UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2008
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 of (I.R.S. Employer Identification No.)
incorporation or organization)
Wests Centre, Bath Street
St. Helier, Jersey JE2 4ST
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 a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ]
Smaller reporting company [X] (Do not check if a smaller
reporting company)
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 May 15, 2008, the registrant had outstanding 64,439,073 Ordinary
Shares, par value $0.05 per share.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Page
Item 1. Financial Statements:
Unaudited Condensed Consolidated Balance Sheets as of March 31, 2008 and
December 31, 2007............................................................................ 3
Unaudited Condensed Consolidated Statements of Operations for the three months
ended March 31, 2008 and 2007................................................................ 4
Unaudited Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2008 and 2007................................................................ 5
Unaudited Consolidated Statement of Changes in Shareholders' Equity for the three months
ended March 31, 2008......................................................................... 6
Unaudited Consolidated Statements of Comprehensive Income for the three months
ended March 31, 2008 and 2007................................................................ 7
Notes to Unaudited Condensed Consolidated Financial Statements................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 24
Item 4. Controls and Procedures.......................................................................... 24
PART II
OTHER INFORMATION
Item 1A. Risk Factors..................................................................................... 24
Item 6. Exhibits......................................................................................... 24
Signature ................................................................................................. 25
Exhibit Index............................................................................................... 26
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
March 31, December 31,
2008 2007
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 14,124(1) $ 14,568
Accounts receivable, less allowances of $34 as of March 31, 2008
and December 31, 2007...................................................... 443 423
Interest receivable............................................................ 9 14
Prepaid expenses and deposits.................................................. 120 164
------------ ------------
Total current assets.............................................................. 14,696 15,169
Private equity investments (at lower of cost or estimated fair value)............. 1,984(1) 1,984
Property and equipment, net of accumulated depreciation of $173 and $175
as of March 31, 2008 and December 31, 2007, respectively....................... 14 14
------------ ------------
Total assets...................................................................... $ 16,694 $ 17,167
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.......................................... $ 499 $ 547
Policyholder liabilities (due in less than one year)........................... 129 46
------------ ------------
Total current liabilities......................................................... 628 593
Policyholder liabilities (due in more than one year).............................. 13 95
------------ ------------
Total liabilities................................................................. 641 688
------------ ------------
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 March 31, 2008
and December 31, 2007.......................................................... 3,222 3,222
Additional paid-in capital........................................................ 67,811 67,789
Retained earnings................................................................. 8,017 8,465
Employee benefit trusts, at cost (13,522,381 shares as of
March 31, 2008 and December 31, 2007).......................................... (62,598) (62,598)
Accumulated other comprehensive loss.............................................. (399) (399)
------------ ------------
Total shareholders' equity........................................................ 16,053 16,479
------------ ------------
Total liabilities and shareholders' equity........................................ $ 16,694 $ 17,167
------------ ------------
------------ ------------
<FN>
(1) Includes $1,844 of investments and $10,600 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
March 31,
-------------------------------
2008 2007
------------- -------------
Revenues:
Consulting fee income............................................................. $ 114 $ 205
Investment income................................................................. 121 231
Realized investment gains......................................................... 270 1,198
------------- -------------
505 1,634
Expenses:
Operating expenses................................................................ 950 924
Amounts credited on insurance policyholder accounts............................... 1 30
------------- -------------
951 954
------------- -------------
Income (loss) before income tax expense........................................... (446) 680
Income tax expense................................................................ 2 2
------------- -------------
Net income (loss)................................................................. $ (448) $ 678
------------- -------------
------------- -------------
Basic and diluted earnings (loss) per share....................................... $ (0.01) $ 0.01
------------- -------------
------------- -------------
Basic and diluted earnings (loss) per ADS......................................... $ (0.09) $ 0.13
------------- -------------
------------- -------------
See accompanying Notes which are an integral part of these Unaudited
Condensed Consolidated Financial Statements.
4
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
March 31,
------------------------------
2008 2007
------------ ------------
Net cash used in operating activities............................................. $ (712) $ (532)
Cash flows from investing activities:
Proceeds from maturity of held-to-maturity fixed maturity securities.............. - 1,000
Proceeds from maturity of available-for-sale fixed maturity securities............ - 3,000
Proceeds from WorldCom, Inc. securities litigation settlement..................... 270 1,198
Capital expenditures.............................................................. (2) -
------------ ------------
Net cash provided by investing activities......................................... 268 5,198
------------ ------------
Cash flows from financing activities:
Insurance policyholder benefits paid.............................................. - (1,703)
------------ ------------
Net cash used in financing activities............................................. - (1,703)
------------ ------------
Net increase (decrease) in cash and cash equivalents.............................. (444) 2,963
Cash and cash equivalents at beginning of period.................................. 14,568 6,707
------------ ------------
Cash and cash equivalents at end of period (1).................................... $ 14,124 $ 9,670
------------ ------------
------------ ------------
<FN>
(1) The amount for March 31, 2008 includes $10,600 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, 2007............ 64,439 $ 3,222 $ 67,789 $ 8,465 $ (62,598) $ (399) $ 16,479
Net loss........................ - - - (448) - - (448)
Share based compensation,
including income tax
effect of $0................. - - 22 - - - 22
-------- --------- --------- --------- --------- ----------- ----------
Balance as of
March 31, 2008............... 64,439 $ 3,222 $ 67,811 $ 8,017 $ (62,598) $ (399) $ 16,053
-------- --------- --------- --------- --------- ----------- ----------
-------- --------- --------- --------- --------- ----------- ----------
See accompanying Notes which are an integral part of these Unaudited
Condensed Consolidated Financial Statements.
6
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three Months Ended
March 31,
------------------------------
2008 2007
------------ ------------
Net income (loss)................................................................. $ (448) $ 678
Other comprehensive income, net of deferred income taxes:
Foreign currency translation adjustments, net of income taxes of $0............... - (1)
Change in net unrealized gains and losses:
Unrealized holding gains and losses on available-for-sale securities........... - 9
------------ ------------
Other comprehensive income ....................................................... - 8
------------ ------------
Comprehensive income (loss)....................................................... $ (448) $ 686
------------ ------------
------------ ------------
See accompanying Notes which are an integral part of these Unaudited
Condensed Consolidated Financial Statements.
7
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
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, 2007,
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 31, 2008. The December
31, 2007 condensed balance sheet data was derived from audited financial
statements but does not include all disclosures required by U.S. GAAP.
The results for the three month period ended March 31, 2008 are not
indicative of the results to be expected for the full fiscal year.
From January 1, 2008, the unaudited condensed consolidated balance sheets
are presented in a classified format as is appropriate for a consulting company
rather than in an unclassified format as is appropriate for a life insurance and
annuities company. The majority of the Group's assets continue to be held by its
life insurance and annuities business; however, there are few policies remaining
and no new policies or maturities are expected in 2008. Policy maturities and
surrenders during 2007 were $3.6 million. This change has no impact on the
Company's shareholders' equity at January 1, 2008. The Group's primary business
is now consulting in venture capital. See Note 3 "Investments" below for a
discussion of the impact of this change on the Company's accounting policy for
its private equity investments.
The Company is incorporated under the laws of Jersey, Channel Islands.
Its Ordinary Shares are traded on the London Stock Exchange and in the U.S. on
the Over-the-Counter Bulletin Board in the form of American Depositary Shares
("ADSs"), which are evidenced by American Depositary Receipts ("ADRs"). Pursuant
to the regulations of the SEC, the Company is considered a U.S. domestic
registrant and must file financial statements prepared under U.S. GAAP.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of these unaudited condensed consolidated financial
statements
8
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
Recently Issued Accounting Pronouncements
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 financial assets and
financial liabilities within its scope for fiscal years beginning after November
15, 2007 and for interim periods within those fiscal years. The Company adopted
SFAS 157 for financial assets and financial liabilities within its scope during
the first quarter of 2008 and the adoption did not have an impact on its
financial statements. In February 2008, the FASB issued FASB Staff Position No.
FAS 157-2 ("FSP FAS 157-2"), "Effective Date of FASB Statement No. 157," which
defers the effective date of SFAS 157 for all non-financial assets and
non-financial liabilities for fiscal years beginning after November 15, 2008 and
interim periods within those fiscal years for items within the scope of FSP FAS
157-2. The adoption of FSP FAS 157-2 effective January 1, 2009 for the Company's
non-financial assets and non-financial liabilities is not expected to have an
impact on the Company's consolidated financial statements.
In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159 ("SFAS 159"), "The Fair Value Option for Financial Assets and
Financial Liabilities - Including an amendment of FASB Statement No 115." SFAS
159 permits entities to choose to measure many financial instruments and certain
other items at fair value that currently are not required to be measured at fair
value. SFAS 159 is effective no later than fiscal years beginning after November
15, 2007. While the Company had the option of adopting this standard for the
first quarter of 2008, the Company did not apply the provisions of SFAS 159 to
any existing financial instruments and therefore SFAS 159 did not have an impact
on its consolidated financial statements.
In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 141R ("SFAS 141R"), "Business Combinations." SFAS 141R requires
the acquiring entity in a business combination to recognize all of the assets
acquired and liabilities assumed in the transaction at fair value as of the
acquisition date. SFAS 141R is effective for business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The Company is currently
evaluating the effect that the adoption of SFAS 141R will have on its
consolidated financial statements. However, the adoption of SFAS 141R is not
expected to have an impact on the Company's consolidated financial statements.
In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 160 ("SFAS 160"), "Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51." SFAS 160 amends ARB 51 to
establish accounting and reporting standards for the noncontrolling interest in
a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary, which is sometimes referred to as a
minority interest, is an ownership interest in the consolidated entity that
should be reported in the equity section of the balance sheet. Among other
requirements, the statement requires that the consolidated net income
attributable to the parent and the noncontrolling interest be clearly identified
and presented on the face of the consolidated income statement. SFAS 160 is
effective for fiscal years beginning on or after December 15, 2008 and earlier
adoption is not permitted. The Company is currently evaluating the effect that
the adoption of SFAS 160 will have on its consolidated financial statements.
However, the adoption of SFAS 160 is not expected to have an impact on the
Company's consolidated financial statements.
9
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In March 2008, the FASB issued Statement of Financial Accounting
Standards No. 161 ("SFAS 161"), "Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133." This statement
requires enhanced disclosures about how derivative and hedging activities affect
an entity's financial position, financial performance and cash flows. SFAS 161
is effective for fiscal years and interim periods beginning after November 15,
2008, with early application encouraged. As the Company currently does not
engage in derivative and hedging activities, the adoption of SFAS 161 is not
expected to have an impact on the Company's consolidated financial statements.
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
Ordinary Share options, which are considered potential common stock under SFAS
128. The Company has also issued Ordinary Share warrants to Bank of Scotland in
connection with the Company's bank facility (now terminated), which are also
considered potential common stock under SFAS 128. Diluted earnings per share is
calculated by dividing net income by the weighted-average number of Ordinary
Shares outstanding during the applicable period as adjusted for these
potentially dilutive options and warrants which are determined based on the
"Treasury Stock Method."
For both of the three month periods ended March 31, 2008 and 2007, there
were no "in-the-money" options or warrants, and therefore no potentially
dilutive securities. As a result, diluted earnings (loss) per share is the same
as basic earnings (loss) per share.
Earnings (loss) per ADS is equivalent to ten times earnings (loss) per
Ordinary Share.
A reconciliation of the numerators and denominators for the basic and
diluted earnings (loss) per share calculations is as follows:
Three Months Ended
March 31,
------------------------------
2008 2007
------------ ------------
(In thousands, except per
share and ADS amounts)
Net income (loss)................................................................. $ (448) $ 678
------------ ------------
------------ ------------
Basic and diluted earnings (loss) per share and ADS:
Weighted average number of Ordinary Shares outstanding,
excluding shares held by the employee benefit trusts............................ 50,917 50,917
------------ ------------
Basic and diluted earnings (loss) per share....................................... $ (0.01) $ 0.01
------------ ------------
------------ ------------
Basic and diluted earnings (loss) per ADS......................................... $ (0.09) $ 0.13
------------ ------------
------------ ------------
10
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3. Investments
As discussed above in Note 1 "Basis of Presentation and Principles of
Consolidation," the Group's primary business for financial reporting purposes is
now considered to be consulting in venture capital rather than life insurance
and annuities. As such, the Group's private equity investments are now carried
at cost less any other-than-temporary impairments in accordance with Accounting
Principles Board Opinion No. 18 (As Amended) ("APB 18"), "The Equity Method of
Accounting for Investments in Common Stock." Previously, the Group carried its
private equity investments at fair value in accordance with Statement of
Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain
Investments in Debt and Equity Securities." Under paragraph 127(b) of SFAS 115,
insurance companies are required to report equity securities at fair value even
if they do not meet the scope criteria in paragraph 3 of SFAS 115. With respect
to the Group's private equity investments held at December 31, 2007, the Group's
best estimate of their fair value was their cost basis. Therefore, the change
from an insurance company for financial reporting purposes to a consulting
company as of January 1, 2008 did not have an impact on the carrying values of
the Group's private equity investments. Marketable debt and equity securities
will be carried at fair value in accordance with SFAS 115, should the Group make
such investments in the future.
As of March 31, 2008 and December 31, 2007, the Group's only investments
were private equity securities.
Because all of the Group's private equity investments are less than 20%
in the investee companies, and the Group does not have any significant influence
on the investee companies, all such investments are accounted for in accordance
with the cost method. The carrying amount of such investments is compared to
their estimated fair value, and if any impairment is determined to be
other-than-temporary, then an impairment charge would be taken during the period
such determination is made by the Group's management.
SFAS 157 defines fair value as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date (an exit price). SFAS 157 has also
established a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three broad levels. See Note 4 "Fair
Value Measurements and Disclosures" below for the three levels of the SFAS 157
hierarchy. Level 3 inputs apply to the determination of fair value for the
Group's private equity investments. These are unobservable inputs where 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
the Group's privately held equity securities in technology companies, resulting
in material impairment charges in future periods. Historically, the Group has
determined that its best estimate of the fair value of its private equity
investments has equaled its cost basis, unless there has been a temporary or
other-than-temporary impairment of the investment. From January 1, 2008, only
other-than-temporary impairments will be recognized and the carrying value of a
private equity investment cannot be increased above its cost unless the investee
company completes an initial public offering or is acquired. For the quarter
ended March 31, 2008, there were no other-than-temporary impairments of the
Group's private equity investments.
Investment Concentration and Risk
As of March 31, 2008, the Group's investments consisted of three private
corporate equity securities with individual carrying values of less then 10% of
the Group's shareholders' equity. One of these investments, with a carrying
value of $1.0 million, is in preferred stock of a technology company that is a
consulting client of BICC. Another investment, with a carrying value of
$140,000, is in preferred stock of another technology company that was a
consulting client of BICC in prior years. The third investment has a carrying
value of $844,000 and is in preferred stock of a technology company.
11
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of March 31, 2008, the Company's Jersey based life insurance
subsidiary, LPAL, owned 93% of the Group's $2.0 million in private equity
securities. LPAL is a regulated insurance company, and as such it must meet
stringent capital adequacy requirements and no transfers, except in satisfaction
of long-term business liabilities, are permitted from its long-term insurance
fund without the consent of LPAL's directors and actuary. Dividends require the
approval of the Jersey Financial Services Commission ("JFSC"). LPAL's
investments are therefore not currently available to fund the operations or
commitments of the Company or its other subsidiaries. For further discussion,
see the Liquidity and Capital Resources section in Item 2 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" below.
Realized Investment Gains
In the first quarter of 2008, the Company recorded realized investment
gains of $270,000, representing the final distribution from the WorldCom, Inc.
securities litigation. LPAL held certain WorldCom, Inc. publicly traded bonds
which it sold at a loss in 2002. This $270,000 payment, in addition to the $1.2
million initial payment received from the WorldCom securities litigation in the
first quarter of 2007, reverses part of LPAL's realized loss recorded in 2002.
Since these payments are for LPAL's account, they are not currently available to
fund the operations or commitments of the Company or its other subsidiaries.
In February 2008, LPAL submitted a claim in the Enron Securities class
action settlement, based on certain Enron bonds previously held by LPAL which
LPAL believes constitute "Category 1" securities eligible for the Enron
settlement proceeds. The Group does not expect any payment based on LPAL's claim
until 2009 at the earliest. The amount of the recovery of LPAL's realized
investment losses recorded in 2002 is currently unknown.
Note 4. Fair Value Measurements and Disclosures
The Company adopted SFAS 157 for financial assets and liabilities as of
January 1, 2008. SFAS 157 defines fair value as the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date (an exit price). The
standard also outlines a valuation framework and creates a fair value hierarchy
in order to increase the consistency and comparability of fair value
measurements and the related disclosures. Under U.S. GAAP, certain assets and
liabilities must be measured at fair value, and SFAS 157 details the disclosures
that are required for items measured at fair value.
Financial assets and liabilities are measured using inputs from the three
levels of the SFAS 157 hierarchy. The three levels are as follows:
Level 1 - Inputs are unadjusted quoted prices in active markets for
identical assets or liabilities that are accessible by the Company. During the
quarter ended March 31, 2008, the Company's Level 1 assets included money market
mutual funds which are included in cash and cash equivalents in the condensed
consolidated balance sheets. As of March 31, 2008, the Company had $1,264,000 in
money market mutual funds, compared to $1,871,000 as of December 31, 2007.
Level 2 - Inputs include quoted prices in markets that are not active or
financial instruments for which all significant inputs are observable, either
directly or indirectly. During the quarter ended March 31, 2008, the Company
held no Level 2 assets.
Level 3 - Unobservable inputs for the asset or liability including
significant assumptions of the Company and other market participants. As of
December 31, 2007 and March 31, 2008, the Group held $1,984,000 of private
equity investments which are carried at cost, as adjusted for
other-than-temporary impairments. In
12
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
order to determine if any other-than-temporary impairments exist, the Group must
first determine the fair values of its private equity investments using Level 3
unobservable inputs, including the analysis of various financial, performance
and market factors. For the quarter ended March 31, 2008, there were no
other-than-temporary impairments of the Group's private equity investments.
Cash and cash equivalents, accounts receivable, interest receivable,
prepaid expenses and deposits, accounts payable and accrued expenses, and
insurance policyholder liabilities are reflected in the condensed consolidated
balance sheets at carrying values which approximate fair values due to the
short-term nature of these instruments.
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 and directors 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.
Share based compensation expense
Effective 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 applied the
provisions of SAB 107 in its adoption of SFAS 123R.
The Company adopted SFAS 123R using the modified prospective transition
method as permitted under SFAS 123R. Accordingly, prior period amounts were not
restated. Under this application, the Company is required to record compensation
expense for all awards granted after the date of adoption and for the unvested
portion of previously granted awards that remain outstanding at the date of
adoption. Prior to the adoption of SFAS 123R, the Company used the intrinsic
value method as prescribed by APB 25 and thus recognized no compensation expense
for options granted with exercise prices equal to the fair market value of the
Company's ordinary shares on the date of grant.
In November 2005, the Financial Accounting Standards Board ("FASB")
issued Staff Position No. FAS 123(R)-3 ("FSP 123R-3"), "Transition Election
Related to Accounting for the Tax Effects of Share-Based Payments." The Company
elected to adopt the alternative transition method provided in FSP 123R-3 for
calculating the tax effects of share based compensation under SFAS 123R. The
alternative transition method includes simplified methods to establish the
beginning balance of the additional paid-in capital pool ("APIC pool") related
to the tax effects of share based compensation, and for determining the
subsequent impact on the APIC pool and consolidated statements of cash flows of
the tax effects of share based compensation awards that are outstanding upon
adoption of SFAS 123R.
13
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SFAS 123R requires companies to estimate the fair value of share based
payment awards on the date of grant using an option pricing model. The value of
the portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in the Company's consolidated
statements of operations.
Share based compensation expense recognized in the Company's consolidated
statements of operations for the first quarter of 2008 and 2007 includes
compensation expense for share options granted prior to, but not yet vested as
of December 31, 2005, as well as compensation expense for 4.5 million share
options granted to employees and directors on March 27, 2007. No share options
have been granted since 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 the first quarter of 2008 and 2007 is based upon the fact that all unvested
options relate to longstanding employees and directors. One employee who held
share options left the Company during the third quarter of 2007 and his 50,000
unvested share options were forfeited. However, this fact does not change the
Group's management estimate of zero percent forfeitures for future periods.
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. As there were no share
option exercises during the first quarter of 2008 or 2007, the Company had no
related tax benefits during those periods. Prior to the adoption of SFAS 123R,
those tax benefits would have been reported as operating cash flows had the
Company received any tax benefits related to share option exercises.
The fair value of share option grants to employees is calculated using
the Black-Scholes option pricing model, even though this model was developed to
estimate the fair value of freely tradable, fully transferable options without
vesting restrictions, which differ significantly from the Company's share
options. The Black-Scholes model also requires subjective assumptions, including
future share price volatility and expected time to exercise, which greatly
affect the calculated values. The expected term of options granted is derived
from historical data on employee exercises and post-vesting employment
termination behavior. The risk-free rate is based on the U.S. Treasury rates in
effect during the corresponding period of grant. The expected volatility is
based on the historical volatility of the Company's share price. These factors
could change in the future, which would affect the share based compensation
expense in future periods, if the Company, through the ESOT, should grant
additional share options.
Valuation and expense information under SFAS 123R
The estimated fair value of share option compensation awards to employees
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 March 31, 2008 and 2007,
compensation expense related to share options under SFAS 123R totaled $22,000
and $5,000, respectively, and is included in operating expenses in the
accompanying statement of operations.
During the first quarter of 2007, 4,500,000 options were granted to
employees and directors at an exercise price equal to the fair market value of
the underlying shares on the grant date which was $0.10. These options were
valued using the Black-Scholes option pricing model using the following
assumptions: expected share price volatility of 66%, risk-free interest rate of
4.52%, weighted average expected life of 6.25 years and expected dividend yield
of zero percent. The fair value of the 4,500,000 options was $292,000. During
2007, 250,000 options became vested, 100,000 options were forfeited and no
options were exercised. During the first quarter of 2008, 1,112,500 options
became vested, no options were forfeited and no options were exercised. At March
31, 2008, there were 9,625,000 options outstanding with a weighted average
14
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
exercise price of $1.45. Of these options, 5,787,500 were exercisable at March
31, 2008, and these have a weighted average exercise price of $2.35. The
remaining 3,837,500 options were unvested at March 31, 2008. These unvested
options have a weighted average exercise price of $0.11. As of March 31, 2008,
total unrecognized compensation expense related to unvested share options was
$232,000, which is expected to be recognized as follows: $66,000 in the
remainder of 2008, $77,000 in 2009, $72,000 in 2010 and $17,000 in 2011. For
additional information relating to our employee share options, see Note 12 to
the Company's consolidated financial statements included in our Form 10-K for
the year ended December 31, 2007.
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, and there has been no
change to the $0 unrecognized tax benefits from January 1, 2007 through March
31, 2008. In general, the Company's tax returns remain subject to examination by
taxing authorities for the tax years 2003 through 2007.
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 March 31, 2008.
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
15
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
indemnification provisions is unlimited. The Company believes the estimated fair
value of these agreements is minimal as historically, no payments have been made
by the Company under these indemnification obligations. Accordingly, the Company
has no liabilities recorded for these agreements as of March 31, 2008.
Note 8. Business Segment and Geographical Information
The Company's reportable operating segments are classified according to
its businesses of consulting in venture capital, 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 information by geographic segment,
based on the domicile of the Group company generating those revenues, is as
follows:
Three Months Ended
March 31,
------------------------------
2008 2007
------------ ------------
(In thousands)
Jersey............................................................................ $ 371 $ 1,371
Guernsey.......................................................................... - 29
United States..................................................................... 134 234
------------ ------------
Consolidated revenues and net investment gains ................................... $ 505 $ 1,634
------------ ------------
------------ ------------
Revenues and income (loss) before income tax expense for the Company's
reportable operating segments, based on management's internal reporting
structure, were as follows:
Three Months Ended
March 31,
------------------------------
2008 2007
------------ ------------
(In thousands)
Revenues and net investment gains:
Consulting in venture capital..................................................... $ 114 $ 205
Life insurance and annuities ..................................................... 357 1,364
------------ ------------
471 1,569
Reconciliation of segment amounts to consolidated amounts:
Interest income .................................................................. 34 65
------------ ------------
Consolidated revenues and net investment gains ................................... $ 505 $ 1,634
------------ ------------
------------ ------------
Income (loss) before income taxes:
Consulting in venture capital..................................................... $ (254) $ (157)
Life insurance and annuities ..................................................... 262 1,151
------------ ------------
8 994
Reconciliation of segment amounts to consolidated amounts:
Interest income................................................................... 34 65
Corporate expenses................................................................ (488) (379)
------------ ------------
Consolidated income (loss) before income tax expense ............................. $ (446) $ 680
------------ ------------
------------ ------------
16
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
As used herein, the terms "registrant," "Company," "we," "us" and "our"
refer to Berkeley Technology Limited. Except as the context otherwise requires,
the term "Group" refers collectively to the registrant and its subsidiaries.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the unaudited condensed
consolidated financial statements, and the notes thereto, included in this
quarterly report, and the December 31, 2007 audited consolidated financial
statements, and the notes thereto, included in our Annual Report on Form 10-K
filed with the SEC on March 31, 2008. 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) variations in demand for our products and services, (ii) the
success of our new products and services, (iii) significant changes in net cash
flows in or out of our businesses, (iv) fluctuations in the performance of debt
and equity markets worldwide, (v) the enactment of adverse state, federal or
foreign regulation or changes in government policy or regulation (including
accounting standards) affecting our operations, (vi) the effect of economic
conditions and interest rates in the U.S., the U.K. or internationally, (vii)
the ability of our subsidiaries to compete in their respective businesses,
(viii) our ability to attract and retain key personnel, and (ix) actions by
governmental authorities that regulate our businesses, including insurance
commissions.
17
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
Consulting in Venture Capital
Certain information regarding our consulting segment's results of
operations is as follows:
Three Months Ended
March 31,
------------------------------
2008 2007
------------ ------------
(In thousands)
Revenues:
Consulting fees................................................................... $ 114 $ 205
------------ ------------
Total revenues.................................................................... 114 205
Operating expenses................................................................ 368 362
------------ ------------
Loss before income tax expense.................................................... $ (254) $ (157)
------------ ------------
------------ ------------
First quarter of 2008 compared to first quarter of 2007
In the first quarter of 2008, the consulting segment contributed a loss
before income taxes of $254,000 to our overall loss before income taxes,
compared to a loss before income taxes of $157,000 in the first quarter of 2007.
The losses for both periods were attributable to an excess of fixed operating
expenses over consulting fee income and investment gains.
Consulting fees of $114,000 were earned during the first quarter of 2008
compared to $205,000 in the first quarter of 2007, due a decrease in the number
of consulting clients. A contract was signed with a client in early 2007 that
generated $0.9 million in consulting fees during 2007; however, that contract
ran only through the end of 2007. A new contract has been signed with this
client in March 2008, though the scope of our work under this new contract has
been reduced and, accordingly, consulting revenues from this client during 2008
are expected to be significantly lower than in 2007.
Under the 2007 contract referenced above, we are entitled to earn
additional compensation in the future depending upon the performance of certain
venture capital investments made by the client during 2007 with our assistance.
Any such compensation would be paid to us as a proportion of any capital gain
realized by the client, after deducting certain costs, upon a defined
realization of the investment by the client.
Some of the consulting agreements that we have had provided that we
receive promissory notes that were convertible into preferred stock, or common
stock options, as part of our compensation. During 2007, we received preferred
stock in a consulting client valued at $140,000. We also hold common stock
options in two technology companies that are now fully vested, though we believe
that currently these have no value. We expect to receive additional stock
options in 2008 from one of our consulting clients.
BICC's typical client is a Silicon Valley technology company or a large
international telecommunications company. Our objective has been to use
consulting revenues to finance the development of large telecommunications
company relationships in Europe and Asia, which has led to several equity
investments by a client with additional fees for work performed by BICC. The
level of consulting fees is expected to be volatile depending on the nature and
extent of our work at any point in time.
18
Life Insurance and Annuities
Certain information regarding our life insurance and annuities segment's
results of operations is as follows:
Three Months Ended
March 31,
------------------------------
2008 2007
------------ ------------
(In thousands)
Revenues and net investment gains:
Investment income................................................................. $ 87 $ 166
Net realized investment gains..................................................... 270 1,198
------------ ------------
Total revenues and net investment gains........................................... 357 1,364
Expenses:
Amounts credited on insurance policyholder accounts .............................. 1 30
General and administrative expenses .............................................. 94 183
------------ ------------
Total expenses.................................................................... 95 213
------------ ------------
Income before income tax expense.................................................. $ 262 $ 1,151
------------ ------------
------------ ------------
LPAL's policyholder liabilities fell from $2.0 million at March 31, 2007
to $142,000 at March 31, 2008 primarily due to maturing policies. LPAL now has
three policies remaining which are scheduled to mature in the first half of
2009. There are no plans currently to write new policies.
First quarter of 2008 compared to first quarter of 2007
In the first quarter of 2008, LPAL contributed income before income taxes
of $0.3 million to our overall loss before income taxes, compared to income
before income taxes of $1.2 million in the first quarter of 2007. This $0.9
million decrease is attributable to lower realized investment gains in the first
quarter of 2008 compared to the first quarter of 2007. These realized gains for
both periods relate to distributions from the WorldCom, Inc. securities
litigation. LPAL held certain WorldCom, Inc. publicly traded bonds which it sold
at a loss in 2002. In January 2007, a partial distribution of $1.2 million was
received by LPAL, and in February 2008, a final distribution of $0.3 million was
received by LPAL. These payments reverse part of the realized losses recorded in
2002.
Interest income on cash and investments declined from $0.2 million in the
first quarter of 2007 to $0.1 million in the first quarter of 2008, due to the
decline in the level of LPAL's corporate bond investments and cash, which was
consistent with the decline in policyholder liabilities since March 31, 2007, as
well as to decreasing interest rates during the period. The level of LPAL's
corporate bonds and cash at March 31, 2008 was $10.6 million, compared with
$12.9 million at March 31, 2007. Interest credited on policyholder accounts for
the first quarter of 2008 was $1,000, compared to $30,000 in the first quarter
of 2007. This decrease was due to policy maturities and surrenders since March
31, 2007, leaving only three policies totaling $96,000 and two pending death
claims totaling $46,000 at March 31, 2008. The three policies outstanding as of
March 31, 2008 are scheduled to mature in the first half of 2009.
Total assets increased to $12.5 million as of March 31, 2008, compared to
$12.2 million as of December 31, 2007, due to LPAL's $0.3 million net income for
the first quarter of 2008. Total assets as of March 31, 2008 decreased by $1.5
million from $14.0 million as of March 31, 2007, primarily due to $1.8 million
of policyholder benefits paid during the last nine months of 2007. No
policyholder benefits were paid in the first quarter of 2008.
19
Included in general and administrative expenses for the first quarter of
2007 are $44,000 of employee severance costs. Excluding these employee severance
costs, general and administrative expenses for the first quarter of 2007 were
$139,000, compared with $94,000 for the first quarter of 2008. This $45,000
decrease for the first quarter of 2008 was primarily due to lower staff costs as
well as to lower facilities costs subsequent to the closure of our Jersey office
in mid-2007. We no longer have staff or operations in Jersey, though LPAL
maintains a registered office in Jersey and is still regulated by the JFSC.
In February 2008, LPAL submitted a claim in the Enron Securities class
action settlement, based on certain Enron bonds previously held by LPAL which
LPAL believes constitute "Category 1" securities eligible for the Enron
settlement proceeds. We do not expect any payment based on LPAL's claim until
2009 at the earliest. The amount of the recovery of LPAL's realized investment
losses recorded in 2002 is currently unknown.
Corporate and Other
First quarter of 2008 compared to first quarter of 2007
Corporate expenses increased by $0.1 million to $0.5 million in the first
quarter of 2008, compared to the first quarter of 2007. This increase was due to
the write-off of $0.1 million in web development costs paid to a third party
vendor subsequent to our decision not to go forward with a web based project.
Consolidated Income (Loss) Before Income Tax Expense
First quarter of 2008 compared to first quarter of 2007
Our consolidated loss before income tax expense was $0.4 million in the
first quarter of 2008, compared to income before income tax expense of $0.7
million in the first quarter of 2007. This decline in income of $1.1 million is
attributable to the $0.9 million decrease in distributions from the WorldCom,
Inc. securities litigation, a $0.1 million decrease in consulting fee income and
a $0.1 million decline in interest income, all as explained above.
Income Taxes
We are subject to taxation on our income in all countries in which we
operate based upon the taxable income arising in each country. However, realized
gains on certain investments are exempt from Jersey and Guernsey taxation. We
are subject to income tax in Jersey at a rate of 20%. In the United States, we
are subject to both federal and California taxes at rates up to 34% and 8.84%,
respectively.
First quarter of 2008 compared to first quarter of 2007
The $2,000 tax expense for the first quarter of 2008 is comprised of our
minimum California taxes. Other than these taxes, no other tax expense or
benefits were applicable to our Group for the period. Income before income taxes
of $15,000 was contributed by our Jersey operations; however this includes the
$0.3 million of investment gain related to the final distribution from the
WorldCom, Inc. litigation settlement which is treated as a capital gain for tax
purposes. Realized gains on certain investments are not taxed in Jersey. Our
U.S. subsidiaries contributed a loss before income taxes of $0.4 million during
the first quarter of 2008; 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. In the first quarter of 2007, our only tax expense was $2,000 of minimum
California taxes.
20
CRITICAL ACCOUNTING POLICIES
Management has identified those accounting policies that are most
important to the accurate portrayal of our financial condition and results of
operations and that require management's most complex or subjective judgments,
often as a result of the need to make estimates about the effect of matters that
are inherently uncertain. These most critical accounting policies pertain to our
investments, life insurance policy liabilities, revenue recognition and
assumptions used to value share options granted. These critical accounting
policies are described below.
Accounting for Investments
From January 1, 2008, the Group's primary business for financial
reporting purposes is considered to be consulting in venture capital rather than
life insurance and annuities. As such, the Group's private equity investments
are now carried at cost less any other-than-temporary impairments in accordance
with Accounting Principles Board Opinion No. 18 (As Amended) ("APB 18"), "The
Equity Method of Accounting for Investments in Common Stock." Previously, the
Group carried its private equity investments at fair value in accordance with
Statement of Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting
for Certain Investments in Debt and Equity Securities." Under paragraph 127(b)
of SFAS 115, insurance companies are required to report equity securities at
fair value even if they do not meet the scope criteria in paragraph 3 of SFAS
115. With respect to the Group's private equity investments held at December 31,
2007, the Group's best estimate of their fair value was their cost basis.
Therefore, the change from an insurance company for financial reporting purposes
to a consulting company as of January 1, 2008 did not have an impact on the
carrying values of the Group's private equity investments.
Because all of our private equity investments are less than 20% in the
investee companies, and we do not have any significant influence on the investee
companies, all such investments are accounted for in accordance with the cost
method. The carrying amount of such investments is compared to their fair value,
and if any impairment is determined to be other-than-temporary, then an
impairment charge would be taken during the period such determination is made by
our management.
Marketable debt and equity securities will be carried at fair value in
accordance with SFAS 115, with temporary changes in fair value recognized as
unrealized gains and losses and reported, net of applicable income taxes, in a
separate component of shareholders' equity, should we make such investments in
the future.
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 companies doing business in various segments of
technology industries. These investments are normally held for a number of
years. 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
21
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.
SFAS 157 defines fair value as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date (an exit price). SFAS 157 has also
established a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three broad levels. Level 3 inputs
apply to the determination of fair value for our private equity investments.
These are unobservable inputs where 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. Historically, we have determined that our best estimate of the
fair value of our private equity investments has equaled our cost basis, unless
there has been a temporary or other-than-temporary impairment of the investment.
From January 1, 2008, only other-than-temporary impairments will be recognized
and the carrying value of a private equity investment cannot be increased above
its cost unless the investee company completes an initial public offering or is
acquired.
Other-than-temporary Impairments of Investments
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, factors considered 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.
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).
Revenue Recognition
The timing of revenue recognition for consulting services requires a
degree of judgment. Under SEC Staff Accounting Bulletin No. 104 ("SAB 104"),
revenue is realized or realizable and earned when persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the
seller's price to the buyer is fixed and determinable and collectibility is
reasonably assured. We recognize consulting fee revenues in our consolidated
statement of operations as the services are performed, if all the conditions of
22
SAB 104 are met. We do not recognize performance based revenues under a
consulting arrangement until the payments are earned, the client has
acknowledged the liability in writing and collectibility is reasonably assured.
Valuation of Share Options Granted
We calculate the fair value of share option grants to employees 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. It should be noted, however, that share based
compensation expense in the Company's consolidated statement of operations has
no negative impact on total shareholders' equity because there is an offsetting
entry to additional paid-in capital in the Company's consolidated balance sheet.
Liquidity and Capital Resources
Our cash and cash equivalents decreased during the first quarter of 2008
by $0.4 million to $14.1 million. This decrease in cash and cash equivalents
resulted from $0.7 million used in operating activities, partially offset by
$0.3 million of cash provided by investing activities. Cash provided by
investing activities related solely to the $0.3 million final payment received
by LPAL from the WorldCom, Inc. securities litigation. Cash used in operating
activities resulted from the excess of expenses over revenues (excluding
investment gains and losses) for the first quarter of 2008. As of March 31,
2008, our cash and cash equivalents, excluding the amount held by LPAL, amounted
to $3.5 million, an decrease of $0.7 million from December 31, 2007.
The $10.6 million of cash and cash equivalents held by LPAL, as well as
the $1.8 million of investments held by LPAL, are not currently available to
fund the operations or commitments of the Company or its other subsidiaries.
However, approval from the JFSC has been obtained for LPAL to make dividend
payments up to a total of $5.0 million to the Company in the future. As a
condition of the JFSC's approval, the Company has agreed to provide financial
support to LPAL in the unlikely event LPAL's funds are insufficient to pay off
its policy liabilities totaling $142,000 as of March 31, 2008, as well as the
operational costs of LPAL.
Shareholders' equity decreased during the first quarter of 2008 by $0.4
million from $16.5 million at December 31, 2007 to $16.1 million at March 31,
2008, primarily due to the net loss for the period. As of March 31, 2008 and
December 31, 2007, $62.6 million of our Ordinary Shares, at cost, held by the
employee benefit trusts have been netted against shareholders' equity.
During the first quarter of 2008, LPAL continued to service its existing
policyholders. During this period, there were no policy surrenders or
maturities. Policyholder liabilities were $142,000 as of March 31, 2008,
compared to $141,000 as of December 31, 2007. We do not expect any surrender
activity during the remaining nine months of 2008. The policies remaining at
March 31, 2008 are scheduled to mature in the first half of 2009. LPAL has
sufficient liquid resources to fund these maturities. As of March 31, 2008, LPAL
had cash of $10.6 million.
As of March 31, 2008, we had no bank borrowings, guarantee obligations,
material commitments outstanding for capital expenditures or additional funding
for private equity portfolio companies.
As of March 31, 2008, we had $3.5 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.
23
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our company's management, with the participation of our Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of our
"disclosure controls and procedures" (as defined in the Securities Exchange Act)
Rules 13a-15(e) and 15-d-15(e)) as of the end of the period covered by this
Report (the "Evaluation Date"). Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that as of the Evaluation
Date, our disclosure controls and procedures are effective to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act (i) is recorded, processed, summarized and reported,
within the time periods specified in the SEC's rules and forms and (ii) 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 our Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure controls and procedures or our
internal controls will prevent all errors and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal controls over financial reporting
that occurred during the quarter ended March 31, 2008 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART II - OTHER INFORMATION
Item 1A. RISK FACTORS
Not required.
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.
24
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BERKELEY TECHNOLOGY LIMITED
(Registrant)
Date: May 15, 2008 By: /s/ Ian K. Whitehead
Ian K. Whitehead
Chief Financial Officer
(Principal Financial and
Accounting Officer and Duly
Authorized Officer of the
Registrant)
25
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
EXHIBIT INDEX FOR THE QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2008
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.
26