U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): March 31, 2009
Berkeley Technology Limited
(Exact Name of Registrant as Specified in its Articles)
----------------------
0-21874
(Commission File Number)
Jersey, Channel Islands Not applicable
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation)
One Castle Street
St. Helier, Jersey JE2 3RT
Channel Islands
Tel: 011 44 1534 607700
(Address and telephone of Principal Executive Offices)
N/A
(Former Name or Address, if Changed Since Last Report)
The following information is furnished pursuant to this Item 7.01,"Regulation FD
Disclosure" and Item 2.02, "Results of Operations and Financial Condition."
FOR IMMEDIATE RELEASE March 31, 2009
Berkeley Technology Limited
Annual Report
For the Twelve Months Ended
December 31, 2008
London, March 31, 2009 - Berkeley Technology Limited (OTCBB: BKLYY.PK,
London: BEK.L) (the "Company") is an international venture capital consulting
firm with a focus on Silicon Valley technology companies.
The Company today reported financial results for the year ended December
31, 2008. The Company's consolidated net loss for the year ended December 31,
2008, was $(1.6) million, or $(0.03) per diluted share and $(0.31) per diluted
ADR, compared with consolidated net income of $0.4 million, or $0.01 per diluted
share and $0.07 per diluted ADR, for the year ended December 31, 2007. The
Company computes and reports consolidated net income (loss) and diluted earnings
(loss) per share and ADR in accordance with U.S. generally accepted accounting
principles ("U.S. GAAP").
We are operating in a significantly weaker economic environment.
Consulting fee revenues were $1.2 million lower in 2008 compared to 2007 due to
a reduction in the number of clients and the decrease in fee income from 2007 to
2008 from a consulting contract. Interest income declined by $0.5 million after
the dramatic cut in interest rates during the second half of 2008. Net realized
investment gains in 2008 of $1.1 million were slightly lower than in 2007. In
January 2007, we received a $1.2 million partial distribution from the WorldCom,
Inc. securities litigation. In February 2008, we received a final WorldCom
distribution of $0.3 million. In December 2008, we received a $1.3 million
partial distribution from the Enron Corporation securities litigation. These
payments recover part of the losses that we realized in 2002 upon the sale of
publicly traded WorldCom and Enron bonds. The $1.6 million in recoveries in 2008
were offset by a reduction in the carrying value of one of our private equity
investments during difficult market conditions. Our review of investment values
identified "other-than-temporary" impairments and thus write-downs were taken
during 2008 totaling $0.5 million. Operating expenses increased by $0.3 million
in 2008, primarily due to severance costs. These increased costs will continue
through June 30, 2009, but after taking into account other cost savings and
favorable currency movements, the net increase in quarterly costs are expected
to be approximately $53,000 until the end of the second quarter of 2009.
In certain cases, we may benefit from investments made by our clients if
their investments are successful. We use our consulting relationships in part to
generate fees that help cover operating expenses. The level of consulting fees
is expected to be volatile depending on the nature and extent of our work at any
point in time and the global economy. We are actively seeking new clients and
business opportunities.
**********
The above should be read in conjunction with the Cautionary Statement
included at the end of this Annual Report.
Please address any inquiries to:
Ian Whitehead
Chief Financial Officer
Berkeley Technology Limited
Jersey (0)1534 607700
1
The financial information set out in this announcement does not
constitute the Company's statutory accounts for the years ended December 31,
2008 and 2007. The financial information for the year ended December 31, 2007
is derived from the statutory accounts for that year.
The audit of our statutory accounts for the year ended December 31, 2008
is complete. The auditors reported on those accounts; their report was
unqualified and did not include references to any matters to which the auditors
draw attention to by way of emphasis without qualifying their report.
The Company's 2008 Annual Report and consolidated financial statements
will be sent to shareholders during May. Copies of this report may be obtained
by contacting the registered office in Jersey, Channel Islands.
Form 10-K for the year ended December 31, 2008
A copy of the above document will be submitted to the U.K. Listing
Authority and will be shortly available for inspection at the U.K. Listing
Authority's Document Viewing Facility, which is situated at:
Financial Services Authority
25 The North Colonnade
Canary Wharf
London
E14 5HS
Tel: 020 7676 1000
2
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 31,
-------------------------------
2008 2007
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 13,681(1) $ 14,568
Accounts receivable, less allowances of $0 and $34 as of December 31,
2008 and 2007, respectively................................................ 222 423
Interest receivable............................................................ 1 14
Prepaid expenses and deposits.................................................. 147 164
------------- -------------
Total current assets.............................................................. 14,051 15,169
Private equity investments (at lower of cost or estimated fair value)............. 1,484(1) 1,984
Property and equipment, net of accumulated depreciation of $177 and $175
as of December 31, 2008 and 2007, respectively................................. 9 14
------------- -------------
Total assets...................................................................... $ 15,544 $ 17,167
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.......................................... $ 459 $ 547
Policyholder liabilities (due in less than one year)........................... 106 46
------------- -------------
Total current liabilities......................................................... 565 593
Policyholder liabilities (due in more than one year).............................. - 95
------------- -------------
Total liabilities................................................................. 565 688
------------- -------------
Commitments and contingencies (See Note 8)
Shareholders' equity:
Ordinary shares, $0.05 par value per share: 86,400,000 shares authorized;
64,439,073 shares issued and outstanding as of December 31, 2008
and 2007....................................................................... 3,222 3,222
Additional paid-in capital........................................................ 67,860 67,789
Retained earnings................................................................. 6,894 8,465
Employee benefit trusts, at cost (13,522,381 shares as of
December 31, 2008 and 2007).................................................... (62,598) (62,598)
Accumulated other comprehensive loss.............................................. (399) (399)
------------- -------------
Total shareholders' equity........................................................ 14,979 16,479
------------- -------------
Total liabilities and shareholders' equity........................................ $ 15,544 $ 17,167
------------- -------------
------------- -------------
<FN>
(1) The Company's insurance subsidiary, London Pacific Assurance Limited ("LPAL"), holds $11,823 of the Group's
$13,861 in cash and cash equivalents and $1,344 of the Group's $1,484 in private equity investments which are
only available to fund the operations or commitments of LPAL, and not to the parent company or any of the other
subsidiaries.
</FN>
See accompanying Notes which are an integral part of these
Consolidated Financial Statements.
3
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share and ADS amounts)
Year Ended December 31,
-------------------------------
2008 2007
------------- -------------
Revenues:
Consulting fee income............................................................. $ 564 $ 1,718
Investment income................................................................. 314 804
Insurance policy charges.......................................................... - 2
Net realized investment gains..................................................... 1,143 1,198
------------- -------------
2,021 3,722
Expenses:
Operating expenses................................................................ 3,582 3,300
Amounts credited on insurance policyholder accounts............................... 6 44
------------- -------------
3,588 3,344
------------- -------------
Income (loss) before income tax expense........................................... (1,567) 378
Income tax expense................................................................ 4 2
------------- -------------
Net income (loss)................................................................. $ (1,571) $ 376
------------- -------------
------------- -------------
Basic and diluted earnings (loss) per share....................................... $ (0.03) $ 0.01
------------- -------------
------------- -------------
Basic and diluted earnings (loss) per ADS......................................... $ (0.31) $ 0.07
------------- -------------
------------- -------------
See accompanying Notes which are an integral part of these
Consolidated Financial Statements.
4
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
-------------------------------
2008 2007
------------- -------------
Net income (loss)................................................................. $ (1,571) $ 376
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization..................................................... 6 5
Non-cash consulting fees.......................................................... - (140)
Amounts credited on insurance policyholder accounts............................... 6 44
Net realized investment gains..................................................... (1,143) (1,198)
Net amortization of investment premiums and discounts............................. - 30
Share based compensation.......................................................... 71 71
Net changes in operating assets and liabilities:
Accrued investment income ..................................................... 13 289
Other assets................................................................... 218 (237)
Life insurance policy liabilities.............................................. - (2)
Accounts payable, accruals and other liabilities............................... (74) (27)
Other operating cash flows........................................................ - 2
------------- -------------
Net cash used in operating activities............................................. (2,474) (787)
------------- -------------
Cash flows from investing activities:
Purchases of available-for-sale equity securities................................. - (1,000)
Proceeds from maturity of held-to-maturity fixed maturity securities.............. - 3,000
Proceeds from sale and maturity of available-for-sale fixed
maturity securities............................................................ - 9,000
Proceeds from WorldCom, Inc. and Enron securities litigation settlements ......... 1,643 1,198
Capital expenditures.............................................................. (2) (4)
------------- -------------
Net cash provided by investing activities ........................................ 1,641 12,194
------------- -------------
Cash flows from financing activities:
Insurance policyholder benefits paid.............................................. - (3,560)
------------- -------------
Net cash used in financing activities............................................. - (3,560)
------------- -------------
Effect of exchange rate changes on cash........................................... (54) 14
------------- -------------
Net increase (decrease) in cash and cash equivalents.............................. (887) 7,861
Cash and cash equivalents at beginning of year.................................... 14,568 6,707
------------- -------------
Cash and cash equivalents at end of year ......................................... $ 13,681 $ 14,568
------------- -------------
------------- -------------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes (net of amounts recovered)........................................... $ 2 $ 2
See accompanying Notes which are an integral part of these
Consolidated Financial Statements.
5
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS 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 January 1, 2007 64,439 $ 3,222 $ 67,718 $ 7,999 $ (62,598) $ (418) $ 15,923
Net income.................... - - - 376 - - 376
Change in net unrealized
gains and losses on
available-for-sale securities - - - - - 14 14
Foreign currency translation
adjustment................... - - - - - 5 5
Unclaimed dividends........... - - - 90 - - 90
Share based compensation,
including income tax
effect of $0 ................ - - 71 - - - 71
-------- --------- ---------- ---------- ---------- ------------ ----------
Balance as of
December 31, 2007............ 64,439 $ 3,222 $ 67,789 $ 8,465 $ (62,598) $ (399) $ 16,479
-------- --------- ---------- ---------- ---------- ------------ ----------
-------- --------- ---------- ---------- ---------- ------------ ----------
Net loss...................... - $ - $ - $ (1,571) $ - $ - $ (1,571)
Share based compensation,
including income tax
effect of $0................. - - 71 - - - 71
-------- --------- ---------- ---------- ---------- ------------ ----------
Balance as of
December 31, 2008............ 64,439 $ 3,222 $ 67,860 $ 6,894 $ (62,598) $ (399) $ 14,979
-------- --------- ---------- ---------- ---------- ------------ ----------
-------- --------- ---------- ---------- ---------- ------------ ----------
See accompanying Notes which are an integral part of these
Consolidated Financial Statements.
6
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Year Ended December 31,
----------------------------
2008 2007
------------ ------------
Net income (loss).................................................................... $ (1,571) $ 376
Other comprehensive income, net of deferred income taxes:
Foreign currency translation adjustments, net of income taxes of $0.................. - 5
Change in net unrealized gains and losses:
Unrealized holding gains and losses on available-for-sale securities.............. - 14
------------ ------------
Other comprehensive income .......................................................... - 19
------------ ------------
Comprehensive income (loss).......................................................... $ (1,571) $ 395
------------ ------------
------------ ------------
See accompanying Notes which are an integral part of these
Consolidated Financial Statements.
7
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
As used herein, the term "Company" refers to Berkeley Technology Limited.
Except as the context otherwise requires, the term "Group" refers collectively
to the Company and its subsidiaries.
Note 1. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared by
the Company in conformity with United States generally accepted accounting
principles ("U.S. GAAP"). These consolidated financial statements include the
accounts of the Company, its subsidiaries, the Employee Share Option Trust
("ESOT") and the Agent Loyalty Opportunity Trust ("ALOT"). Significant
subsidiaries included in the operations of the Group and discussed in this
document include Berkeley International Capital Corporation ("BICC") and London
Pacific Assurance Limited ("LPAL"). All intercompany transactions and balances
have been eliminated in consolidation.
From January 1, 2008, the 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
there were no new policies issued or policies that matured in 2008. Policy
maturities and surrenders during 2007 were $3.6 million. This change had 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 2 "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 OTC Bulletin Board in the form of American Depositary Shares ("ADSs"), which
are evidenced by American Depositary Receipts ("ADRs"). Each ADS represents ten
Ordinary Shares. Pursuant to the regulations of the U.S. Securities and Exchange
Commission ("SEC"), the Company is considered a U.S. domestic registrant and
must file financial statements prepared under U.S. GAAP. As the Company is a
"Smaller Reporting Company" as defined by SEC rules that became effective on
February 4, 2008, only two years of financial statements are included herein.
Cash and Cash Equivalents
The Group considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Investments
As discussed above, from January 1, 2008, 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
impairment, if any. 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.
8
As of December 31, 2008 and 2007, the Group's only investments were
private equity securities.
For 2008, 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. In accordance with FASB Staff Position Nos. FAS
115-1 and FAS 124-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments," the Group's management evaluates the
Group's investments for any events or changes in circumstances ("impairment
indicators") that may have significant adverse effects on the Group's
investments. If impairment indicators exist, then the carrying amount of the
investment is compared to its estimated fair value as determined in accordance
with Statement of Financial Accounting Standards No. 157 ("SFAS 157"), "Fair
Value Measurements." If any impairment is determined to be other-than-temporary,
then a realized investment loss would be recognized during the period in which
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 9 "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. As discussed above, 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. During 2008, the
Group determined that impairment indicators existed for one of its private
equity investments, and then determined that the impairment was
other-than-temporary. The Group recognized realized investment losses in its
consolidated statement of operations totaling $500,000 on this investment during
the third and fourth quarters of 2008. It is possible that the factors evaluated
by management and fair values will change in subsequent periods, resulting in
material impairment charges in future periods.
When a quoted market price is available for a security, the Group uses
this price to determine fair value. If a quoted market price is not available
for a security, management estimates the security's fair value based on
appropriate valuation methodologies. Management's valuation methodologies
include fundamental analysis that evaluates the investee company's progress in
developing products, building intellectual property portfolios and securing
customer relationships, as well as overall industry conditions, conditions in
and prospects for the investee's geographic region, overall equity market
conditions, and the level of financing already secured and available. This is
combined with analysis of comparable acquisition transactions and values to
determine if the security's liquidation preferences will ensure full recovery of
the Group's investment in a likely acquisition outcome. In its valuation
analysis, management also considers the most recent transaction in a company's
shares.
Realized gains and losses on securities are included in net income using
the specific identification method. Any other-than-temporary declines in the
fair value of the Group's investments, below the cost or amortized cost basis,
are recognized as realized investment losses in the consolidated statements of
operations. The cost basis of such securities is adjusted to reflect the
write-down recorded.
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost less
accumulated depreciation. Depreciation is calculated on a straight-line basis at
rates sufficient to write-off such assets over their estimated useful lives on
the following basis:
Furniture and equipment - five years
Computer equipment, including software - three to five years
Leasehold improvements - life of lease
9
Assets held under capital leases are included in property, equipment and
leasehold improvements and are depreciated over their estimated useful lives.
The future obligations under these leases are included in accounts payable and
accruals. Interest paid on capital leases is charged to the statement of
operations over the periods of the leases.
Life Insurance Policy Liabilities, Revenues and Expenses
Life insurance policy liabilities, premium revenues and related expenses
are accounted for in accordance with Statement of Financial Accounting Standards
No. 97, "Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sale of
Investments," as follows:
i) Life insurance policy liabilities for deferred annuities are accounted
for as investment-type insurance products and are recorded at accumulated value
(premiums received, plus accrued interest to the balance sheet date, less
withdrawals and assessed fees);
ii) Revenues for investment-type insurance products consist of charges
assessed against policy account values for surrenders; and
iii) Benefits for investment-type insurance products are charged to
expense when incurred and reflect the claim amounts in excess of the policy
account balance. Expenses for investment-type products include the interest
credited to the policy account balance.
Revenue Recognition
Consulting fees are recognized in income on an accrual basis, based upon
when services are performed and in accordance with SEC Staff Accounting Bulletin
No. 104 ("SAB 104"). Under 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. Performance based
revenues under a consulting arrangement are not recorded until the payments are
earned, the client has acknowledged the liability in writing and collectibility
is reasonably assured.
Investment income comprises interest on fixed maturity securities and
cash balances and is accounted for on an accrual basis. Dividends are accounted
for when declared.
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. 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. Until August 2008, options were generally granted with an
exercise price equal to the fair market value of the underlying shares at the
date of grant. On August 19, 2008, the exercise price of 4,450,000 options
granted on March 27, 2007 to employees and directors was modified from $0.10 to
$0.31, the net book value of the shares as of December 31, 2006. Until further
notice, new option grants will have an exercise price equal to the net book
value of the shares as of the end of the previous quarter.
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.
10
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.
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 year ended December 31, 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 4,500,000 share
options granted to employees and directors on March 27, 2007, and 3,450,000
share options granted to employees and directors on August 20, 2008. No share
options were granted during 2006. 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 six months of 2008 and for the full year 2007 was based upon the fact that
all unvested options related to longstanding employees and directors. However,
in September 2008, an employee gave notice of his resignation effective at the
end of October 2008. As such, 2,900,000 unvested options were forfeited on
October 31, 2008. As these forfeitures were expected as of September 30, 2008,
share based compensation expense was reduced in the third quarter of 2008 by
$18,000. This represents the reversal of share based compensation expense
amortization through the third quarter of 2008 related to the 2,900,000 unvested
and forfeited options. In August 2008, the Company gave notice to its Chief
Financial Officer that his current employment agreement would end on June 30,
2009. As a result, it is expected that this employee will forfeit 500,000
options that will be unvested as of June 30, 2009. The Company's net share based
compensation expense for 2008 was not impacted by this expected forfeiture of
500,000 options; however, there will be no net compensation expense related to
these options from the second quarter of 2009 (a reduction of $4,056 of
compensation expense per quarter). Despite the departure of these two employees,
the Group's management continues to believe that a zero percent forfeiture rate
for future periods is appropriate.
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
11
there were no share option exercises during 2008 or 2007, the Company had no
related tax benefits during those years. 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 option exercises.
The fair value of share option grants to employees and directors 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.
Income Taxes
The Group accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." Under SFAS 109, the Group recognizes taxes payable or refundable for the
current year, and deferred tax assets and liabilities due to temporary
differences in the basis of assets and liabilities between amounts recorded for
financial statement and tax purposes.
The Group provides a valuation allowance for deferred income tax assets
if it is more likely than not that some portion of the deferred income tax asset
will not be realized. The Group includes in income any increase or decrease in a
valuation allowance that results from a change in circumstances that causes a
change in judgment about the realization of the related deferred income tax
asset.
The Group includes in additional paid-in capital the tax benefit on share
options exercised during the period to the extent that such exercises result in
a permanent difference between financial statement and tax basis compensation
expense.
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 on January 1, 2007. The
adoption of the FIN 48 did not have any impact on the Company's consolidated
financial statements.
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."
Earnings (loss) per ADS is equivalent to ten times earnings (loss) per
Ordinary Share.
12
Foreign Currencies
Prior to July 1, 2007, the Group used the British pound sterling
("sterling") as the functional currency of LPAL and the U.S. dollar as the
functional currency of the Company and all other significant subsidiaries. Due
to significant changes in the operating environment of LPAL, the functional
currency of LPAL was changed to the U.S. dollar effective July 1, 2007. By the
end of the second quarter of 2007, almost all policies had been redeemed, and
LPAL's sterling assets were a small portion of its total assets. In addition,
LPAL's sterling operating expenses have been significantly reduced. With this
change in functional currency, LPAL's foreign exchange gains and losses
resulting from the remeasurement of foreign currency assets and liabilities into
U.S. dollars are included in operating expenses in the Group's consolidated
statement of operations, rather than included in a separate component of other
comprehensive income in shareholders' equity, effective July 1, 2007. This
change did not have a material impact on the Group's consolidated statement of
operations. The $(399,000) balance as of June 30, 2007 in accumulated other
comprehensive income (loss) in the Group's consolidated balance sheet will
remain until such time LPAL is sold or liquidated.
Comprehensive Income
Comprehensive income consists of net income; changes in unrealized gains
and losses on available-for-sale securities, net of income taxes; and foreign
currency translation gains or losses arising on the translation of the Group's
non-U.S. dollar based subsidiaries.
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. 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.
13
In May 2008, the FASB issued Statement of Financial Accounting Standards
No. 162 ("SFAS 162"), "The Hierarchy of Generally Accepted Accounting
Principles." This statement identifies the sources of accounting principles and
the framework for selecting the principles to be used in the preparation of
financial statements of non-governmental entities that are presented in
conformity with generally accepted accounting principles in the United States
("US GAAP"). This statement will be effective 60 days following the SEC's
approval of the Public Company Accounting Oversight Board ("PCAOB") amendments
to AU Section 411, "The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles." The Company is currently evaluating the effect
that the adoption of SFAS 162 will have on its consolidated financial
statements.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of these consolidated financial statements as well as
the reported amount of revenues and expenses during this reporting period. The
Group's management's estimates are based on historical experience, input from
sources outside of the Company, and other relevant facts and circumstances.
Actual results could differ materially from those estimates. Accounting policies
that include particularly significant estimates include the assessment of
recoverability and measuring impairment of private equity investments,
investment and impairment valuations, measurement of deferred tax assets and the
corresponding valuation allowances, fair value estimates for the expense of
employee share options, valuation of accounts receivable, and estimates related
to commitments and contingencies.
Note 2. Investments
See Note 1 "Summary of Significant Accounting Policies" above for a
discussion of the Group's accounting policies with respect to its investments.
As of December 31, 2008 and 2007, the Group's only investments were private
corporate equity securities. As of December 31, 2007, the carrying value of
these investments totaled $1,984,000, which represented their estimated fair
value and which was also their cost basis. During 2008, the Group recognized
other-than-temporary impairment losses totaling $500,000 on one of its private
equity investments, leaving an aggregate carrying value of its investments of
$1,484,000 as of December 31, 2008.
Investment Concentration and Risk
As of December 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 $500,000, 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.
As of December 31, 2008, the Company's Jersey based life insurance
subsidiary, LPAL, owned 91% of the Group's $1.5 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. LPAL's investments are
not currently available to fund the operations or commitments of the Company or
its other subsidiaries. However, in April 2008, the Company obtained approval
from the Jersey Financial Services Commission ("JFSC") 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 $106,000 as of December 31, 2008, as well as the
operational costs of LPAL.
The Group held no fixed maturity securities as of December 31, 2008 and
2007.
14
Net Investment Income
The details of net investment income are as follows:
Year Ended December 31,
----------------------------
2008 2007
------------ ------------
(In thousands)
Interest on fixed maturity securities............................................... $ - $ 208
Interest on cash and cash equivalents............................................... 314 596
------------ ------------
Gross investment income............................................................. 314 804
Amounts credited on insurance policyholder accounts (6) (44)
------------ ------------
Net investment income............................................................... $ 308 $ 760
------------ ------------
------------ ------------
Realized Gains and Losses
Information about gross and net realized gains and losses on securities
transactions is as follows:
Year Ended December 31,
----------------------------
2008 2007
------------ ------------
(In thousands)
Realized gains (losses) on securities transactions:
Fixed maturities, available-for-sale:
Gross gains...................................................................... $ 1,643 $ 1,198
------------ ------------
Realized gains on fixed maturities, available-for-sale.............................. 1,643 1,198
------------ ------------
Equity securities:
Gross losses..................................................................... (500) -
------------ ------------
Realized losses on equity securities................................................ (500) -
------------ ------------
Net realized investment gains on securities transactions............................ $ 1,143 $ 1,198
------------ ------------
------------ ------------
The net realized gain of $1.2 million in 2007 represents a partial
distribution received by LPAL from the WorldCom, Inc. securities litigation.
LPAL held certain WorldCom, Inc. publicly traded bonds which it sold at a loss
in 2002. In February 2008, LPAL received an additional $270,000 payment
representing the final distribution from the WorldCom, Inc. securities
litigation. These two payments totaling almost $1.5 million recover part of
LPAL's realized loss on the WorldCom bonds recognized in 2002.
In December 2008, LPAL received a $1.37 million partial distribution from
the Enron Corporation securities litigation. LPAL held certain Enron Corporation
publicly traded bonds which it sold at a loss in 2002. This payment recovers
part of LPAL's realized loss on the Enron Corporation bonds recognized in 2002.
The timing and amount of future Enron distributions is currently uncertain.
15
Note 3. Property and Equipment
Property and equipment are carried at cost and consisted of the
following:
December 31,
----------------------------
2008 2007
------------ ------------
(In thousands)
Property, equipment and leasehold improvements.................................... $ 186 $ 189
Accumulated depreciation.......................................................... (177) (175)
------------ ------------
Property and equipment, net....................................................... $ 9 $ 14
------------ ------------
------------ ------------
Note 4. Life Insurance Policy Liabilities
An analysis of life insurance policy liabilities is as follows:
December 31,
----------------------------
2008 2007
------------ ------------
(In thousands)
Deferred annuities - policyholder contract deposits............................... $ 72 $ 95
Other policy claims and benefits.................................................. 34 46
------------ ------------
$ 106 $ 141
------------ ------------
------------ ------------
The liability for future policy benefits and policyholder contract
deposits was determined based on the following assumptions:
Mortality Assumptions
Assumed mortality rates were based on standard tables commonly used in
the U.K. life insurance industry, namely the AM80 table for male lives and the
AF80 table for female lives.
Withdrawal Assumptions
Withdrawal charges on deferred annuities generally ranged from 1% to 7%,
grading to zero over a period of up to 7 years.
Note 5. Statutory Financial Information and Restrictions
LPAL is regulated by the JFSC and under Article 6 of the Insurance
Business (Jersey) Law 1996 is permitted to conduct long-term insurance business.
The JFSC requires LPAL to submit annual audited financial statements (prepared
under U.S. GAAP which is permitted), and an audited annual filing in the format
consistent with that required by the Financial Services Authority in the United
Kingdom. The annual filing submitted by LPAL to the JFSC must be accompanied by
a Certificate from the Appointed Actuary that based on sufficiently prudent
assumptions, assets are sufficient to cover all liabilities. The annual filing
contains a report from the Appointed Actuary on the matching of investments to
liabilities.
The JFSC sets out the conditions with which LPAL must comply and
determines the reporting requirements and the frequency of reporting. These
conditions require that: (i) LPAL must hold, at all times, approved assets at
least equal to the long-term insurance fund plus the required minimum solvency
margin, (ii) the margin of solvency must be the greater of (pound)50,000 or 2.5%
of the value of the long-term business fund, and (iii) assets equal to not less
than 90% of liabilities must be placed with approved independent custodians. As
of December 31, 2008, LPAL met all of these conditions.
16
LPAL is also required under the insurance laws to appoint an actuary. The
actuary must be qualified as defined under Jersey law and is required to
supervise the long-term insurance fund. No transfers, except in satisfaction of
long-term insurance business liabilities, are permitted from LPAL's long-term
insurance fund without the consent of LPAL's directors and actuary. Dividends
require the approval of the JFSC. In April 2008, the Company obtained approval
from the JFSC 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 $106,000 as of
December 31, 2008, as well as the operational costs of LPAL.
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 of unrecognized tax benefits from January 1, 2007 through
December 31, 2008. The Company's tax returns remain subject to examination by
taxing authorities for the tax years 2004 through 2007.
The Group is subject to taxation on its income in all countries in which
it operates based upon the taxable income arising in each country. However,
realized gains on certain investments are exempt from Jersey and Guernsey
taxation. This tax benefit which may not recur has reduced the tax charge in
2008 and 2007.
The Group is subject to income tax in Jersey at a rate of 20% through
2008. In the United States, the Group is subject to both federal and California
taxes at rates up to 34% and 8.84%, respectively.
A breakdown of the Group's book income (loss) before income taxes by tax
jurisdiction follows:
Year Ended December 31,
----------------------------
2008 2007
------------ ------------
(In thousands)
Income (loss) before income taxes:
Jersey, Guernsey and United Kingdom................................................. $ (476) $ 270
United States....................................................................... (1,091) 108
------------ ------------
Total income (loss) before income taxes............................................. $ (1,567) $ 378
------------ ------------
------------ ------------
17
The provision for income taxes differs from the amount computed by
applying the Jersey, Channel Islands statutory income tax rate of 20% to the
income (loss) before income taxes. The sources and tax effects of the difference
are as follows:
Year Ended December 31,
----------------------------
2008 2007
------------ ------------
(In thousands)
Income tax expense (benefit) computed at Jersey statutory income tax
rate of 20%...................................................................... $ (313) $ 76
Realized and unrealized investment gains not subject to taxation
in Jersey........................................................................ (229) (240)
Other losses not deductible in Jersey............................................... 289 158
Income not taxable in Guernsey...................................................... - (10)
Tax expense (benefit) on losses at higher than 20% statutory Jersey rate:
Income (losses) in the U.S....................................................... (249) 24
Increase (decrease) in valuation allowance.......................................... 359 (48)
Expiration of capital loss carryforwards of U.S. entities........................... - 67,245
Decrease in valuation allowance related to expiration of capital loss
carryforwards.................................................................... - (67,245)
Other.............................................................................. 147 42
------------ ------------
Actual tax expense ................................................................. $ 4 $ 2
------------ ------------
------------ ------------
The components of the actual tax expense were as follows:
Year Ended December 31,
----------------------------
2008 2007
------------ ------------
(In thousands)
Jersey, Guernsey and United Kingdom:
Current tax expense.............................................................. $ - $ -
Deferred tax expense............................................................. - -
United States:
Current tax expense ............................................................. 4 2
Deferred tax expense............................................................. - -
------------ ------------
Total actual tax expense ........................................................... $ 4 $ 2
------------ ------------
------------ ------------
The Group recognizes assets and liabilities for the deferred tax
consequences of temporary differences between the tax basis of assets and
liabilities and their reported amounts in the financial statements. These
temporary differences will result in taxable or deductible amounts in future
years when the reported amounts of assets and liabilities are recovered or
settled. The deferred income tax assets are reviewed periodically for
recoverability and valuation allowances are provided as necessary. Deferred
income tax assets and liabilities are disclosed net in the consolidated
financial statements when they arise within the same tax jurisdiction and tax
return.
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets and deferred income tax liabilities
are presented below. As of both December 31, 2008 and December 31, 2007, full
valuation allowances were provided on the net deferred tax assets of the U.S.
tax group due to the uncertainty of generating future taxable income or capital
gains to benefit from the deferred tax assets.
18
December 31,
----------------------------
2008 2007
------------ ------------
(In thousands)
U.S. subsideries:
Deferred income tax assets:
Net operating loss carryforwards.................................................. $ 5,868 $ 5,497
Deferred compensation............................................................. 3 3
Bad debts......................................................................... - 14
Other assets...................................................................... 2 1
Valuation allowance............................................................... (5,873) (5,514)
------------ ------------
Deferred income tax assets, net of valuation allowance............................ - 1
Deferred income tax liabilities:
Depreciation, amortization and other.............................................. - (1)
------------ ------------
- (1)
------------ ------------
Net deferred income tax assets - U.S. subsidiaries................................ $ - $ -
------------ ------------
------------ ------------
As of December 31, 2008, the Group's U.S. subsidiaries have pre-tax
federal net operating loss carryforwards of approximately $14.2 million expiring
as follows: approximately $1.3 million in 2011, and approximately $12.9 million
from 2020 to 2028. These subsidiaries have California net operating loss
carryforwards of approximately $11.9 million expiring from 2012 to 2028. The
Group has recorded a full valuation allowance for the deferred tax assets
arising from these carryforward amounts as of December 31, 2008 due to the
uncertainty of generating future taxable income to benefit from the deferred tax
assets.
The Company's Jersey, Channel Islands subsidiaries have net operating
loss carryforwards of approximately $19.5 million as of December 31, 2008;
however, no deferred tax assets, and no corresponding valuation reserves, have
been recorded for these net operating loss carryforwards due to the introduction
of a new tax system in Jersey in 2009 when the expected tax rate for certain
Jersey corporations will be zero. The Company expects that its tax rate for its
Jersey entities will be zero.
During the third quarter of 2008, the Internal Revenue Service issued a
private letter ruling that the Group's U.S. holding company, Berkeley (USA)
Holdings Limited ("BUSA"), should include London Pacific Life & Annuity Company
in Liquidation ("LCL") in its federal consolidated tax returns for tax years
commencing with 2005. LCL is not considered a variable interest entity within
the scope of FASB Interpretation No. 46 (Revised), "Consolidation of Variable
Interest Entities," which interprets Accounting Research Bulletin No. 51,
"Consolidated Financial Statements." BUSA holds the common stock of LCL but BUSA
does not have any voting or management control over LCL. The financial
statements of LCL have not been included in the Company's consolidated financial
statements and they will not be included in the future. The Group will be filing
amended federal consolidated tax returns for 2005 through 2007 during 2009, and
the Group's management believes that the inclusion of LCL in the federal
consolidated tax returns of BUSA for 2005 through 2008 will result in
insignificant tax liabilities for the Group. As of the end of 2007, LCL has
approximately $59 million of net operating loss carryforwards and approximately
$74 milllion of capital loss carryforwards. The Group's management believes that
these loss carryforwards should be sufficient to offset any taxable income of
LCL in the foreseeable future and that any resulting tax liabilities (e.g.,
alternative minimum tax) will not be material. In addition, future taxable
income generated by LCL also could be offset with BUSA's carryforward net
operating or capital losses, if any, and with BUSA's current net operating or
capital losses, if any. Alternatively, BUSA's future taxable income could be
offset with LCL's carryforward or current net operating or capital losses, if
any. BUSA and LCL have signed a tax allocation and sharing agreement. Under this
agreement, any benefit to BUSA of utilizing the tax losses of LCL to offset
BUSA's separate taxable income in BUSA's federal consolidated tax returns should
BUSA not have any of its own carryforward losses will be paid by BUSA to LCL,
and any benefit to LCL of utilizing the tax losses of BUSA to
19
offset LCL's separate taxable income in BUSA's federal consolidated tax returns
should LCL not have any of it own carryforward losses will be paid by LCL to
BUSA. Any tax liabilities, including alternative minimum taxes, created by the
inclusion of LCL in the federal consolidated tax returns of BUSA will be paid by
LCL either directly to the U.S. Internal Revenue Service ("IRS") or reimbursed
to BUSA by LCL if payment is made to the IRS by BUSA. For purposes of computing
allocable federal income tax liability, BUSA will allocate taxable income
brackets and exemptions on a pro-rated basis among members of the affiliated tax
group.
Note 7. Shareholders' Equity
The Company has authorized 86,400,000 Ordinary Shares with a par value of
$0.05 per share. As of December 31, 2008 and 2007, there were 64,439,073
Ordinary Shares issued and outstanding.
No dividends were declared or paid in 2008 or 2007.
Prior to December 31, 2007, the Company had a liability on its
consolidated balance sheet of $215,000, representing the amount of dividend
checks issued by the Company's share registrar to shareholders that had not been
cashed. As the Company had previously remitted the full amount of the dividends
to its registrar, after a period of time, the registrar would return the funds
to the Company in the amount of the uncashed dividend checks. Pursuant to the
Company's Memorandum and Articles, any unclaimed dividend after twelve or more
years after the date of its declaration shall be forfeited and shall revert back
to the Company. As such, at the end of 2007, the Company wrote-off $90,000 of
unclaimed dividends that were more than 12 years old, directly as a credit to
retained earnings in the Company's consolidated balance sheet.
Accumulated other comprehensive loss consists of one component, foreign
currency translation adjustments. Accumulated foreign currency translation
adjustments were $(399,000) as of both December 31, 2008 and 2007. For further
information, see the discussion under "Foreign Currencies" in Note 1 "Summary of
Significant Accounting Policies" above.
The Group has two share incentive plans as described in Note 10 "Share
Incentive Plans" below. Under the terms of these plans, shares of the Company
may be purchased in the open market and held in trust. These shares are owned by
the employee benefit trusts, which are subsidiaries of the Company for financial
reporting purposes.
Changes in the number of shares held by The London Pacific Group 1990
Employee Share Option Trust ("ESOT") and the Agent Loyalty Opportunity Trust
("ALOT") were as follows:
Year Ended December 31,
--------------------------------------------------
2008 2007
----------------------- ------------------------
ESOT ALOT ESOT ALOT
---------- --------- ---------- ----------
(In thousands)
Shares held as of January 1.................................... 13,084 438 13,084 438
Purchased...................................................... - - - -
Exercised...................................................... - - - -
---------- ---------- ---------- ----------
Shares held as of December 31.................................. 13,084 (1) 438 13,084 (1) 438
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
<FN>
(1) 834,000 shares are held in ADR form.
</FN>
Warrants
On November 11, 2002, the Company agreed to grant 1,933,172 warrants to
subscribe for the Company's Ordinary Shares to Bank of Scotland in connection
with the extension of the Group's credit facility (which was fully repaid and
terminated in June 2003). The warrants were granted on February 14, 2003 and
20
have an exercise price of (pound)0.1143 (based on the average of the closing
prices of the Ordinary Shares over the trading days from November 1, 2002
through November 11, 2002), which was higher than the market price of
(pound)0.09 on November 11, 2002. These warrants are exercisable at any time
prior to February 14, 2010 and their fair value was determined to be $251,125,
based on a risk-free rate of 2.80%, volatility of 179% and a dividend yield of
zero. The Company recognized $30,625 of expense relating to these warrants in
2002. The balance of $220,500 was recognized as an expense in 2003, with the
corresponding entries to additional paid-in capital.
Note 8. Commitments and Contingencies
Lease Commitments
The Group leases office space under operating leases. Total rents under
these operating leases were $223,000 (net of sublease income of $78,000) and
$201,000 (net of sublease income of $86,000), for the years ended December 31,
2008 and 2007, respectively. The Group had no capital leases as of December 31,
2008 or 2007.
Future minimum lease payments required under non-cancellable operating
leases with terms of one year or more, as of December 31, 2008, were as follows:
Operating
Leases(1)
------------
(In thousands)
2009............................................................................................... $ 272
2010............................................................................................... 48
------------
Total.............................................................................................. $ 320
------------
------------
<FN>
(1) Includes commitments related to the Group's Jersey office lease which expires in September 2010. The
Group entered into a sublease of its Jersey office during 2006. Expected future sublease income from 2009
through 2010 is $93,000. A liability of $51,000 remains recorded on the Company's consolidated balance
sheet as of December 31, 2008, representing the loss on the sublease from 2009 through September 2010.
</FN>
Approximately 64% of the Jersey office lease commitments are covered by a
sublease to a third party.
Guarantees
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others - an interpretation of FASB
Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34." The
following is a summary of the Company's agreements that the Company has
determined are within the scope of FIN 45.
Under its Memorandum and Articles of Association, the Company has agreed
to indemnify its officers and directors for certain events or occurrences
arising as a result of the officer or director serving in such capacity. The
maximum potential amount of future payments the Company could be required to
make under these indemnification agreements is unlimited. However, the Company
maintains directors and officers' liability insurance that limits the Company's
exposure and enables it to recover a portion of any future amounts paid. As a
result of its insurance coverage, the Company believes the estimated fair value
of these indemnification agreements is minimal and has no liabilities recorded
for these agreements as of December 31, 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,
21
the Company generally indemnifies and holds harmless the indemnified party for
losses suffered or incurred by the indemnified party as a result of the
Company's activities. These indemnification provisions sometimes include
indemnifications relating to representations made by the Company with regard to
intellectual property rights. These indemnification provisions generally survive
termination of the underlying agreement. The maximum potential amount of future
payments the Company could be required to make under these indemnification
provisions is unlimited. The Company believes the estimated fair value of these
agreements is minimal. Accordingly, the Company has no liabilities recorded for
these agreements as of December 31, 2008.
Note 9. Fair Value of Financial Instruments
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
twelve months ended December 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 December 31, 2008, the Company had
$328,000 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 twelve months ended December 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, 2008 and December 31, 2007, the Group held $1,484,000 and
$1,984,000, respectively, of private equity investments which are carried at
cost, as adjusted for other-than-temporary impairments. In 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.
During the twelve months ended December 31, 2008, the Group recognized
other-than-temporary impairment losses totaling $500,000 on one of its private
equity investments. The Group's management considered the investee company's
declining cash position, less favorable business environment and likely
acquisition value in determining the fair value estimates of this investment.
The change in carrying value of the Group's private equity investments,
all of which have Level 3 inputs in the SFAS 157 hierarchy, for the twelve
months ended December 31, 2008 was as follows:
(In thousands)
Balance at December 31, 2007....................................................................... $ 1,984
Realized investment losses included in earnings in 2008 determined by considering
fair value measurements using significant unobservable inputs (Level 3)......................... (500)
------------
Balance at December 31, 2008....................................................................... $ 1,484
------------
------------
22
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 consolidated balance
sheets at carrying values which approximate fair values due to the short-term
nature of these instruments.
The carrying values and estimated fair values of the financial
instruments held by the Group, excluding its private equity investments, were as
follows:
December 31,
------------------------------------------------------------
2008 2007
-------------------------- ---------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
-------- ----------- ---------- ----------
(In thousands)
Financial assets:
Cash and cash equivalents........................ $ 13,681 $ 13,681 $ 14,568 $ 14,568
Financial liabilities:
Life insurance policy liabilities................ 106 105 141 139
The following methods and assumptions were used by the Group in
estimating the carrying value of the financial instruments presented:
Cash and Cash Equivalents: The carrying amounts reported in the consolidated
balance sheet for these instruments approximate fair value.
Life Insurance Policy Liabilities: The balance sheet caption "life insurance
policy liabilities" includes investment-type insurance contracts (i.e., deferred
annuities). The estimated fair values of deferred annuity policies are based on
their account values after deduction of surrender charges.
Note 10. Share Incentive Plans
The Group has two share incentive plans for employees, agents and
directors of Berkeley Technology Limited and its subsidiaries that provide for
the issuance of share options and stock appreciation rights.
Employee Share Option Trust
The London Pacific Group 1990 Employee Share Option Trust ("ESOT"), which
was approved by shareholders in 1990, provides for the granting of share options
to employees and directors. The objectives of this plan include retaining the
best personnel and providing for additional performance incentives. 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. Until August
2008, options were generally granted with an exercise price equal to the fair
market value of the underlying shares at the date of grant. On August 19, 2008,
the exercise price of 4,450,000 options granted on March 27, 2007 to employees
and directors was modified from $0.10 to $0.31 cents, the net book value of the
shares as of December 31, 2006. Until further notice, new option grants will
have an exercise price equal to the net book value of the shares as of the end
of the previous quarter.
The ESOT may purchase shares of the Company in the open market, funded
each year by a loan from the Company or its subsidiaries. While the loan is
limited up to an annual maximum of 5% of the consolidated net assets of the
Group, the ESOT is not limited as to the number of options that may be granted,
as long as it holds the shares underlying the total outstanding options. The
loan is secured by the shares held in the trust, is interest-free, and is
eliminated in the consolidated financial statements. The ESOT has waived its
entitlement to dividends on any shares held. See Note 7 "Shareholders' Equity"
for a summary of the share activity within the ESOT.
23
Share option activity for the years ended December 31, 2008 and 2007 was
as follows:
2008 2007
-------------------- -------------------
Weighted- Weighted-
Number Average Number Average
of Exercise of Exercise
(Options in thousands) Options Price Options Price
--------- -------- -------- --------
Outstanding as of January 1........................................... 9,625 $1.45 5,225 $2.59
Granted (1)........................................................... 3,450 0.30 4,500 0.10
Forfeited............................................................. (3,400) 0.31 (100) 0.20
Exercised............................................................. - - - -
Expired............................................................... - - - -
--------- -------- -------- --------
Outstanding as of December 31......................................... 9,675 $1.54 9,625 $1.45
--------- -------- -------- --------
--------- -------- -------- --------
Options exercisable as of December 31................................. 5,538 $2.47 4,675 $2.88
--------- -------- -------- --------
--------- -------- -------- --------
<FN>
(1) The 4.5 million options granted in March 27, 2007 with an exercise price of $0.10 were repriced in August 2008
to $0.31. This is reflected in the weighted average exercise price of the options outstanding and options
exercisable as of December 31, 2008.
</FN>
See Note 1 "Summary of Significant Accounting Policies" for information
regarding the Group's accounting for share based compensation.
Summary information about the Group's share options outstanding as of
December 31, 2008 is as follows:
Options Outstanding (1) Options Exercisable (1)
------------------------------------------------- --------------------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ------------ --------------- ----------- ------------ --------------- ------------
(In thousands) (Years) (In thousands)
$ 0.11 - $ 0.50 7,365 7.18 $0.29 3,228 $0.28
0.51 - 5.00 220 2.18 2.46 220 2.46
5.01 - 10.00 2,030 2.38 5.41 2,030 5.41
10.01 - 21.00 60 1.68 21.00 60 21.00
- ---------------- --------------- ----------- ------------ --------------- ------------
$ 0.11 - $21.00 9,675 6.03 $1.54 5,538 $2.47
- ---------------- --------------- ----------- ------------ --------------- ------------
- ---------------- --------------- ----------- ------------ --------------- ------------
<FN>
(1) The intrinsic value of all options outstanding as of December 31, 2008 was zero, as the market value of the
underlying shares was $0.04 as of that date.
</FN>
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 each of the years ended December 31, 2008 and 2007,
compensation expense related to employee share options under SFAS 123R totaled
$71,000, and is included in operating expenses in the accompanying statements of
operations.
On March 27 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
24
dividend yield of zero percent. The fair value of the 4,500,000 options was
$292,000. During 2007, 50,000 of these options were forfeited. As discussed
above, on August 19, 2008, the exercise price of the remaining 4,500,000 options
was modified from $0.10 to $0.31, the net book value per share as of December
31, 2006. The fair value of the modified options was determined to be $160,000,
calculated using the Black-Scholes option pricing model using the following
assumptions: expected share price volatility of 99%, risk-free interest rate of
3.04%, weighted average expected life of 4.85 years and expected dividend yield
of zero percent. Using these same assumptions, the fair value of the original
4.45 million options immediately prior to the exercise price modification was
calculated to be $216,000. As the fair value of the modified options is less
than the fair value of the original options immediately before the exercise
price modification, under SFAS123R, there is no incremental cost resulting from
the modification and therefore the original grant date fair value will continue
to be amortized over the remaining vesting schedule to March 27, 2011, less the
value of any actual or expected forfeitures of unvested options.
On August 20, 2008, 3,450,000 options were granted to employees and
directors with an exercise price of $0.30, the net book value of the shares as
of June 30, 2008. These options were valued using the Black-Scholes option
pricing model using the following assumptions: expected share price volatility
of 99%, risk-free interest rate of 3.27%, weighted average expected life of 6.25
years and expected dividend yield of zero percent. The fair value of the
3,450,000 options was $151,000.
During 2008, 1,362,500 options became vested, 3,450,000 options were
granted, 3,400,000 were forfeited and no options were exercised. At December 31,
2008, there were 9,675,000 options outstanding with a weighted average exercise
price of $1.54. There were no in-the-money options outstanding at that date. Of
the outstanding options, 5,538,000 were exercisable at December 31, 2008, and
these have a weighted average exercise price of $2.47. The remaining 4,137,000
options were unvested at December 31, 2008. These unvested options have a
weighted average exercise price of $0.30. As of December 31, 2008, total
unrecognized compensation expense related to unvested share options was
$143,000, which is expected to be recognized as follows: $55,000 in 2009,
$46,000 in 2010, $28,000 in 2011 and $14,000 in 2012.
Agent Loyalty Opportunity Trust
The Agent Loyalty Opportunity Trust ("ALOT") was established in 1997
(without shareholders' approval) to provide for the granting of stock
appreciation rights ("SARs") on the Company's Ordinary Shares to agents of the
Company's former U.S. life insurance subsidiary. Each award unit entitled the
holder to cash compensation equal to the difference between the Company's
prevailing share price and the exercise price. The award units were exercisable
in four equal annual installments commencing on the first anniversary of the
date of grant and were forfeited upon termination of the agency contract.
Vesting of the award in any given year was also contingent on the holder of the
award surpassing a predetermined benchmark tied to sales and persistency. The
SARs expired seven years from the date of grant. No awards have been outstanding
under this plan since 2006.
The ALOT may purchase Ordinary Shares in the open market, funded by a
loan from a Group subsidiary. The loan is secured by the shares held in the
trust and bears interest based upon the trust's net income before interest for
each financial period. The trust receives dividends on all Ordinary Shares held.
The loan, interest income and dividend income are eliminated in the consolidated
financial statements. See Note 7 "Shareholders' Equity" for a summary of the
share activity within the ALOT.
Note 11. Pension Plan
The Group provides a defined contribution plan for its U.K. employees.
There is currently one participant in the plan. The Group has no ongoing
liabilities associated with the plan. Contributions of $303,000 and $175,000
were made by the Group to the plan in 2008 and 2007, respectively. Of the 2008
and 2007 contributions, $245,000 and $121,000, respectively, were offset by a
salary waiver.
25
Note 12. Earnings Per Share and ADS
Earnings (loss) per ADS are 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 in accordance with Statement of
Financial Accounting Standard No. 128 ("SFAS 128"), "Earnings per Share," is as
follows:
Year Ended December 31,
----------------------------
2008 2007
------------ ------------
(In thousands, except per
share and ADS amounts)
Net income (loss).................................................................... $ (1,571) $ 376
------------ ------------
------------ ------------
Basic 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 earnings (loss) per share...................................................... $ (0.03) $ 0.01
------------ ------------
------------ ------------
Basic earnings (loss) per ADS........................................................ $ (0.31) $ 0.07
------------ ------------
------------ ------------
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
Effect of dilutive securities (warrants and employee share options) ................. - 304
------------ ------------
Weighted-average number of Ordinary Shares used in diluted
earnings (loss) per share calculations............................................ 50,917 51,221
------------ ------------
------------ ------------
Diluted earnings (loss) per share.................................................... $ (0.03) $ 0.01
------------ ------------
------------ ------------
Diluted earnings (loss) per ADS...................................................... $ (0.31) $ 0.07
------------ ------------
------------ ------------
For the year ended December 31, 2008, there were no "in-the-money"
options or warrants, and therefore no potentially dilutive securities. As a
result, if the Company had reported net income for the year ended December 31,
2008, diluted earnings per share would be the same as basic earnings per share.
Note 13. Transactions with Related Parties
The Group paid legal fees of approximately $45,000 and $5,000 during 2008
and 2007, respectively, to a law firm of which one of its directors, Victor A.
Hebert, was a member until October 2008.
Note 14. 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, in accordance with Statement of Financial Accounting Standards No.
131, "Segment Reporting."
26
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 net investment gain and loss information by
geographic segment, based on the domicile of the Group company generating those
revenues, is as follows:
Year Ended December 31,
----------------------------
2008 2007
------------ ------------
(In thousands)
Jersey............................................................................... $ 1,409 $ 1,842
Guernsey............................................................................. - 52
United States........................................................................ 612 1,828
------------ ------------
Consolidated revenues and net investment gains and losses............................ $ 2,021 $ 3,722
------------ ------------
------------ ------------
Total assets by geographic segment were as follows:
December 31,
----------------------------
2008 2007
------------ ------------
(In thousands)
Jersey............................................................................. $ 13,643 $ 14,135
Guernsey........................................................................... 1 1
United States...................................................................... 1,900 3,031
------------ ------------
Consolidated total assets ......................................................... $ 15,544 $ 17,167
------------ ------------
------------ ------------
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:
Year Ended December 31,
----------------------------
2008 2007
------------ ------------
(In thousands)
Revenues and net investment gains and losses:
Consulting in venture capital........................................................ $ 564 $ 1,718
Life insurance and annuities ........................................................ 1,380 1,778
------------ ------------
1,944 3,496
Reconciliation of segment amounts to consolidated amounts:
Interest income...................................................................... 77 226
------------ ------------
Consolidated revenues and net investment gains and losses............................ $ 2,021 $ 3,722
------------ ------------
------------ ------------
Income (loss) before income tax expense:
Consulting in venture capital........................................................ $ (738) $ 317
Life insurance and annuities......................................................... 1,027 1,228
------------ ------------
289 1,545
Reconciliation of segment amounts to consolidated amounts:
Interest income...................................................................... 77 226
Corporate expenses................................................................... (1,933) (1,393)
------------ ------------
Consolidated income (loss) before income tax expense................................. $ (1,567) $ 378
------------ ------------
------------ ------------
27
Assets attributable to each of the Company's reportable operating
segments, based on management's reporting structure, were as follows:
December 31,
----------------------------
2008 2007
------------ ------------
(In thousands)
Assets:
Consulting in venture capital...................................................... $ - $ -
Life insurance and annuities....................................................... 13,226 12,238
Corporate and other................................................................ 2,318 4,929
------------ ------------
Consolidated total assets.......................................................... $ 15,544 $ 17,167
------------ ------------
------------ ------------
Note 15. Client Concentration
The Group's revenues are from a limited number of clients. During 2008,
the Group's largest consulting client accounted for 20% of its consolidated
revenues. No other consulting client accounted for more than 10% of consolidated
revenues.
28
MANAGEMENT REPORT
This Management Report should be read in conjunction with the audited
consolidated financial statements, and the notes thereto, presented in this
Annual Report. The consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States. This section
should also be read in conjunction with the Cautionary Statement included at the
end of this Annual Report.
Results of Operations by Business Segment
Income (loss) before income tax expense for our reportable operating
segments, based on management's internal reporting structure, is as follows:
Year Ended December 31,
------------ ------------
2008 2007
------------ ------------
(In thousands)
Income (loss) from before income tax expense
by operating segment:
Consulting in venture capital ...................................................... $ (738) $ 317
Life insurance and annuities........................................................ 1,027 1,228
------------ ------------
289 1,545
Reconciliation of segment amounts to consolidated amounts:
Interest income..................................................................... 77 226
Corporate expenses.................................................................. (1,933) (1,393)
------------ ------------
Consolidated income (loss) before
income tax expense................................................................ $ (1,567) $ 378
------------ ------------
------------ ------------
Business segment data contained in Note 14 to the Consolidated Financial
Statements should be read in conjunction with this discussion. A detailed
discussion of the results for each reportable segment follows.
Consulting in Venture Capital
Certain information regarding our consulting segment's results of
operations is as follows:
Year Ended December 31,
----------------------------
2008 2007
------------ ------------
(In thousands)
Revenues:
Consulting fees..................................................................... $ 564 $ 1,718
------------ ------------
Total revenues...................................................................... 564 1,718
Operating expenses.................................................................. 1,302 1,401
------------ ------------
Income (loss) before income tax expense............................................. $ (738) $ 317
------------ ------------
------------ ------------
2008 compared to 2007
In 2008, our consulting segment contributed a loss before income taxes of
$0.7 million to our overall loss before income taxes, compared to income before
income taxes of $0.3 million in 2007. This decrease in income before taxes for
this segment in 2008 was attributable to a $1.1 million decrease in consulting
fee revenues.
29
Consulting fee revenues decreased from $1.7 million in 2007 to $0.6
million in 2008, due to a decline 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 was signed with this client in March 2008, though the scope
of our work under this contract was significantly reduced and thus consulting
revenues from this client for 2008 were significantly lower at $0.4 million.
This second contract expired at the end of 2008, and as of this date, a new
contract for 2009 has not yet been agreed.
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. To date, no such compensation has
been realized.
Some of our former consulting agreements provided that we receive
promissory notes that are 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, resulting from the conversion of
$140,000 in promissory notes. We also hold common stock options in a technology
company that are now fully vested, though we believe that currently these have
no value.
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 and the global economy. We are actively
seeking new clients and business opportunities.
Life Insurance and Annuities
Certain information regarding our life insurance and annuities segment's
results of operations is as follows:
Year Ended December 31,
----------------------------
2008 2007
------------ ------------
(In thousands)
Revenues and net investment gains and losses:
Investment income................................................................... $ 237 $ 578
Insurance policy charges............................................................ - 2
Net realized investment gains....................................................... 1,143 1,198
------------ ------------
Total revenues and net investment gains and losses.................................. 1,380 1,778
Expenses:
Amounts credited on insurance policyholder accounts................................. 6 44
General and administrative expenses................................................. 347 506
------------ ------------
Total expenses...................................................................... 353 550
------------ ------------
Income before income tax expense.................................................... $ 1,027 $ 1,228
------------ ------------
------------ ------------
LPAL's policyholder liabilities fell during 2008 from $141,000 to
$106,000 primarily due to exchange rate changes. As of December 31, 2008, LPAL
has three policies remaining which are scheduled to mature in the first half of
2009. There are currently no plans to write new policies.
30
2008 compared to 2007
In 2008, LPAL contributed income before income taxes of $1.0 million to
our overall loss before income taxes, compared to income before income taxes of
$1.2 million in 2007. The $0.2 million lower income before taxes in 2008 is
attributable to a decrease of $0.3 million in interest income and a decrease of
$0.1 million in net realized investment gains, offset by a $0.2 million decrease
in expenses.
Interest income on cash and corporate bond investments declined by $0.3
million in 2008 to $237,000, due to the maturity of all corporate bond holdings
by July 2007 (which was tied to the maturity of policies), as well as to a
decline in interest rates. The level of LPAL's cash and cash equivalents at the
end of 2008 was $11.8 million, compared with $10.3 million at the end of 2007,
with $1.4 million in cash coming in at the very end of 2008 related to the Enron
securities litigation settlement payment (see below for more information).
Interest credited on policyholder accounts decreased to $6,000 in 2008, compared
to $44,000 in 2007. This decrease was due to policy maturities of $3.6 million
during 2007. The average rate credited to policyholders was 4.25% in 2008,
compared with 4.8% in 2007.
LPAL's total assets increased to $13.2 million as of December 31, 2008,
compared to $12.2 million as of December 31, 2007, primarily due to the receipt
in February 2008 of the $0.3 million final payment from the WorldCom, Inc.
securities litigation settlement and the receipt in December 2008 of the $1.4
million partial payment from the Enron securities litigation settlement (see
below for more information), which was offset by other-than-temporary
write-downs totaling $0.5 million on one of LPAL's private equity investments.
Net realized investment gains for 2008 were $1.1 million, compared to
$1.2 million for 2007. In January 2007, LPAL received $1.2 million representing
a partial distribution from the WorldCom, Inc. securities litigation. In
February 2008, LPAL received a final WorldCom distribution of $0.27 million.
LPAL held certain WorldCom, Inc. publicly traded bonds which it sold at a loss
in 2002. These two payments totaling almost $1.5 million recover part of the
realized loss recognized by LPAL in 2002. In December 2008, LPAL received a
partial distribution of $1.37 million from the Enron Corporation securities
litigation. LPAL held certain Enron Corporation publicly traded bonds which it
sold at a loss in 2002. This payment recovers part of the realized loss
recognized by LPAL in 2002. The timing and amount of future Enron distributions
is currently uncertain. The two payments received in 2008 totaling $1.64 million
were offset by other-than-temporary impairment write-downs totaling $0.5 million
on one of LPAL's private equity investments.
Policyholder liabilities as of December 31, 2008 were $106,000. There are
three policies outstanding as of that date totaling $72,000 which are scheduled
to mature in the first half of 2009. The balance of $34,000 relates to two death
claims which are pending payment.
Included in general and administrative expenses for 2007 are $44,000 of
employee severance costs. Excluding these employee severance costs, general and
administrative expenses for 2007 were $0.5 million, compared with $0.3 million
for 2008. This $0.2 million decrease in expenses for 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.
Corporate and Other
2008 compared to 2007
Corporate expenses increased by $0.5 million to $1.9 million in 2008,
compared to $1.4 million in 2007. This increase was due to a $0.1 million
increase in professional services costs, a $0.1 million write-off in web
development costs paid to a third party vendor subsequent to our decision not to
go forward with a web based project, and a $0.3 million increase in compensation
paid to our Chief Financial Officer, Mr. Ian K. Whitehead, under an agreement
dated August 12, 2008. Under that agreement, the Company gave notice to Mr.
Whitehead that his employment agreement would end on June 30, 2009. Reference is
made to Exhibit 10.3.1 to the Company's Form 10-K for the year ended December
31, 2000 for a copy of Mr. Whitehead's employment agreement and to the Company's
Proxy Statement dated April 29, 2008 for a description of his
31
salary waiver of May 2003. The Company's operating expenses for the 12-month
period ending on June 30, 2009 will increase by approximately $0.7 million, of
which approximately half has already been recognized in the second half of 2008.
Interest income, excluding interest income earned by LPAL, decreased by
$149,000 to $77,000 for 2008 compared to $226,000 in 2007, due to declining cash
balances (outside of LPAL), as well as to lower interest rates. As of December
31, 2008, our cash and cash equivalents, excluding the amount held by LPAL,
amounted to $1.9 million, a decrease of $2.4 million from December 31, 2007.
This decrease resulted from the use of cash in operating activities.
Consolidated Income (Loss) Before Income Tax Expense
2008 compared to 2007
Our consolidated loss before income tax expense was $1.6 million in 2008,
compared to income before income taxes of $0.4 million in 2007. This $2.0
million decline in income before taxes was due to a decrease in consulting fee
revenues of $1.2 million, a decrease in interest income of $0.5 million, and an
increase in operating expenses of $0.2 million, 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.
Through 2008, we were 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.
2008 compared to 2007
The $4,000 tax expense for 2008 is comprised of $2,000 in minimum
California taxes and $2,000 in federal alternative minimum taxes caused by the
consolidation of London Pacific Life & Annuity Company in our U.S. tax group's
consolidated returns from 2005 onwards. For more information, see Note 6 "Income
Taxes" to our consolidated financial statements included in this Annual Report.
Other than these taxes, no other tax expense or benefits were applicable to our
Group for 2008. A loss before income taxes of $0.5 million was contributed by
our Jersey operations and a loss before income taxes of $1.1 million was
contributed by our U.S. operations; however, we did not recognize any tax
benefits due to the 100% valuation allowances that we have provided for all
deferred tax assets. In 2007, our only tax expense was $2,000 of minimum
California taxes.
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, our primary business for financial reporting
purposes is considered to be consulting in venture capital rather than life
insurance and annuities. As such, our private equity investments are now carried
at cost less any other-than-temporary impairments. Previously, we carried our
private equity investments at fair value in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115"). Under paragraph 127(b) of SFAS 115,
insurance companies are required to report equity securities at fair value even
if they do not meet
32
the scope criteria in paragraph 3 of SFAS 115. With respect to our private
equity investments held at December 31, 2007, our 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 our private equity investments.
For 2008, 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. In accordance with FASB Staff Position Nos. FAS 115-1 and FAS
124-1 ("FSP 115-1 and 124-1"), "The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments," we evaluate our investments for any
events or changes in circumstances ("impairment indicators") that may have
significant adverse effects on our investments. If impairment indicators exist,
then the carrying amount of the investment is compared to its estimated fair
value as determined in accordance with Statement of Financial Accounting
Standards No. 157 ("SFAS 157"), "Fair Value Measurements." If any impairment is
determined to be other-than-temporary, then a realized investment loss would be
recognized during the period in which we make such determination.
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 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. 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.
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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 private 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
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.
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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 1 to the Consolidated Financial Statements in this Annual Report
for a summary of recently issued accounting pronouncements.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents decreased during 2008 by $0.9 million from
$14.6 million as of December 31, 2007 to $13.7 million as of December 31, 2008.
This decrease in cash and cash equivalents resulted from $2.5 milion of cash
used in operating activities, which was partially offset by $1.6 million of cash
provided by investing activities. Cash used in operating activities primarily
resulted from the $1.6 million operating loss for 2008, as adjusted for net
realized investment gains of $1.1 million which includes the $1.6 million
partial proceeds from the Enron securities litigation settlement (which is
included in cash flows provided by investing activities), net of $0.5 million in
other-than-temporary write-downs on one private equity investment taken during
2008. As of December 31, 2008, our cash and cash equivalents, excluding the
amount held by LPAL, amounted to $1.9 million, a decrease of $2.4 million from
December 31, 2007. This decrease resulted from the use of cash in operating
activities.
The $11.8 million of cash and cash equivalents held by LPAL, as well as
the $1.3 million of investments held by LPAL, are not currently available to
fund the operations or commitments of the Company or its other subsidiaries.
However, a dividend could be paid from LPAL to the Company. In April 2008, the
Company obtained approval from the JFSC 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 $106,000 as of December 31, 2008, as well as the
operational costs of LPAL.
Shareholders' equity decreased during 2008 by $1.5 million from $16.5
million at December 31, 2007 to $15.0 million as of December 31, 2008, primarily
due to the net loss for the period of $1.6 million. As of December 31, 2008 and
2007, $62.6 million of our Ordinary Shares, at cost, held by the employee
benefit trusts have been netted against shareholders' equity.
During 2008, LPAL continued to service its existing policyholders. There
were no policy maturities or surrenders in 2008. Policyholder liabilities were
$106,000 as of December 31, 2008, compared to $141,000 as of December 31, 2007.
The $35,000 decrease in policyholder liabilities was primarily due to exchange
rate changes. The three policies remaining at December 31, 2008 are scheduled to
mature in the first half of 2009. LPAL has sufficient liquid resources to fund
these maturities. As of December 31, 2008, LPAL had cash of $11.8 million.
As of December 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 December 31, 2008, we had $1.9 million of cash and cash
equivalents, excluding cash held by our life insurance and annuities segment. We
believe that this cash balance, along with dividends to the Company from LPAL up
to a total of $5.0 milion (as discussed above), is sufficient to fund our
operations (consulting in venture capital and corporate activities) over at
least the next 12 months.
PRINCIPAL RISKS AND UNCERTAINTIES
We consider the principal risks and uncertainties for 2009 to be the
following: (1) the level of consulting fee revenues is expected to be volatile
depending on the nature and extent of our work at any point in time,
particularly in the current economic environment; (2) by their very nature,
venture capital investments are risky, and the private equity investments held
by the Company's insurance subsidiary could decline in value; and (3) U.S.
dollar interest rates have fallen significantly in 2008 and may continue to
remain at a very low level thereby minimizing our interest income.
35
RESPONSIBILITY AND CAUTIONARY STATEMENTS
Responsibility Statement
We confirm that to the best of our knowledge:
o The financial statements for the twelve months ended December 31, 2008
included in this Annual Report, which has been prepared in conformity
with United States generally accepted accounting principles ("U.S.
GAAP"), gives a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company and the
undertakings included in the consolidation taken as a whole; and
o This Annual Report includes a fair review of the information required
by the Financial Services Authority's Disclosure and Transparency Rules
("DTR") 4.1.8 to 4.1.11 (including a fair review of the business, a
description of the principal risks and uncertainties facing the
Company, a review of the development and performance of the Company,
any important events since the end of the financial year and likely
future developments).
Cautionary Statement
This Annual Report is addressed to shareholders of Berkeley Technology
Limited and has been prepared solely to provide information to them.
This Annual Report is intended to inform the shareholders of the Company's
performance during the twelve months ended December 31, 2008. Statements
contained herein which are not historical facts are forward-looking statements
that involve a number of risks and uncertainties that could cause the actual
results of the future events described in such forward-looking statements to
differ materially from those anticipated in such forward-looking statements.
Factors that could cause or contribute to deviations from the forward-looking
statements include, but are not limited to, (i) variations in demand for the
Company's products and services, (ii) the success of the Company's new products
and services, (iii) significant changes in net cash flows in or out of the
Company's 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 the Company's operations, (vi) the effect of economic
conditions and interest rates in the U.S., the U.K. or internationally, (vii)
the ability of the Company's subsidiaries to compete in their respective
businesses, (viii) the ability of the Company to attract and retain key
personnel, and (ix) actions by governmental authorities that regulate the
Company's businesses, including insurance commissions. The Company undertakes no
obligation to update any forward-looking statements, whether as a result of new
information, future developments or otherwise.
On behalf of the Board
Ian K. Whitehead
Chief Financial Officer
March 31, 2009
36