnings.
We determine that a fixed maturity security is impaired when it is probable
that we will not be able to collect amounts due (principal and interest)
according to the security's contractual terms. We make this determination by
considering all available facts and circumstances, including our intent and
ability to continue to hold the investment to maturity. The factors we consider
include: (i) the length of time and extent to which the market values have been
below amortized cost and the reasons for the decline, (ii) the issuer's recent
financial performance and condition, earnings trends and future prospects in the
near to mid-term, (iii) changes in the issuer's debt rating and/or regulatory
actions or other events that may effect the issuer's operations, (iv) the market
condition of either the issuer's geographic area or industry as a whole, and (v)
factors that raise doubt about the issuer's ability to continue as a going
concern. If the evidence supports that a decline in fair value is
other-than-temporary, then the fixed maturity security is written down to its
quoted market value, if such a value is available. If a readily determinable
fair value does not exist, then the fixed maturity security is written down to
management's estimate of its fair value, which is based on the valuation
methodologies described above. Write-downs are recorded as realized losses and
included in earnings.
The evaluations for other-than-temporary impairments require the
application of significant judgment. It is possible that the impairment factors
evaluated by management and fair values will change in subsequent periods,
especially with respect to privately held equity securities in technology
companies, resulting in material impairment charges in future periods.
Life Insurance Policy Liabilities
We account for life insurance policy liabilities in accordance with
Statement of Financial Accounting Standards No. 97, "Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains
and Losses from the Sale of Investments." We account for life insurance policy
liabilities for deferred annuities as investment-type insurance products and we
record these liabilities at accumulated value (premiums received, plus accrued
interest to the balance sheet date, less withdrawals and assessed fees).
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents increased during the first six months of 2007
by $8.0 million to $14.7 million. This increase in cash and cash equivalents
resulted from $12.2 million of cash provided by investing activities, partially
offset by $3.5 million used in financing activities and $0.7 million used in
operating activities. Cash used in financing activities related to insurance
policyholder benefits paid by LPAL. Cash used in operating activities primarily
resulted from the $0.8 million operating loss from continuing operations for the
first six months of 2007 (this excludes the $1.2 million realized gain related
to the WorldCom, Inc. partial litigation
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settlement payment). Cash provided by investing activities relates to the
maturity of $11.0 million of fixed maturity securities held by the Group and
LPAL and the $1.2 million WorldCom payment. As of June 30, 2007, our cash and
cash equivalents, excluding the amount held by LPAL, amounted to $4.4 million,
an increase of $2.0 million from December 31, 2006.
Shareholders' equity increased during the first six months of 2007 by $0.4
million from $15.9 million at December 31, 2006 to $16.3 million at June 30,
2007, primarily due to the net income for the period of $0.4 million. As of June
30, 2007 and December 31, 2006, $62.6 million of our Ordinary Shares, at cost,
held by the employee benefit trusts have been netted against shareholders'
equity.
As discussed above in "Results of Operations by Business Segment - Life
Insurance and Annuities, during the first six months of 2007 LPAL continued to
service its existing policyholders. During this period, policy surrenders
totaled $27,000 and policy maturities totaled $3.5 million. Policyholder
liabilities were $0.2 million as of June 30, 2007, compared to $3.6 million as
of December 31, 2006. We do not expect surrender activity during the remaining
six months of 2007 and no policyholder liabilities are scheduled to mature until
2009. As of June 30, 2007, LPAL had cash of $10.3 million and a $1.0 million
corporate bond which matured in July 2007. Subsequent to June 30, 2007, LPAL
invested $1.0 million in a private corporate equity security. LPAL expects to
receive an additional $0.4 million as a final distribution later in 2007 from
the settlements achieved in the WorldCom, Inc. securities litigation. However,
such an amount and receipt is uncertain at this time.
In prior years, LPAL held listed equity securities at levels such that
fluctuations in the market value of these listed equity securities could have
had a significant impact on LPAL's statutory capital level. Following the sale
of LPAL's remaining listed equity holdings in January 2005, fluctuations in the
market value of LPAL's listed equity securities no longer have an impact on
LPAL's required statutory capital level.
As of June 30, 2007, we had no bank borrowings, guarantee obligations,
material commitments outstanding for capital expenditures or additional funding
for private equity portfolio companies.
As of June 30, 2007, we had $4.4 million of cash and cash equivalents,
excluding cash held by our life insurance and annuities segment. We believe that
this cash balance is sufficient to fund our operations (venture capital and
corporate activities) over at least the next 12 months.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The nature of our businesses exposes us to market risk. Market risk is the
risk of loss that may occur when changes in interest rates and public equity
prices adversely affect the value of invested assets.
Interest Rate Risk
LPAL is subject to risk from interest rate fluctuations when payments due
to policyholders are not matched in respect of amount and duration with income
from investments. LPAL attempts to minimize this risk by ensuring that payments
and income are matched as closely as possible while also maximizing investment
returns. LPAL has not used derivative financial instruments as part of its
investment strategy.
For LPAL's business, the amount of policyholder liabilities is unaffected
by changes in interest rates. Early policy redemptions are protected by a market
value adjustment and surrender penalty. In addition, LPAL's policyholder
liabilities are now down to $0.2 million as of June 30, 2007, a level where any
interest rate risk is minimal.
Interest income earned on cash and cash equivalents in LPAL and in the
remainder of the Group is expected to be approximately $0.3 million during the
remainder of 2007, therefore movements in market interest rates should not have
a material impact on our consolidated results.
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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 sold all of our listed equity
holdings and thus we are no longer exposed to equity price risk on listed equity
securities.
As of June 30, 2007, we held one private corporate equity security in a
technology company for which a liquid market does not exist. Subsequent to June
30, 2007, LPAL made a $1.0 million investment in another privately held
technology company. Private equity prices do not fluctuate directly with public
equity markets, but significant market movements may trigger a review for
other-than-temporary adjustment of the carrying values of our private equity
securities. The risks inherent in these private equity investments relate
primarily to the viability of the investee companies. We try to mitigate these
risks in various ways, including performing extensive due diligence prior to
making an investment, and regularly reviewing the progress of the investee
companies.
Item 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in our filings under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the periods specified in the rules and forms of the SEC. Such
information is accumulated and communicated to our management, including our
chief executive officer and chief financial officer, as appropriate, to allow
timely decisions regarding required disclosure. Our management, including the
chief executive officer and the chief financial officer, recognizes that any set
of controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives.
As of the end of the period covered by this quarterly report on Form 10-Q,
we carried out an evaluation, under the supervision and with the participation
of our management, including our chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on such evaluation, our chief executive officer
and chief financial officer concluded that our disclosure controls and
procedures were effective as of the end of the period covered by the quarterly
report on Form 10-Q.
There were no changes in our internal controls over financial reporting
during the quarter ended June 30, 2007 that materially affected, or that could
reasonably likely materially affect, our internal controls over financial
reporting.
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PART II - OTHER INFORMATION
Item 1A. RISK FACTORS
There are no material changes from the risk factors as previously disclosed
in our Form 10-K for the year ended December 31, 2006 in response to Item 1A to
Part I of Form 10-K.
Item 6. EXHIBITS
The following exhibits are filed herewith:
Exhibit
Number Description
- ------- -----------
31.1 Certification by the Company's Executive Chairman pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification by the Company's Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification by the Company's Executive Chairman pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification by the Company's Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BERKELEY TECHNOLOGY LIMITED
(Registrant)
Date: August 14, 2007 By: /s/ Ian K. Whitehead
Ian K. Whitehead
Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer of the Registrant)
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
EXHIBIT INDEX FOR THE QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2007
Exhibit
Number Description
- ------- -----------
31.1 Certification by the Company's Executive Chairman pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification by the Company's Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification by the Company's Executive Chairman pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification by the Company's Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
28