UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2009
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 0-21874
Berkeley Technology Limited
(Exact name of registrant as specified in its charter)
______________________
Jersey, Channel Islands Not applicable
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Castle Street
St. Helier, Jersey JE2 3RT
Channel Islands
(Address of principal executive offices)
(Zip Code)
011 44 (1534) 607700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ]
Smaller reporting company [X] (Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of May 15, 2009, the registrant had outstanding 64,439,073 Ordinary
Shares, par value $0.05 per share.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Page
Item 1. Financial Statements:
Unaudited Condensed Consolidated Balance Sheets as of March 31, 2009 and
December 31, 2008............................................................................ 3
Unaudited Condensed Consolidated Statements of Operations for the three months
ended March 31, 2009 and 2008................................................................ 4
Unaudited Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2009 and 2008................................................................ 5
Unaudited Consolidated Statement of Changes in Shareholders' Equity for the three months
ended March 31, 2009......................................................................... 6
Unaudited Consolidated Statements of Comprehensive Income for the three months
ended March 31, 2009 and 2008................................................................ 7
Notes to Unaudited Condensed Consolidated Financial Statements................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 25
Item 4. Controls and Procedures.......................................................................... 25
PART II
OTHER INFORMATION
Item 1A. Risk Factors..................................................................................... 26
Item 6. Exhibits......................................................................................... 26
Signature ................................................................................................. 27
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
March 31, December 31,
2009 2008
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 13,001 $ 13,681
Accounts receivable, less allowances of $0 as of March 31, 2009
and December 31, 2008...................................................... 148 222
Interest receivable............................................................ 2 1
Prepaid expenses and deposits.................................................. 93 147
------------ ------------
Total current assets.............................................................. 13,244 14,051
Private equity investments (at lower of cost or estimated fair value)............. 1,284 (1) 1,484
Property and equipment, net of accumulated depreciation of $179 and $177
as of March 31, 2009 and December 31, 2008, respectively....................... 8 9
------------ ------------
Total assets...................................................................... $ 14,536 $ 15,544
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.......................................... $ 460 $ 459
Policyholder liabilities (due in less than one year)........................... 44 106
------------ ------------
Total current liabilities......................................................... 504 565
------------ ------------
Commitments and contingencies (Note 7)
Shareholders' equity:
Ordinary shares, $0.05 par value per share: 86,400,000 shares authorized;
64,439,073 shares issued and outstanding as of March 31, 2009
and December 31, 2008.......................................................... 3,222 3,222
Additional paid-in capital........................................................ 67,879 67,860
Retained earnings................................................................. 5,928 6,894
Employee benefit trusts, at cost (13,522,381 shares as of
March 31, 2009 and December 31, 2008).......................................... (62,598) (62,598)
Accumulated other comprehensive loss.............................................. (399) (399)
------------ ------------
Total shareholders' equity........................................................ 14,032 14,979
------------ ------------
Total liabilities and shareholders' equity........................................ $ 14,536 $ 15,544
------------ ------------
------------ ------------
<FN>
(1) The Company's insurance subsidiary, London Pacific Assurance Limited ("LPAL"), holds $11,716 of the Group's
$13,001 in cash and cash equivalents and $1,144 of the Group's $1,284 in private equity investments which are
only available currently to fund the operations or commitments of LPAL, and not to the parent company or any of
the other subsidiaries, except for $5 million in cash which was distributed by LPAL to the Company in April 2009.
</FN>
See accompanying Notes which are an integral part of these Unaudited Condensed
Consolidated Financial Statements.
3
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share and ADS amounts)
Three Months Ended
March 31,
------------------------------
2009 2008
------------ ------------
Revenues:
Consulting fee income............................................................. $ 97 $ 114
Interest income................................................................... 7 121
Realized investment gains (losses)................................................ (200) 270
------------ ------------
(96) 505
Expenses:
Operating expenses................................................................ 867 950
Amounts credited on insurance policyholder accounts............................... 1 1
------------ ------------
868 951
------------ ------------
Loss before income tax expense.................................................... (964) (446)
Income tax expense................................................................ 2 2
------------ ------------
Net loss.......................................................................... $ (966) $ (448)
------------ ------------
------------ ------------
Basic and diluted loss per share.................................................. $ (0.02) $ (0.01)
------------ ------------
------------ ------------
Basic and diluted loss per ADS.................................................... $ (0.19) $ (0.09)
------------ ------------
------------ ------------
See accompanying Notes which are an integral part of these Unaudited Condensed
Consolidated Financial Statements.
4
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
March 31,
------------------------------
2009 2008
------------ ------------
Net cash used in operating activities............................................. $ (616) $ (712)
Cash flows from investing activities:
Proceeds from WorldCom, Inc. securities litigation settlement..................... - 270
Capital expenditures.............................................................. - (2)
------------ ------------
Net cash provided by investing activities......................................... - 268
------------ ------------
Cash flows from financing activities:
Insurance policyholder benefits paid.............................................. (63) -
------------ ------------
Net cash used in financing activities............................................. (63) -
------------ ------------
Effect of exchange rate changes on cash........................................... (1) -
------------ ------------
Net decrease in cash and cash equivalents......................................... (680) (444)
Cash and cash equivalents at beginning of period.................................. 13,681 14,568
------------ ------------
Cash and cash equivalents at end of period ....................................... $ 13,001 $ 14,124
------------ ------------
------------ ------------
See accompanying Notes which are an integral part of these Unaudited Condensed
Consolidated Financial Statements.
5
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
Accumulated
Other
Ordinary Shares Additional Employee Compre- Total
-------------------- Paid-in Retained Benefit hensive Shareholders'
Number Amount Capital Earnings Trusts Loss Equity
-------------------- ---------- ---------- ---------- ----------- -----------
Balance as of
December 31, 2008............ 64,439 $ 3,222 $ 67,860 $ 6,894 $ (62,598) $ (399) $ 14,979
Net loss........................ - - - (966) - - (966)
Share based compensation,
including income tax
effect of $0................. - - 19 - - - 19
--------- -------- ---------- ---------- ---------- ----------- -----------
Balance as of
March 31, 2009............... 64,439 $ 3,222 $ 67,879 $ 5,928 $ (62,598) $ (399) $ 14,032
--------- -------- ---------- ---------- ---------- ----------- -----------
--------- -------- ---------- ---------- ---------- ----------- -----------
See accompanying Notes which are an integral part of these Unaudited Condensed
Consolidated Financial Statements.
6
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three Months Ended
March 31,
-------------------------------
2009 2008
------------- -------------
Net loss.......................................................................... $ (966) $ (448)
Other comprehensive income........................................................ - -
------------- -------------
Comprehensive loss................................................................ $ (966) $ (448)
------------- -------------
------------- -------------
See accompanying Notes which are an integral part of these Unaudited Condensed
Consolidated Financial Statements.
7
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
As used herein, the terms "registrant," "Company," "we," "us" and "our"
refer to Berkeley Technology Limited. Except as the context otherwise requires,
the term "Group" refers collectively to the registrant and its subsidiaries.
Note 1. Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated financial statements are
unaudited and have been prepared by the Company in conformity with United States
generally accepted accounting principles ("U.S. GAAP"). These unaudited
condensed consolidated financial statements include the accounts of the Company,
its subsidiaries, the Employee Share Option Trust ("ESOT") and the Agent Loyalty
Opportunity Trust ("ALOT"). Significant subsidiaries included in the operations
of the Group and discussed in this document include Berkeley International
Capital Corporation ("BICC") and London Pacific Assurance Limited ("LPAL"). All
intercompany transactions and balances have been eliminated in consolidation.
Certain information and note disclosures normally included in the
Company's annual consolidated financial statements have been condensed or
omitted. In the opinion of management, the unaudited condensed consolidated
financial statements reflect all adjustments (consisting of normal recurring
accruals) which are necessary for a fair statement of the results for the
interim periods presented.
These unaudited condensed consolidated financial statements should be
read in conjunction with the audited financial statements and related notes for
the year ended December 31, 2008, which are contained in the Company's Annual
Report on Form 10-K, filed with the U.S. Securities and Exchange Commission
("SEC") on March 31, 2009. The December 31, 2008 condensed balance sheet data
was derived from audited financial statements but does not include all
disclosures required by U.S. GAAP.
As the level of consulting fees earned by the Company is expected to be
volatile depending on the nature and extent of consulting work at any point in
time, the results for the three month period ended March 31, 2009 are not
indicative of the results to be expected for the full fiscal year.
From January 1, 2008, the unaudited condensed consolidated balance sheets
are presented in a classified format as is appropriate for a consulting company
rather than in an unclassified format as is appropriate for a life insurance and
annuities company. 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 3 "Investments" for a discussion of the impact of this
change on the Company's accounting policy for its private equity investments.
The majority of the Group's assets at March 31, 2009 were held by its
life insurance and annuities business. After policy maturities in LPAL during
the first quarter of 2009 totaling $63,000, there remains only one policy
outstanding and two pending death claim payments at March 31, 2009. During April
2009, as approved by the Jersey Financial Services Commission ("JFSC"), LPAL
distributed $5.0 million in cash to the Company. LPAL's final policy of
approximately $9,000 will mature in June 2009, and it intends to pay out the two
pending death claims (approximately $35,000 in aggregate) by June 30, 2009.
During the second quarter of 2009, the directors of LPAL submitted a Cessation
of Business Plan ("COBP") to the JFSC and, subject to the satisfactory
completion of the COBP, the JFSC should be able to cancel LPAL's insurance
permit. At that point, LPAL will no longer be regulated by the JFSC and the
Company intends to move toward the dissolution of LPAL as soon as practicable.
Also during the second quarter of 2009, the Company's board of directors agreed
to provide an undertaking to the JFSC that the Company "will honor any and all
liabilities of LPAL whether or not these liabilities have been accounted for in
the financial statements at the date of cessation of business."
8
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company is incorporated under the laws of Jersey, Channel Islands.
Its Ordinary Shares are traded on the London Stock Exchange and in the U.S. on
the Over-the-Counter Bulletin Board in the form of American Depositary Shares
("ADSs"), which are evidenced by American Depositary Receipts ("ADRs"). Pursuant
to theregulations of the SEC, the Company is considered a U.S. domestic
registrant and must file financial statements prepared under U.S. GAAP.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of these unaudited condensed consolidated financial
statements as well as the reported amount of revenues and expenses during this
reporting period. 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.
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 did not have an impact on the
Company's consolidated financial statements.
In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 160 ("SFAS 160"), "Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51." SFAS 160 amends ARB 51 to
establish accounting and reporting standards for the noncontrolling interest in
a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary, which is sometimes referred to as a
minority interest, is an ownership interest in the consolidated entity that
should be reported in the equity section of the balance sheet. Among other
requirements, the statement requires that the consolidated net income
attributable to the parent and the noncontrolling interest be clearly identified
and presented on the face of the consolidated income statement. SFAS 160 is
effective for fiscal years beginning on or after December 15, 2008. The adoption
of SFAS 160 effective January 1, 2009 did not have an impact on the Company's
consolidated financial statements.
9
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2. Earnings Per Share and ADS
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share." This
statement requires the presentation of basic and diluted earnings per share.
Basic earnings per share is calculated by dividing net income or loss by the
weighted-average number of Ordinary Shares outstanding during the applicable
period, excluding shares held by the ESOT and the ALOT which are regarded as
treasury stock for the purposes of this calculation. The Company has issued
employee share options, which are considered potential common stock under SFAS
128. The Company has also issued Ordinary Share warrants to Bank of Scotland in
connection with the Company's bank facility (now terminated), which are also
considered potential common stock under SFAS 128. Diluted earnings per share is
calculated by dividing net income by the weighted-average number of Ordinary
Shares outstanding during the applicable period as adjusted for these
potentially dilutive options and warrants which are determined based on the
"Treasury Stock Method."
For both of the three month periods ended March 31, 2009 and 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
these periods, diluted loss per share would be the same as basic loss per share.
Earnings (loss) per ADS is equivalent to ten times earnings (loss) per
Ordinary Shares.
A reconciliation of the numerators and denominators for the basic and
diluted earnings (loss) per share calculations is as follows:
Three Months Ended
March 31,
-------------------------------
2009 2008
------------- -------------
(In thousands, except per
share and ADS amounts)
Net loss.......................................................................... $ (966) $ (448)
------------- -------------
------------- -------------
Basic and diluted loss per share and ADS:
Weighted average number of Ordinary Shares outstanding,
excluding shares held by the employee benefit trusts............................ 50,917 50,917
------------- -------------
Basic and diluted loss per share.................................................. $ (0.02) $ (0.01)
------------- -------------
------------- -------------
Basic and diluted loss per ADS.................................................... $ (0.19) $ (0.09)
------------- -------------
------------- -------------
Note 3. Investments
As discussed above, from January 1, 2008, the Group's primary business
for financial reporting purposes is considered to be consulting in venture
capital rather than life insurance and annuities. As such, the Group's private
equity investments are carried at cost less any other-than-temporary
impairments. 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
10
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
was their cost basis. Therefore, the change from an insurance company for
financial reporting purposes to a consulting company as of January 1, 2008 did
not have an impact on the carrying values of the Group's private equity
investments. Marketable debt and equity securities will be carried at fair value
in accordance with SFAS 115, should the Group make such investments in the
future.
As of March 31, 2009 and December 31, 2008, the Group's only investments
were private equity securities.
For 2008 and the first quarter of 2009, 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 4 "Fair
Value of Financial Instruments" 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 the first
quarter of 2009, 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 a realized investment loss in its
consolidated statement of operations of $200,000 on this investment as of the
end of March 2009. 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.
Investment Concentration and Risk
As of March 31, 2009 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 $300,000, is in preferred stock of a technology company that was a
consulting client of BICC until February 2009. 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 March 31, 2009, the Company's Jersey based life insurance
subsidiary, LPAL, owned 89% of the Group's $1.3 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, as discussed above in Note 1, during the second
quarter of 2009, the directors of LPAL submitted a Cessation of Business Plan
("COBP") to the JFSC and, subject to the satisfactory
11
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
completion of the COBP, the JFSC should be able to cancel LPAL's insurance
permit. At that point, LPAL will no longer be regulated by the JFSC and the
Company intends to move toward the dissolution of LPAL as soon as practicable.
Realized Investment Gains and Losses
In the first quarter of 2008, the Company recorded realized investment
gains of $270,000, representing the final distribution from the WorldCom, Inc.
securities litigation. LPAL held certain WorldCom, Inc. publicly traded bonds
which it sold at a loss in 2002. This $270,000 payment, in addition to the $1.2
million initial payment received from the WorldCom securities litigation in
January 2007, reverses part of LPAL's realized loss recorded 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.
LPAL expects to receive the final Enron distribution in 2009, but the amount of
this final distribution is currently uncertain.
As disclosed above, during the first quarter of 2009, the Group
determined that impairment indicators existed for one of LPAL's private equity
investments, and then determined that the impairment was other-than-temporary.
The Group recognized a realized investment loss in its consolidated statement of
operations of $200,000 on this investment during the first quarter of 2009. In
each of the two preceding quarters, an other- than-temporary impairment
write-down of $250,000 was recognized in the Group's consolidated statement of
operations on this same private equity investment.
Note 4. 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
three months ended March 31, 2009, the Company's Level 1 assets included money
market mutual funds which are included in cash and cash equivalents in the
condensed consolidated balance sheets. As of March 31, 2009, the Company had
$1,065,000 in money market mutual funds, compared to $328,000 as of December 31,
2008.
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 three months ended March 31, 2009, 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
March 31, 2009 and December 31, 2008, the Group held $1,284,000 and $1,484,000,
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
12
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
analysis of various financial, performance and market factors. During the three
months ended March 31, 2009, the Group recognized an other-than-temporary
impairment loss of $200,000 on one of its private equity investments. In
determining the fair value estimate of this investment, the Group's management
considered the investee company's liquidity issues, the less favorable business
environment, and the dilution in liquidity preferences for the preferred stock
that the Group holds subsequent to a bridge financing that closed in May 2009.
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 three months
ended March 31, 2009 was as follows:
(In thousands)
Balance at December 31, 2008....................................................................... $ 1,484
Realized investment loss included in earnings in the first quarter of 2009 determined by considering
fair value measurements using significant unobservable inputs (Level 3)......................... (200)
------------
Balance at March 31, 2009.......................................................................... $ 1,284
------------
------------
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.
Note 5. Share Based Compensation
Equity Compensation Plan
The London Pacific Group 1990 Employee Share Option Trust ("ESOT"), which
was approved by shareholders in 1990, provides for the granting of share options
to employees and directors. 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
13
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
accounting under Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees," and related interpretations, for
periods beginning in fiscal 2006. In March 2005, the SEC issued Staff Accounting
Bulletin No. 107 ("SAB 107") relating to SFAS 123R. The Company applied the
provisions of SAB 107 in its adoption of SFAS 123R.
The Company adopted SFAS 123R using the modified prospective transition
method as permitted under SFAS 123R. Accordingly, prior period amounts were not
restated. Under this application, the Company is required to record compensation
expense for all awards granted after the date of adoption and for the unvested
portion of previously granted awards that remain outstanding at the date of
adoption. Prior to the adoption of SFAS 123R, the Company used the intrinsic
value method as prescribed by APB 25 and thus recognized no compensation expense
for options granted with exercise prices equal to the fair market value of the
Company's ordinary shares on the date of grant.
In November 2005, the Financial Accounting Standards Board ("FASB")
issued Staff Position No. FAS 123(R)-3 ("FSP 123R-3"), "Transition Election
Related to Accounting for the Tax Effects of Share-Based Payments." The Company
elected to adopt the alternative transition method provided in FSP 123R-3 for
calculating the tax effects of share based compensation under SFAS 123R. The
alternative transition method includes simplified methods to establish the
beginning balance of the additional paid-in capital pool ("APIC pool") related
to the tax effects of share based compensation, and for determining the
subsequent impact on the APIC pool and consolidated statements of cash flows of
the tax effects of share based compensation awards that are outstanding upon
adoption of SFAS 123R.
SFAS 123R requires companies to estimate the fair value of share based
payment awards on the date of grant using an option pricing model. The value of
the portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in the Company's consolidated
statement of operations.
Share based compensation expense recognized in the Company's consolidated
statement of operations for the quarter ended March 31, 2009 and 2008 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. 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 three months of 2009 and 2008 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 and for the first quarter of 2009
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.
14
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 the first quarter of 2009, the Company had no
related tax benefits during those periods. Prior to the adoption of SFAS 123R,
those tax benefits would have been reported as operating cash flows had the
Company received any tax benefits related to 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.
Valuation and Expense Information Under SFAS 123R
The estimated fair value of share option compensation awards to employees
and directors, as calculated using the Black-Scholes option pricing model as of
the date of grant, is amortized using the straight-line method over the vesting
period of the options. For the three months ended March 31, 2009 and 2008,
compensation expense related to share options under SFAS 123R totaled $19,000
and $22,000, respectively, and is included in operating expenses in the
accompanying statement of operations.
On March 27 2007, 4,500,000 options were granted to employees and
directors at an exercise price equal to the fair market value of the underlying
shares on the grant date which was $0.10. These options were valued using the
Black-Scholes option pricing model using the following assumptions: expected
share price volatility of 66%, risk-free interest rate of 4.52%, weighted
average expected life of 6.25 years and expected 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. During the
first quarter of 2009, 612,500 options became vested, and no options were
granted, forfeited or exercised. At March 31, 2009, 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.
15
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Of the outstanding options, 6,150,000 were exercisable at March 31, 2009, and
these have a weighted average exercise price of $2.26. The remaining 3,525,000
options were unvested at March 31, 2009. These unvested options have a weighted
average exercise price of $0.29. As of March 31, 2009, total unrecognized
compensation expense related to unvested share options was $124,000, which is
expected to be recognized as follows: $36,000 in the last nine months of 2009,
$46,000 in 2010, $28,000 in 2011 and $14,000 in 2012.
For additional information relating to the Group's share options, see
Note 10 to the Company's consolidated financial statements included in Form 10-K
for the year ended December 31, 2008.
Note 6. Income Taxes
In June 2006, the FASB issued Interpretation No. 48 ("FIN 48"),
"Accounting for Uncertainty in Income Taxes." FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an enterprise's financial
statements in accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes." This interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN
48 also provides guidance on de-recognition of tax benefits, classification on
the balance sheet, interest and penalties, accounting in interim periods,
disclosure and transition. The Company adopted FIN 48 effective on January 1,
2007.
The Company's management believes that its income tax positions would be
sustained upon examination by appropriate taxing authorities based on the
technical merits of such positions, and therefore the Company has not provided
for any unrecognized tax benefits at the adoption date, and there has been no
change to the $0 unrecognized tax benefits from January 1, 2007 through June 30,
2008. In general, the Company's tax returns remain subject to examination by
taxing authorities for the tax years 2004 through 2007, and for 2008 once the
returns are filed.
During the third quarter of 2008, the Internal Revenue Service issued a
private letter ruling that the Group's U.S. holding company, Berkeley (USA)
Holdings Limited ("BUSA"), should include London Pacific Life & Annuity Company
in Liquidation ("LCL") in its federal consolidated tax returns for tax years
commencing with 2005. LCL is not considered a variable interest entity within
the scope of FASB Interpretation No. 46 (Revised), "Consolidation of Variable
Interest Entities," which interprets Accounting Research Bulletin No. 51,
"Consolidated Financial Statements." BUSA holds the common stock of LCL but BUSA
does not have any voting or management control over LCL. The financial
statements of LCL have not been included in the Company's consolidated financial
statements and they will not be included in the future. The Group will be filing
amended federal consolidated tax returns for 2005 through 2007 during 2009, and
the Group's management believes that the inclusion of LCL in the federal
consolidated tax returns of BUSA for 2005 through 2008 will result in
insignificant tax liabilities for the Group. As of the end of 2007, LCL has
approximately $59 million of net operating loss carryforwards and approximately
$74 milllion of capital loss carryforwards. The Group's management believes that
these loss carryforwards should be sufficient to offset any taxable income of
LCL in the foreseeable future and that any resulting tax liabilities (e.g.,
alternative minimum tax) will not be material. In addition, future taxable
income generated by LCL also could be offset with BUSA's carryforward net
operating or capital losses, if any, and with BUSA's current net operating or
capital losses, if any. Alternatively, BUSA's future taxable income could be
offset with LCL's carryforward or current net operating or capital losses, if
any. BUSA and LCL have signed a tax allocation and sharing agreement. Under this
agreement, any benefit to BUSA of utilizing the tax losses of LCL to offset
BUSA's separate taxable income in BUSA's federal consolidated tax returns should
BUSA not have any of its own carryforward losses will be paid by BUSA to LCL,
and any benefit to LCL of utilizing the tax losses of BUSA to 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
16
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. Commitments and Contingencies
Guarantees
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others - an interpretation of FASB
Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34." The
following is a summary of the Company's agreements that the Company has
determined are within the scope of FIN 45.
Under its Memorandum and Articles of Association, the Company has agreed
to indemnify its officers and directors for certain events or occurrences
arising as a result of the officer or director serving in such capacity. The
maximum potential amount of future payments the Company could be required to
make under these indemnification agreements is unlimited. However, the Company
maintains directors and officers' liability insurance that limits the Company's
exposure and enables it to recover a portion of any future amounts paid. As a
result of its insurance coverage, the Company believes the estimated fair value
of these indemnification agreements is minimal and has no liabilities recorded
for these agreements as of March 31, 2009.
The Company enters into indemnification provisions under its agreements
with other companies in its ordinary course of business, typically with business
partners, clients and landlords. Under these provisions, the Company generally
indemnifies and holds harmless the indemnified party for losses suffered or
incurred by the indemnified party as a result of the Company's activities. These
indemnification provisions sometime include indemnifications relating to
representations made by the Company with regard to intellectual property rights.
These indemnification provisions generally survive termination of the underlying
agreement. The maximum potential amount of future payments the Company could be
required to make under these indemnification provisions is unlimited. The
Company believes the estimated fair value of these agreements is minimal as
historically, no payments have been made by the Company under these
indemnification obligations. Accordingly, the Company has no liabilities
recorded for these agreements as of March 31, 2009.
Note 8. Business Segment and Geographical Information
The Company's reportable operating segments are classified according to
its businesses of consulting in venture capital, and life insurance and
annuities, 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.
17
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Summary revenue and investment gain (loss) information by geographic
segment, based on the domicile of the Group company generating those revenues,
is as follows:
Three Months Ended
March 31,
-------------------------------
2009 2008
------------- -------------
(In thousands)
Jersey............................................................................ $ (195) $ 371
United States..................................................................... 99 134
------------- -------------
Consolidated revenues and investment gains (losses)............................... $ (96) $ 505
------------- -------------
------------- -------------
Revenues and loss before income tax expense for the Company's reportable
operating segments, based on management's internal reporting structure, were as
follows:
Three Months Ended
March 31,
-------------------------------
2009 2008
------------- -------------
(In thousands)
Revenues and investment gains (losses):
Consulting in venture capital..................................................... $ 97 $ 114
Life insurance and annuities ..................................................... (195) 357
------------- -------------
(98) 471
Reconciliation of segment amounts to consolidated amounts:
Interest income .................................................................. 2 34
------------- -------------
Consolidated revenues and investment gains (losses) .............................. $ (96) $ 505
------------- -------------
------------- -------------
Loss before income taxes:
Consulting in venture capital..................................................... $ (220) $ (254)
Life insurance and annuities ..................................................... (270) 262
------------- -------------
(490) 8
Reconciliation of segment amounts to consolidated amounts:
Interest income................................................................... 2 34
Corporate expenses................................................................ (476) (488)
------------- -------------
Consolidated loss before income tax expense ...................................... $ (964) $ (446)
------------- -------------
------------- -------------
Note 9. Client Concentration
The Group's revenues are from a limited number of clients. In the
first three months of 2009, the Group's largest consulting client accounted for
78% of its consulting revenues, and another client accounted for 18% of its
consulting revenues.
18
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 10. Subsequent Events
During April 2009, as approved by the JFSC, LPAL distributed $5.0
million in cash to the Company.
During the second quarter of 2009, the directors of LPAL submitted a
Cessation of Business Plan ("COBP") to the JFSC and, subject to the satisfactory
completion of the COBP, the JFSC should be able to cancel LPAL's insurance
permit. See Note 1 for further information.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
As used herein, the terms "registrant," "Company," "we," "us" and "our"
refer to Berkeley Technology Limited. Except as the context otherwise requires,
the term "Group" refers collectively to the registrant and its subsidiaries.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the unaudited condensed
consolidated financial statements, and the notes thereto, included in this
quarterly report, and the December 31, 2008 audited consolidated financial
statements, and the notes thereto, included in our Annual Report on Form 10-K
filed with the SEC on March 31, 2009. The unaudited condensed consolidated
financial statements are prepared in accordance with U.S. GAAP. This item should
also be read in conjunction with the "Forward-Looking Statements and Factors
That May Affect Future Results" which are set forth below and in our other
filings with the SEC.
Forward-Looking Statements and Factors That May Affect Future Results
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this report contain forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Such forward-looking statements are based on current
expectations, estimates, forecasts and projections about the industries in which
we operate, management's current beliefs and assumptions made by management.
Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," "goals," variations of such words and similar expressions are
intended to identify such forward-looking statements. These statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions that are difficult to predict. Future outcomes and results may
differ materially from what is expressed or forecasted in such forward-looking
statements. We undertake no obligation to update any forward-looking statements,
whether as a result of new information, future developments or otherwise.
Factors that could cause or contribute to deviations from the
forward-looking statements include those discussed in this section, elsewhere in
this report and in our other filings with the SEC. The factors include, but are
not limited to, (i) variations in demand for our products and services, (ii) the
success of our new products and services, (iii) significant changes in net cash
flows in or out of our businesses, (iv) fluctuations in the performance of debt
and equity markets worldwide, (v) the enactment of adverse state, federal or
foreign regulation or changes in government policy or regulation (including
accounting standards) affecting our operations, (vi) the effect of economic
conditions and interest rates in the U.S., the U.K. or internationally, (vii)
the ability of our subsidiaries to compete in their respective businesses,
(viii) our ability to attract and retain key personnel, and (ix) actions by
governmental authorities that regulate our businesses, including insurance
commissions.
19
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
Consulting in Venture Capital
Certain information regarding our consulting segment's results of
operations is as follows:
Three Months Ended
March 31,
------------------------------
2009 2008
------------ ------------
(In thousands)
Revenues:
Consulting fees................................................................... $ 97 $ 114
------------ ------------
Total revenues.................................................................... 97 114
Operating expenses................................................................ 317 368
------------ ------------
Loss before income tax expense.................................................... $ (220) $ (254)
------------ ------------
------------ ------------
First quarter of 2009 compared to first quarter of 2008
In the first three months of 2009, the consulting segment contributed a
loss before income taxes of $220,000 to our overall loss before income taxes,
compared to a loss before income taxes of $254,000 in the first three months of
2008. The losses for both periods were attributable to an excess of fixed
operating expenses over consulting fee revenues.
Consulting fees revenues decreased from $114,000 in the first quarter of
2008 to $97,000 in the first quarter of 2009, due to consulting arrangements
that were in place for only part of the quarter.
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. We are actively seeking new clients and
business opportunities.
Under a consulting arrangement we had in 2007, 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 were convertible into preferred stock, or common stock
options, as part of our compensation. During 2007, we received preferred stock
in a consulting client valued at $140,000, 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.
20
Life Insurance and Annuities
Certain information regarding our life insurance and annuities segment's
results of operations is as follows:
Three Months Ended
March 31,
-------------------------------
2009 2008
------------- -------------
(In thousands)
Revenues and investment gains (losses):
Interest income................................................................... $ 5 $ 87
Realized investment gains (losses)................................................ (200) 270
------------- -------------
Total revenues and investment gains (losses)...................................... (195) 357
Expenses:
Amounts credited on insurance policyholder accounts .............................. 1 1
General and administrative expenses .............................................. 74 94
------------- -------------
Total expenses.................................................................... 75 95
------------- -------------
Income (loss) before income tax expense........................................... $ (270) $ 262
------------- -------------
------------- -------------
LPAL's policyholder liabilities fell from $142,000 at March 31, 2008 to
$44,000 at March 31, 2009 due to exchange rate changes (as LPAL's remaining
policies are in pounds sterling) and to two policy maturities totaling $63,000
in the first quarter of 2009. LPAL now has one policy remaining (of
approximately $9,000) which is scheduled to mature in June 2009 and two pending
death claim payments (approximately $35,000 in aggregate). LPAL has submitted a
Cessation of Business Plan ("COBP") to the JFSC and, subject to the satisfactory
completion of the COBP, the JFSC should be able to cancel LPAL's insurance
permit. At that point, LPAL will no longer be regulated by the JFSC and we
intend to move toward the dissolution of LPAL as soon as practicable.
First quarter of 2009 compared to first quarter of 2008
In the first quarter of 2009, LPAL contributed a loss before income taxes
of $270,000 to our overall loss before income taxes, compared to income before
income taxes of $262,000 in the first quarter of 2008. This $0.5 million swing
is attributable to a $0.1 million decrease in interest income on bank deposits
caused by significantly lower interest rates, and to a $0.2 million
other-than-temporary impairment write-down on one of LPAL's private equity
investments during the first quarter of 2009, versus a $270,000 realized
investment gain in the first quarter 2008 due to the receipt of the final
distribution from the WorldCom, Inc. securities litigation. LPAL held certain
WorldCom, Inc. publicly traded bonds which it sold at a loss in 2002. This
payment, as well as the initial distribution of $1.2 million received in January
2007, reverses part of the realized losses recorded on WorldCom in 2002.
LPAL's total assets decreased to $12.9 million as of March 31, 2009,
compared to $13.2 million as of December 31, 2008, primarily due to the $0.2
million investment impairment write-down discussed above and to the $63,000 in
payments on the two policies that matured during the first quarter of 2009.
LPAL's cash decreased during the first quarter of 2009 by $0.1 million from
$11.8 million at December 31, 2008 to $11.7 million at March 31, 2009, primarily
to the two policy maturities during the quarter. In April 2009, LPAL distributed
$5.0 million in cash to the Company, as pre-approved by the JFSC.
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 Corpporation bonds recognized in 2002.
LPAL expects to receive the final Enron distribution in 2009, but the amount of
this final distribution is currently uncertain.
21
Corporate and Other
First quarter of 2009 compared to first quarter of 2008
Corporate expenses remained level at $0.5 million for the first quarter
of 2009, compared to the first quarter of 2008. However, corporate expenses for
the first quarter of 2008 includes the write-off of $0.1 million in web
development costs paid to a third party vendor subsequent to our decision not to
go forward with a web based project. The first quarter of 2009 includes
increased corporate staff costs of $0.1 million 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 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 75% has already been
recognized in the second half of 2008 and the first quarter of 2009.
Consolidated Loss Before Income Tax Expense
First quarter of 2009 compared to first quarter of 2008
Our consolidated loss before income tax expense was $964,000 in the first
quarter of 2009, compared to $446,000 in the first quarter of 2008. This higher
loss of $0.5 million is due to the $0.5 million swing in realized investment
losses versus gains, as explained above. Interest income decreased by $0.1
million; however, this was offset by a $0.1 million decrease in operating
expenses for the first quarter of 2009, compared to the first quarter of 2008.
Income Taxes
Under a new tax system in Jersey, Channel Islands, our tax rate is zero,
and realized gains on certain investments are exempt from Jersey taxation. In
the United States, we are subject to both federal and California taxes at rates
up to 34% and 8.84%, respectively.
First quarter of 2009 compared to first quarter of 2008
The $2,000 tax expense for the first quarter of 2009, and for the first
quarter of 2008, is comprised of our minimum California taxes. Other than these
taxes, no other tax expense or benefits were applicable to our Group for these
periods. Our U.S. subsidiaries contributed a loss before income taxes of $0.3
million during the first quarter of 2009; however, we did not recognize any U.S.
tax benefits due to the 100% valuation allowances that we have provided for all
deferred tax assets.
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, 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 ("SFAS
22
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 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 and the first quarter of 2009, because all of our private equity
investments are less than 20% in the investee companies, and we do not have any
significant influence on the investee companies, all such investments are
accounted for in accordance with the cost method. In accordance with FASB Staff
Position Nos. FAS 115-1 and FAS 124-1 ("FSP 115-1 and 124-1"), "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments," we
evaluate our investments for any events or changes in circumstances ("impairment
indicators") that may have significant adverse effects on our investments. If
impairment indicators exist, then the carrying amount of the investment is
compared to its estimated fair value as determined in accordance with Statement
of Financial Accounting Standards No. 157 ("SFAS 157"), "Fair Value
Measurements." If any impairment is determined to be other-than-temporary, then
a realized investment loss would be recognized during the period in which we
make such determination.
Determination of Fair Values of Investments
When a quoted market price is available for a security, we use this price
in the determination of fair value. If a quoted market price is not available
for a security, management estimates the security's fair value based on
valuation methodologies as described below.
We hold investments in privately held equity securities, primarily
convertible preferred stock in companies doing business in various segments of
technology industries. These investments are normally held for a number of
years. Investments in convertible preferred stock come with rights that vary
dramatically both from company to company and between rounds of financing within
the same company. These rights, such as anti-dilution, redemption, liquidation
preferences and participation, bear directly on the price an investor is willing
to pay for a security. The returns on these investments are generally realized
through an initial public offering of the company's shares or, more commonly,
through the company's acquisition by a public company.
One of the factors affecting fair value is the amount of time before a
company requires additional financing to support its operations. Management
believes that companies that are financed to the estimated point of operational
profitability or for a period greater than one year will most likely return
value to the investor through an acquisition between a willing buyer and seller,
as the company does not need to seek financing from an opportunistic investor or
insider in an adverse investment environment. If a particular company needs
capital in the near term, management considers a range of factors in its fair
value analysis, including our ability to recover our investment through
surviving liquidation preferences. Management's valuation methodologies also
include fundamental analysis that evaluates the investee company's progress in
developing products, building intellectual property portfolios and securing
customer relationships, as well as overall industry conditions, conditions in
and prospects for the investee's geographic region, and overall equity market
conditions. This is combined with analysis of comparable acquisition
transactions and values to determine if the security's liquidation preferences
will ensure full recovery of our investment in a likely acquisition outcome. In
its valuation analysis, management also considers the most recent transaction in
a company's shares.
SFAS 157 defines fair value as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date (an exit price). SFAS 157 has also
established a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three broad levels. Level 3 inputs
apply to the determination of fair value for our private equity investments.
These are unobservable inputs where the determination of fair values of
investments requires the application of significant judgment. It is possible
that the factors evaluated by management and fair values will change in
subsequent periods, especially with respect to our privately held equity
securities in technology companies, resulting in material impairment charges in
future periods. From January 1, 2008, only other-than-temporary impairments will
be recognized and the carrying value of a private equity investment cannot be
increased above its cost unless the investee company completes an initial public
offering or is acquired.
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Other-than-temporary Impairments of Investments
Management performs an ongoing review of all investments in the portfolio
to determine if there are any declines in fair value that are
other-than-temporary.
In relation to our private equity securities that do not have a readily
determinable fair value, factors considered in impairment reviews include: (i)
the length of time and extent to which estimated fair values have been below
cost and the reasons for the decline, (ii) the investee's recent financial
performance and condition, earnings trends and future prospects, (iii) the
market condition of either the investee's geographic area or industry as a
whole, and (iv) concerns regarding the investee's ability to continue as a going
concern (such as the inability to obtain additional financing). If the evidence
supports that a decline in fair value is other-than-temporary, then the
investment is reduced to its estimated fair value, which becomes its new cost
basis, and a realized loss is reflected in earnings.
The evaluations for other-than-temporary impairments require the
application of significant judgment. It is possible that the impairment factors
evaluated by management and fair values will change in subsequent periods,
especially with respect to privately held equity securities in technology
companies, resulting in material impairment charges in future periods.
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.
Liquidity and Capital Resources
Our cash and cash equivalents decreased during the first quarter of 2009
by $0.7 million from $13.7 milion as of December 31, 2008 to $13.0 million as of
March 31, 2009. This decrease in cash and cash equivalents resulted from $0.6
million of cash used in operating activities and $0.1 million of cash used in
financing activities. Cash used in operating activities resulted from the excess
of operating expenses over revenues for the first quarter of 2009. Cash used in
financing activities resulted from the payout of two policies that had matured
during the first quarter of 2009 in LPAL. As of March 31, 2009, our cash and
cash equivalents, excluding the amount held by LPAL, amounted to $1.3 million, a
decrease of $0.6 million from December 31, 2008. This decrease resulted from the
use of cash in operating activities.
24
Shareholders' equity decreased during the first quarter of 2009 by $1.0
million from $15.0 million at December 31, 2008 to $14.0 million at March 31,
2009, due to the $1.0 million net loss for the period. As of March 31, 2009 and
December 31, 2008, $62.6 million of our Ordinary Shares, at cost, held by the
employee benefit trusts have been netted against shareholders' equity.
The majority of the Group's assets, including $11.7 million in cash at
March 31, 2009, were held by its life insurance and annuities business. After
policy maturities in LPAL during the first quarter of 2009 totaling $63,000,
there remains only one policy outstanding and two pending death claim payments
at March 31, 2009. During April 2009, as approved by the JFSC, LPAL distributed
$5.0 million in cash to the Company. LPAL's remaining policy of approximately
$9,000 will mature in June 2009, and it intends to pay out the two pending death
claims (approximately $35,000 in aggregate) by June 30, 2009. During the second
quarter of 2009, the directors of LPAL submitted a Cessation of Business Plan
("COBP") to the JFSC and, subject to the satisfactory completion of the COBP,
the JFSC should be able to cancel LPAL's insurance permit. At that point, LPAL
will no longer be regulated by the JFSC and the Company intends to move toward
the dissolution of LPAL as soon as practicable.
As of March 31, 2009, we had no bank borrowings, guarantee obligations,
material commitments outstanding for capital expenditures or additional funding
for private equity portfolio companies.
As of March 31, 2009, we had $1.3 million of cash and cash equivalents,
excluding cash held by our life insurance and annuities segment. We believe that
this cash balance, along with the $5.0 million in cash that LPAL distributed to
the Company in April 2009, is sufficient to fund our operations (consulting in
venture capital and corporate activities) over at least the next 12 months.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our company's management, with the participation of our Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of our
"disclosure controls and procedures" (as defined in the Securities Exchange Act)
Rules 13a-15(e) and 15-d-15(e)) as of the end of the period covered by this
Report (the "Evaluation Date"). Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that as of the Evaluation
Date, our disclosure controls and procedures are effective to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act (i) is recorded, processed, summarized and reported,
within the time periods specified in the SEC's rules and forms and (ii) is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
Our management, including our Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure controls and procedures or our
internal controls will prevent all errors and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal controls over financial reporting
that occurred during the quarter ended March 31, 2009 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
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PART II - OTHER INFORMATION
Item 1A. RISK FACTORS
Not required.
Item 6. EXHIBITS
The following exhibits are filed herewith:
Exhibit
Number Description
- ------- ----------------
31.1 Certification by the Company's Executive Chairman pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification by the Company's Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification by the Company's Executive Chairman pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification by the Company's Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BERKELEY TECHNOLOGY LIMITED
(Registrant)
Date: May 15, 2009 By: /s/ Ian K. Whitehead
Ian K. Whitehead
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer
of the Registrant)
27