Attached files
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 September 30, 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 November 16, 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 September 30, 2009 and
December 31, 2008............................................................................ 3
Condensed Consolidated Statements of Operations for the three and nine months
ended September 30, 2009 and 2008............................................................ 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2009 and 2008............................................................ 5
Consolidated Statement of Changes in Shareholders' Equity for the nine months
ended September 30, 2009..................................................................... 6
Notes to Condensed Consolidated Financial Statements............................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 24
Item 4. Controls and Procedures.......................................................................... 24
PART II
OTHER INFORMATION
Item 1A. Risk Factors..................................................................................... 25
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 25
Item 5. Other Information................................................................................ 25
Item 6. Exhibits......................................................................................... 26
Signature ................................................................................................. 27
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share amounts)
September 30, December 31,
2009 2008
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 11,744 $ 13,681
Accounts receivable, less allowances of $0 as of September 30, 2009
and December 31, 2008 150 222
Interest receivable 2 1
Prepaid expenses and deposits 27 147
------------- -------------
Total current assets 11,923 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 $181 and
$177 as of September 30, 2009 and December 31, 2008, respectively 6 9
------------- -------------
Total assets $ 13,270 $ 15,544
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 417 $ 459
Policyholder liabilities (due in less than one year) - 106
------------- -------------
Total current liabilities 417 565
------------- -------------
Commitments and contingencies
Shareholders' equity:
Ordinary shares, $0.05 par value per share: 86,400,000 shares authorized;
64,439,073 shares issued and outstanding as of September 30, 2009
and December 31, 2008 3,222 3,222
Additional paid-in capital 67,903 67,860
Retained earnings 4,725 6,894
Employee benefit trusts, at cost (13,522,381 shares as of
September 30, 2009 and December 31, 2008) (62,598) (62,598)
Accumulated other comprehensive loss (399) (399)
------------- -------------
Total shareholders' equity 12,853 14,979
------------- -------------
Total liabilities and shareholders' equity $ 13,270 $ 15,544
============= =============
See accompanying Notes which are an integral part of these
Condensed Consolidated Financial Statements.
3
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share and ADS amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2009 2008 2009 2008
------------ ------------ ------------ ------------
Revenues:
Consulting fees................................................... $ 150 $ 150 $ 397 $ 414
------------ ------------ ------------ ------------
Total revenues.................................................... 150 150 397 414
Operating expenses:
Cost of services.................................................. 199 218 609 697
Selling, general and administrative expenses ..................... 425 758 1,789 2,091
------------ ------------ ------------ ------------
Total operating expenses.......................................... 624 976 2,398 2,788
------------ ------------ ------------ ------------
Operating loss.................................................... (474) (826) (2,001) (2,374)
Interest income................................................... 20 72 34 271
Net realized investment gains (losses)............................ - (250) (200) 20
------------ ------------ ------------ ------------
Loss before income tax expense.................................... (454) (1,004) (2,167) (2,083)
Income tax expense................................................ - - 2 2
------------ ------------ ------------ ------------
Net loss.......................................................... $ (454) $ (1,004) $ (2,169) $ (2,085)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Basic and diluted loss per share $ (0.01) $ (0.02) $ (0.04) $ (0.04)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Basic and diluted loss per ADS $ (0.09) $ (0.20) $ (0.43) $ (0.41)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
See accompanying Notes which are an integral part of these
Condensed Consolidated Financial Statements.
4
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
September 30,
-----------------------------
2009 2008
------------ ------------
Cash flows from operating activities:
Net loss.......................................................................... $ (2,169) $ (2,085)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization..................................................... 3 5
Amounts credited on insurance policyholder accounts............................... 1 4
Net realized investment losses (gains)............................................ 200 (20)
Share based compensation.......................................................... 43 51
Net changes in operating assets and liabilities:
Accrued investment income ..................................................... (1) 12
Other assets................................................................... 135 269
Accounts payable, accruals and other liabilities............................... (43) 10
------------ ------------
Net cash used in operating activities............................................. (1,831) (1,754)
------------ ------------
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.............................................. (111) -
------------ ------------
Net cash used in financing activities............................................. (111) -
------------ ------------
Effect of exchange rate changes on cash........................................... 5 (18)
------------ ------------
Net decrease in cash and cash equivalents......................................... (1,937) (1,504)
Cash and cash equivalents at beginning of period.................................. 13,681 14,568
------------ ------------
Cash and cash equivalents at end of period ....................................... $ 11,744 $ 13,064
------------ ------------
------------ ------------
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
Condensed Consolidated Financial Statements.
5
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(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........................ - - - (2,169) - - (2,169)
Share based compensation,
including income tax
effect of $0................. - - 43 - - - 43
--------- -------- ---------- ---------- ---------- ----------- -----------
Balance as of
September 30, 2009........... 64,439 $ 3,222 $ 67,903 $ 4,725 $ (62,598) $ (399) $ 12,853
--------- -------- ---------- ---------- ---------- ----------- -----------
--------- -------- ---------- ---------- ---------- ----------- -----------
See accompanying Notes which are an integral part of these
Condensed Consolidated Financial Statements.
6
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SEPTEMBER 30, 2009
As used herein, the terms "registrant," "Company," "we," "us" and "our"
refer to Berkeley Technology Limited ("BTL"). 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"). 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
fluctuate depending on the nature and extent of consulting work at any point in
time, the results for the nine month period ended September 30, 2009 may not be
indicative of the results to be expected for the full fiscal year or future
years.
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. Following the payout of its remaining
policies and death claims during the first nine months of 2009 ($111,000 in
aggregate), London Pacific Assurance Limited ("LPAL") had no policyholder
liabilities as of September 30, 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
will cancel LPAL's insurance permit. All steps in the COBP have now been
completed, except for submitting audited closing financial statements of LPAL as
of September 30, 2009 to the JFSC. The Company plans to submit these to the JFSC
prior to the end of 2009. Once these audited closing financial statements are
submitted to and accepted by the JFSC, LPAL will no longer be regulated as an
insurance company by the JFSC and the Company will move toward the dissolution
of LPAL as soon as practicable. LPAL's $2.6 million of cash and $1.2 million of
private equity investments will be then transferred to BTL.
7
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Prior to the cessation of its insurance business during the third quarter
of 2009, the Company reported its results of operations using an insurance
company format and in two operating segments: the consulting in venture capital
segment, and the life insurance and annuities segment. Beginning with the third
quarter of 2009, the Company changed its reporting of results to a commercial
company format with only one operating business segment (consulting in venture
capital). Certain reclassifications were made to prior period amounts to conform
with the current period's presentation. These reclassifications had no effect on
the net loss or shareholders' equity for the prior periods.
The Company is incorporated under the laws of Jersey, Channel Islands.
Its Ordinary Shares are traded on the London Stock Exchange and in the U.S. on
the Over-the-Counter Bulletin Board in the form of American Depositary Shares
("ADSs"), which are evidenced by American Depositary Receipts ("ADRs"). Pursuant
to the regulations of the SEC, the Company is considered a U.S. domestic
registrant and must file financial statements prepared under U.S. GAAP.
Subsequent Events
Subsequent events have been evaluated to November 16, 2009, the date the
condensed consolidated financial statements were issued. No events have occurred
since September 30, 2009 that would require adjustment to, or disclosure in, the
condensed consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP
requires management to make certain 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.
Comprehensive Loss
The Company had no other comprehensive income or loss for the three and
nine month periods ended September 30, 2009 and 2008. Therefore, the Company's
comprehensive loss was equal to the Company's consolidated net loss for these
periods.
Recently Issued Accounting Pronouncements
In February 2008, the Financial Accounting Standards Board ("FASB")
issued new accounting guidance which delayed the effective date to fiscal years
ending after November 15, 2008 for fair value accounting for all 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 this
guidance 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 related sets of accounting guidance
intended to enhance disclosures regarding fair value measurements and
impairments of securities. This guidance sets forth rules related to determining
the fair value of financial assts and financial liabilities when the activity
levels have significantly decreased in relation to the normal market, guidance
related to the determination of other-than-
8
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
temporary impairments to include intent and ability of the holder as an
indicator in the determination of whether an other-than-temporary impairment
exists and interim disclosure requirements for the fair value of financial
instruments. These sets of accounting guidance became effective June 15, 2009.
The adoption of this guidance did not have an impact on the Company's
consolidated financial statements.
In December 2007, the FASB issued new accounting guidance related to
noncontrolling interests in consolidated financial statements. This guidance
establishes accounting and reporting standards to improve the relevance,
comparability and transparency of financial information that a reporting entity
provides in its consolidated financial statements. This guidance became
effective December 15, 2008. The adoption of this guidance did not have an
impact on the Company's financial position or results of operations.
In April 2009, the FASB issued new accounting guidance related to the
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 this guidance for the quarter ended June 30, 2009. The adoption
of this guidance did not have an impact on the Company's consolidated financial
statements. See above in Note 1 to the accompanying condensed consolidated
financial statements for the related disclosure.
In June 2009, the FASB issued the FASB Accounting Standards Codification
("ASC"). The ASC has become 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. ASC became effective for financial statements issued for
interim and annual periods ending after September 15, 2009. The adoption of SFAS
168 did not have a material impact on the Company's consolidated financial
statements.
Note 2. Earnings Per Share and ADS
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. 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. 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 nine month periods ended September 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.
9
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of the numerators and denominators for the basic and
diluted loss per share calculations is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2009 2008 2009 2008
------------ ------------ ------------ ------------
(In thousands, except per
share and ADS amounts)
Net loss.......................................................... $ (454) $ (1,004) $ (2,169) $ (2,085)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
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) $ (0.02) $ (0.04) $ (0.04)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Basic and diluted loss per ADS.................................... $ (0.09) $ (0.20) $ (0.43) $ (0.41)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
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 the accounting guidance relating to insurance
companies. 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 should the Group make such
investments in the future.
As of September 30, 2009 and December 31, 2008, the Group's only
investments were private equity securities.
For 2008 and the first nine 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. 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. 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.
10
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The accounting guidance for fair value measurements 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). That accounting guidance 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 fair value 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 and third quarters 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 September 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 the Group in prior years. The third investment
has a carrying value of $844,000 and is in preferred stock of a technology
company.
As of September 30, 2009, the Company's Jersey based life insurance
subsidiary, LPAL, owned 90% of the Group's $1.3 million in private equity
securities. 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 will cancel
LPAL's insurance permit. All steps in the COBP have now been completed, except
for submitting audited closing financial statements of LPAL as of September 30,
2009 to the JFSC. The Company plans to submit these to the JFSC prior to the end
of 2009. Once these audited closing financial statements are submitted to and
accepted by the JFSC, LPAL will no longer be regulated as an insurance company
by the JFSC and the Company will move toward the dissolution of LPAL as soon as
practicable. The cash and investments held by LPAL will be then transferred to
BTL.
Realized Investment Gains and Losses
In the first nine 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. This gain of $270,000 was offset by an other-than-temporary impairment
loss of $250,000 on one of LPAL's private equity investments during the third
quarter of 2008.
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 fourth quarter of
2009. The amount of this final distribution is currently uncertain.
11
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 and third quarters of 2009, the
Group determined that no impairment indicators existed for its private equity
investments.
Note 4. Fair Value of Financial Instruments
The accounting guidance for fair value measurements provides a framework
for measuring fair value and expands related disclosures. Fair value is defined
as the price that would be received for an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date
(an exit price). The accounting guidance also established a hierarchy which
requires an entity to maximize the use of observable inputs, when available. The
accounting guidance requires that fair value measurements be classified and
disclosed in one of the following three categories:
Level 1 - Inputs are unadjusted quoted prices in active markets for
identical assets or liabilities that are accessible by the Company. During the
nine months ended September 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 September 30, 2009, the Company had
$7,851,000 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 nine months ended September 30, 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
September 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 nine months ended September 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.
12
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The change in carrying value of the Group's private equity investments,
all of which have Level 3 inputs in the fair value measurement hierarchy, for
the nine months ended September 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 (Level 3)........................ 57
------------
Balance at September 30, 2009...................................................................... $ 1,341
------------
------------
Cash and cash equivalents, accounts receivable, interest receivable,
accounts payable 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
The accounting guidance for share based payment established 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. A public entity is required 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. Companies
are required 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 nine month periods ended September 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
13
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
August 20, 2008. The accounting guidance for share based payment 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 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 nine 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. A
further 2,700,000 vested options were forfeited by the ex-Chief Financial
Officer on July 31, 2009 as they were unexercised. 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.
The accounting guidance for share based payment 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
nine months of 2009, the Company had no related tax benefits during those
periods.
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 September 30, 2009 and 2008,
compensation expense related to share options totaled $11,000 and $7,000,
respectively, and is included in operating expenses in the accompanying
statement of operations. For the nine months ended September 30, 2009 and 2008,
compensation expense related to share options totaled $43,000 and $51,000,
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
14
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 was less than the fair value
of the original options immediately before the exercise price modification,
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. During the third quarter of 2009, 512,500 options
became vested, 2,700,000 options were forfeited, and no options were granted or
exercised. At September 30, 2009, there were 6,475,000 options outstanding with
a weighted-average exercise price of $2.09. There were no in-the-money options
outstanding at that date. Of the outstanding options, 4,212,500 were exercisable
at September 30, 2009, and these have a weighted-average exercise price of
$3.05. The remaining 2,262,500 options were unvested at September 30, 2009.
These unvested options have a weighted-average exercise price of $0.30. As of
September 30, 2009, total unrecognized compensation expense related to unvested
share options was $100,000, which is expected to be recognized as follows:
$12,000 in the last three 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 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 Form 10-K
for the year ended December 31, 2008.
Note 6. Income Taxes
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
September 30, 2009. In general, the Company's tax returns remain subject to
examination by taxing authorities for the tax years 2005 through 2008, and for
2009 once the returns are filed in 2010.
During the third quarter of 2008, the Internal Revenue Service ("IRS")
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
15
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
with 2005. 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.
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 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.
In September 2009, the Group filed amended federal consolidated tax
returns for 2005 through 2008, and the inclusion of LCL in the federal
consolidated tax returns of BUSA for 2005 through 2008 did not result in any tax
liabilities for the Group, except for a $1,585 payment due to the IRS related to
alternative minimum taxes for 2007. As of the end of 2008, LCL has approximately
$59 million of net operating loss carryforwards and approximately $65 million 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. However, LCL could have liabilities for alternative minimum
taxes ("AMT") in future periods due to the utilization of net operating losses
to offset current taxable income. Any AMT liability attributable to LCL computed
on a standalone basis would be the responsibility of LCL, not of the Group, and
accordingly, any such liability has not been included in the condensed
consolidated financial statements of the Company.
Note 7. Commitments and Contingencies
Guarantees
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 September 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 September 30, 2009.
16
BERKELEY TECHNOLOGY LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 8. Business Segment and Geographical Information
Prior to the third quarter of 2009, the Company's reportable operating
segments were classified according to its businesses of consulting in venture
capital, and life insurance and annuities.
As the Company ceased its insurance business during the third quarter of
2009, only one operating business remains: consulting in venture capital.
Beginning with the third quarter of 2009, the Company changed its reporting of
results to a commercial company format with only one operating business segment
(consulting in venture capital). Certain reclassifications were made to prior
period amounts to conform with the current period's presentation. These
reclassifications had no effect on the net income or shareholders' equity for
the prior periods.
Summary revenue, interest income 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 Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2009 2008 2009 2008
------------ ------------ ------------ ------------
(In thousands)
Jersey............................................................ $ 1 $ (184) $ (189) $ 262
United States..................................................... 169 156 420 443
------------ ------------ ------------ ------------
Consolidated revenues, interest income and investment
gains (losses)................................................. $ 170 $ (28) $ 231 $ 705
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Total consolidated assets by geographic segment were as follows:
September 30, December 31,
2009 2008
------------- -------------
(In thousands)
Jersey.......................................................................... $ 4,923 $ 13,644
United States................................................................... 8,347 1,900
------------- -------------
Consolidated total assets....................................................... $ 13,270 $ 15,544
------------- -------------
------------- -------------
Note 9. Client Concentration
The Group's revenues are from a limited number of clients. In the
first nine months of 2009, the Group's largest consulting client accounted for
64% of its consulting revenues, and another client accounted for 31% of its
consulting revenues.
17
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.
18
RESULTS OF OPERATIONS
Revenues
Third quarter of 2009 compared to third quarter of 2008
Consulting fee income remained level at $150,000 for the third quarter of
2009, compared to the third quarter of 2008.
Our typical client is a Silicon Valley technology company or a large
international telecommunications company. Our objective has been to use
consulting revenues to finance the development of large telecommunications
company relationships in Europe and Asia, which has led to several equity
investments by a client with additional fees for work performed by the Group.
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 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.
First nine months of 2009 compared to first nine months of 2008
Consulting fee income remained level at $0.4 million for the first nine
months of 2009, compared to the first nine months of 2008.
Operating Expenses
Third quarter of 2009 compared to third quarter of 2008
Total operating expenses fell by $352,000 to $624,000 for the third
quarter of 2009, compared to the third quarter of 2008, due to lower staff
costs.
As discussed in previous Form 10-Q and 10-K filings with the SEC, on
August 12, 2008, the Company gave notice to Mr. Ian K. Whitehead, the Company's
Chief Financial Officer, 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 consolidated operating expenses for
the 12-month period ended June 30, 2009 increased by approximately $0.6 million
due to Mr. Whitehead's agreement.
The severance costs paid to our Chief Financial Officer as discussed
above were fully paid by June 30, 2009. In addition, there were staff cost
savings related to an employee that left the Company in the fourth quarter of
2008.
19
First nine months of 2009 compared to first nine months of 2008
Total operating expenses fell by $0.4 million to $2.4 million for the
first nine months of 2009, compared to the first nine months of 2008. This
decrease was due to lower staff costs of $0.3 million primarily related to the
employee who left during the fourth quarter of 2008, and the $0.1 million
included in the first nine months of 2008 related to the write-off of web
development costs paid to a third party vendor subsequent to our decision not to
go forward with a web based project.
Interest Income
Third quarter of 2009 compared to third quarter of 2008
Interest income earned on bank deposits and money market mutual funds
fell by $52,000 to $20,000 for the third quarter of 2009, compared to the third
quarter of 2008, due to the lower interest rate environment.
First nine months of 2009 compared to first nine months of 2008
Interest income earned on bank deposits and money market mutual funds
fell by $237,000 to $34,000 for the first nine months of 2009, compared to the
first nine months of 2008, due to the lower interest rate environment.
Realized Investment Gains and Losses
Third quarter of 2009 compared to third quarter of 2008
There were no realized investment gains or losses in the third quarter of
2009. The results for the third quarter of 2008 included an other-than-temporary
impairment loss of $250,000 taken on one of the Group's private equity
investments.
First nine months of 2009 compared to first nine months of 2008
The results for the first nine months of 2009 included an
other-than-temporary impairment loss of $200,000 taken on one of the Group's
private equity investments. During the first nine months of 2008, LPAL received
a $270,000 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, reversed part of the realized losses recorded on
WorldCom in 2002. Offsetting this $270,000 gain in the first nine months of 2008
was an other-than-temporary impairment loss of $250,000 taken on one of the
Group's private equity investments, for a net realized gain of $20,000 for the
first nine months of 2008. Therefore, there was a change in realized investment
gains and losses of $220,000 for the first nine months of 2009 compared to the
same period in 2008.
Consolidated Loss Before Income Tax Expense
Third quarter of 2009 compared to third quarter of 2008
Our consolidated loss before income tax expense was $454,000 in the third
quarter of 2009, compared to a consolidated loss of $1,004,000 in the third
quarter of 2008. This lower loss of $550,000 was due to the other-than-temporary
impairment loss of $250,000 taken on a private equity investment in the third
quarter of 2008, lower interest income of $52,000 for the third quarter of 2009
due to lower interest rates, and a decrease of $352,000 in operating expenses
for the third quarter of 2009 The decrease in operating expenses was
attributable to lower staff costs. The severance costs paid to our Chief
Financial Officer as discussed above were fully paid by June 30, 2009. In
addition, there were staff cost savings related to an employee that left the
Company in the fourth quarter of 2008.
20
First nine months of 2009 compared to first nine months of 2008
Our consolidated loss before income tax expense was $2.2 million for the
first nine months of 2009, compared to $2.1 million for the first nine months of
2008. This increased loss of $0.1 million was due to a $220,000 change in net
realized investment gains and losses as explained above, and lower interest
income of $237,000 due to lower interest rates during the first nine months of
2009, partially offset by a $390,000 decrease in operating expenses. Operating
expenses decreased in first nine months of 2009 compared to the first nine
months of 2008 due to a $0.3 million decrease in staff costs primarily related
to the employee who left during the fourth quarter of 2008, and the $0.1 million
included in the first nine months of 2008 related to the write-off of web
development costs paid to a third party vendor subsequent to our decision not to
go forward with a web based project.
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.
Third quarter of 2009 compared to third quarter of 2008
We had no tax expense and we did not recognize any tax benefits related
to operating loss carryforwards in the third quarter of 2009, as was the case in
the third quarter of 2008.
First nine months of 2009 compared to first nine months of 2008
The $2,000 tax expense for the first nine months of 2009, and for the
first nine months 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 $0.7 million during the first nine months 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 the accounting
guidance relating to insurance companies. 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 nine months 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. We evaluate our
investments for any events or changes in circumstances ("impairment indicators")
that may have significant adverse effects on our
21
investments. If impairment indicators exist, then the carrying amount of the
investment is compared to its estimated fair value. 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.
The accounting guidance for fair value measurements 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). That accounting guidance 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.
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-
22
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 nine months of
2009 by $1.9 million from $13.68 million as of December 31, 2008 to $11.74
million as of September 30, 2009. This decrease in cash and cash equivalents
resulted from $1.8 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 consulting fee income and interest
income for the first nine months of 2009. Cash used in financing activities
resulted from the payout of the three remaining policies and two death claims in
LPAL during the first nine months of 2009. As of September 30, 2009, our cash
and cash equivalents, excluding the amount held by LPAL, amounted to $9.2
million, an increase of $7.3 million from December 31, 2008. This increase
resulted from the $9.0 million of cash released back to the Company from LPAL
during the second quarter of 2009, offset by the use of cash in operating
activities.
Shareholders' equity decreased during the first nine months of 2009 by
$2.1 million from $15.0 million at December 31, 2008 to $12.9 million at
September 30, 2009, due to the net loss for the period. As of September 30, 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.
LPAL held $2.5 million of the Group's $11.7 million of cash at September
30, 2009. Following the payout of its remaining policies and death claims during
the first nine months of 2009 ($111,000 in aggregate), LPAL had no policyholder
liabilities as of September 30, 2009. During the second quarter of 2009, as
approved by
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the 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 will cancel LPAL's insurance permit. All steps
in the COBP have now been completed, except for submitting audited closing
financial statements of LPAL as of September 30, 2009 to the JFSC. The Company
plans to submit these to the JFSC in November 2009. Once these audited closing
financial statements are submitted to and accepted by the JFSC, LPAL will no
longer be regulated as an insurance company by the JFSC and the Company will
move toward the dissolution of LPAL as soon as practicable. LPAL's $2.6 million
of cash and $1.2 million of private equity investments will be then transferred
to BTL.
As of September 30, 2009, we had no bank borrowings, guarantee
obligations, material commitments outstanding for capital expenditures or
additional funding for private equity portfolio companies.
As of September 30, 2009, we had $9.2 million of cash and cash
equivalents, excluding cash held by LPAL. We believe that this cash balance is
sufficient to fund our operations 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, who is also our Principal Financial Officer (see "Changes in Internal
Control Over Financial Reporting" below), 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/Principal Financial Officer, has 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/Principal Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
Our management, including our Chief Executive Officer/Principal 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
On August 12, 2008, the Company gave notice to our Chief Financial
Officer, Mr. Ian K. Whitehead, that his employment agreement would end on June
30, 2009. Subsequent to Mr. Whitehead's departure on June 30, 2009, the internal
control procedures previously performed by Mr. Whitehead were transferred to our
Executive Chairman and to our Company Secretary. On August 12, 2009, Mr. Arthur
I. Trueger, our Executive Chairman, was appointed by the Company's board of
directors as the Company's Principal Financial Officer.
There were no changes in our internal controls over financial reporting
that occurred during the quarter ended September 30, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 31, 2009, we held our annual general meeting of the shareholders
where the following matters were submitted to a vote and approved:
(1) To receive the report of the directors and the financial statements
included in the Company's Annual Report to Shareholders for the
year ended December 31, 2008, together with the report of BDO Stoy
Hayward LLP, Company's independent auditors; votes received for:
33,094,450, against: 1,269,750. There were 14,080 abstentions.
(2) For the re-election of one director, Harold E. Hughes, Jr.: votes
received for: 33,025,421, against: 1,334,379. There were 18,480
abstentions. Directors whose term of office continued, and who were
not up for re-election at this annual general meeting, include Mr.
Arthur I. Trueger, Mr. Victor A. Hebert and The Viscount Trenchard.
(3) To re-appoint BDO Stoy Hayward LLP as the Company's independent
auditors for purposes of the Company's primary listing on the
London Stock Exchange and BDO Seidman, LLP as the Company's
independent registered public accounting firm for purposes of the
Company's listing in the U.S., and to authorize the directors to
fix their remuneration; votes received for: 33,073,607, against:
1,289,833. There were 14,840 abstentions.
Item 5. OTHER INFORMATION
As disclosed in Item 5 "Other Information" in our Form 10-Q for the
quarter ended June 30, 2008 filed with the SEC on August 14, 2008, the Company
gave notice on August 12, 2008 to Mr. Ian K. Whitehead, Chief Financial Officer,
that his employment agreement would end on June 30, 2009.
Subsequent to Mr. Whitehead's departure on June 30, 2009, the Company's
board of directors on August 12, 2009, appointed Mr. Arthur I. Trueger as the
Company's Principal Financial Officer. Background information on Mr. Trueger may
be found in the Company's Proxy Statement filed with the SEC on April 29, 2009.
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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 Principal 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 Principal 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: November 16, 2009 By: /s/ Arthur I. Trueger
Arthur I. Trueger
Executive Chairman and
Principal Financial Officer
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