U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): August 13, 2009
Berkeley Technology Limited
(Exact Name of Registrant as Specified in its Articles)
----------------------
0-21874
(Commission File Number)
Jersey, Channel Islands Not applicable
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation)
One Castle Street
St. Helier, Jersey JE2 3RT
Channel Islands
Tel: 011 44 1534 607700
(Address and telephone of Principal Executive Offices)
(Former Name or Address, if Changed Since Last Report)
The following information is furnished pursuant to this Item 7.01,"Regulation FD
Disclosure" and Item 2.02, "Results of Operations and Financial Condition."
FOR IMMEDIATE RELEASE August 13, 2009
Berkeley Technology Limited
Interim Report
For the Three and Six Months Ended
June 30, 2009
London, August 13, 2009 - Berkeley Technology Limited (OTCBB: BKLYY.PK,
London: BEK.L) (the "Company") is an international venture capital consulting
firm with a focus on Silicon Valley technology companies.
The Company today reported financial results for the three and six months
ended June 30, 2009. The Company's consolidated net loss for the second quarter
of 2009 was $0.7 million, or $0.01 per diluted share and $0.15 per diluted ADR,
compared with a consolidated net loss of $0.6 million, or $0.01 per diluted
share and $0.12 per diluted ADR, for the second quarter of 2008. The Company
computes and reports consolidated net income (loss) and diluted earnings (loss)
per share and ADR in accordance with U.S. generally accepted accounting
principles ("U.S. GAAP").
For the six months ended June 30, 2009, the Company's consolidated net
loss was $1.7 million, or $0.03 per diluted share and $0.34 per diluted ADR,
compared with a consolidated net loss of $1.1 million, or $0.02 per diluted
share and $0.21 per diluted ADR, for the first six months of 2008.
A $0.2 million decline in interest income and a $0.5 million swing in
realized investment gains and losses contributed to the $0.6 million higher net
loss for the six months ended June 30, 2009, compared with the same period in
2008.
Accounting rules require us to review our private equity investments on a
quarterly basis for impairment indicators. If impairment indicators exist, we
must then record a loss for any decrease in fair value that we determine to be
other-than-temporary. We did not find any impairment indicators in our
investment reviews for the second quarter of 2009; however, during the first
quarter of 2009, we recorded a write-down of $0.2 million on one of our private
equity investments. Despite our valuation of this investment as at the end of
the first quarter of 2009, there is still the possibility that we could
ultimately realize more than our current carrying value of this investment. This
investee company was a former consulting client of ours and during the second
quarter of 2009, we were successful in converting our fees receivable from this
investee company into an additional bridge financing investment which protects
our original preferred stock investment. The results for the first quarter of
2008 included a $0.3 million realized investment gain relating to the final
distribution we received from the WorldCom securities litigation. This means
that $0.5 million of the $0.6 million decline in operating results for the first
six months of 2009, compared to the first six months of 2008, was due to either
unrealized investment write-downs or extraordinary investment gains. During the
fourth quarter of 2008, we received a partial distribution of $1.4 million from
the Enron Corporation securities litigation, and we expect to receive a final
distribution later in 2009.
We continue to make progress in holding operating expenses down, despite
the severance costs paid to one employee over the 12-month period ended on June
30, 2009. Operating expenses for the first six months of 2009 fell by $36,000,
compared to the same period in 2008. We expect quarterly expenses to fall by
approximately $0.2 million starting in the third quarter of 2009 after severance
costs cease in relation to the employee referred to above.
We earned consulting fees of $0.25 million during the first six months of
2009 which was comparable to the fees earned in the same period last year.
Interest income declined by $0.2 million to only $14,000 for the first six
months of 2009, compared to the first six months of 2008, due to lower interest
rates.
1
In certain of our consulting arrangements, we may benefit from investments
made by our clients if their investments are successful. Given the challenges we
face in the current economic environment, 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 continue to actively seek new clients and business
opportunities.
This interim management report and the following condensed set of financial
statements and responsibility statement represent the Company's half yearly
financial report for the six months ended June 30, 2009, in accordance with the
Disclosure and Transparency Rules of the Financial Services Authority in the
U.K.
********
2
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
June 30, December 31,
2009 2008
-------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 12,213 $ 13,681
Accounts receivable, less allowances of $0 as of June 30, 2009
and December 31, 2008 157 222
Interest receivable - 1
Prepaid expenses and deposits 73 147
-------------- ---------------
Total current assets 12,443 14,051
Private equity investments (at lower of cost or estimated fair value) 1,341 1,484
Property and equipment, net of accumulated depreciation of $180 and $177 as of
June 30, 2009 and December 31, 2008, respectively 7 9
-------------- ---------------
Total assets $ 13,791 $ 15,544
============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 455 $ 459
Policyholder liabilities (due in less than one year) 40 106
-------------- ---------------
Total current liabilities 495 565
-------------- ---------------
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 June 30, 2009
and December 31, 2008 3,222 3,222
Additional paid-in capital 67,892 67,860
Retained earnings 5,179 6,894
Employee benefit trusts, at cost (13,522,381 shares as of
June 30, 2009 and December 31, 2008) (62,598) (62,598)
Accumulated other comprehensive loss (399) (399)
-------------- ---------------
Total shareholders' equity 13,296 14,979
-------------- ---------------
Total liabilities and shareholders' equity $ 13,791 $ 15,544
============== ===============
See accompanying Notes which are an integral part of these Unaudited Condensed
Consolidated Financial Statements.
3
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share and ADS amounts)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- --------------------------
2009 2008 2009 2008
------------ ------------ ----------- ------------
Revenues:
Consulting fee income $ 150 $ 150 $ 247 $ 264
Interest income 7 78 14 199
Realized investment gains (losses) - - (200) 270
------------ ------------ ----------- ------------
157 228 61 733
Expenses:
Operating expenses 906 859 1,773 1,809
Amounts credited on insurance policyholder accounts - 2 1 3
------------ ------------ ----------- ------------
906 861 1,774 1,812
------------ ------------ ----------- ------------
Loss before income tax expense (749) (633) (1,713) (1,079)
Income tax expense - - 2 2
------------ ------------ ----------- ------------
Net loss $ (749) $ (633) $ (1,715) $ (1,081)
============ ============ =========== ============
Basic and diluted loss per share $ (0.01) $ (0.01) $ (0.03) $ (0.02)
============ ============ =========== ============
Basic and diluted loss per ADS $ (0.15) $ (0.12) $ (0.34) $ (0.21)
============ ============ =========== ============
See accompanying Notes which are an integral part of these Unaudited Condensed
Consolidated Financial Statements.
4
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
June 30,
---------------------------
2009 2008
------------ ------------
Net cash used in operating activities $ (1,406) $ (1,057)
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 (74) -
------------ ------------
Net cash used in financing activities (74) -
------------ ------------
Effect of exchange rate changes on cash 12 -
------------ ------------
Net decrease in cash and cash equivalents (1,468) (789)
Cash and cash equivalents at beginning of period 13,681 14,568
------------ ------------
Cash and cash equivalents at end of period $ 12,213 $ 13,779
============ ============
Supplemental disclosure of non-cash investing activities:
Exchange of receivable from consulting client for additional
private equity investment in consulting client $ 57 $ -
See accompanying Notes which are an integral part of these Unaudited Condensed
Consolidated Financial Statements.
5
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM REPORT
FOR THE SIX MONTHS ENDED JUNE 30, 2009
This interim report has not been audited or reviewed by independent
auditors pursuant to the Auditing Practices Board guidance on Review of Interim
Financial Information.
As used herein, the terms "Company," "we," "us" and "our" refer to
Berkeley Technology Limited. Except as the context otherwise requires, the term
"Group" refers collectively to the Company 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. 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 six month period ended June 30, 2009 may not be
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 December 31, 2008 were held by its
life insurance and annuities business. After policy maturities in LPAL during
the first six months of 2009 totaling $74,000, there were no policies
outstanding at June 30, 2009. However, as of that date, two death claims
(approximately $40,000 in aggregate) were still pending distribution. The Group
expects these distributions to be made in the third quarter of 2009. During the
second quarter of 2009, as approved by the Jersey Financial Services Commission
("JFSC"), LPAL distributed a total of $9.0 million in cash to the Company. Also
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 will move toward the dissolution of LPAL as soon as practicable.
6
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").
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 February 2008, the Financial Accounting Standards Board ("FASB")
issued FASB Staff Position No. FAS 157-2 ("FSP FAS 157-2"), "Effective Date of
FASB Statement No. 157," which delayed the effective date of Statement of
Financial Accounting Standards No. 157 ("SFAS 157"), "Fair Value Measurements,"
to fiscal years ending after November 15, 2008 for non-financial assets and
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis. The adoption of FSP FAS 157-2 as of
January 1, 2009 did not have an impact on the Company's financial position or
results of operations.
In April 2009, the FASB issued three FASB Staff Positions ("FSPs") that
were intended to provide additional application guidance and enhanced
disclosures regarding fair value measurements and impairments of securities. FSP
No. 157-4, "Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly," provides additional guidelines for estimating fair value
in accordance with SFAS 157. FSP No. 115-2, "Recognition and Presentation of
Other-Than-Temporary Impairments," changes existing accounting requirements for
other-than-temporary impairment ("OTTI") for debt securities by replacing the
current requirement that a holder have the positive intent and ability to hold
an impaired security to recovery in order to conclude an impairment was
temporary with a requirement that an entity conclude it does not intend to sell
an impaired security and it will not be required to sell the security before the
recovery of its amortized cost basis. FSP No. 107-1 and Accounting Principles
Board ("APB") Opinion No. 28-1, "Interim Disclosures about Fair Value of
Financial Instruments," increases the frequency of fair value disclosures. These
FSPs are effective for fiscal years and interim periods ending after June 15,
2009. The adoption of these FSPs 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.
In April 2009, the FASB issued Statement of Financial Accounting
Standards No. 165 ("SFAS 165"), "Subsequent Events." SFAS 165 establishes
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or available
to be issued. The Company adopted SFAS 165 for the quarter ended June 30, 2009.
The adoption of SFAS 165 did not have an
7
impact on the Company's consolidated financial statements. See Note 10 to the
accompanying condensed consolidated financial statements for the related
disclosure.
In June 2009, the FASB issued Statement of Financial Accounting Standards
No. 168 ("SFAS 168"), "The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles." SFAS 168 identifies the
FASB Accounting Standards Codification as the authoritative source of generally
accepted accounting principles in the United States. Rules and interpretive
releases of the SEC under federal securities laws are also sources of
authoritative GAAP for SEC registrants. SFAS 168 is effective for financial
statements issued for interim and annual periods ending after September 15,
2009. The Company does not expect the adoption of SFAS 168 to have a material
impact on its consolidated financial statements.
Note 2. Earnings Per Share and ADS
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share." This
statement requires the presentation of basic and diluted earnings per share.
Basic earnings per share is calculated by dividing net income or loss by the
weighted-average number of Ordinary Shares outstanding during the applicable
period, excluding shares held by the ESOT and the ALOT which are regarded as
treasury stock for the purposes of this calculation. The Company has issued
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 the three and six month periods ended June 30, 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 Six Months Ended
June 30, June 30,
--------------------------- --------------------------
2009 2008 2009 2008
------------ ------------ ----------- ------------
(In thousands, except per share
and ADS amounts)
Net loss $ (749) $ (633) $ (1,715) $ (1,081)
============ ============ =========== ============
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 50,917 50,917
============ ============ =========== ============
Basic and diluted loss per share $ (0.01) $ (0.01) $ (0.03) $ (0.02)
============ ============ =========== ============
Basic and diluted loss per ADS $ (0.15) $ (0.12) $ (0.34) $ (0.21)
============ ============ =========== ============
8
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 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 June 30, 2009 and December 31, 2008, the Group's only investments
were private equity securities.
For 2008 and the first six months 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. During the second quarter of 2009, the Group determined that
no impairment indicators existed for its private equity investments. 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 June 30, 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 $357,000, 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.
9
As of June 30, 2009, the Company's Jersey based life insurance
subsidiary, LPAL, owned 90% 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 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 will move toward the
dissolution of LPAL as soon as practicable.
Realized Investment Gains and Losses
In the first six months of 2008, the Company recorded a realized
investment gain 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 the second half of 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
both the third quarter of 2008 and the fourth quarter of 2008,
other-than-temporary impairment losses of $250,000 in each quarter were
recognized in the Group's consolidated statement of operations on this same
private equity investment. During the second quarter of 2009, the Group
determined that no impairment indicators existed for its private equity
investments.
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
six months ended June 30, 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 June 30, 2009, the Company had
$8,101,000 in U.S. 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 six months ended June 30, 2009, the Company
held no Level 2 assets.
10
Level 3 - Unobservable inputs for the asset or liability including
significant assumptions of the Company and other market participants. As of June
30, 2009 and December 31, 2008, the Group held $1,341,000 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 analysis of various financial, performance and market factors.
During the six months ended June 30, 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 six months
ended June 30, 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)
Additional investment in one the Group's private equity holdings 57
-------------
Balance at June 30, 2009 $ 1,341
=============
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.
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
11
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 three and six months ended June 30, 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. No share options have been granted since 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 six 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, this employee forfeited 500,000 options
that were 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 the expected forfeiture of these 500,000 options; however, share based
compensation expense for the second quarter of 2009 was reduced by $4,056, and
share based compensation expense for future quarters through the first quarter
of 2011 will be reduced by this amount. 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 the first six months 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.
12
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 June 30, 2009 and 2008,
compensation expense related to share options under SFAS 123R totaled $13,000
and $22,000, respectively, and is included in operating expenses in the
accompanying statement of operations. For the six months ended June 30, 2009 and
2008, compensation expense related to share options under SFAS 123R totaled
$32,000 and $44,000, respectively.
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 4,450,000 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 4,450,000 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. During the second quarter of 2009, 250,000
options became vested, 500,000 unvested options were forfeited, and no options
were granted or exercised. At June 30, 2009, there were 9,175,000 options
outstanding with a weighted-average exercise price of $1.61. There were no
in-the-money options outstanding at that date. Of the outstanding options,
6,400,000 were exercisable at June 30, 2009, and these have a weighted-average
exercise price of $2.18. The remaining 2,775,000 options were unvested at June
30, 2009. These unvested options have a weighted-average exercise price of
$0.30. As of June 30, 2009, total unrecognized compensation expense related to
unvested share options was $111,000, which is expected to be recognized as
follows: $23,000 in the last six months of 2009, $46,000 in 2010, $28,000 in
2011 and $14,000 in 2012. On July 31, 2009, 2,700,000 vested options with a
weighted-average
13
exercise price of $0.45 were forfeited by the Company's Chief Financial Officer
whose employment ended on June 30, 2009 as discussed above.
For additional information relating to the Group's share options, see
Note 10 to the Company's consolidated financial statements included in the
Company's Annual Report 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,
2009. 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 dated March
18, 2009. 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.
14
Note 7. Commitments and Contingencies
Guarantees
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others - an interpretation of FASB
Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34." The
following is a summary of the Company's agreements that the Company has
determined are within the scope of FIN 45.
Under its Memorandum and Articles of Association, the Company has agreed
to indemnify its officers and directors for certain events or occurrences
arising as a result of the officer or director serving in such capacity. The
maximum potential amount of future payments the Company could be required to
make under these indemnification agreements is unlimited. However, the Company
maintains directors and officers' liability insurance that limits the Company's
exposure and enables it to recover a portion of any future amounts paid. As a
result of its insurance coverage, the Company believes the estimated fair value
of these indemnification agreements is minimal and has no liabilities recorded
for these agreements as of June 30, 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 June 30, 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.
Summary revenue and investment gain (loss) information by geographic
segment, based on the domicile of the Group company generating those revenues,
is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- --------------------------
2009 2008 2009 2008
------------ ------------ ----------- ------------
(In thousands)
Jersey $ 5 $ 69 $ (190) $ 440
United States 152 159 251 293
------------ ------------ ----------- ------------
Consolidated revenues and net investment
gains $ 157 $ 228 $ 61 $ 733
============ ============ =========== ============
15
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 Six Months Ended
June 30, June 30,
--------------------------- --------------------------
2009 2008 2009 2008
------------ ------------ ----------- ------------
(In thousands)
Revenues and net investment gains (losses):
Consulting in venture capital $ 150 $ 150 $ 247 $ 264
Life insurance and annuities 4 60 (191) 417
------------ ------------ ----------- ------------
154 210 56 681
Reconciliation of segment amounts to consolidated amounts:
Interest income 3 18 5 52
------------ ------------ ----------- ------------
Consolidated revenues and net investment
gains $ 157 $ 228 $ 61 $ 733
============ ============ =========== ============
Income (loss) before income taxes:
Consulting in venture capital $ (156) $ (199) $ (376) $ (453)
Life insurance and annuities (76) (36) (346) 226
------------ ------------ ----------- ------------
(232) (235) (722) (227)
Reconciliation of segment amounts to consolidated amounts:
Interest income 3 18 5 52
Corporate expenses (520) (416) (996) (904)
------------ ------------ ----------- ------------
Consolidated loss before income tax expense $ (749) $ (633) $ (1,713) $ (1,079)
============ ============ =========== ============
Note 9. Client Concentration
The Group's revenues are from a limited number of clients. In the first
six months of 2009, the Group's largest consulting client accounted for 67% of
its consulting revenues, and another client accounted for 26% of its consulting
revenues.
Note 10. Subsequent Events
Subsequent events have been evaluated to August 13, 2009, the date the
condensed consolidated financial statements were issued. No events have occurred
since June 30, 2009 that would require adjustment to, or disclosure in, the
condensed consolidated financial statements.
Note 11. Related Party Transactions
The Company had no related party transactions during the first six months
of 2009 that have materially affected the financial position or the performance
of the Company during that period, and there were no changes in the related
party transactions described in the Company's Annual Report for 2008 that could
have a material effect on the financial position or performance of the Company
in the first six months of 2009.
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Note 12. Principal Risks and Uncertainties
We consider the principal risks and uncertainties for the remaining six
months of 2009 to be the following: (1) the level of consulting fee revenues is
expected to be volatile depending on the nature and extent of our work at any
point in time, particularly in the current economic environment; and (2) by
their very nature, venture capital investments are risky, and the private equity
investments held by the Company's insurance subsidiary could decline in value.
Responsibility and Cautionary Statements
Responsibility Statement
We confirm that to the best of our knowledge:
o The condensed set of consolidated financial statements for the six
months ended June 30, 2009 included in this interim report, which has
been prepared in conformity with United States generally accepted
accounting principles ("U.S. GAAP"), gives a true and fair view of the
assets, liabilities, financial position and profit or loss of the
Company;
o This interim report includes a fair review of the information required
by the Financial Services Authority's Disclosure and Transparency Rules
("DTR") 4.2.7 R (an indication of important events that have occurred
during the first six months of the financial year and a description of
principal risks and uncertainties for the remaining six months of the
financial year); and
o This interim report includes a fair review of the information required
by DTR 4.2.8 R (disclosure of related party transactions and changes
therein).
Cautionary Statement
This report is addressed to shareholders of Berkeley Technology Limited
and has been prepared solely to provide information to them.
This report is intended to inform the shareholders of the Company's
performance during the six months ended June 30, 2009. Statements contained
herein which are not historical facts are forward-looking statements that
involve a number of risks and uncertainties that could cause the actual results
of the future events described in such forward-looking statements to differ
materially from those anticipated in such forward-looking statements. Factors
that could cause or contribute to deviations from the forward-looking statements
include, but are not limited to, (i) variations in demand for the Company's
products and services, (ii) the success of the Company's new products and
services, (iii) significant changes in net cash flows in or out of the Company's
businesses, (iv) fluctuations in the performance of debt and equity markets
worldwide, (v) the enactment of adverse state, federal or foreign regulation or
changes in government policy or regulation (including accounting standards)
affecting the Company's operations, (vi) the effect of economic conditions and
interest rates in the U.S., the U.K. or internationally, (vii) the ability of
the Company's subsidiaries to compete in their respective businesses, (viii) the
ability of the Company to attract and retain key personnel, and (ix) actions by
governmental authorities that regulate the Company's businesses, including
insurance commissions. The Company undertakes no obligation to update any
forward-looking statements, whether as a result of new information, future
developments or otherwise.
17
On behalf of the Board
Arthur I. Trueger
Executive Chairman and Principal Financial Officer
August 13, 2009
********
Please address any inquiries to:
Robert A. Cornman Jersey (0)1534 607700
Company Secretary
Berkeley Technology Limited
Form 10-Q for the quarter ended June 30, 2009
A copy of the above document will be submitted to the U.K. Listing Authority and
will be shortly available for inspection at the U.K. Listing Authority's
Document Viewing Facility, which is situated at:
Financial Services Authority
25 The North Colonnade
Canary Wharf
London
E14 5HS
Tel: 020 7676 1000
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