UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 0-21874
Berkeley Technology Limited
(Exact name of registrant as specified in its charter)
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Jersey, Channel Islands Not applicable
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
One Castle Street
St. Helier, Jersey JE2 3RT
Channel Islands
(Address of principal executive offices, including zip code)
011 44 (1534) 607700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
American Depositary Shares, each representing ten Ordinary Shares of $0.05 par
value per share Ordinary Shares of $0.05 par value per share *
*Not for trading, but only in connection with the registration of American
Depositary Shares, pursuant to the requirements of the Securities and Exchange
Commission.
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
If this report is an annual report or transition report, indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ]
Smaller reporting company [X] (Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the closing sale price of the Ordinary Shares on June 30,
2008 as reported on the London Stock Exchange (using an exchange rate
of (pound)1.00 = $1.99) was $3,145,255. Ordinary Shares held by each current
executive officer and director and by each person who is known by the registrant
to own 10% or more of the outstanding Ordinary Shares have been excluded from
this computation in that such persons may be deemed to be affiliates of the
registrant. This determination is not necessarily conclusive that these persons
are affiliates of the registrant.
As of March 31, 2009, the registrant had outstanding 64,439,073 Ordinary
Shares, $0.05 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive proxy statement for its Annual General Meeting
of Shareholders to be held on July 31, 2009, is incorporated by reference in
Part III of this Form 10-K.
TABLE OF CONTENTS
PART I Page
Item 1. Business...................................................................................... 1
Item 1A. Risk Factors.................................................................................. 4
Item 1B. Unresolved Staff Comments..................................................................... 4
Item 2. Properties.................................................................................... 4
Item 3. Legal Proceedings............................................................................. 4
Item 4. Submission of Matters to a Vote of Security Holders........................................... 4
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.............................................................. 4
Item 6. Selected Financial Data....................................................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 8
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ................................... 15
Item 8. Financial Statements and Supplementary Data................................................... 16
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 46
Item 9A.(T) Controls and Procedures....................................................................... 46
Item 9B. Other Information............................................................................. 46
PART III
Item 10. Directors and Executive Officers of the Registrant............................................ 47
Item 11. Executive Compensation........................................................................ 47
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters......................................................................... 47
Item 13. Certain Relationships and Related Transactions................................................ 48
Item 14. Principal Accountant Fees and Services........................................................ 48
PART IV
Item 15. Exhibits and Financial Statement Schedules ................................................... 49
Signatures ................................................................................................. 57
As used herein, the terms "registrant," "Company," "we," "us" and "our"
refer to Berkeley Technology Limited. Except as the context otherwise requires,
the term "Group" refers collectively to the registrant and its subsidiaries.
Forward-Looking Statements and Factors That May Affect Future Results
Statements contained in this Annual Report on Form 10-K that are not
historical facts, including, but not limited to, statements found in Item 1
"Business" and Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Such forward-looking statements are based on current
expectations, estimates, forecasts and projections about the industries in which
we operate, management's current beliefs and assumptions made by management.
Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," "goals," variations of such words and similar expressions are
intended to identify such forward-looking statements. These statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions that are difficult to predict. Future outcomes and results may
differ materially from what is expressed or forecasted in such forward-looking
statements. We undertake no obligation to update any forward-looking statements,
whether as a result of new information, future developments or otherwise.
PART I
Item 1. BUSINESS
OVERVIEW
We are a venture capital consulting company incorporated under the laws
of Jersey, Channel Islands, with an office in San Francisco, California. A
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 the Group.
In addition to our consulting business, we continue to service the
policyholders of London Pacific Assurance Limited ("LPAL") in Jersey. New
policies are not being sold at this time to preserve our capital. Future gains
on LPAL's investment portfolio would give us more flexibility to rebuild our
insurance operations should we choose to do so, although we have no current
plans to sell new policies.
The Company was incorporated in 1985 in Jersey, Channel Islands and is
listed on the London Stock Exchange ("LSE"). Our Ordinary Shares currently trade
under the symbol "BEK.L." American Depositary Receipts ("ADRs") representing our
Ordinary Shares began trading in the U.S. market in 1992. Our ADRs currently
trade on the Over-the-Counter ("OTC") Bulletin Board under the symbol
"BKLYY.PK."
BUSINESS SEGMENTS
We currently have two business segments that we operate through our
subsidiaries: venture capital consulting, and life insurance and annuities. Our
principal operating subsidiaries, by business segment and location, are set
forth below:
Principal Subsidiaries Business Segment Location
- ---------------------- -------------------------- -------------------------
Berkeley International Capital Corporation Venture capital consulting San Francisco, California
London Pacific Assurance Limited Life insurance and annuities Jersey, Channel Islands
1
See Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Results of Operations by Business Segment" and Note
14 to the Consolidated Financial Statements in Item 8 of this Form 10-K for a
summary of our financial information by business segment and geographical
location.
Venture Capital Consulting
Our consulting business is managed by Berkeley International Capital
Corporation ("BICC"). Over the years, our venture capital and consulting
business has focused primarily on U.S. high technology companies, with
investments as high as $25 million. We identify opportunities for clients
seeking to invest in Silicon Valley. We also assist private technology companies
in growing their businesses. Though no new equity postions were established in
2008, in 2007 we established several equity positions through direct investment
by LPAL and through equity rights received as part of our consulting activities.
We use our consulting relationships in part to generate fees that help to 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.
Typically, BICC seeks a monthly retainer from its clients. Additional
fees may be earned depending on the intensity of the work such as due diligence
fees on transactions and success fees. The consulting work may involve
assistance with the identification of customers and/or investor prospects;
strategy development; introductory meetings with prospective customers or
investors; and assistance in the implementation of the chosen strategy or
transaction.
As an example of its work in consulting, BICC was engaged by a North
American telecommunications equipment company to develop a business strategy for
penetration of the European and Japanese markets. This engagement involved
detailed market and prospect research and meetings with potential clients that
may lead to substantial business for the client company. An example of BICC's
venture capital services has been an engagement advising a European
telecommunications company on making investments in U.S. technology companies.
BICC has a long history and experience in both the U.S. technology
industry and the overseas investment and business markets. It is well positioned
to benefit from the globalization forces that are at work in the industry and
that are challenging so many young technology companies. It can also provide
overseas investors and businesses with the access they desire to U.S.
businesses, technologies and potential sources of funding.
Over the past 28 years, BICC arranged over $1.9 billion of placements in
the private capital markets. Placements were typically arranged in later stage
technology companies, which were near alpha test of their product and needed to
scale up their engineering, marketing and sales infrastructure. Within this
strategy, BICC has been able to identify many promising young technology
companies that have grown in prominence in their fields and gone on to
successful public offerings or acquisition transactions. Many of the companies
are headquartered in close proximity to BICC's offices which allows for easier
access to the companies' management. Most of these companies specialize in
telecommunications (both central office and customer premises), data
communications, software, semiconductors and knowledge learning. These
placements included investments in 3Com, Acuson, Adaptec, Altera, America
Online, Atmel, Cadence Design Systems, Cirrus Logic, Cypress Semiconductor,
Flextronics, IDT, Linear Technology, LSI Logic, Nellcor, Oracle, PMC Sierra and
Packeteer, Inc.
Of the private technology investments arranged by BICC, two investments,
Alacritech, Inc. and Xtera Communications, Inc., are currently held by LPAL.
During 2008, 71% of consulting fee revenues were generated from one
client. Our consulting arrangement with this client expired on December 31,
2008, and a new arrangement has not yet been agreed. The level of consulting
fees is expected to be volatile in future periods 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.
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Competition
Our consulting in venture capital business faces competition primarily
from commercial banks, investment banks, venture capital firms, insurance
companies, hedge funds and consulting firms, many of which have substantially
greater financial resources. The marketplace for venture capital and consulting
is highly competitive, and demand for services is also influenced by economic
and stock market conditions.
Life Insurance and Annuities
Formed in 1999, our Jersey, Channel Islands insurance subsidiary, LPAL,
has principally been engaged in marketing and servicing investment oriented
insurance products. LPAL sold Sterling, U.S. dollar and Euro guaranteed return
bonds in its home market of Jersey, Channel Islands, and in the U.K., Guernsey,
Isle of Man and other permitted jurisdictions. The products guarantee both
capital and yield for the duration of the investment period, which are typically
three or five years. In recent years, LPAL has not sold any new policies due to
the high capital requirements. Due to this change in company strategy, the
number of policyholders has declined significantly to three at the end of 2008
(there was no change from the end of 2007). We have no current plans to sell new
policies, but we monitor the markets for opportunities. LPAL's strategy for its
investment portfolio has been to at least match the level of policyholder
liabilities with corporate bonds and cash. As of December 31, 2008, LPAL's
policyholder liabilities, including death claims pending payout, totaled
$106,000, and LPAL's cash totaled $11.8 million. LPAL held no corporate bonds at
the end of 2008. LPAL's investment portfolio included two private equity
securities valued at $1.3 million as of December 31, 2008.
REGULATION
London Pacific Assurance Limited
LPAL is regulated by the Jersey Financial Services Commission ("JFSC").
Under Article 6 of the Insurance Business (Jersey) Law 1996, LPAL is permitted
to conduct long-term insurance business. LPAL is required to submit annual
audited financial statements (prepared under United States generally accepted
accounting principles as permitted by regulation), and an audited annual filing
to the JFSC in the format consistent with that required by the Financial
Services Authority in the United Kingdom. The annual filing submitted by LPAL
must be accompanied by a Certificate from the Appointed Actuary that based on
sufficiently prudent assumptions, assets are sufficient to cover all
liabilities. The annual filing contains a report from the Appointed Actuary on
the matching of investments to liabilities.
The JFSC sets out the conditions with which LPAL must comply and
determines the reporting requirements and the frequency of reporting. These
conditions require that: (i) LPAL must hold, at all times, approved assets at
least equal to the long-term insurance fund plus the required minimum solvency
margin, (ii) the margin of solvency must be the greater of (pound)50,000 or 2.5%
of the value of the long-term business fund, and (iii) assets equal to not less
than 90% of liabilities must be placed with approved independent custodians. As
of December 31, 2008, LPAL met all of these conditions.
LPAL is also required under the insurance laws to appoint an actuary. The
actuary must be qualified as defined under 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.
Group
Our executive management and in-house attorney are responsible for
managing our subsidiaries' compliance with applicable regulatory requirements.
Although the scope of regulation and form of supervision to which our
subsidiaries are subject, as described above, may vary from jurisdiction to
jurisdiction, the
3
applicable laws and regulations often are complex and generally grant broad
discretion to supervisory authorities in adopting regulations and supervising
regulated activities. Our continuing ability to engage in businesses in the
jurisdictions in which our subsidiaries currently operate is dependent upon
compliance with the rules and regulations promulgated from time to time by the
appropriate authorities in each of these jurisdictions. The burden of such
regulation weighs equally upon all companies carrying on activities similar to
those of our subsidiaries, and we do not consider such regulations to adversely
affect the competitive position of our subsidiaries.
EMPLOYEES
As of December 31, 2008, we had 6 full-time employees.
Item 1A. RISK FACTORS
Not required.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
We currently operate from an office located in San Francisco, California,
consisting of approximately 3,800 square feet. We occupy this office under a
lease which will expire at the end of October 2009.
We are obligated under a lease until September 2010 for office space
consisting of approximately 3,000 square feet in Jersey, Channel Islands. In
June 2006, we entered into a sublease agreement for the remaining term of our
lease for the entire office space.
See Note 8 to the Consolidated Financial Statements in Item 8 of this
Form 10-K for further information regarding our leases.
Item 3. LEGAL PROCEEDINGS
There are no legal proceedings pending against the Group.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to our shareholders during the quarter ended
December 31, 2008.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
The principal trading market for our Ordinary Shares is the LSE, under
the symbol "BEK.L," on which such shares have been listed since February 1985.
ADSs, each representing ten Ordinary Shares, are evidenced by ADRs for which The
Bank of New York Mellon is the Depositary. Our ADSs have traded in the
4
United States from September 1992 through August 1993 on the OTC Bulletin Board,
from September 1993 through November 1999 on The Nasdaq Stock MarketSM under the
symbol "LPGL," from November 1999 through July 3, 2002 on the New York Stock
Exchange ("NYSE") under the symbol "LDP," from July 12, 2002 through June 15,
2003 on the OTC Bulletin Board under the symbol "LDPGY.PK" and since June 16,
2003 on the OTC Bulletin Board under the symbol "BKLYY.PK." As of December 31,
2008, there were 64,439,073 Ordinary Shares outstanding of which 11,871,930, or
18.4%, were represented by 1,187,193 ADSs. ADS holders may exercise their voting
rights through the ADR Depositary.
In June 2002, we completed a one-for-ten reverse split of our ADSs. On
June 24, 2002, every ten of our ADSs issued and outstanding were converted and
reclassified into one post-split ADS. Consequently, effective from the opening
of business on June 24, 2002, each ADS is equal to ten Ordinary Shares.
Fractional new ADSs were sold by the Depositary Bank and paid in cash to the ADR
holders. This ADS split did not affect our Ordinary Shares listed on the LSE.
On July 9, 2002, trading of our ADRs was suspended and the securities
were withdrawn from listing and registration on the NYSE due to a fall in price
below the minimum permitted by the NYSE. As a result of the delisting, the
liquidity of our common stock and its price were adversely affected. These
actions may limit our ability to raise additional capital in the future, and
there is no assurance that a significant trading market for the ADRs will
develop. If an active trading market does not develop, ADR holders may be unable
to sell their ADRs.
Subsequent to the delisting, the ability of ADR holders to buy and sell
is limited to trading on the OTC Bulletin Board. Shares traded on the OTC market
generally experience lower trading volume than those traded on the organized
exchanges. The trading volume of the ADRs has decreased substantially since the
NYSE delisting and the transfer of the ADRs to the OTC Bulletin Board.
The following table shows, for the quarters indicated, the reported
highest and lowest middle market quotations (which represent an average of bid
and asked prices) for our Ordinary Shares on the LSE, based on its Daily
Official List, and the high and low trade price information of the ADSs as
obtained from the OTC Bulletin Board:
LSE OTC Bulletin Board
Pounds Sterling Per U.S. Dollars
Ordinary Share Per ADS
-------------------- --------------------
High Low High Low
------- ------ ------ ------
2008:
First quarter................................................. 0.07 0.03 0.90 0.50
Second quarter................................................ 0.07 0.04 0.95 0.38
Third quarter................................................. 0.06 0.02 0.75 0.20
Fourth quarter................................................ 0.05 0.02 0.22 0.09
2007:
First quarter................................................. 0.10 0.03 1.08 0.56
Second quarter................................................ 0.07 0.05 1.05 0.80
Third quarter................................................. 0.07 0.04 0.99 0.65
Fourth quarter................................................ 0.07 0.05 1.00 0.65
Holders
As of February 28, 2009, we had approximately 1,292 Ordinary shareholders
of record and 71 ADS holders of record. Because many Ordinary Shares and ADSs
are held by brokers and various institutions on behalf of other holders, we are
unable to estimate the total number of beneficial holders represented by these
holders of record.
5
Dividends
Until 2002, we paid dividends on our Ordinary Shares in every year since
we became listed on the LSE in 1985. Dividends on our Ordinary Shares were paid
twice a year. In view of our requirement to conserve cash in order to meet the
operating needs and growth opportunities of the business, we did not pay an
interim or final dividend for 2007 or an interim dividend for 2008. Our Board of
Directors will not be recommending a final dividend for the year 2008.
Holders of ADSs are entitled to receive dividends paid, if any, on our
Ordinary Shares through the ADR Depositary.
Under current practice, holders of ADSs who are residents of the United
States for tax purposes receive the net dividend (the gross dividend less the
associated Jersey income tax). See "Taxation - Taxation of Dividends" below.
Currently, Jersey does not have exchange control restrictions on the
payment of dividends on the Ordinary Shares or on the conduct of the Group's
operations. See Note 7 to the Consolidated Financial Statements in Item 8 of
this Form 10-K for details regarding regulatory restrictions on dividends.
TAXATION
The following summary of certain Jersey and U.S. tax consequences
regarding share ownership is based on law and published practice as of March 23,
2009, and is subject to any changes in Jersey and U.S. law or published practice
or in the establishment of any double taxation convention between Jersey and the
U.S. occurring after that date. The summary is not a complete analysis or
listing of all the possible tax consequences and does not address the tax
implications for special classes of holders, such as banks, insurance companies
and dealers in securities. The summary also does not address U.S. state income
tax consequences. Owners of Ordinary Shares and ADSs should consult their own
tax advisors as to the tax consequences of such ownership.
There is no double tax treaty or similar convention between the U.S. and
Jersey. For the purposes of the U.S. Internal Revenue Code of 1986, as amended,
it is assumed that beneficial owners of ADSs, in accordance with the terms of
the Deposit Agreement, will be treated as the owners of the underlying Ordinary
Shares represented by the ADSs.
Taxation of Dividends
Dividends are declared gross in U.S. dollars. Through 2008, dividends
paid by the Company, if any, were treated as having suffered Jersey income tax
at the standard rate (20%) on the gross amount thereof.
As part of its fundamental review of its tax system, the States of Jersey
in the Channel Islands are introducing a tax rate of zero percent for most
companies in 2009. The resultant reduction in the overall corporate tax revenues
in Jersey is being filled by an increase in direct personal taxation for
individals and by the introduction in May 2008 of a goods and services tax of
3%. The Company anticpates it will have a zero percent tax rate on its Jersey
profits, and as such, no tax credit will be available for Jersey residents in
the event dividends are paid in the future by the Company. It is likely that
from the beginning of 2009, an individual resident in Jersey who owns more than
2% of the Ordinary Share capital of the Company, equivalent to 1,288,781 shares,
may be liable for tax on their proportionate share of the Company's annual
profits that have not been distributed. Shareholders who are unsure of their tax
position should consult their tax advisor.
Charities, superannuation funds and certain assurance companies in the
U.K., together with individual investors who are not resident in Jersey, may be
entitled to a full or partial repayment of the Jersey income tax credit suffered
on distributions, on submission of a claim to the Jersey Comptroller of Income
Tax. Shareholders who are unsure of their tax position should consult their tax
advisor.
6
Generally, the net dividend paid to a holder or owner who is a U.S.
citizen, a U.S. resident, a U.S. domestic corporation or a trust or estate whose
income is subject to U.S. federal income taxation regardless of source (a "U.S.
holder") will be included in gross income and treated as foreign source dividend
income for U.S. federal income tax purposes to the extent payment is made out of
the Company's current or accumulated earnings and profits as determined under
U.S. federal income tax principles. Such dividends generally will not be
eligible for the "dividends received" deduction permitted to be taken by U.S.
corporations.
However, special rules apply for purposes of determining the dividend
income and potential foreign tax credits available to a U.S. corporation that,
either alone or together with one or more associated corporations, controls,
directly or indirectly, 10% or more of the Company's voting stock. Any such
shareholder should consult its tax advisor with respect to the U.S. interest in
the Company.
Taxation of Capital Gains
Currently, there are no Jersey taxes levied on realized gains on certain
investments. A U.S. holder that sells or exchanges an ADR or Ordinary Share will
generally recognize a gain or loss for U.S. federal income tax purposes, in an
amount equal to the difference between the U.S. dollar amount realized and the
U.S. holder's tax basis determined in U.S. dollars in either the ADS represented
by the ADR or the Ordinary Share. Such a gain or loss will generally be a
capital gain or loss if the ADR or the Ordinary Share was a capital asset in the
hands of the U.S. holder and will generally be a long-term capital gain or loss
if the ADR or Ordinary Share was held for more than one year (including, in the
case of an ADR, the period during which the Ordinary Shares surrendered in
exchange therefore were held). In general, the long-term capital gain of a
non-corporate U.S. holder is subject to a maximum tax rate of 15% for taxable
years beginning before January 1, 2011.
Backup Withholding Tax
A U.S. holder may be subject to U.S. backup withholding tax (currently at
a rate of 30%) with respect to dividends received or gross proceeds from the
sale of ADRs or Ordinary Shares unless the holder provides a taxpayer
identification number and certain certifications or otherwise establishes an
exemption from backup withholding. Certain classes of persons, such as
corporations, are exempt from backup withholding. Backup withholding is not an
additional tax; the amount withheld may be credited against the holder's U.S.
federal income tax liability, and a refund of any excess may be obtained from
the U.S. Internal Revenue Service.
Estate and Gift Tax
No death, estate, gift, inheritance or capital transfer taxes are levied
in Jersey. Probate duty is payable in Jersey if an individual dies holding an
interest in the shares of a Jersey company where the total assets of the
deceased located in Jersey for legal purposes are valued at more than
(pound)10,000. The amount of probate duty payable increases depending on the
value of Jersey assets held at death but the maximum probate duty is 0.75%.
Stamp Duty and Stamp Duty Reserve Tax
No U.K. stamp duty should be payable on any transfer of an Ordinary
Share, or of an ADS, provided it is executed and retained outside the U.K.
Therefore, a transfer of an ADS in the United States would not ordinarily give
rise to a U.K. stamp duty charge.
An instrument transferring Ordinary Shares, or an ADS, could be subject
to U.K. stamp duty if its execution relates to anything done or to be done in
the U.K. For example, a U.K. stamp duty charge may apply if such instrument is
executed in the U.K. or is brought into the U.K. after execution. If the
transfer is on a sale, then the rate of stamp duty will be 0.5% of the
consideration given. If this charge is no more than (pound)5, then the transfer
is exempt. Gifts and other transfers which are neither sales, nor made in
contemplation of a sale, are not subject to this charge.
7
A transfer of Ordinary Shares from the Depositary directly to a
purchaser on behalf of an ADS holder may be subject to a stamp duty at a rate of
0.5% of the consideration (if the stamp duty charge is no more than (pound)5,
then the transfer is exempt) if execution of the instrument of transfer relates
to anything done or to be done in the U.K.; for example, if such transfer is
executed in the U.K. or is to be brought into the U.K. after execution.
U.K. stamp duty reserve tax may not be payable on an agreement to
transfer the Ordinary Shares or ADSs.
EQUITY COMPENSATION PLANS
Information regarding our equity compensation plans is presented in Item
10 of this Form 10-K.
WARRANTS
On November 11, 2002, we agreed to grant 1,933,172 warrants to subscribe
for our Ordinary Shares to Bank of Scotland in connection with the extension of
our credit facility (which was fully repaid and terminated in June 2003). The
warrants were granted on February 14, 2003 and 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.
Item 6. SELECTED FINANCIAL DATA
Not required.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the audited
consolidated financial statements, and the notes thereto, presented in Item 8
"Financial Statements and Supplementary Data" of this Form 10-K. The
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States. This item should also be
read in conjunction with the "Forward-Looking Statements and Factors That May
Affect Future Results" which are set forth below and in our other filings with
the SEC.
Forward-Looking Statements and Factors That May Affect Future Results
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this Form 10-K contain
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking statements are based on
current expectations, estimates, forecasts and projections about the industries
in which we operate, management's current beliefs and assumptions made by
management. Words such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates," "goals," variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions that are difficult to predict. Future outcomes and
results may differ materially from what is expressed or forecasted in such
forward-looking statements. We undertake no obligation to update any
forward-looking statements, whether as a result of new information, future
developments or otherwise.
Factors that could cause or contribute to deviations from the
forward-looking statements include those discussed in this section, elsewhere in
this Form 10-K and in our other filings with the SEC. The factors include, but
are not limited to, (i) variations in demand for our products and services, (ii)
the success of our new products and services, (iii) significant changes in net
cash flows in or out of our businesses, (iv) fluctuations in the performance of
debt and equity markets worldwide, (v) the enactment of adverse state, federal
or foreign
8
regulation or changes in government policy or regulation (including accounting
standards) affecting our operations, (vi) the effect of economic conditions and
interest rates in the U.S., the U.K. or internationally, (vii) the ability of
our subsidiaries to compete in their respective businesses, (viii) our ability
to attract and retain key personnel, and (ix) actions by governmental
authorities that regulate our businesses, including insurance commissions.
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 in Item 8 of this Form 10-K 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.
9
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.
10
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
11
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%. (See
discussion of the new tax system in Jersey in Part II, Item 5, "Taxation.") 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 Item 8 of this Form
10K. 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
12
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 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.
13
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.
14
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 1 to the Consolidated Financial Statements in Item 8 of this
Form 10-K 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.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required.
15
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm..................................................... 17
Consolidated Balance Sheets as of December 31, 2008 and 2007................................................ 18
Consolidated Statements of Operations for the Years Ended
December 31, 2008 and 2007.................................................................................. 19
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2008 and 2007.................................................................................. 20
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended
December 31, 2008 and 2007.................................................................................. 21
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2008 and 2007.................................................................................. 22
Notes to Consolidated Financial Statements.................................................................. 23
16
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders of
Berkeley Technology Limited
Jersey, Channel Islands
We have audited the accompanying consolidated balance sheets of Berkeley
Technology Limited (the "Company") as of December 31, 2008 and 2007 and the
related consolidated statements of operations, cash flows, changes in
shareholders' equity and comprehensive income (loss) for each of the two years
in the period ended December 31, 2008. In connection with our audits of the
financial statements, we have also audited Schedule I - Condensed Financial
Information of Registrant as of and for each of the years ended December 31,
2008 and 2007. These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Berkeley
Technology Limited at December 31, 2008 and 2007, and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 2008, in conformity with accounting principles generally accepted
in the United States of America.
Also, in our opinion, Schedule I - Condensed Financial Information of
Registrant, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects, the
information set forth therein.
/s/ BDO Seidman, LLP
San Francisco, California
March 31, 2009
17
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.
18
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.
19
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.
20
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.
21
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.
22
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
As used herein, the terms "registrant" and "Company" refer to Berkeley
Technology Limited. Except as the context otherwise requires, the term "Group"
refers collectively to the registrant 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
23
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
values of the Group's private equity investments. Marketable debt and equity
securities will be carried at fair value in accordance with SFAS 115, should the
Group make such investments in the future.
As of 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.
24
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
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.
25
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. 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.
26
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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
27
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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.
28
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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.
29
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
30
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
31
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
32
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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.
33
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
------------ ------------
------------ ------------
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
------------ ------------
------------ ------------
34
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
December 31,
----------------------------
2008 2007
------------ ------------
(In thousands)
U.S. subsidiaries:
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
35
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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.
36
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
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.
37
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 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.
38
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
------------
------------
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.
39
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
40
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
41
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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.
42
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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.
43
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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."
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
------------ ------------
------------ ------------
44
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
------------ ------------
------------ ------------
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.
45
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Item 9A.(T) CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our company's management, with the participation of our Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of our
"disclosure controls and procedures" (as defined in the Securities Exchange Act)
Rules 13a-15(e) and 15-d-15(e)) as of the end of the period covered by this
Report (the "Evaluation Date"). Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that as of the Evaluation
Date, our disclosure controls and procedures are effective to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act (i) is recorded, processed, summarized and reported,
within the time periods specified in the SEC's rules and forms and (ii) is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
Our management, including our Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure controls and procedures or our
internal controls will prevent all errors and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected.
Management's Report on Internal Control Over Financial Reporting
Our company's management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined in Rule 13a-15(f)
under the Exchange Act). Our management assessed the effectiveness of our
internal control over financial reporting as of December 31, 2008. In making
this assessment, our management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal
Control-Integrated Framework. Our management has concluded that, as of December
31, 2008, our internal control over financial reporting is effective based on
these criteria. This annual report does not include an attestation report of our
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by our registered
public accounting firm pursuant to temporary rules of the SEC that permit us to
provide only management's report in this annual report.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal controls over financial reporting
that occurred during the fourth quarter of 2008 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
Item 9B. OTHER INFORMATION
None.
46
PART III
Certain information required by Part III is omitted from this Form 10-K
and is incorporated by reference to our definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on July 31, 2009 (the "Proxy
Statement"), which will be filed with the SEC not later than 120 days after the
end of the fiscal year covered by this Form 10-K.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are as follows:
Arthur I. Trueger, Executive Chairman: Mr. Trueger, age 60, is the
founder and a principal shareholder of Berkeley Technology Limited. He has
worked for us for more than 30 years and holds A.B., M.A. and J.D. degrees from
the University of California.
Ian K. Whitehead, Chief Financial Officer: Mr. Whitehead, age 54, has
held the position of Chief Financial Officer of Berkeley Technology Limited
since he joined us in 1990. Mr. Whitehead is a member of the Institute of
Chartered Accountants in England and Wales.
Information regarding our directors is incorporated by reference to the
sections entitled "Proposal 2 - Election of Director" and "Board of Directors
and Committees" in our Proxy Statement.
Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, is incorporated by reference to the section
entitled "Other Information About Directors and Executive Officers" in our Proxy
Statement.
Information regarding our Code of Ethics, adopted on November 12, 2003
and amended and restated in December 2007, is incorporated by reference to the
section entitled "Code of Ethics" in our Proxy Statement.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
sections entitled "Executive Compensation" and "Directors' Compensation" in our
Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information regarding security ownership of certain beneficial owners
and management is incorporated by reference to the section entitled "Information
Regarding Beneficial Ownership of Principal Shareholders, Directors and
Executive Officers" in our Proxy Statement.
47
The following table is a summary of selected information for our equity
compensation plans as of December 31, 2008.
Number of Shares
Number of Shares to Weighted-Average Remaining Available for
be Issued Upon Exercise Exercise Price of Future Issuance Under
of Outstanding Options, Outstanding Options, Equity Compensation
Warrants and Rights Warrants and Rights Plans
----------------------- -------------------- -----------------------
Equity compensation plans
approved by shareholders............. 9,675,000 (1) $1.54 (1)
Equity compensation plans not
approved by shareholders............. - -
--------------- --------
Total................................... 9,675,000 $1.54
--------------- --------
--------------- --------
<FN>
(1) Our equity compensation plans do not contain a limit on the number of options that may be granted to employees.
However, the plans do not allow for the issuance of previously authorized and unissued shares to meet the
obligations of the plans upon an employee option exercise. When an option is granted, the trust that administers the
plan borrows funds from the Company or one of its subsidiaries and uses those funds to purchase the number of
shares underlying the option grant. The maximum loan allowed in any given year is equal to 5% of consolidated net
assets as of the end of the previous fiscal year.
</FN>
Information regarding the features of the equity compensation plan not
approved by shareholders is incorporated by reference to Note 10 to the
Consolidated Financial Statements in Item 8 of this Form 10-K.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
section entitled "Other Information About Directors and Executive Officers" in
our Proxy Statement.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference to the
section entitled "Report of the Audit Committee of the Board of Directors" in
our Proxy Statement.
48
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as a part of this Form 10-K:
1. Financial Statements: Page
The following consolidated financial statements of Berkeley Technology
Limited and subsidiaries are included in Item 8:
Report of Independent Registered Public Accounting Firm...................................... 17
Consolidated Balance Sheets as of December 31, 2008 and 2007................................. 18
Consolidated Statements of Operations for the Years Ended
December 31, 2008 and 2007............................................................... 19
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2008 and 2007............................................................... 20
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended
December 31, 2008 and 2007............................................................... 21
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2008 and 2007............................................................... 22
Notes to the Consolidated Financial Statements............................................... 23
2. Financial Statement Schedules:
The following financial statement schedule of Berkeley Technology
Limited and subsidiaries is included in this Form 10-K immediately
following Item 15 and should be read in conjunction with the
consolidated financial statements and notes thereto included in Item 8:
Schedule I - Condensed Financial Information of Registrant
Condensed Balance Sheets as of December 31, 2008 and 2007................................ 53
Condensed Statements of Operations for the Years Ended
December 31, 2008 and 2007............................................................ 54
Condensed Statements of Cash Flows for the Years Ended
December 31, 2008 and 2007............................................................ 55
Note to Condensed Financial Statements................................................... 56
All other financial statement schedules required by Regulation S-X have
been omitted because they are not applicable or the required
information is included in the applicable consolidated financial
statements or notes thereto in Item 8 "Financial Statements and
Supplementary Data" of this Form 10-K.
49
3. Exhibits:
The following exhibits of Berkeley Technology Limited and subsidiaries
are filed herewith or incorporated by reference as indicated below:
Exhibit
Number Description
- --------- -------------
3.(I).1 Memorandum and Articles of Association of Berkeley Technology
Limited, as amended and restated on April 18, 2000 (filed
previously as Exhibit 3.(I) to our Form 10-Q for the quarter
ended June 30, 2000).
3.(I).2 Certificate of Incorporation on Change of Name dated June 12,
2003 (filed previously as Exhibit 3.(I).2 to our Form 10-K for
the year ended December 31, 2003).
4.1 Specimen Ordinary Share certificate (filed previously as
Exhibit 4.1 to our Form 10-K for the year ended December 31,
2000).
4.2 Form of Deposit Agreement dated September 25, 1992, as amended
and restated as of November 24, 1993, as further amended and
restated as of March 14, 2000, among us, The Bank of New York
as Depositary, and all Owners and Holders from time to time of
American Depositary Receipts issued thereunder (filed
previously as Exhibit A to our Registration Statement on Form
F-6 (Registration No. 333-11658) dated March 14, 2000).
4.3 Letter Agreement dated August 25, 1992 between The Bank of New
York and us covering the Basic Administration Charge relating
to the Deposit Agreement (shown above as Exhibit 4.2)
(filed previously as Exhibit 3.8 to our Post-Effective
Amendment No. 2 to our Registration Statement on Form 20-F/A
dated August 31, 1993).
4.4 Form of Deposit Agreement as amended and restated as of June
24, 2002, among us, The Bank of New York as Depositary, and
all Owners and Holders from time to time of American
Depositary Receipts issued thereunder (filed previously as
Exhibit 4.4 to our Form 10-Q for the quarter ended June 30,
2002).
4.5 Warrant Agreement dated February 14, 2003 between us and the
Governor and Company of the Bank of Scotland relating to the
Term Loan and Guarantee Facility dated December 20, 2002
(filed previously as Exhibit 4.5 to our Form 10-Q for the
quarter ended March 31, 2003).
4.6 Specimen Ordinary Share certificate, as amended on June 12,
2003 (filed previously as Exhibit 4.6 to our Form 10-K for the
year ended December 31, 2003).
10.1.1 Settlement dated February 16, 1990 among (1) us, (2) John
Gerald Patrick Wheeler and (3) Ian Walter Strang, constituting
The London Pacific Group 1990 Employee Share Option Trust
(filed previously as Exhibit 3.2 to our Post-Effective
Amendment No. 2 to Registration Statement on Form 20-F/A dated
August 31, 1993).
10.1.2 Executed Instrument dated March 18, 1994 among (1) John Gerald
Patrick Wheeler, (2) Ian Walter Strang and (3) Richard John
Pirouet, relating to The London Pacific Group 1990 Employee
Share Option Trust (filed previously as Exhibit 3.2.1 to our
Annual Report on Form 20-F dated June 10, 1994).
50
10.1.3 Executed Instrument dated September 27, 1994 among (1) Ian
Walter Strang, (2) Richard John Pirouet and (3) Clive Aubrey
Charles Chaplin, relating to The London Pacific Group 1990
Employee Share Option Trust (filed previously as Exhibit 3.2.2
to our Annual Report on Form 20-F dated June 29, 1995).
10.1.4 Executed Instrument dated March 3, 1995 among (1) Ian Walter
Strang, (2) Richard John Pirouet and (3) Clive Aubrey Charles
Chaplin, relating to The London Pacific Group 1990 Employee
Share Option Trust (filed previously as Exhibit 3.2.3 to our
Annual Report on Form 20-F dated June 29, 1995).
10.1.5 Executed Instrument dated August 22, 1996 among (1) Richard
John Pirouet, (2) Clive Aubrey Charles Chaplin and (3) Ronald
William Green, relating to The London Pacific Group 1990
Employee Share Option Trust (filed previously as Exhibit 3.2.4
to our Annual Report on Form 20-F dated June 30, 1997).
10.1.6 Executed Instrument dated August 29, 1998 among (1) Richard
John Pirouet, (2) Clive Aubrey Charles Chaplin, (3) Ronald
William Green and (4) Victor Aloysius Hebert, relating to The
London Pacific Group 1990 Employee Share Option Trust (filed
previously as Exhibit 3.2.5 to our Annual Report on Form 20-F
dated June 30, 1999).
10.1.7 Executed Instrument dated May 31, 2000 among (1) Richard John
Pirouet, (2) Clive Aubrey Charles Chaplin, (3) Ronald William
Green and (4) Victor Aloysius Hebert, relating to The London
Pacific Group 1990 Employee Share Option Trust (filed
previously as Exhibit 10.2.1 to our Form 10-Q for the quarter
ended September 30, 2000).
10.1.8 Executed Instrument dated May 31, 2000 among (1) Richard John
Pirouet, (2) Clive Aubrey Charles Chaplin, (3) Ronald William
Green, (4) Victor Aloysius Hebert and (5) Christopher Byrne,
relating to The London Pacific Group 1990 Employee Share
Option Trust (filed previously as Exhibit 10.2.2 to our Form
10-Q for the quarter ended September 30, 2000).
10.2.1 (1) Agreement dated July 1, 1990 between us and Ian Kenneth
Whitehead (filed previously as Exhibit 10.3.1 to our Form 10-K
for the year ended December 31, 2000).
10.2.2 (1) London Pacific Advisers Limited Retirement Scheme
confirmation dated December 5, 2000 for Ian Kenneth Whitehead
(filed previously as Exhibit 10.3.3 to our Form 10-K for the
year ended December 31, 2001).
10.3.1 Settlement dated May 23, 1997 among BG Services Limited and
A.L.O.T. Trustee Limited establishing Agent Loyalty
Opportunity Trust (filed previously as Exhibit 10.4.1 to our
Form 10-K for the year ended December 31, 2001).
10.3.2 Executed Deed dated July 16, 1997 by A.L.O.T. Trustee Limited
relating to Agent Loyalty Opportunity Trust (filed previously
as Exhibit 10.4.2 to our Form 10-K for the year ended December
31, 2001).
10.3.3 Executed Deed dated August 13, 1997 by A.L.O.T. Trustee
Limited relating to Agent Loyalty Opportunity Trust (filed
previously as Exhibit 10.4.3 to our Form 10-K for the year
ended December 31, 2001).
10.3.4 Executed Deed dated August 20, 1998 by A.L.O.T. Trustee
Limited relating to Agent Loyalty Opportunity Trust (filed
previously as Exhibit 10.4.4 to our Form 10-K for the year
ended December 31, 2001).
51
10.3.5 Executed Deed of Amendment and Appointment dated December 11,
2001 among Berkeley International Capital Limited and A.L.O.T.
Trustee Limited relating to Agent Loyalty Opportunity Trust
(filed previously as Exhibit 10.4.5 to our Form 10-K for the
year ended December 31, 2001).
10.4 Asset Purchase Agreement dated March 7, 2003 between Berkeley
Capital Management ("BCM"), Berkeley (USA) Holdings Limited
and Berkeley Capital Management LLC relating to the sale of
substantially all of the assets and operations of BCM (filed
previously as Exhibit 10.5 to our Form 10-Q for the quarter
ended March 31, 2003).
10.5 Purchase Agreement, dated May 9, 2003, for the acquisition
of London Pacific Advisory Services, Inc. and London Pacific
Securities, Inc. by SunGard Business Systems Inc. (filed
previously as Exhibit 10.6 to our Form 10-Q for the quarter
ended June 30, 2003).
14.1 Code of Ethics as amended and restated as of December 2007.
21 Subsidiaries of the Company as of March 31, 2009.
31.1 Certification by the Company's Executive Chairman pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Company's Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification by the Company's Executive Chairman pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification by the Company's Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
- ----------
(1) Management contract or compensatory arrangement filed in response to
Item 15(a)(3) of the instructions to Form 10-K.
(b) Our exhibits are listed in Item 15(a)(3) above.
(c) Our financial statement schedules follow on pages 53 through 56.
52
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BERKELEY TECHNOLOGY LIMITED
CONDENSED BALANCE SHEETS
December 31,
--------------------------------
2008 2007
-------------- --------------
(In thousands, except share amounts)
ASSETS
Cash and cash equivalents......................................................... $ 1,483 $ 2,277
Investment in subsidiaries........................................................ (65,208) (64,866)
Intercompany balances............................................................. 80,269 80,097
Other assets...................................................................... 4 13
-------------- --------------
Total assets...................................................................... $ 16,548 $ 17,521
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accruals..................................................... $ 334 $ 381
Intercompany balances............................................................. 1,235 661
-------------- --------------
Total liabilities................................................................. 1,569 1,042
-------------- --------------
Commitments and contingencies
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........................................ $ 16,548 $ 17,521
-------------- --------------
-------------- --------------
See accompanying Note to Condensed Financial Statements.
53
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
BERKELEY TECHNOLOGY LIMITED
CONDENSED STATEMENTS OF OPERATIONS
Year Ended December 31,
----------------------------
2008 2007
------------ ------------
(In thousands)
Revenues:
Investment income..................................................................... $ 44 $ 72
------------ ------------
44 72
Expenses:
Staff costs........................................................................... 828 393
Other operating expenses.............................................................. 548 497
------------ ------------
1,376 890
------------ ------------
Loss before income tax benefit and equity in
undistributed net income (loss) of subsidiaries.................................... (1,332) (818)
Income tax benefit.................................................................... - -
------------ ------------
Loss before equity in undistributed net income (loss) of
subsidiaries....................................................................... (1,332) (818)
Equity in undistributed net income (loss) of subsidiaries (1)......................... (239) 1,194
------------ ------------
Net income (loss)..................................................................... $ (1,571) $ 376
------------ ------------
------------ ------------
<FN>
(1) Eliminated on consolidation.
</FN>
See accompanying Note to Condensed Financial Statements.
54
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
BERKELEY TECHNOLOGY LIMITED
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31,
----------------------------
2008 2007
------------ ------------
(In thousands)
Cash flows from operating activities:
Net income (loss).................................................................... $ (1,571) $ 376
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Equity in undistributed net loss (income) of subsidiaries............................ 239 (1,194)
Other operating cash flows........................................................... 46 37
------------ ------------
Net cash used in operating activities ............................................... (1,286) (781)
------------ ------------
Cash flows from investing activities:
Net advances from subsidiaries....................................................... 504 255
------------ ------------
Net cash provided by investing activities............................................ 504 255
------------ ------------
Cash flows from financing activities:
Repayments from subsidiaries......................................................... - 2,126
------------ ------------
Net cash provided by financing activities ........................................... - 2,126
------------ ------------
Effect of exchange rate changes on cash ............................................. (12) -
------------ ------------
Net increase in cash and cash equivalents............................................ (794) 1,600
Cash and cash equivalents at beginning of year....................................... 2,277 677
------------ ------------
Cash and cash equivalents at end of year............................................. $ 1,483 $ 2,277
------------ ------------
------------ ------------
See accompanying Note to Condensed Financial Statements.
55
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
BERKELEY TECHNOLOGY LIMITED
NOTE TO CONDENSED FINANCIAL STATEMENTS
Note 1. Basis of Presentation and Significant Accounting Policies
The accompanying financial statements comprise a condensed presentation
of financial position, results of operations and cash flows of Berkeley
Technology Limited (the "Company") on a separate company basis. These condensed
financial statements do not include the accounts of the Company's subsidiaries,
but instead include the Company's investment in those subsidiaries, stated at
amounts which are equal to the Company's equity in the subsidiaries' net assets.
The consolidated financial statements of the Company and its subsidiaries are
included in Item 8 of this Form 10-K for the year ended December 31, 2008.
Additional information about the significant accounting policies applied
by the Company and its subsidiaries is included in Note 1 to the Consolidated
Financial Statements in Item 8 of this Form 10-K for the year ended December 31,
2008.
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BERKELEY TECHNOLOGY LIMITED
(Registrant)
By /s/ Arthur I. Trueger
Date: March 31, 2009 Arthur I. Trueger
Executive Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Arthur I. Trueger
Date: March 31, 2009 Arthur I. Trueger
Executive Chairman
(Principal Executive Officer)
/s/ Ian K. Whitehead
Date: March 31, 2009 Ian K. Whitehead
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Victor A. Hebert
Date: March 31, 2009 Victor A. Hebert
Deputy Chairman and Non-Executive Director
/s/ Harold E. Hughes, Jr.
Date: March 31, 2009 Harold E. Hughes, Jr.
Non-Executive Director
/s/ Trenchard
Date: March 31, 2009 The Viscount Trenchard
Non-Executive Director
57