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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
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
London Pacific Group Limited
(Exact name of registrant as specified in its charter)
______________________
Jersey, Channel Islands Not applicable
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
Minden House, 6 Minden Place
St. Helier, Jersey JE2 4WQ
Channel Islands
(Address of principal executive offices, including Zip Code)
011 44 (1534) 607700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange on
Title of each class which registered
American Depositary Shares, each representing Over-the-Counter Bulletin Board
ten Ordinary Shares of $0.05 par value per share
Ordinary Shares of $0.05 par value per share Over-the-Counter Bulletin Board*
*Not for trading, but only in connection with the registration of American
Depositary Shares, pursuant to the requirements of the Securities and Exchange
Commission.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ |X|] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ |X| ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [ |X|].
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the closing sale price of the Ordinary Shares on June
28, 2002 as reported on the London Stock Exchange (using an exchange rate of
(pound)1.00 = $1.52) was $11,376,945. Ordinary Shares held by each current
executive officer and director and by each person who is known by the registrant
to own 5% or more of the outstanding Ordinary Shares have been excluded from
this computation in that such persons may be deemed to be affiliates of the
registrant. This determination is not necessarily conclusive that these persons
are affiliates of the registrant.
As of February 28, 2003, the registrant had outstanding 64,439,073
Ordinary Shares, $0.05 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive proxy statement for its Annual General
Meeting of Shareholders to be held on June 12, 2003, is incorporated by
reference in Part III of this Form 10-K.
TABLE OF CONTENTS
PART I Page
Item 1. Business ........................................................ 1
Item 2. Properties ...................................................... 10
Item 3. Legal Proceedings ............................................... 10
Item 4. Submission of Matters to a Vote of Security Holders ............. 10
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ......................................... 10
Item 6. Selected Financial Data ....................................... 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................... 16
Item 7A. Quantitative and Qualitative Disclosures about Market Risk .... 34
Item 8. Financial Statements and Supplementary Data ................... 36
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ......................... 85
PART III
Item 10. Directors and Executive Officers of the Registrant ............ 85
Item 11. Executive Compensation ........................................ 85
Item 12. Security Ownership of Certain Beneficial Owners
and Management .............................................. 85
Item 13. Certain Relationships and Related Transactions ................ 86
PART IV
Item 14. Controls and Procedures ....................................... 87
Item 15. Exhibits, Financial Statement Schedules and
Reports on Form 8-K ........................................... 87
Financial Statement Schedules ............................................ 91
Signatures ............................................................... 97
Certifications ........................................................... 98
Exhibit Index .................................. ......................... 100
As used herein, the terms "registrant," "Company," "we," "us" and "our"
refer to London Pacific Group Limited. Except as the context otherwise requires,
the term "Group" refers collectively to the registrant and its subsidiaries.
Forward-Looking Statements and Factors That May Affect Future Results
Statements contained in this Annual Report on Form 10-K that are not
historical facts, including, but not limited to, statements found in Item 1
"Business," Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Item 7A "Quantitative and Qualitative Disclosures
About Market Risk," are forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Such forward-looking statements are based on current expectations, estimates,
forecasts and projections about the industries in which we operate, management's
current beliefs and assumptions made by management. Words such as "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates," "goals,"
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions that are
difficult to predict. Future outcomes and results may differ materially from
what is expressed or forecast in such forward-looking statements. We undertake
no obligation to update any forward-looking statements, whether as a result of
new information, future developments or otherwise.
PART I
Item 1. BUSINESS
OVERVIEW
We are based in Jersey, Channel Islands, and are a diversified
international financial services company. Our operating subsidiaries gather
assets through distribution networks, primarily in the U.S. Assets under the
Group's management, consulting or administration as of December 31, 2002 totaled
approximately $3.2 billion.
We evolved from a financial consulting business, The Berkeley Consulting
Group, formed in 1977. That business focused on financial consulting services
and venture capital finance for U.S. high technology companies from non-U.S.
institutional financing sources. The Company (originally named Berkeley
Technology Limited) was incorporated in 1985 in Jersey, Channel Islands. We
obtained a listing on the London Stock Exchange in that same year and our
Ordinary Shares currently trade under the symbol LPG. Since 1985, we grew with
the establishment of life insurance and annuity businesses in both the U.S. and
Jersey, and through acquisitions in the financial advisory services and asset
management areas. In 2002, we lost management control of the U.S. life insurance
business due to the dilution in the level of the life insurance company's
capital arising from bond and equity losses in poor market conditions.
American Depositary Receipts ("ADRs") representing our Ordinary Shares
began trading in the U.S. market in 1992. The Company obtained a listing on The
Nasdaq Stock MarketSM in 1993 and in November 1999 migrated to the New York
Stock Exchange ("NYSE") where its ADRs were traded under the symbol LDP. During
2002, the Company's ADR price fell below the minimum required by the NYSE;
consequently, the ADRs were withdrawn from listing and registration on the NYSE.
The Company's shares currently trade on the Over-the-Counter ("OTC") Bulletin
Board under the symbol LDPGY.PK.
During the first quarter of 2000, we completed a four-for-one split of
our ADRs. Effective from the close of business on March 23, 2000, each American
Depositary Share ("ADS"), represented by an ADR, equaled one Ordinary Share.
During the second quarter of 2002, we completed a one-for-ten reverse split of
our ADRs. Effective from the opening of business on June 24, 2002, each ADS
represents ten Ordinary Shares.
We currently have offices in Jersey (Channel Islands) and California.
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BUSINESS SEGMENTS
We have four business segments that we operate through our subsidiaries:
life insurance and annuities, financial advisory services, asset management and
venture capital management. The Group's principal operating subsidiaries, by
business segment and location, are set forth below:
Principal Subsidiaries Business Segment Location
- ------------------------------------------- ---------------------------- --------------------------
London Pacific Assurance Limited Life insurance and annuities Jersey, Channel Islands
London Pacific Advisors Financial advisory services Sacramento
Berkeley Capital Management Asset management San Francisco
Berkeley International Capital Corporation Venture capital management San Francisco
Berkeley International Capital Limited Venture capital management Guernsey, Channel Islands
On March 10, 2003, we announced that a definitive agreement had been
signed to sell substantially all of the business and operations of Berkeley
Capital Management ("BCM") to a company majority-owned by funds under the
management of Putnam Lovell NBF Private Equity.
See Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Results of Operations by Business Segment" and Note
22 to the Consolidated Financial Statements in Item 8 of this Form 10-K for a
summary of the Group's financial information by business segment and
geographical location.
Life Insurance and Annuities
Our U.S. life insurance company, London Pacific Life & Annuity Company
("LPLA"), was established in 1989 and provided tax advantaged annuity products.
By the end of 2001, LPLA grew to approximately $2.3 billion in assets; however,
during 2002, the life insurance and annuities segment suffered from the adverse
conditions in the bond and equity markets. On July 2, 2002, we announced that
further declines in the value of LPLA's investment portfolio, due to persistent
negative events in the equity and bond markets, continued to erode significantly
the statutory capital of LPLA and that we had been unsuccessful in concluding a
transaction to enhance the capital of LPLA. Subsequently, LPLA was placed under
regulatory control and rehabilitation based on LPLA's statutory capital and
surplus as of June 30, 2002. On August 6, 2002, on petition of the Commissioner
of Insurance of the State of North Carolina (the "Commissioner") with the
consent of LPLA and unanimous approval of its board of directors, the Superior
Court of Wake County in the State of North Carolina ordered the Commissioner to
take possession and control of all of the property, books and accounts,
documents and other records of LPLA. Based on this court order, we no longer
exercise control over LPLA. As a result of this event, we deconsolidated LPLA
and recorded a charge to earnings in 2002 of approximately $38.5 million for
losses resulting from the disposition of LPLA.
London Pacific Assurance Limited
Formed in 1999, our Jersey, Channel Islands insurance subsidiary, London
Pacific Assurance Limited ("LPAL"), has principally been engaged in marketing
and servicing investment oriented insurance products. LPAL sold Sterling, U.S.
dollar and Euro guaranteed return bonds in its home market of Jersey, Channel
Islands, and in the UK, Guernsey, Isle of Man and other permitted jurisdictions.
The products guarantee both capital and yield for the duration of the investment
period, which are typically three or five years. From LPAL's start of operations
in the first quarter of 2000 through the end of 2002, LPAL generated premiums
totaling $135.0 million. LPAL generated sales directly to the public and through
financial intermediaries in the Channel Islands, U.K., Isle of Man and other
international locations.
On July 2, 2002, we announced that LPAL would discontinue writing new
policies immediately. The decision to discontinue the issuance of policies was
made to avoid the increased capital requirements created by additional
policyholder liabilities. Subsequent to this announcement and other
announcements relating to the Group and LPLA, LPAL policy surrenders increased
substantially. The number of policyholders fell from
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2,603 at June 30, 2002 to 925 at December 31, 2002. The primary financial impact
of the high level of surrenders has been the reduction in the level of capital
required to support the policyholder liabilities.
LPAL has over 200 sales agreements in place with financial
intermediaries, giving the company access to over 9,000 independent financial
advisers ("IFAs"). However, if LPAL's management decides to sell policies in the
future, it is not clear how many IFAs in the network will sell LPAL policies
again due to the negative announcements regarding LPLA in the U.S. Inevitably,
the high level of surrenders and the discontinuation of policy issuances will
also have a negative impact on this segment. Policy administration continues to
be handled for a fee by LPLA in Raleigh, North Carolina.
Investment Portfolio
In turbulent market conditions, LPAL's portfolio strategy has sought to
match the level of policyholder liabilities with corporate bonds and cash. At
December 31, 2002, policyholder liabilities amounted to $35.4 million and the
market value of LPAL's corporate bonds, cash, accrued interest and amounts due
from brokers amounted to $35.4 million. In addition, LPAL's portfolio included
listed equities valued at $8.9 million and private equities valued at $7.2
million at December 31, 2002.
See Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Life Insurance and Annuities" for additional
information on LPAL's investment portfolio and its effect on the profitability
of the insurance segment.
Competition
LPAL operates in a highly competitive environment. The industry consists
of a large number of companies, many of which have greater financial resources,
more diversified product lines and larger staffs than those of LPAL. An
expanding number of other financial services companies also market insurance
products or offer competing products. Competition is based on a number of
factors, including product pricing, service provided to distributors and
policyholders, and ratings.
We believe LPAL could compete again in the future but its distribution
capability may be significantly weakened due to the ongoing discontinuation of
sales activity, as well as the negative publicity associated with the loss of
management control of LPLA. LPAL has had little pro-active contact with sales
agents since the decision to discontinue issuing policies.
Financial Advisory Services
London Pacific Advisors
In September 1996, we completed the acquisition of London Pacific
Advisory Services, Inc. ("LPAS") (formerly Select Advisors, Inc.), a registered
investment adviser, London Pacific Securities, Inc. ("LPS") (formerly Select
Capital Corporation), a registered broker-dealer, and Advisors Insurance
Services of Texas ("AIST"), an insurance agency. LPAS, LPS and AIST are
collectively known as London Pacific Advisors ("LPA"). LPA is located in
Sacramento, California. The total value of assets under LPA management,
consulting or administration as of December 31, 2002 was $2.2 billion.
LPA changed its business strategy in 2000. The LPA business previously
focused on providing back office services to independent financial advisors (and
small groups of advisors). In 2000, LPA expanded its focus considerably to
include large institutional clients and to encompass a full range of web based
front office and back office services. LPA has branded this new package of
services as myOfficeOnline,(SM) and it now delivers these services primarily
over the Internet, or through intranets maintained by institutional clients. We
believe that the change in LPA's strategy will allow LPA to increase its
revenues and greatly strengthen its competitive position.
LPA has partnerships with or provides services to several prominent
institutions including First Mercantile Trust Co., H&R Block Financial Advisors,
Harris Investor Services, ORBA(R) Financial Management,
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SunGard Wealth Management Services, Union Planters Investment Advisors and Wells
Fargo & Co. LPA has also developed a relationship with and is in the process of
rolling out a platform to Lincoln Financial Advisors.
Products, Services and Revenues
LPA provides a comprehensive menu of services to financial institutions
and investment advisors, with an emphasis on web based technologies, investment
consulting and back office services. LPA's products and services are used
primarily to research, create, manage and administer managed accounts comprised
of separate account managers, mutual funds and exchange traded funds. The term
"managed account" generally denotes an investment advisory program where the
client pays one asset based fee for a package of services that includes some or
all of the following: money management, asset allocation, trading, custody,
clearing and back office services. This segment of the investment management
industry is experiencing rapid and accelerating growth, as investors move away
from mutual funds, which lack the flexibility of managed accounts and often
carry higher fees and tax costs. To date, all of LPA's clients are U.S. based,
but the managed account business is gaining momentum outside of the U.S., and
LPA is positioned to address these developing markets.
LPA offers a full complement of services, including portfolio accounting,
invoicing and performance reporting, to the managed account industry. The open,
"menu driven" architecture of its software systems allows a client to select the
specific capabilities it desires to utilize on the platform, and then to
integrate those capabilities with its own, and third party, functionalities. The
result is a customized, private labeled solution to maximize each client's brand
awareness.
LPA's four principal revenue sources are: (i) asset management and
consulting fees generated under contracts providing for fees calculated as a
percentage of assets under management or consulting by its financial advisors
and institutional clients; (ii) back office fees and web platform fees generated
under contracts providing for fees calculated as a percentage of assets under
management or administration by its clients; (iii) commissions received from the
sale by advisors of insurance products, including annuities and life insurance;
and (iv) brokerage fees received on trading activity handled through LPA's
trading desk or via business placed directly with investment companies. The
latter two sources of revenues are generated by LPA's broker-dealer subsidiary,
London Pacific Securities, Inc.
A portion of LPA's revenues is paid out as commissions to its affiliated
advisors. The percentage payouts apply only to business generated by those
advisors, and the percentages vary based on the source of the revenue and the
contractual relationship with the advisor.
Net asset management and consulting fees decreased to $4.4 million in
2002 from $4.7 million in 2001. These fees contributed approximately 71%, 72%,
and 65% to net revenues (i.e., gross revenues less commissions) for the years
ended December 31, 2002, 2001 and 2000, respectively. The composition of these
fees is changing as new institutional client fees are realized and older back
office fee contracts reach maturity. The overall decrease in fees for 2002 was a
result of the significant decline in market values of the assets of LPA's
financial advisors upon which the fees are based, offset by growth in the assets
and net revenues of LPA's institutional clients.
Net commissions received from the sale by advisors of insurance products
contributed approximately 4%, 3% and 5% to net revenues for 2002, 2001 and 2000,
respectively, while net brokerage fees contributed approximately 16%, 17% and
22% to net revenues for 2002, 2001 and 2000, respectively.
When financial advisors affiliate with LPA, they generally transfer their
clients' assets to LPA's registered investment adviser and broker-dealer. By
themselves, such asset transfers may be a significant source of growth for LPA.
In addition, once the financial advisor joins LPA, new assets from the sale of
fee based services and commission products can be invested in LPA services or
processed by LPA companies. Also, LPA achieves growth from existing clients in
the form of new contributions, market appreciation and reinvested income.
4
A second source of growth for LPA is its focus on adding large financial
institutions to its client base. In the typical scenario, LPA offers its web
based consulting, administration and reporting services to the institution and
to its financial advisor employees. LPA's fees for these back office services
are tied to the assets under management in the institution's program and are at
lower overall rates than full managed account services. LPA's revenues increase
along with the growth of those program assets. Institutional net revenues, a
component of net asset management and consulting revenues, increased in 2002 to
$2.7 million from $2.1 million in 2001. These net revenues represented
approximately 44%, 32% and 21% of total net revenues for the years ended
December 31, 2002, 2001 and 2000, respectively.
Intellectual Property
LPA currently has one trademark registered with the U.S. Patent and
Trademark Office. This trademark is for LPA's flagship asset management product,
Global Leaders(R) and was registered on August 3, 1999. The registration has an
initial ten year "in force" period, unless terminated earlier as provided by
law, and is subject to unlimited renewals. In August 2000, LPA applied for a
trademark registration for myOfficeOnline,(SM) the name given to LPA's web based
services package. "MyOfficeOnline.com" is also the domain name for LPA's
website. This trademark application remains outstanding, pending resolution of
an alleged potential conflict with a trademark held by another company for a
different package of computer based products and services. LPA believes that the
existence of this alleged potential conflict with the other trademark should not
prevent the registration of LPA's "myOfficeOnline" mark, as the products and
services identified by LPA's mark differ substantially from the products and
services identified by the other mark. However, there can be no assurances that
LPA will be able successfully to register its "myOfficeOnline" mark, and no
assurance can be given that LPA will be able successfully to enforce or protect
its rights under the myOfficeOnline(SM) mark in the event it is subject to third
party infringement claims.
Although we consider both the Global Leaders(R) and the
myOfficeOnline(SM) marks to be important identifiers of LPA's products, we do
not consider either of these marks to be material to our business.
Competition
LPA operates in a highly competitive industry. Competitors include other
investment management firms, broker-dealers, commercial banks, trust companies,
insurance companies, financial advisory firms, application software and service
providers in the financial services sector, and mutual funds. Many of LPA's
competitors operate across all of LPA's markets, offer a full range of products
or financial services, and have greater financial capacity and other resources.
We believe that the considerable experience and past success of LPA's
investment, consulting and technical personnel, its growing base of prestigious
clients, successful performance for those clients and its proprietary systems
enable LPA to compete within the markets in which it operates.
Asset Management
BCM and Berkeley International Limited ("BIL") are our asset management
companies. While BCM offers its services to third parties and Group affiliates,
BIL is currently inactive.
On March 10, 2003, we announced that a definitive agreement had been
signed to sell substantially all of the business and operations of BCM to a
company majority-owned by funds under the management of Putnam Lovell NBF
Private Equity. The agreement is subject to certain conditions, including
receipt of sufficient consents from clients of BCM to the assignment of their
investment management contracts to the acquiror. The purchase price consists of
$7.75 million in cash to be paid at closing subject to certain adjustments; and
a further $1.0 million cash installment to be paid on December 31, 2003 subject
to certain adjustments. In addition, up to $1.25 million of earn-out payments
will be paid by the buyer to the Group ratably over the four quarters of 2004 if
revenues received in 2003 from a new product planned for launch by BCM in 2003
exceed certain defined targets. The definitive agreement is binding on both
companies and is subject to regulatory approvals and other conditions. As of
December 31, 2002, BCM's assets under management were approximately $1.2
billion, including approximately $0.2 billion of assets under a subadvisory
agreement with LPA.
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Berkeley Capital Management (See the immediately preceding paragraph regarding
the definitive agreement to sell BCM)
Established in 1972, BCM is a San Francisco based investment manager and
is our primary asset management subsidiary. BCM manages equity, balanced and
bond accounts for institutional clients and for the wrap fee programs of major
brokerage houses. Its investment approach involves strong fundamental research
and is led by its senior portfolio managers, who have worked together at BCM
since 1975. BCM derives revenue from the management of public equity and fixed
income securities. The level of the bond and stock markets affects BCM's
revenues, as BCM is generally compensated for its services with fees calculated
as percentages of assets under management.
BCM has two principal equity products and a fixed income product. The
Growth Equity style focuses on selecting companies with strong earnings growth
potential. The median market capitalization of the portfolio is greater than
that of the S&P 500. The Dividend Equity style (formerly named the Income Equity
style) focuses on companies from the S&P 500 universe with high relative yields
and is designed to produce superior returns with below average volatility. Both
investment styles utilize bottom-up approaches and disciplined buy and sell
processes. BCM's fixed income style seeks out the most attractive relative
values in the marketplace. Risk levels are set in conjunction with client
objectives and value is added around the benchmark by trading into those areas
that BCM believes have the best relative values.
BCM also provides investment management services to institutional
clients, which include pension plans, employee benefit plans, trusts,
foundations and corporations, as well as to individual clients. BCM markets
these services primarily through financial consultants, plan sponsors and
brokerage firms. Most new business over the past three years has come from
managed account programs.
The bond portfolio of our insurance subsidiary, LPAL, is managed by BCM's
professional fixed income managers and utilizes a range of fixed income
investments, including investment grade and high-yield corporate bonds.
BCM's principal revenue source is derived from the management of equity
assets for individuals and institutions on a nationwide basis and consists of
management fees which are calculated based upon the dollar value of assets
managed. Additional fees, representing 9% and 29% of BCM's total fees during
2002 and 2001, respectively, were received from the Group's insurance
subsidiaries (LPLA and LPAL), again based on a percentage of assets under
management. The arrangement with LPLA was terminated effective October 31, 2002.
Fees of $0.4 million and $0.8 million were received by BCM from LPLA during 2002
and 2001, respectively.
BCM has separately managed account marketing agreements with over 20
firms, and assets managed under these agreements represent the majority of BCM's
assets under management for unaffiliated parties. Some of these agreements have
been in place for more than ten years. Either party may terminate these
agreements at will, though none of these contracts has ever been terminated by
the other party at any time during the past ten years. BCM's largest customers
are Morgan Stanley and PaineWebber. During 2002, fees from these two customers
together represented more than 66% of BCM's revenues.
BCM is actively seeking to broaden its product array with firms with
which it has existing relationships. Competition for positions in these programs
is becoming increasingly fierce, enhancing the value of BCM's incumbent status.
Intellectual Property
We believe that the name and reputation of Berkeley Capital Management is
a material asset. BCM registered with the U.S. Patent and Trademark Office a
trademark for financial management and mutual fund investment (Berkeley Capital
Management) on June 15, 1999. The registration has an initial ten year "in
force" period, unless terminated earlier as provided by law.
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Berkeley International Limited
BIL is located in Jersey, Channel Islands. Prior to the loss of control
of LPLA, BIL managed the listed equity securities in LPLA's investment
portfolio. BIL is currently inactive.
Competition
Numerous competitors offer asset management services. Within each
brokerage firm managed account program, there are dozens of competitors and many
more potential competitors. BCM competes based upon performance, service and
marketing. Price is set by market conditions and is generally the same for all
investment managers with managed account agreements with each brokerage firm.
There are no dominant competitors in the managed account marketplace because
brokerage firms seek to limit the total client assets with any manager and
because performance records tend to vary from year to year. In relation to
direct institutional and individual client relationships, BCM competes based on
the same principal factors and price may be a secondary factor. There are,
however, other firms with significantly greater assets under management than BCM
in each category in which it competes. In addition to the above, there is
intense competition within the securities industry with respect to obtaining and
retaining the services of investment professionals.
Venture Capital Management
Berkeley International Capital Corporation ("BICC") and Berkeley
International Capital Limited ("BICL") comprise the Group's venture capital
management business. In recent years, our venture capital subsidiaries have
focused primarily on U.S. high technology companies, with investments generally
ranging from $5 million to $25 million.
Berkeley International Capital Corporation
BICC, based in San Francisco, arranges private equity placements into
rapidly growing technology companies. Placements are typically arranged in later
stage technology companies, which are near alpha test of their product and need
to scale up their engineering, marketing and sales infrastructure. Within this
strategy, BICC has been able to identify many promising young technology
companies that have grown in prominence in their fields and gone on to
successful public offerings or acquisition transactions.
Over the past 23 years, BICC arranged over $1.9 billion of placements in
the private capital markets on behalf of Group companies and clients. Many of
the companies are headquartered in close proximity to BICC's offices which allow
for easier access to the companies' management. Most of these companies
specialize in "business-to-business" Internet technologies, telecommunications
(both central office and consumer premises), data communications, software,
semiconductors and knowledge learning. These placements included investments in
America Online, Oracle Corporation, Cadence Design Systems, Inc., Cypress
Semiconductor, Inc., Packeteer, Inc. and New Focus, Inc.
Placement activity was reduced significantly in 2002 due to poor market
conditions and the loss of management control of LPLA. In general, institutional
investment demand for technology companies has weakened considerably, but we
believe interest in high growth companies continues particularly where there is
a potential strategic relationship.
The private technology investments arranged by BICC and currently held by
LPAL are Agility Communications, Inc., Alacritech, Inc. and Ceon Corporation.
Due to the loss of control of LPLA, BICC will no longer receive fees from
LPLA. Fees earned by BICC from LPLA during 2002 and 2001 were $2.9 million and
$9.9 million, respectively.
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Berkeley International Capital Limited
BICL, formed in 1988 and based in Guernsey, Channel Islands, takes
principal positions in connection with private equity transactions arranged by
its sister company, BICC. These private equity positions may become listed
equity securities pursuant to initial public offerings or in connection with the
acquisition of the private issuing company by a listed company. As of December
31, 2002, BICL held $7.6 million of such positions in listed equity securities.
Competition
The Group's venture capital management business faces competition
primarily from commercial banks, investment banks, venture capital firms and
insurance companies, many of which have substantially greater financial
resources than the Group. The marketplace for venture capital is highly
competitive, and demand for financing is also influenced by economic and stock
market conditions. The pool of capital seeking opportunities to invest in later
stage technology companies contracted further in 2002 but we believe demand
continues for high value technology companies.
REGULATION
Life Insurance and Annuities - London Pacific Assurance Limited and London
Pacific Life & Annuity Company
LPAL is regulated by the Jersey Financial Services Commission ("JFSC").
Under Article 6 of the Insurance Business (Jersey) Law 1996, LPAL is permitted
to conduct long-term insurance business. LPAL is required to submit annual
audited financial statements (prepared under U.S. GAAP as permitted by
regulation), and an audited annual filing to the JFSC in the format consistent
with that required by the Insurance Directorate of HM Treasury in the United
Kingdom. The annual filing submitted by LPAL must be accompanied by a
Certificate from the Appointed Actuary that based on sufficiently prudent
assumptions, assets are sufficient to cover all liabilities. The annual filing
contains a report from the Appointed Actuary on the matching of investments to
liabilities.
The JFSC sets out the conditions with which LPAL must comply and
determines the reporting requirements and the frequency of reporting. These
conditions include: (i) LPAL must hold, at all times, approved assets at least
equal to the long-term insurance fund plus the required minimum solvency margin,
(ii) the margin of solvency must be the greater of (pound)50,000 or 2.5% of the
value of the long-term business fund, (iii) a maximum of 20% of the approved
assets necessary to cover the long-term insurance fund and the required minimum
solvency margin may be held in private equity investments, and (iv) assets equal
to not less than 90% of liabilities must be placed with approved independent
custodians. As of December 31, 2002, LPAL met all of these conditions.
LPAL is also required under the insurance laws to appoint an actuary. The
actuary must be qualified as defined under the laws and is required to supervise
the long-term insurance fund. No transfers, except in satisfaction of long-term
insurance business liabilities, including dividends, are permitted from the
long-term insurance fund without written consent from the actuary.
LPLA, which was deconsolidated effective July 1, 2002, is subject to
regulation and supervision by the insurance regulatory agencies of the U.S.
states in which it transacts business. State laws generally establish
supervisory agencies with broad regulatory authority, including the power to:
(i) grant and revoke business licenses, (ii) regulate and supervise trade
practices and market conduct, (iii) establish guaranty associations, (iv)
license agents, (v) approve policy forms, (vi) establish reserve requirements,
(vii) prescribe the form and content of required financial statements and
reports, (viii) determine the reasonableness and adequacy of statutory capital
and surplus, (ix) regulate the type and amount of permitted investments, and (x)
limit the amount of dividends that may be paid without obtaining regulatory
approval.
During 2002, LPLA was placed under regulatory control and rehabilitation
due to the erosion of its statutory capital. On August 6, 2002, on petition of
the Commissioner of Insurance of the State of North
8
Carolina, with the consent of LPLA and unanimous approval of its board of
directors, the Superior Court of Wake County in the State of North Carolina
ordered the Commissioner to take possession and control of all the property,
books and accounts, documents and other records of LPLA.
Other Business Segments
Our U.S. investment adviser subsidiaries, London Pacific Advisory
Services, Inc. and Berkeley Capital Management, are registered as investment
advisers under the Investment Advisers Act of 1940, as amended (the "Advisers
Act"). Because each of these subsidiaries has $25 million or more of assets
under management, each is required to register with the U.S. Securities and
Exchange Commission ("SEC"). The Advisers Act imposes detailed regulatory
requirements on the activities of SEC registered investment advisers, including,
but not limited to: contents of advisory contracts, recordkeeping, fee
structures, performance advertising, fiduciary duty to clients and custody of
client assets. Additionally, SEC registered investment advisers are subject to
state statutes regulating fraudulent activity in all U.S. states in which they
conduct business.
Our investment adviser subsidiaries provide investment management
services to U.S. retirement plan accounts. Consequently, they are required to
follow the provisions of the Employee Retirement Income Security Act of 1974
("ERISA"), in addition to the provisions of the Advisers Act. ERISA sets forth
specific rules governing the conduct of ERISA plan fiduciaries, including but
not limited to: use of soft dollars, proxy voting, bonding requirements, tax
considerations, performance fees, agency and principal transactions, and
solicitation fees. ERISA falls under the governing authority of the SEC, the
U.S. Department of Labor and the U.S. Internal Revenue Service.
Our broker-dealer subsidiary, London Pacific Securities, Inc., negotiates
security transactions on behalf of its clients through registered affiliates in
all 50 U.S. states and clears all transactions on a fully disclosed basis
through two clearing broker-dealers which maintain the customer accounts. LPS is
registered under the Securities Exchange Act of 1934, as amended ("Exchange
Act") and is subject to regulation by the SEC. The Exchange Act and related
rules generally regulate the conduct of business and the financial condition of
registered broker-dealers. LPS is a member of the National Association of
Securities Dealers, Inc. ("NASD"), a self-regulatory organization that oversees
the activities of registered broker-dealers. The NASD requires compliance with
its membership, registration, conduct and marketplace rules, which govern, among
other things, the registration of personnel, finance and operations,
recommendations to customers, sales practices, underwriting of securities and
supervisory responsibilities.
Group
We employ compliance officers responsible for managing our subsidiaries'
compliance with applicable regulatory requirements. Although the scope of
regulation and form of supervision to which our subsidiaries are subject, as
described above, may vary from jurisdiction to jurisdiction, the applicable laws
and regulations often are complex and generally grant broad discretion to
supervisory authorities in adopting regulations and supervising regulated
activities. Our continuing ability to engage in the life insurance and
annuities, financial advisory services, asset management and venture capital
management businesses in the jurisdictions in which our subsidiaries currently
operate is dependent upon its compliance with the rules and regulations
promulgated from time to time by the appropriate authorities in each of these
jurisdictions. The burden of such regulation weighs equally upon all companies
carrying on activities similar to those of our subsidiaries, and we do not
consider such regulations to adversely affect the competitive position of our
subsidiaries.
EMPLOYEES
As of December 31, 2002, the Group had 106 employees. The breakdown by
business segment was as follows: financial advisory services, 76; asset
management, 18; corporate, 5; venture capital management, 4; and life insurance
and annuities, 3. None of the Group's employees are covered by a collective
bargaining agreement and the Group has not experienced any work stoppages.
9
Item 2. PROPERTIES
We operate from three offices located in Jersey (Channel Islands), San
Francisco and Sacramento, currently consisting of approximately 34,000 square
feet of space in the aggregate. All offices are leased. Approximately 1,000
square feet is leased in Jersey, under a lease expiring in 2010, pertaining to
our life insurance and annuities segment. Approximately 17,000 square feet is
leased in Sacramento, under a lease expiring in 2008, pertaining to our
financial advisory services segment. Under a lease expiring in 2004,
approximately 11,000 square feet is leased in San Francisco of which 60%
pertains to our asset management segment and 40% to our venture capital
management segment. Approximately 5,000 square feet is leased for corporate
activities in Jersey and San Francisco, under leases expiring in 2010 and 2004,
respectively. We believe that existing facilities are suitable and adequate for
the conduct of our business. See Note 15 to the Consolidated Financial
Statements in Item 8 of Part II for further information regarding our leases.
Item 3. LEGAL PROCEEDINGS
On August 6, 2002, on petition of the Commissioner of Insurance of the
State of North Carolina (the "Commissioner"), with the consent of LPLA and
unanimous approval of its board of directors, the Superior Court of Wake County
in the State of North Carolina ordered the Commissioner to take possession and
control of all the property, books and accounts, documents and other records of
LPLA. LPLA and its officers, directors, agents, employees and all other persons
were enjoined from disposing of LPLA's property and from transacting LPLA's
business except with the consent of the Commissioner. The Court appointed the
Commissioner as rehabilitator of LPLA. Based on the court order, the Company no
longer exercises control over LPLA.
For further discussion, see the "Liquidity and Capital Resources" section
in Item 7 of Part II.
We are involved in various legal proceedings, including claims for
damages from clients of a nature we consider to be normal for our business. We
believe the ultimate settlement or other resolution of the claims will not
materially affect our consolidated financial position, results of operations or
cash flows.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to our shareholders during the quarter ended
December 31, 2002.
Part II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The principal trading market for our Ordinary Shares is the London Stock
Exchange ("LSE"), on which such shares have been listed since February 1985.
ADSs, each representing ten Ordinary Shares, are represented by ADRs for which
The Bank of New York is the Depositary. ADSs have been traded in the United
States from September 1992 through August 1993 on the OTC Bulletin Board, from
September 1993 through November 1999 on The Nasdaq Stock Market(SM) under the
symbol "LPGL," from November 1999 through July 3, 2002 on the NYSE under the
symbol "LDP" and since July 12, 2002 on the OTC Bulletin Board under the symbol
"LDPGY.PK." As of December 31, 2002, there were 64,439,073 Ordinary Shares
outstanding. Also as of that date, there were 1,807,742 ADSs outstanding,
representing 18,077,420 Ordinary Shares or 28.1% of our outstanding shares. ADS
holders may exercise their voting rights through the ADR Depositary.
10
In June 2002, we completed a one-for-ten reverse split of our ADSs. On
June 24, 2002, every ten of our ADSs issued and outstanding were converted and
reclassified into one post-split ADS. Consequently, effective from the opening
of business on June 24, 2002, each ADS is equal to ten Ordinary Shares.
Fractional new ADSs were sold by the Depositary Bank and paid in cash to the ADR
holders. This ADS split did not affect our Ordinary Shares listed on the LSE.
On July 3, 2002, the NYSE halted trading of our ADRs in response to the
administrative actions taken by the North Carolina Department of Insurance
relating to LPLA. On July 9, 2002, trading of the ADRs was suspended and the
securities were withdrawn from listing and registration from the NYSE. As a
result of the delisting, the liquidity of our common stock and its price have
been adversely affected. These actions may limit our ability to raise additional
capital in the future, and there is no assurance that a significant trading
market for the ADRs will develop. If an active trading market does not develop,
ADR holders may be unable to sell their ADRs.
Subsequent to the delisting, the ability of ADR holders to buy and sell
is limited to trading on the OTC Bulletin Board under the ticker symbol
LDPGY.PK. Shares traded on the OTC market generally experience lower trading
volume than those traded on the organized exchanges. The trading volume of the
ADRs has decreased substantially since the NYSE delisting and the transfer of
the ADRs to the OTC Bulletin Board.
The following table shows, for the quarters indicated, the reported
highest and lowest middle market quotations (which represent an average of bid
and asked prices) for our Ordinary Shares on the LSE, based on its Daily
Official List, and the high and low trade price information of the ADSs as
obtained from the NYSE through the second quarter of 2002 and on the OTC
Bulletin Board from the third quarter of 2002 (as restated to reflect the
one-for-ten reverse split on June 24, 2002):
LSE NYSE/OTC Bulletin Board
Pounds Per U.S. Dollars
Ordinary Share Per ADS
----------------------- -----------------------
High Low High Low
--------- --------- --------- ---------
2001:
First quarter ................................................ 8.05 3.45 120.00 44.50
Second quarter................................................ 4.73 3.08 69.00 39.00
Third quarter................................................. 4.18 1.88 59.90 25.00
Fourth quarter................................................ 2.75 1.78 43.50 25.50
2002:
First quarter ................................................ 3.08 1.93 45.50 27.50
Second quarter................................................ 1.90 0.24 30.50 3.30
Third quarter................................................. 0.25 0.02 3.16 0.20
Fourth quarter................................................ 0.13 0.05 1.75 0.50
Holders
As of February 28, 2003, we had approximately 1,752 shareholders of
record and 45 ADS holders of record. Because many Ordinary Shares and ADSs are
held by brokers and various institutions on behalf of other holders, we are
unable to estimate the total number of beneficial holders represented by these
holders of record.
Dividends
Until 2002, we paid dividends on our Ordinary Shares in every year since
we became listed on the LSE in 1985. Dividends on our Ordinary Shares were paid
twice a year. In view of our requirement to conserve cash during the current
period of market instability and in order to meet the operating needs and growth
opportunities of the business, and given undertakings made to the Bank of
Scotland in connection with our
11
loan facility not to pay dividends without their consent, our Board of Directors
suspended the 2002 interim dividend and will not recommend a final dividend for
the year 2002.
Holders of ADSs are entitled to receive dividends paid, if any, on our
Ordinary Shares through the ADR Depositary.
The table below shows the amounts of interim, final and total dividends
together with the net dividends (after 20% Jersey tax) paid on each Ordinary
Share for the last two years.
U.S. Dollars Per Ordinary Share U.S. Dollars Per ADS(1)
----------------------------------------------------------- ------------------------------
Gross Net
-------------------------- --------------------------
Interim Final Total Interim Final Total Interim Final Total
-------------------------- -------------------------- ------------------------------
2001............ $0.11 $0.05 $0.16 $0.088 $0.040 $0.128 $0.88 $0.40 $1.28
2002............ $0.00 $0.00 $0.00 $0.000 $0.000 $0.000 $0.00 $0.00 $0.00
(1) As restated to reflect the one-for-ten reverse split in June 2002.
Under current practice, holders of ADSs who are residents of the United
States for tax purposes receive the net dividend (the gross dividend less the
associated Jersey income tax). See "Taxation - Taxation of Dividends" below.
Currently, Jersey does not have exchange control restrictions on the
payment of dividends on the Ordinary Shares or on the conduct of the Group's
operations. See Note 11 to the Consolidated Financial Statements in Item 8 of
this Form 10-K for details regarding regulatory restrictions on dividends.
TAXATION
The following summary of certain Jersey and U.S. tax consequences
regarding share ownership is based on law and published practice as of February
28, 2003, and is subject to any changes in Jersey and U.S. law or published
practice or in the establishment of any double taxation convention between
Jersey and the U.S. occurring after that date. The summary is not a complete
analysis or listing of all the possible tax consequences and does not address
the tax implications for special classes of holders, such as banks, insurance
companies and dealers in securities. The summary also does not address U.S.
state income tax consequences. Owners of Ordinary Shares and ADSs should consult
their own tax advisors as to the tax consequences of such ownership.
There is no double tax treaty or similar convention between the U.S. and
Jersey. For the purposes of the U.S. Internal Revenue Code of 1986, as amended,
it is assumed that beneficial owners of ADSs, in accordance with the terms of
the Deposit Agreement, will be treated as the owners of the underlying Ordinary
Shares represented by the ADSs.
Taxation of Dividends
Dividends are declared gross in U.S. dollars. Dividends paid by us are
treated as having suffered Jersey income tax at the standard rate (currently
20%) on the gross amount thereof.
Charities, superannuation funds and certain assurance companies in the
U.K., together with individual investors who are Commonwealth citizens or
citizens of a member state of the European Community, may be entitled to a full
or partial repayment of the Jersey income tax credit suffered on distributions,
on submission of a claim to the Jersey Comptroller of Income Tax. Shareholders
who are unsure of their tax position should consult their tax advisor.
12
Generally, the net dividend paid to a holder or owner who is a U.S.
citizen, a U.S. resident, a U.S. domestic corporation or a trust or estate whose
income is subject to U.S. federal income taxation regardless of source (a "U.S.
holder") will be included in gross income and treated as foreign source dividend
income for U.S. federal income tax purposes to the extent payment is made out of
the Company's current or accumulated earnings and profits as determined under
U.S. federal income tax principles. Such dividends generally will not be
eligible for the "dividends received" deduction permitted to be taken by U.S.
corporations.
However, special rules apply for purposes of determining the dividend
income and potential foreign tax credits available to a U.S. corporation that
controls 10% or more of the Company's voting stock. Any such shareholder should
consult its tax advisor with respect to the U.S. tax treatment of its interest
in us.
Taxation of Capital Gains
Currently, there are no Jersey taxes levied on capital gains. A U.S.
holder that sells or exchanges an ADR or Ordinary Share will generally recognize
a gain or loss for U.S. federal income tax purposes, in an amount equal to the
difference between the amount realized and the holder's tax basis in either the
ADS represented by the ADR or the Ordinary Share. Such a gain or loss will
generally be a capital gain or loss if the ADR or the Ordinary Share was a
capital asset in the hands of the U.S. holder and will generally be a long-term
capital gain or loss if the ADR or Ordinary Share was held for more than one
year (including, in the case of an ADR, the period during which the Ordinary
Shares surrendered in exchange therefore were held). In general, the long-term
capital gain of a non-corporate U.S. holder is subject to a maximum tax rate of
20% (18% if the ADR or Ordinary Share is held for more than five years and was
acquired after December 31, 2000).
Backup Withholding Tax
A U.S. holder may be subject to U.S. backup withholding tax (currently at
a rate of 30%) with respect to dividends received or gross proceeds from the
sale of ADRs or Ordinary Shares unless the holder provides a taxpayer
identification number and certain certifications or otherwise establishes an
exemption from backup withholding. Certain classes of persons, such as
corporations, are exempt from backup withholding. Backup withholding is not an
additional tax; the amount withheld may be credited against the holder's U.S.
federal income tax liability, and a refund of any excess may be obtained from
the U.S. Internal Revenue Service.
Estate and Gift Tax
No death, estate, gift, inheritance or capital transfer taxes are levied
in Jersey.
Stamp Duty and Stamp Duty Reserve Tax
No U.K. stamp duty should be payable on any transfer of an Ordinary
Share, or of an ADS, provided it is executed and retained outside the U.K.
Therefore, a transfer of an ADS in the United States would not ordinarily give
rise to a U.K. stamp duty charge.
An instrument transferring Ordinary Shares, or an ADS, could be subject
to U.K. stamp duty if its execution relates to anything done or to be done in
the U.K. For example, a U.K. stamp duty may apply if such instrument is executed
in the U.K. or is brought into the U.K. after execution. If the transfer is on a
sale then the rate of stamp duty will be 0.5% of the consideration given. This
charge is rounded up to the nearest (pound)5. Gifts and other transfers which
are neither sales, nor made in contemplation of a sale, are not subject to this
charge. Instead, they will either be exempt or subject to a fixed duty of
(pound)5 per transfer.
A transfer from the Depositary to an ADS holder of the underlying
Ordinary Shares may be subject to a fixed stamp duty of (pound)5 if the
instrument of transfer relates to anything done or to be done in the U.K. For
example, a fixed stamp duty of (pound)5 may apply if such transfer is executed
in the U.K. or is to be brought into the U.K. after execution. A transfer of
Ordinary Shares from the Depositary directly to a purchaser on behalf of an
13
ADS holder may be subject to a stamp duty at a rate of 0.5% of the consideration
(rounded up to the nearest (pound)5) if execution of the instrument of transfer
relates to anything done or to be done in the U.K.; for example, if such
transfer is executed in the U.K. or is to be brought into the U.K. after
execution.
U.K. stamp duty reserve tax will not be payable on an agreement to
transfer the Ordinary Shares or ADSs.
EQUITY COMPENSATION PLANS
The following table is a summary of selected information for our equity
compensation plans as of December 31, 2002.
Number of Shares
Number of Shares to Weighted Average Remaining Available for
be Issued Upon Exercise Exercise Price of Future Issuance Under
of Outstanding Options, Outstanding Options, Equity Compensation
Warrants and Rights Warrants and Rights Plans
----------------------- -------------------- -----------------------
Equity compensation plans
approved by shareholders.............. 13,575,312(1) $3.10 (1)
Equity compensation plans not
approved by shareholders.............. 388,100(1) 3.73 (1)
----------- ------
Total................................... 13,963,412 $3.12
----------- ------
----------- ------
(1) Our equity compensation plans do not contain a limit on the number of
options that may be granted to employees. However, the plans do not allow for
the issuance of previously authorized and unissued shares to meet the
obligations of the plans upon an employee option exercise. When an option is
granted, the trust that administers the plan borrows funds from us or one of our
subsidiaries and uses those funds to purchase the number of shares underlying
the option grant. The maximum loan allowed in any given year is equal to 5% of
consolidated net assets as of the end of the previous fiscal year.
Information regarding the features of the equity compensation plan not
approved by shareholders is incorporated by reference to Note 18 to the
Consolidated Financial Statements presented in Item 8 "Financial Statements and
Supplementary Data" of this Form 10-K.
WARRANTS
On November 11, 2002, we agreed to grant 1,933,172 warrants to subscribe
for our Ordinary Shares to Bank of Scotland in connection with the extension of
our credit facility. The warrants were granted on February 14, 2003 and have an
exercise price of (pound)0.1143 (based on the average of the closing prices of
the Ordinary Shares over the trading days from November 1, 2002 through November
11, 2002), which was higher than the market price of (pound)0.09 on November 11,
2002. These warrants are exercisable at any time prior to February 14, 2010.
14
Item 6. SELECTED FINANCIAL DATA
The following is a summary of selected financial data for the Group. This
data should be read in conjunction with the audited consolidated financial
statements, and the notes thereto, presented in Item 8 "Financial Statements and
Supplementary Data" of this Form 10-K. ADS amounts have been restated to reflect
the four-for-one split in March 2000 and the one-for-ten reverse split in June
2002.
Years Ended/As of December 31,
--------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- -----------
(In thousands, except per share and ADS data)
Operating Results
Revenues from continuing operations, including net realized
and change in net unrealized investment gains and losses $ (11,879) $(168,948) $ 118,543 $ 221,386 $ 34,393
Income (loss) from continuing operations before income
taxes................................................. (58,132) (223,397) 66,196 157,909 5,049
Income tax expense (benefit) on continuing operations... 4,078 648 201 2,020 (2,787)
Income (loss) from discontinued operations.............. (151,024) (177,830) (51,186) 147,753 27,922
Income tax expense (benefit) on discontinued operations. (7,730) (57,091) (17,648) 51,766 9,302
Net income (loss)....................................... (205,504) (344,784) 32,457 251,876 26,456
Basic earnings (loss) per share:
Continuing operations................................ (1.23) (4.39) 1.30 3.13 0.15
Discontinued operations.............................. (2.82) (2.37) (0.66) 1.92 0.36
---------- ---------- ---------- ---------- ----------
Total basic earnings (loss) per share................... (4.05) (6.76) 0.64 5.05 0.51
Diluted earnings (loss) per share:
Continuing operations................................ (1.23) (4.39) 1.08 2.81 0.14
Discontinued operations.............................. (2.82) (2.37) (0.55) 1.73 0.35
---------- ---------- ---------- ---------- ----------
Total diluted earnings (loss) per share................. (4.05) (6.76) 0.53 4.54 0.49
Basic earnings (loss) per ADS:
Continuing operations................................ (12.26) (43.94) 12.99 31.25 1.50
Discontinued operations.............................. (28.23) (23.68) (6.60) 19.24 3.57
---------- ---------- ---------- ---------- ----------
Total basic earnings (loss) per ADS..................... (40.49) (67.62) 6.39 50.49 5.07
Diluted earnings (loss) per ADS:
Continuing operations................................ (12.26) (43.94) 10.87 28.12 1.46
Discontinued operations.............................. (28.23) (23.68) (5.52) 17.31 3.48
---------- ---------- ---------- ---------- ----------
Total diluted earnings (loss) per ADS................... (40.49) (67.62) 5.35 45.43 4.94
Financial Position
Cash and total investments (continuing operations)...... 70,345 262,809 456,898 357,361 191,734
Total assets............................................ 80,213 2,539,126 2,562,988 2,195,266 1,658,797
Bank debt............................................... 9,314 36,874 35,556 - -
Guarantees under bank facility.......................... 10,590 - - - -
Shareholders' equity.................................... 21,486 221,653 567,742 552,475 328,481
Book value per share*................................... 0.42 4.37 11.00 11.25 6.67
Book value per ADS*..................................... 4.23 43.68 109.98 112.52 66.70
Ordinary Share and ADS Data
Ordinary Shares outstanding as of December 31........... 64,439 64,439 64,433 64,433 64,424
Weighted average shares used in:
Basic earnings per share calculation................. 50,753 50,984 50,795 49,892 52,206
Diluted earnings per share calculation............... 50,753 50,984 60,728 55,445 53,552
Total dividends per share relating to the year (gross).. $ - $ 0.16 $ 0.29 $ 0.29 $ 0.29
Total dividends per ADS relating to the year............ $ - $ 1.28 $ 2.32 $ 2.32 $ 2.32
Market price per share on December 31................... (pound)0.055 (pound)2.60 (pound)5.53 (pound)5.59 (pound)1.87
Market price per ADS on December 31..................... $ 0.50 $ 39.60 $ 75.60 $ 90.00 $ 31.40
Market capitalization as of December 31................. $ 5,706 $ 244,611 $ 530,431 $ 583,495 $ 199,449
* Based on the net asset value of the Group after deducting the cost of the
shares held by the employee benefit trusts, and on the number of shares
outstanding excluding the shares held by the employee benefit trusts.
15
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the audited
consolidated financial statements, and the notes thereto, presented in Item 8
"Financial Statements and Supplementary Data" of this Form 10-K. The
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States. This item should also be
read in conjunction with the "Forward-Looking Statements and Factors That May
Affect Future Results" set forth below and our other filings with the SEC.
Forward-Looking Statements and Factors That May Affect Future Results
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this Form 10-K contain
forward-looking statements within the meaning of Section 21E of the Exchange
Act. Such forward-looking statements are based on current expectations,
estimates, forecasts and projections about the industries in which we operate,
management's current beliefs and assumptions made by management. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates,"
"goals," variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and assumptions that
are difficult to predict. Future outcomes and results may differ materially from
what is expressed or forecast in such forward-looking statements. We undertake
no obligation to update any forward-looking statements, whether as a result of
new information, future developments or otherwise.
Factors that could cause or contribute to deviations from the
forward-looking statements include those discussed in this section, elsewhere in
this Form 10-K and in our other filings with the SEC. The factors include, but
are not limited to, (i) the risks described in Item 7A "Quantitative and
Qualitative Disclosures About Market Risk," (ii) variations in demand for our
products and services, (iii) the success of our new products and services, (iv)
significant changes in net cash flows in or out of our businesses, (v)
fluctuations in the performance of debt and equity markets worldwide, (vi) the
enactment of adverse state, federal or foreign regulation or changes in
government policy or regulation (including accounting standards) affecting our
operations, (vii) the effect of economic conditions and interest rates in the
U.S., the U.K. or internationally, (viii) the ability of our subsidiaries to
compete in their respective businesses, (ix) our ability to attract and retain
key personnel, and (x) actions by governmental authorities that regulate our
businesses, including insurance commissions.
16
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
Income before income taxes for our reportable operating segments, based
on management's internal reporting structure, is as follows:
Years Ended December 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
(In thousands)
Income (loss) from continuing operations before income taxes
by operating segment:
Life insurance and annuities (1), (2) ................................ $ (19,637) $ (163,873) $ 183,857
Financial advisory services .......................................... (4,211) (3,638) (2,261)
Asset management (2) ................................................. 615 1,533 1,778
Venture capital management (3) ....................................... (28,149) (51,262) (110,444)
---------- ---------- ---------
(51,382) (217,240) 72,930
Reconciliation of segment amounts to consolidated amounts:
Interest income ...................................................... 549 2,004 1,574
Corporate expenses ................................................... (5,870) (5,634) (7,333)
Goodwill amortization and write-offs ................................. (396) (221) (248)
Interest expense (4) ................................................ (1,033) (2,306) (727)
---------- ---------- ---------
Consolidated income (loss) from continuing operations before
income taxes ....................................................... $ (58,132) $ (223,397) $ 66,196
---------- ---------- ----------
---------- ---------- ----------
(1) Netted against the revenues (investment income) of the life insurance and
annuities segment are management fees paid to the asset management segment of
$39,000, $47,000 and $9,000 in 2002, 2001 and 2000, respectively.
(2) Included in the revenues of the asset management segment are management fees
from the life insurance and annuities segment of $39,000, $47,000 and $9,000 in
2002, 2001 and 2000, respectively. In addition, revenues of the asset management
segment also included management fees from LPLA (discontinued operations) of
$724,000, $1,907,000 and $2,766,000 in 2002, 2001 and 2000, respectively.
(3) Included in the revenues of the venture capital management segment are
management fees from LPLA (discontinued operations) of $2,908,000, $9,924,000
and $7,474,000 in 2002, 2001 and 2000, respectively.
(4) Included in interest expense is interest paid to LPLA (discontinued
operations) of $30,000, $58,000 and $55,000 in 2002, 2001 and 2000,
respectively.
Business segment data contained in Note 22 to the Consolidated Financial
Statements in Item 8 should be read in conjunction with this discussion. A
detailed discussion of the results for each reportable segment follows.
17
Life Insurance and Annuities
Certain information regarding our life insurance and annuities segment's
results of operations (continuing operations only) is as follows:
Years Ended December 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
(In thousands)
Revenues:
Investment income..................................................... $ 6,059 $ 6,214 $ 1,957
Insurance policy charges ............................................. 1,155 (7) -
Net realized investment gains (losses) ............................... (114,325) 12,900 139,340
Change in net unrealized investment gains and losses on
trading securities.................................................. 97,762 (174,780) 44,383
---------- ---------- ----------
Total revenues and investment gains (losses) ......................... (9,349) (155,673) 185,680
Expenses:
Interest credited on insurance policyholder accounts ................. 6,031 6,314 1,201
Amortization of deferred policy acquisition costs .................... 2,952 932 115
General and administrative expenses .................................. 1,305 954 507
---------- ---------- ----------
Total expenses related to operations ................................. 10,288 8,200 1,823
---------- ---------- ----------
Income (loss) from continuing operations before income taxes ......... $ (19,637) $ (163,873) $ 183,857
---------- ---------- ----------
---------- ---------- ----------
During 2002, our life insurance and annuities segment continued to suffer
from the adverse conditions in the bond and equity markets.
During the year, our primary insurance company, LPLA, was placed under
regulatory control and rehabilitation based on LPLA's statutory capital and
surplus as of June 30, 2002. On August 6, 2002, on petition of the Commissioner
with the consent of LPLA and unanimous approval of its board of directors, the
Superior Court of Wake County in the State of North Carolina ordered the
Commissioner to take possession and control of all of the property, books and
accounts, documents and other records of LPLA. As a result of this event, we
deconsolidated LPLA and recorded a charge to earnings in 2002 of $38.5 million
for losses resulting from this disposition.
For further discussion, see the "Liquidity and Capital Resources" section
below and Note 4 "Discontinued Operations" to the Consolidated Financial
Statements in Part II, Item 8.
On July 2, 2002, we announced that further declines in the value of
LPLA's investment portfolio, due to persistent negative events in the equity and
bond markets, continued to erode significantly the statutory capital of LPLA and
that we had been unsuccessful in concluding a transaction to enhance the capital
of LPLA. As a consequence, LPLA discontinued the issuance of new policies as of
July 2, 2002. Although the statutory capital of our Jersey insurance subsidiary,
LPAL, had not been affected by the adverse equity and bond markets to the same
extent as the statutory capital of LPLA, we also announced on July 2, 2002 that
LPAL would discontinue writing new policies effective immediately. The decision
to discontinue the issuance of new policies through LPAL was made to avoid the
increased capital requirements created by additional policyholder liabilities.
Subsequent to this announcement and other announcements relating to the Group
and LPLA, LPLA policy surrenders increased substantially. Approximately 73% of
LPAL's policyholder liabilities as of December 31, 2001 had been redeemed as of
December 31, 2002.
Due to the events referred to above, LPAL plans to focus on managing the
remaining block of policyholder liabilities. There are no plans currently to
write new policies before conditions improve.
18
2002 compared to 2001
In 2002, LPAL contributed a loss before income taxes of $19.6 million to
our overall loss before income taxes, compared to a loss before income taxes of
$163.9 million in 2001. Net realized investment losses in 2002 were $114.3
million compared to net realized investment gains of $12.9 million in 2001. The
gain from the change in net unrealized investment gains and losses was $97.8
million in 2002, compared to a loss of $174.8 million in 2001. In 2002, the
spread between investment income and interest credited to policyholders
increased by $0.1 million; amortization of deferred policy acquisition costs
("DPAC") increased by $2.0 million; and general and administration expenses
increased by $0.4 million, each as compared to 2001. Policy charges in 2002
increased by $1.2 million compared to 2001.
LPAL generated $6.5 million of premiums during 2002, a decrease of $69.2
million from the premiums received by LPAL in 2001. LPAL's premium volume
continued to decline as a result of lowering interest crediting rates during the
last quarter of 2001 and the events as described above.
Interest and dividend income on investments was $6.1 million in 2002,
compared with $6.2 million in 2001. This $0.1 million decrease was due primarily
to a decline in the level of invested bonds and cash, offset by the
strengthening of sterling on the level of U.S. dollar income.
During the second half of 2002, $96.0 million of bonds and cash were used
to meet policy redemptions. Following this reduction, and further expected bond
realizations and maturities required to meet 2003 policy maturities, interest
income is expected to decline to approximately $2.0 million for 2003.
Policyholder liabilities at December 31, 2002 were $35.4 million of which
$10.6 million is scheduled to mature during 2003. These maturities are expected
to be met by a combination of cash held at the beginning of 2003 of $3.8 million
and bond maturities of approximately $13.0 million during 2003. Excess cash will
be reinvested in bonds to meet future policy redemptions and expenses as
appropriate. If there are no significant redemptions, policyholder liabilities
are projected to be approximately $25.9 million at the end of 2003. Assuming the
reinvestment of excess cash in bonds, investment income should approximately
equal the amount credited to policies during 2003. Operating expenses are
expected to be approximately $0.9 million during 2003 and investment gains on
listed equities were $1.2 million for the two months ended February 28, 2003.
Net investment losses were $16.5 million in 2002, compared to net
investment losses of $161.9 million in 2001. Net investment losses in 2002 were
comprised of net realized investment losses of $114.3 million and $97.8 million
in gains from the change in net realized gains and losses on the listed equity
securities held in the trading portfolio. The trading portfolio decreased from
$22.3 million as of December 31, 2001 to $8.9 million as of December 31, 2002.
Additions to the trading portfolio during 2002 of $5.0 million resulted from the
transfer of certain listed equity securities from the venture capital management
segment. LPAL sold certain trading positions during 2002, which resulted in net
realized losses of $102.9 million based on an aggregate original cost of $116.2
million. These disposals represented shares held in companies that had completed
initial public offerings of their securities. These realized losses were
increased by net realized losses of $2.9 million on sales of $96.9 million of
publicly traded corporate debt securities and by other-than-temporary impairment
charges on two private equity securities of $8.2 million and on one public
corporate bond of $0.3 million.
Total invested assets (defined as total assets excluding DPAC and other
assets) decreased to $51.6 million as of December 31, 2002, compared to $161.5
million as of December 31, 2001. On total average invested assets in 2002, the
average annualized net return, including both realized and unrealized investment
gains and losses, was -9.1%, compared with -78.8% in 2001.
Policy surrender charge income increased by $1.2 million in 2002 to $1.2
million, compared with a net expense of $7,000 in 2001. The increase in policy
surrenders followed the events as described above.
Interest credited on policyholder accounts decreased by $0.3 million in
2002 to $6.0 million, compared with $6.3 million in 2001. The decrease was due
primarily to the substantial increases in policyholder surrenders in the second
half of 2002. The average rate credited to policyholders was 6.1% in 2002,
compared with 6.6% in 2001.
19
Amortization of DPAC was $3.0 million in 2002, an increase of $2.0
million over 2001. This increase was due to the acceleration of DPAC
amortization to fully write-off DPAC at December 31, 2002. The reason for the
write-off is the discontinuance of new business at the start of the third
quarter of 2002 and the lack of interest spread on the remaining block of
business.
General and administrative expenses were $1.3 million in 2002, compared
with $1.0 million in 2001. This $0.3 million increase was due primarily to the
reduction in expenses deferred as policy acquisition costs and employee
severance costs.
2001 compared to 2000
In 2001, LPAL contributed a loss before income taxes of $163.9 million to
our overall loss before taxes, compared to income of $183.9 million in 2000. Net
realized investment gains in 2001 were $12.9 million, compared to $139.3 million
in 2000. The loss from the change in net unrealized investment gains and losses
was $174.8 million in 2001, compared to a net gain of $44.4 million in 2000. The
spread between investment income and interest credited to policyholder accounts
decreased by $0.9 million; amortization of DPAC increased by $0.8 million; and
general and administrative expenses increased by $0.4 million, each as compared
to 2000.
LPAL generated $75.7 million of premiums during 2001, an increase of
$22.9 million over the amount generated in 2000. The premium volume in 2001 for
LPAL reflected a full year of operations in 2001, compared to nine months in
2000. LPAL's premium volume, however, decreased during the last quarter of 2001
as a result of lowering interest crediting rates.
Interest and dividend income on investments was $6.2 million in 2001 as
compared with $2.0 million in 2000. This $4.2 million increase was primarily due
to asset growth from new business, offset by lower reinvestment rates. The
carrying value of the private equity portfolio as of December 31, 2001 was $15.2
million, compared with $153.4 million as of December 31, 2000. This decrease was
the result of net investment sales of $120.2 million and impairment adjustments
made to the carrying value of investments of $18.0 million.
Net investment losses were $161.9 million in 2001, compared to net
investment gains of $183.7 million in 2000. Net investment losses in 2001 were
comprised of net realized investment gains of $12.9 million, and a $174.8
million loss from the change in net unrealized gains and losses on the listed
equity securities held in the trading portfolio. The trading portfolio decreased
from $64.8 million as of December 31, 2000, to $22.3 million as of December 31,
2001. Additions to the trading portfolio during 2001 of $139.3 million resulted
from the $55.8 million purchase of certain listed equity securities from the
venture capital management segment, and the transfer of a $83.5 million listed
equity security from LPLA. LPAL sold certain trading positions during 2001,
which resulted in net realized gains of $36.1 million based on their aggregate
original cost of $7.0 million. These realized gains were offset by realized
losses of $23.2 million, consisting of other-than-temporary impairments on one
private technology security and one publicly traded corporate bond. All
intersegmental investment gains, other than those arising from sales to LPLA
(discontinued operations), have been eliminated in our consolidated statements
of income.
Total invested assets (defined as total assets excluding DPAC and other
assets) decreased from $295.9 million as of December 31, 2000 to $161.5 million
as of December 31, 2001, primarily due to the unrealized holding losses in the
trading securities portfolio. On total average invested assets for 2001, the
average net return, including both realized and unrealized investment gains and
losses, was -78.8%, compared with 106.1% for 2000. This decrease in average net
return resulted primarily from the net investment losses discussed above.
Interest credited on policyholder accounts increased by $5.1 million in
2001 to $6.3 million, compared with $1.2 million in 2000. The increase was
primarily due to new business growth, and the interest credited in 2001 also
reflected a full year of operations, compared to nine months in 2000. The
average rate credited to policyholders was 6.6% in 2001, compared with 6.9% in
2000.
20
Amortization of DPAC was $0.9 million in 2001, an increase of $0.8
million over 2000. This increase was primarily due to new business growth.
General and administrative expenses were $1.0 million in 2001, compared
with $0.5 million in 2000. This $0.5 million increase was primarily due to
higher staff costs with the additional headcount to support its growth, and
reflected a full year of operations in 2001, compared to nine months in 2000.
Financial Advisory Services
Certain information regarding our financial advisory services segment's
results of operations is as follows:
Years Ended December 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
(In thousands)
Gross financial advisory services fees................................ $ 16,184 $ 18,627 $ 22,952
Payouts due to independent advisors................................... (10,029) (12,039) (16,441)
---------- ---------- ----------
6,155 6,588 6,511
Operating expenses.................................................... 10,366 10,226 8,772
---------- ---------- ----------
Loss before income taxes ............................................. $ (4,211) $ (3,638) $ (2,261)
---------- ---------- ----------
---------- ---------- ----------
2002 compared to 2001
Net revenues in the financial advisory services segment decreased from
$6.6 million in 2001 to $6.2 million in 2002. Net asset management and
consulting fees decreased from the prior year as a result of an overall decrease
in assets under management upon which these fees are based, while net revenues
from brokerage and commission product sales remained constant. Assets under
management, consulting or administration decreased from $2.3 billion as of
December 31, 2001 to $2.2 billion as of December 31, 2002. The addition of
assets from new institutional clients helped to offset the decline in managed
assets resulting from continued negative market conditions. The fees associated
with these institutional back office services are at lower overall rates than
full asset management and consulting services.
Operating expenses increased to $10.4 million in 2002, compared with
$10.2 million in 2001. Before the capitalization and amortization of web
development costs, expenses totaled $10.2 million in 2002, compared with $10.5
million in 2001. Staffing reductions were made over the course of the year in
response to negative market conditions resulting in a $0.4 million decrease in
expenses. This cost savings was offset, in part, by the recognition of a $0.2
million loss on disposition of property in connection with the relocation of the
LPA offices in December 2002.
In late 1999, we decided to make the LPA business the foundation for an
Internet based initiative that could then be migrated to other vertical markets
in which the Group had expertise. This initiative aimed to deliver a full
complement of consulting and back office services to institutions and financial
advisors through the Internet.
The total investment in the Internet based project through December 31,
2002 was $3.6 million, including $0.4 million in 2002. Of this total, $2.9
million has been capitalized as software development costs and is being
amortized (as a component of operating expenses) over five years; amortization
of these costs began in May 2001. The amount amortized during 2001 and 2002 was
$0.3 million and $0.6 million, respectively.
The Internet based initiative has opened the door for marketing of
financial advisory services to institutions and large groups of advisors. To
date, service contracts have been signed with eleven major
21
institutions, and additional contracts are currently under negotiation. The
revenue impact of these contracts increased during 2002 as newly contracted
business came on line. Net asset management and consulting fees are expected to
increase significantly during the second half of 2003 as new business from
institutional clients comes onto the myOfficeOnline(SM) platform.
2001 compared to 2000
The pre-tax loss from the financial advisory services segment increased
to $3.6 million in 2001 from $2.3 million in 2000, primarily due to an increase
in operating expenses, partially offset by an increase in net revenues resulting
from new client contracts.
Net revenues increased from $6.5 million in 2000 to $6.6 million in 2001.
Net asset management and consulting fees increased from the prior year as a
result of a shift toward higher margin managed and consulting accounts, while
net revenues from brokerage and commission product sales decreased due to a
change in focus toward fee based (rather than commission based) services and the
difficult market conditions prevailing during 2001. Assets under management,
consulting or administration increased from $1.5 billion as of December 31, 2000
to $2.3 billion as of December 31, 2001. The addition of assets from new
institutional clients helped to offset the decline in managed assets resulting
from the negative market conditions.
Operating expenses increased to $10.2 million in 2001, compared with $8.8
million in 2000. Before the capitalization and amortization of web development
costs, expenses totaled $10.5 million in 2001, compared with $10.8 million in
2000. The mix of expenses changed in 2001 as outside consulting costs of the web
development project were replaced by additional staff costs. Staffing additions
were made over the course of 2001 to support the institutional and Internet
based initiatives.
During 2001, LPA capitalized $0.5 million as software development costs
associated with the Internet based project. The software development costs are
being amortized (as a component of operating expenses) over five years;
amortization of these costs began in May 2001 and the amount amortized during
2001 was $0.3 million.
Asset Management
On March 10, 2003, the Group announced that it had entered into a
definitive agreement to sell substantially all of the business and operations of
BCM to a company majority-owned by funds under the management of Putnam Lovell
NBF Private Equity. The agreement is subject to certain conditions, including
receipt of sufficient consents from clients of BCM to the assignment of their
investment management contracts to the acquiror. The purchase price consists of
$7.75 million in cash to be paid at closing subject to certain adjustments; and
a further $1.0 million cash installment to be paid on December 31, 2003 subject
to certain adjustments. In addition, up to $1.25 million of earn-out payments
will be paid by the buyer to the Group ratably over the four quarters of 2004 if
revenues received in 2003 from a new product planned for launch by BCM in 2003
exceeds certain defined targets. The definitive agreement is binding on both
companies and is subject to regulatory approvals and other conditions. As of
December 31, 2002, BCM's assets under management were approximately $1.2
billion, including approximately $0.2 billion of assets under a subadvisory
agreement with LPA.
Certain information regarding our asset management segment's results of
operations is as follows:
Years Ended December 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
(In thousands)
Revenues ............................................................. $ 5,256 $ 6,764 $ 7,799
Operating expenses ................................................... 4,641 5,231 6,021
---------- ---------- ----------
Income before income taxes ........................................... $ 615 $ 1,533 $ 1,778
---------- ---------- ----------
---------- ---------- ----------
22
2002 compared to 2001
BCM, our U.S. asset manager, generates most of this segment's revenues
and expenses. BCM's 2002 revenues declined $0.8 million to $4.9 million, which
included management fees of $0.5 million from the life insurance and annuities
segment, most of which was received in the first half of 2002, a decrease of
$0.4 million from the fees received in the full year 2001. BCM's expenses
decreased $0.6 million to $4.6 million for 2002. BCM's revenues declined
slightly more than its expenses for the year causing its contribution to segment
income to decline by $0.2 million.
Total assets under management for managed account programs of major
brokerage firms (wrap accounts) were $905 million as of December 31, 2002,
compared to $997 million as of December 31, 2001, despite the addition of $81
million of new wrap assets in 2002, net of redemptions. Although the number of
wrap accounts increased 3% during 2002 to 5,381 accounts as of December 31,
2002, the decline in market value of the assets in the accounts more than offset
the market value of the new wrap accounts. The U.S. stock market fell for a
third consecutive year in 2002 with the total return of the S&P 500 index
yielding approximately -22%. Returns for BCM's principal product, its Dividend
Equity value equity investment style (formerly called Income Equity), were
approximately -14% for the year. Returns for BCM's balanced Dividend Equity
style were approximately -6% for the year. As a result, BCM continued to attract
net new wrap accounts, more than offsetting account losses from its smaller
Growth Equity product.
The lower expenses at BCM during 2002 reflected both a second cost
reduction program implemented during the year and a reduction in expenses as a
result of its diminished involvement with LPLA's corporate bond portfolio during
the year.
Included in the revenues of the asset management segment for 2002 were
portfolio management fees from LPLA received by BIL of $0.3 million, compared
with $1.1 million for 2001. These reduced fees, including similar fees received
by BCM, primarily account for the overall decrease in income in the asset
management segment. The reduced fees resulted from the decline in the market
value of the listed equity securities portfolio held by LPLA which was managed
by BIL and as a result of its diminished involvement with LPLA's portfolio
during the year. Due to the loss of the management contracts related to LPLA's
investment portfolios, both BCM and BIL will no longer receive fees from LPLA in
future periods.
2001 compared to 2000
BCM's revenues increased in 2001 by $0.2 million to $5.7 million, which
included $0.9 million of management fees from LPLA. Expenses decreased in 2001
by $0.7 million to $5.2 million. The increased revenues and lower expenses
together increased BCM's contribution to segment income by $0.9 million for 2001
compared to 2000.
Total wrap fee account assets under management were $997 million as of
December 31, 2001, compared to $955 million as of December 31, 2000. The
additional assets under management resulted from the 19% net increase in the
number of wrap accounts in 2001. Wrap account assets under management in BCM's
Income Equity style (from January 31, 2003, named the Dividend Equity style),
which represented the majority of BCM's equity assets, increased during the year
as the inflow of new account assets more than offset market value declines. Wrap
account assets under management in BCM's Growth Equity style decreased during
the year primarily due to market value declines.
BCM implemented a cost reduction program during the second quarter of
2001, which caused its operating margins to increase during the second half as
compared with the first half.
Other revenues in the asset management segment decreased by $0.2 million
in 2001, following the conclusion at the end of the third quarter of 2000 of a
development capital fund management contract handled by BIL, our asset
management subsidiary in Jersey.
Included in the revenues of the asset management segment for 2001 were
portfolio management fees from the life insurance and annuities segment of $2.0
million, compared with $2.8 million in 2000. These
23
reduced fees primarily account for the overall decrease in income in the asset
management segment. The lower fees resulted from the decline in the market value
of the listed equity securities portfolio held by LPLA which was managed by BIL.
Venture Capital Management
Certain information regarding our venture capital management segment's
results of operations is as follows:
Years Ended December 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
(In thousands)
Revenues:
Management fees....................................................... $ 2,908 $ 9,924 $ 9,398
Investment income..................................................... - - 273
Net realized investment gains (losses) (1) ........................... (44,130) 42,876 14,341
Change in net unrealized investment gains and losses on
trading securities (1).............................................. 16,703 (93,470) (123,474)
---------- ---------- ----------
Total revenues and net investment losses.............................. (24,519) (40,670) (99,462)
Operating expenses.................................................... 3,630 10,592 10,982
---------- ---------- ----------
Loss before income taxes.............................................. $ (28,149) $ (51,262) $ (110,444)
---------- ---------- ----------
---------- ---------- ----------
(1) Realized investment gains in the amounts of $1,603,000 and $37,269,000 were
recorded during 2002 and 2001, respectively, by the venture capital management
segment, related to intersegmental investment sales to the life insurance and
annuities segment. These realized investment gains were offset by corresponding
decreases in unrealized investment gains and losses on trading securities for
the same amounts. These gains and losses have been eliminated in our
consolidated financial statements.
2002 compared to 2001
The pre-tax loss from the venture capital management segment decreased
from $51.3 million in 2001 to $28.1 million in 2002. The loss in both years was
attributable primarily to net realized and unrealized investment losses on
listed equity securities. These positions in listed equity securities resulted
from privately held technology companies, in which the venture capital
management segment had an equity interest, completing initial public offerings
or being acquired by publicly traded companies in stock-for-stock acquisitions.
The change in net unrealized gains and losses in the listed equity
trading portfolio during 2002 was a gain of $16.7 million, which was more than
offset by net realized losses of $44.1 million, of which $33.0 million resulted
from disposals of certain listed equity securities to LPLA (discontinued
operations), based on their aggregate cost of $50.0 million. We also took $14.0
million in other-than-temporary impairment write-downs on four private
investments, including $10.8 million relating to guarantees as discussed in Note
12 to the consolidated financial statements. The trading portfolio decreased
from $45.3 million as of December 31, 2001 to $7.7 million as of December 31,
2002. Additions to the trading portfolio of $1.3 million in 2002 resulted from
the purchase of listed equity securities. The realized losses were partially
offset by net realized gains of $1.3 million on sales of $2.3 million of listed
equity securities and a realized gain of $1.6 million resulting from the
disposal of certain listed equity securities to the life insurance and annuities
segment (LPAL), based on their aggregate cost of $3.4 million. All
intersegmental investment gains and losses, other than those arising from sales
to LPLA (discontinued operations), have been eliminated in our consolidated
statements of income.
We expect significant fluctuations in net unrealized gains and losses in
the listed equity trading portfolio in future periods, reflecting continued
equity market volatility, especially in the technology sector.
24
The venture capital management segment earned portfolio management fees
from LPLA of $2.9 million in 2002, compared to $9.9 million in 2001. The $7.0
million decrease in fees resulted from the lower value of the assets managed,
the lower percentage fees recorded for the second quarter of 2002, and the
discontinuation of fees for the third and fourth quarter of 2002. As explained
above, BICC no longer manages LPLA's investment portfolio.
Total financings completed by BICC during 2002 were $27.2 million,
compared to $67.0 million in 2001. No financings were made in new companies in
2002, but follow-on investments were completed in selected portfolio companies,
where in some cases, larger ownership stakes could be taken in promising
companies at attractive prices. This decreased level of activity in venture
capital placements reflected a general trend in the industry as a whole during
2002, as many venture capitalists curtailed their investments in view of the
difficulties experienced by the market and the technology sector in particular.
Future activity is expected to be focused more on third party investors.
Operating expenses in 2002 were $3.6 million, compared to $10.6 million
in 2001. The $7.0 million decrease was attributable primarily to lower staff
costs, reflecting the reduction in business and staffing during the year.
2001 compared to 2000
The loss before income taxes from the venture capital management segment
decreased from $110.4 million in 2000 to $51.3 million in 2001. The loss in both
years was primarily attributable to the change in net unrealized gains and
losses on the listed equity securities held in the trading portfolio. These
positions in listed equity securities were the result of private equity
transactions in technology companies.
The change in net unrealized gains and losses in the listed equity
trading portfolio during 2001 was a loss of $93.5 million. The trading portfolio
decreased from $105.2 million as of December 31, 2000 to $45.3 million as of
December 31, 2001. The decline in value reflected the general downward trend in
the market for technology stocks during 2001. Additions to the trading portfolio
during 2001 of $52.0 million resulted from the purchase of certain listed equity
securities from the life insurance and annuities segment. Disposals of certain
listed equity securities to the life insurance and annuities segment resulted in
realized gains of $37.3 million based on their aggregate cost of $18.5 million.
Included in the revenues of the venture capital management segment for
2001 were portfolio management fees from the life insurance and annuities
segment of $9.9 million, compared to $7.5 million in 2000. The $2.4 million
increase in fees reflected the larger portfolio of private investments held by
LPLA during 2001 which were monitored by BICC. BICC sourced and monitored
private investments for LPLA, for which LPLA paid BICC management fees. Total
financings completed by BICC during 2001 were $67.0 million, compared to $131.1
million during 2000. Financings totaling $51.1 million were made in four new
investee companies, and follow-on investments totaling $15.9 million were added
in selected portfolio companies where, in some cases, larger ownership stakes
could be taken in promising companies at attractive prices. This decreased level
of activity in venture capital placements reflected the general trend in the
industry as a whole during 2001, as venture capitalists adopted a wait and see
policy in view of the difficulties experienced by the market and the technology
sector in particular. Other non-recurring fees of $1.9 million were received in
2000.
Operating expenses in 2001 were $10.6 million, compared to $11.0 million
in 2000. This $0.4 million decrease was primarily attributable to lower staff
costs and other general expenses due to the decreased level of activity in this
business area.
Corporate and Other
2002 compared to 2001
Corporate expenses increased by $0.3 million to $5.9 million in 2002, as
compared to $5.6 million for 2001. This increase was primarily due to higher
bank facility costs, corporate insurance premiums, pension
25
costs, legal and professional services fees and audit fees, partially offset by
decreases in staff compensation, directors fees, stock exchange fees and
registrar fees.
Interest income earned by us and our subsidiaries (excluding the life
insurance and annuities segment) decreased by $1.5 million to $0.5 million in
2002 as compared with 2001, primarily due to the decrease in cash and cash
equivalents held by us. Interest expense incurred by us and our subsidiaries
(excluding the life insurance and annuities segment) decreased by $1.3 million
to $1.0 million in 2002 as compared with 2001, primarily due to the partial
repayment of bank borrowings and the lower interest rate environment. A
discussion of our sources and uses of cash is discussed in "Liquidity and
Capital Resources" below.
2001 compared to 2000
Corporate expenses decreased by $1.7 million to $5.6 million in 2001, as
compared to $7.3 million for 2000. This decrease was primarily due to
compensation expense of $2.2 million relating to the extension of employee share
options recorded in 2000, which was not repeated in 2001. This was offset by an
increase of $0.5 million in corporate expense in 2001 related to the grant of
employee share options at an exercise price below fair market value on the date
of the grant.
Interest income earned by us and our subsidiaries (excluding the life
insurance and annuities segment) increased by $0.4 million to $2.0 million in
2001 as compared with 2000, primarily due to the increase in cash and cash
equivalents held by us. Interest expense incurred by us and our subsidiaries
(excluding the life insurance and annuities segment) increased by $1.6 million
to $2.3 million in 2001 as compared with 2000, primarily due to higher bank
borrowings during 2001.
Consolidated Income (Loss) from Continuing Operations Before Income Taxes
2002 compared to 2001
The consolidated loss from continuing operations before income taxes
decreased from $223.4 million in 2001 to $58.1 million in 2002. This loss was
attributable primarily to the change in net unrealized investment gains and
losses on the listed equity securities held in the trading portfolio, as well as
net realized investment losses.
Consolidated income before income taxes for 2003 and future years may be
volatile due to our holdings of listed equity securities primarily in the
technology sector, which are marked to market with changes in their market value
recognized in the income statement for each period. Other-than-temporary
impairments of our private equity securities primarily in the technology sector
could also affect consolidated income before income taxes in future periods. For
more information on the possible effects of volatility in the prices of equity
securities, see Item 7A "Quantitative and Qualitative Disclosures About Market
Risk" below.
See discussion of events relating to LPLA and LPAL in the "Liquidity and
Capital Resources" section below.
2001 compared to 2000
Consolidated income from continuing operations before income taxes
decreased from $66.2 million in 2000 to a loss of $223.4 million in 2001. This
loss was attributable primarily to the change in net unrealized investment gains
and losses on the listed equity securities held in the trading portfolio.
Income Taxes
We are subject to taxation on our income in all countries in which we
operate based upon the taxable income arising in each country. However, realized
gains on certain investments are exempt from Jersey and Guernsey taxation. We
are subject to income tax in Jersey at a rate of 20%. In the United States, we
are subject to both federal and California taxes at 34% and 8.84%, respectively.
26
2002 compared to 2001
Although the loss from continuing operations before income taxes was
$58.1 million for 2002, an income tax expense of $4.1 million resulted for the
year. This was largely attributable to losses of $52.5 million contributed by
the Jersey and Guernsey operations during the year, which primarily consisted of
realized and unrealized investment losses for which no tax benefits will be
realized. In addition, deferred tax asset valuation allowances in the U.S.
subsidiaries of continuing operations were increased by $7.6 million during the
year. These allowances were considered necessary due to the high level of
operating loss carryovers in the two U.S. tax groups, raising doubt about their
ability to utilize these carryovers.
2001 compared to 2000
Although the loss from continuing operations before income taxes was
$223.4 million for 2001, an income tax expense of $0.6 million resulted for the
year. This was largely attributable to losses of $224.1 million contributed by
the Jersey and Guernsey operations during the year, which primarily consisted of
realized and unrealized investment losses for which no tax benefits will be
realized.
The effective tax rate, as a percentage of the income from continuing
operations before income taxes of $66.2 million, for 2000 was 0.3%. This very
low effective tax rate was primarily attributable to gains of $70.2 million
contributed by the Jersey and Guernsey operations during the period, which
primarily consisted of untaxed investment gains.
Discontinued Operations
In the first six months of 2002, prior to the loss of management control
over LPLA, we recorded an after-tax loss from operations of LPLA of $104.8
million, compared to an after-tax loss from operations of LPLA of $120.7 million
for all of 2001. The loss in the first half of 2002 was primarily due to net
realized investment losses and the change in net unrealized investment gains and
losses totaling $97.6 million. As discussed above, we recorded impairment losses
totaling $27.9 million related to LPLA in the third quarter of 2002, and
recognized $10.6 million in our income statement for LPLA's net unrealized
losses on available-for-sale securities, net of deferred policy acquisition cost
amortization adjustments and deferred income taxes. For further information see
Note 4 to the consolidated financial statements in Part II, Item 8.
CRITICAL ACCOUNTING POLICIES
Management has identified those accounting policies that are most
important to the 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, and to the accounting for life insurance policy liabilities. In
addition, for 2002, our accounting policies relating to consolidation,
deconsolidation and the reporting of discontinued operations became very
important to the portrayal of our financial condition and results of operations.
These critical accounting policies are described below.
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 venture capital companies doing business in
various segments of technology industries. Venture capital investing entails
making investments in companies that are developing products or services for
large emerging markets with the belief that these investments will yield
superior returns if these companies are successful. These investments are
normally held for a number of years. When we make these investments, most of the
companies are still developing the products they intend to bring to market or
are in the early stages of product
27
sales. Venture capital companies are net consumers of cash and often dependent
upon additional financing to execute their business plans. These investments
involve substantial risk and the companies generally lack meaningful historical
financial results used in traditional valuation models. The process of pricing
these securities range from fierce competitive bidding between financial
institutions to existing investors negotiating prices with the company without
outside investor validation. 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 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.
Other-than-Temporary Impairments
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.
As our listed equity securities are classified as trading securities,
impairment adjustments are not required as any change in the market value of
these securities between reporting periods is included in earnings.
In relation to our equity securities that do not have a readily
determinable fair value and are classified as available-for-sale, factors
considered in impairment reviews include: (i) the length of time and extent to
which estimated fair values have been below cost and the reasons for the
decline, (ii) the investee's recent financial performance and condition,
earnings trends and future prospects, (iii) the market condition of either the
investee's geographic area or industry as a whole, and (iv) concerns regarding
the investee's ability to continue as a going concern (such as the inability to
obtain additional financing). If the evidence supports that a decline in fair
value is other-than-temporary, then the investment is reduced to its estimated
fair value, which becomes its new cost basis, and a realized loss is reflected
in earnings.
A fixed maturity security is deemed to be impaired when it is determined
that it is probable that amounts due (principal and interest) will not be fully
collected according to the security's contractual terms. This determination is
made by considering all available facts and circumstances, including our intent
and ability to continue to hold the investment to maturity. Factors considered
include: (i) the length of time and extent to which the market values have been
below amortized cost and the reasons for the decline, (ii) the issuer's recent
financial performance and condition, earnings trends and future prospects in the
near to mid-term, (iii) changes in the issuer's debt rating and/or regulatory
actions or other events that may effect the issuer's operations, (iv) the market
condition of either the issuer's geographic area or industry as a whole, and (v)
factors that raise doubt about the issuer's ability to continue as a going
concern. If the evidence supports that
28
a decline in fair value is other-than-temporary, then the fixed maturity
security is written down to its quoted market value, if such a value is
available. If a readily determinable fair value does not exist, then the fixed
maturity security is written down to management's estimate of its fair value,
which is based on the valuation methodologies described above. Write-downs are
recorded as realized losses and included in earnings.
The evaluations for other-than-temporary impairments require the
application of significant judgment. It is possible that the impairment factors
evaluated by management and fair values will change in subsequent periods,
especially with respect to privately held equity securities in technology
companies, resulting in material impairment charges in future periods.
Life Insurance Policy Liabilities
Life insurance policy liabilities are accounted for in accordance with
Statement of Financial Accounting Standards No. 97, "Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains
and Losses from the Sale of Investments." Life insurance policy liabilities for
deferred annuities are accounted for as investment-type insurance products and
are recorded at accumulated value (premiums received, plus accrued interest to
the balance sheet date, less withdrawals and assessed fees).
Consolidation, Deconsolidation and Reporting of Discontinued Operations
Our consolidated financial statements include the accounts of the
Company, its subsidiaries (with the exception of LPLA which was deconsolidated
during 2002 as discussed below), the Employee Share Option Trust and the Agent
Loyalty Opportunity Trust (collectively, the "Group"). Significant subsidiaries
included in the continuing operations of the Group and discussed in this Form
10-K include: London Pacific Assurance Limited, London Pacific Advisors,
Berkeley Capital Management and Berkeley International Capital Corporation. All
intercompany transactions and balances are eliminated in consolidation except
for intercompany transactions between continuing and discontinued operations
principally related to investment management fees from LPLA (the discontinued
operations) to the continuing operations. Our consolidated balance sheet is
presented in an unclassified format as the majority of the Group's assets relate
to its continuing life insurance and annuities business.
In accordance with Statement of Financial Accounting Standard No. 144
("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets,"
if a long-lived asset or "component of an entity" (a reportable segment, an
operating segment, a reporting unit, a subsidiary or an asset group) is disposed
of by sale or by abandonment, then the results of operations of that component
of an entity shall be reported in discontinued operations if both of the
following conditions are met: (i) the operations and cash flows of the component
have been eliminated from the ongoing operations of the entity and (ii) the
entity will not have any significant continuing involvement in the operations of
the component.
As described above in Item 1 "Business" under the section entitled "Life
Insurance and Annuities," during the third quarter of 2002, our U.S. life
insurance company, LPLA, was placed under regulatory control and rehabilitation
by the North Carolina insurance regulators. As we no longer exercise control
over LPLA, we deconsolidated LPLA and recorded a charge to earnings in 2002 of
approximately $38.5 million for losses resulting from the disposition of LPLA.
We will not regain control or receive any benefit from LPLA in the future. As
such, in accordance with SFAS 144, the results of operations of LPLA
(pre-rehabilitation) have been reported in discontinued operations. Under SFAS
144, the results of operations of a discontinued business, and any impairment
losses related to a discontinued business, are reported separately in the income
statement under discontinued operations for the current and prior periods, and
in the prior period balance sheet as total assets of discontinued operations and
total liabilities of discontinued operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 3 to the Consolidated Financial Statements for a summary of
recently issued accounting pronouncements.
29
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents decreased during 2002 by $45.0 million to
$16.3 million. This decrease resulted from a $139.8 million use of cash in
financing activities, partially offset by $8.9 million and $85.9 million
provided by operating and investing activities, respectively. The majority of
cash used in financing activities related to policy surrender benefits paid by
the life insurance and annuities segment together with the partial repayment of
the bank line. As of December 31, 2002, our cash and cash equivalents, excluding
the life insurance and annuities segment, amounted to $12.4 million, a decrease
of $45.9 million from December 31, 2001 and a $40.9 million decrease from
December 31, 2000. Excluding the life insurance and annuities segment, we also
held $7.7 million of listed equity securities which could be sold within a short
period of time as of December 31, 2002, compared to $24.4 million as of December
31, 2001 and $102.7 million as of December 31, 2000.
Shareholders' equity decreased during 2002 by $200.2 million from $221.7
million at December 31, 2001 to $21.5 million at December 31, 2002, primarily
due to a net loss for the period of $205.5 million and payment of the final
dividend for 2001 of $2.0 million. Shareholders' equity decreased during 2001 by
$346.0 million from $567.7 million in 2000, primarily due to a net loss for the
period of $344.8 million. As of December 31, 2002 and 2001, $63.6 million of our
Ordinary Shares, at cost, held by the employee benefit trusts have been netted
against shareholders' equity.
Until the latter part of 2000, we financed operations and capital
expenditures with internally generated funds and existing liquid resources. As
of December 31, 2000, we had utilized $14.1 million of our $50.0 million bank
facility in the form of letters of credit and guarantees provided on behalf of
certain former investee companies, and had drawn down $35.6 million in loans. As
of December 31, 2001, we had utilized $12.7 million of the bank facility in the
form of letters of credit and guarantees provided on behalf of certain former
investee companies, and had drawn down $36.9 million in loans.
Our consolidated results for the quarters ended June 30, 2002 and
September 30, 2002 resulted in breaches of the net worth, operating
profit/interest charge and intangible asset ratio financial covenants under our
bank facility with Bank of Scotland. On December 20, 2002, we and Bank of
Scotland agreed to the terms and conditions of an amended credit facility. The
new facility provided up to $23.0 million of borrowings, with an interest rate
of 3.5% above the LIBOR rate on borrowings up to $10.0 million and 4.5% above
the LIBOR rate on borrowings between $10.0 million and $23.0 million. (The one
month LIBOR rate on December 31, 2002 was 1.38%.) The facility limit decreases
at the end of each quarter, such that the facility must be repaid in full no
later than December 31, 2003; however, the bank has agreed to consider an
extension of the final facility expiration date in light of the overall
circumstances prevailing at the time of any such request by us. In addition to
providing the bank with security interest over certain of our listed equity
securities having an aggregate market value of $4.5 million as of February 28,
2003, we gave the bank other guarantees, pledges and security interests over
certain other assets. We agreed to pay the bank a one-time restructuring fee of
(pound)180,000, monthly management fees of (pound)10,000 and quarterly facility
fees which begin at 0.5% per annum and increase each quarter until they reach
2.5% per annum in the third quarter of 2003 based on the average facility usage
during the quarter. We also granted to the bank warrants to subscribe for
1,933,172 Ordinary Shares. The warrants have a subscription price of
(pound)0.1143 ($0.184 at (pound)1 = $1.61) and may be exercised any time prior
to February 14, 2010. New financial covenants have been set under this reducing
credit facility with testing to take place as of the end of each quarter. As of
December 31, 2002, we met the financial covenants under the facility.
During December 2002, we repaid $3.0 million to Bank of Scotland in
permanent reduction of the facility to $20.0 million. As of December 31, 2002,
$9.3 million was outstanding under the facility. In addition, $10.6 million of
the remaining $10.7 million under the facility was utilized in the form of
guarantees provided on behalf of certain former investee companies. During
February 2003, we sold certain of our listed equity securities for $4.7 million
and the proceeds were used to reduce borrowings to $4.6 million and the facility
to $15.2 million.
We believe that it is unlikely that the former investee companies will
have the ability to repay any of their borrowings totaling $10.6 million
according to the bank's quarterly repayment schedule during 2003, and thus we
believe we will be obligated to pay this amount on their behalf. We have
recorded the maximum guarantee
30
obligation of $10.6 million at December 31, 2002 on our consolidated balance
sheet and have taken other-than-temporary impairment losses on the related
investments in our consolidated income statement for 2002.
On March 10, 2003, the Group announced that it had entered into a
definitive agreement to sell substantially all of the business and operations of
BCM to a company majority-owned by funds under the management of Putnam Lovell
NBF Private Equity ("Putnam Lovell"). The agreement is subject to certain
conditions, including receipt of sufficient consents from clients of BCM to the
assignment of their investment management contracts to the acquiror. If the
transaction closes, the purchase price will consist of: (1) $7.75 million in
cash to be paid at closing, subject to a 2 percent adjustment (upward or
downward to a maximum adjustment of $775,000) for every 1 percent change
(between 105 percent and 110 percent, or 90 percent and 95 percent, only) in the
annualized revenues from BCM clients who will become clients of the acquiror
(measured as an average of that computation for the 30 days prior to close) as
compared to the annualized client revenues of BCM at the date of signing of the
definitive agreement; (2) a further $1.0 million cash installment to be paid on
December 31, 2003, less up to one quarter of management fees the acquiror would
have received from subadvising certain products of LPA should LPA terminate
before December 31, 2003 a new subadvisory agreement which LPA and the acquiror
will enter into at closing; and (3) up to $1.25 million of earn-out payments to
be paid by the buyer ratably over the four quarters of 2004, if revenues
received in 2003 from a new product planned for launch by BCM in 2003 exceed
certain defined targets. As part of the agreement, BCM and its shareholder make
certain representations and warranties, and related indemnities, and these and
other customary obligations are guaranteed by the Company. The definitive
agreement is binding on both companies, subject to regulatory approvals and
other conditions. Should the annualized revenues from BCM clients who will
become clients of the acquiror fall below 90% of a base revenue, the acquiror
will have the opportunity to either terminate the acquisition or renegotiate
terms. We expect the sale to close on or before May 15, 2003. As of December 31,
2002, BCM's assets under management were approximately $1.2 billion, including
approximately $0.2 billion of assets under a subadvisory agreement with LPA.
We intend to use a combination of cash, proceeds from listed equity
security sales and the net proceeds from the sale of BCM in order to meet the
paydown schedule under the bank facility described above.
As of March 19, 2003, we had approximately $11.2 million in cash and cash
equivalents, and approximately $4.9 million in listed equity securities,
excluding cash and securities held by LPAL, which are discussed separately
below. Our total liability to Bank of Scotland, including guarantees, as of the
date of this filing, is $15.2 million. We are required to repay the bank $0.2
million by March 31, 2003. The approximate $7.6 million in net proceeds expected
at closing of the sale of BCM will be used to pay down the bank facility during
the second quarter of 2003. This would meet all of our paydown obligation of
$5.0 million for the second quarter of 2003, and $2.6 million of our $5.0
million paydown obligation for the third quarter of 2003, and would leave $7.4
million outstanding on our bank facility. We believe that the remaining balance
of cash and the proceeds from the possible sale of our listed equity securities
after the remaining bank obligations are fully repaid, as well as the expected
$1.0 million installment from the sale of BCM due on December 31, 2003, will be
sufficient to fund operations over the next twelve months.
In the unlikely event that the sale of BCM to Putnam Lovell is not
completed, in order to meet our near-term obligations, we will need to find
other sources of liquidity. We believe that we can meet our near-term
obligations through the sale of BCM to another party or the sale of other
assets.
It is possible that we may not be able to meet one of the bank's
financial covenants at the quarterly reporting dates of March 31, 2003, June 30,
2003 or September 30, 2003 due to a potential shortfall in operating income. The
financial covenant relates to our cumulative quarterly loss targets for the
Group's core businesses. If the bank were unwilling to waive such a covenant
breach, we may be in default under the bank facility and all of the outstanding
amounts under the bank facility would immediately become due. In the event the
bank facility becomes repayable, we believe the balances of existing cash,
proceeds from the sale of listed equity securities and the net proceeds from the
sale of BCM will be sufficient to repay the bank facility and to meet other
obligations for the next twelve months, including working capital for
operations.
31
As disclosed in our quarterly report on Form 10-Q for the quarter ended
March 31, 2002, which was filed with the SEC on May 17, 2002, the statutory
capital and surplus of our primary insurance company, LPLA, decreased to a level
which resulted in LPLA's risk based capital ("RBC") ratio falling to the
"company action level." We pursued various corrective measures designed to raise
LPLA's RBC position above the "company action level," including a sale of LPLA,
reinsurance of all or a portion of LPLA's existing block of business, and an
exchange by LPLA of its private equity and debt portfolio for an equity-linked
note. On July 2, 2002, we announced that further declines in the value of LPLA's
investment portfolio due to persistent negative events in the bond and equity
markets continued to erode significantly the statutory capital of LPLA and that
we had been unsuccessful in concluding a transaction to enhance the capital of
LPLA. As a consequence, LPLA discontinued the issuance of new policies. Though
the statutory capital of our Jersey, Channel Islands insurance subsidiary, LPAL,
had not been affected to the same extent as the statutory capital of LPLA, LPAL
also discontinued writing new policies effective as of July 2, 2002. The
decision to discontinue writing new policies through LPAL was made to avoid the
increased capital requirement created by additional policyholder liabilities.
As a result of LPLA informing the North Carolina Department of Insurance
("NCDOI") that further deterioration in LPLA's capital and surplus caused by
declines in the fair values of its investments would reduce LPLA's RBC ratio to
the "authorized control level," the NCDOI placed LPLA under administrative
supervision on July 3, 2002.
As our further efforts to conclude a transaction to sell LPLA or to
enhance its capital were unsuccessful, and as the RBC ratio of LPLA as of June
30, 2002, as subsequently determined, fell below the "authorized control level,"
on August 6, 2002, on petition of the Commissioner with the consent of LPLA and
unanimous approval of its board of directors, the Superior Court of Wake County
in the State of North Carolina ordered the Commissioner to take possession and
control of all of the property, books and accounts, documents and other records
of LPLA. LPLA and its officers, directors, agents, employees and all other
persons were enjoined from disposing of LPLA's property and from transacting
LPLA's business except with the consent of the Commissioner. The Court appointed
the Commissioner as Rehabilitator of LPLA. Based on this court order, we no
longer exercise control over LPLA.
Due to the loss of control of LPLA, a loss for the impairment of our
investment in LPLA in the amount of $27.9 million was recorded in our
consolidated financial statements during the third quarter of 2002. This amount
consists of the $12.3 million in LPLA's net equity as of June 30, 2002 as
determined under U.S. GAAP and $15.6 million in receivables from LPLA which may
be uncollectible. In addition, LPLA's net unrealized losses of $10.6 million as
of June 30, 2002 on available-for-sale securities, net of deferred policy
acquisition cost amortization adjustments and deferred income taxes, were
recognized in our consolidated income statement in the third quarter of 2002.
During 2002 and 2001, LPLA paid investment management fees to our asset
management and venture capital management segments totaling $3.7 million and
$11.9 million, respectively. The investment management agreement between LPLA
and our other subsidiaries and related fees had been approved by the NCDOI. Due
to the loss of control of LPLA, we no longer manage LPLA's portfolio of public
corporate bonds and private equity and debt investments and no longer receive
investment management fees for these services.
We are not aware of any obligations of the Group to cover any current or
future losses of LPLA. However, in the course of the administration of LPLA in
rehabilitation, during November 2002, the NCDOI requested information concerning
the history of a limited number of investments in securities of portfolio
companies. These portfolio investments have been associated with LPLA for more
than seven years, and involve intercompany transfers. The history of their
investment performance and ownership is complex. We have complied with these
requests. We are not able at this time to predict what conclusions the NCDOI
will reach after evaluating this information.
As discussed above, on July 2, 2002, we announced that LPAL discontinued
issuing new policies. Subsequent to this announcement and other announcements
relating to the Group and LPLA, LPAL policy
32
surrenders substantially increased. Approximately 75% of LPAL's $140.2 million
policyholder liabilities as of June 30, 2002 had been redeemed as of December
31, 2002. Policy surrenders significantly decreased by the end of 2002; for the
month of December 2002, surrenders totaled $0.5 million. We do not expect
significant surrender activity during 2003; however, approximately $10.6 million
of policyholder liabilities are scheduled to mature during 2003. These
maturities are expected to be met by a combination of cash held at the beginning
of 2003 of $3.8 million and the proceeds from maturing bonds which are estimated
to be $13.0 million during 2003. Assuming the reinvestment of excess cash in
bonds, investment income should approximately equal the amount credited to
policies during 2003.
Due to the weakened economic environment, in February 2003, the Jersey
Financial Services Commission amended LPAL's insurance permit such that private
equity investments are no longer approved assets and it has requested a letter
of comfort from us that we will meet any capital shortfall should LPAL's listed
equities become impaired. Declines in the market value of LPAL's listed equity
securities, which totaled $8.9 million as of December 31, 2002, could have a
significant impact on LPAL's statutory capital level. If LPAL's statutory
capital falls below the minimum solvency level required by the Jersey insurance
regulators, we may be required to inject additional capital into LPAL. A capital
injection would be limited to the extent any shortfall arises from a decline in
the value of LPAL's listed equity securities that are required to support
minimum solvency. As of December 31, 2002, approximately $6.7 million of the
listed equity holdings were required to support the minimum solvency
requirement. Due to the sale of approximately $2.0 million of listed equities
since December 31, 2002, $3.0 million of the listed equities were required to
support the minimum solvency level as of February 28, 2003.
Given the liquidity issues facing us as discussed above and in view of
the agreement with Bank of Scotland regarding their approval of dividends, our
Board of Directors suspended the 2002 interim dividend to shareholders and ADR
holders and is not recommending a final dividend for the year 2002.
As of December 31, 2002, we had no material commitments outstanding for
capital expenditures or additional funding for private equity portfolio
companies.
33
CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS
The following table aggregates our expected contractual obligations and
commitments subsequent to December 31, 2002.
2004 - 2006 - Beyond
Contractual obligations(1) 2003 2005 2007 2007 Total
- ------------------------------------- ---------- ---------- ---------- ---------- ----------
(In thousands)
Bank debt............................................ $ 9,314 $ - $ - $ - $ 9,314
Guarantees under bank facility....................... 10,590 - - - 10,590
Capital lease commitments (2)........................ 166 94 2 - 262
Operating lease commitments.......................... 455 973 878 526 2,832
---------- ---------- ---------- ---------- ----------
Total contractual cash obligations........... $ 20,525 $ 1,067 $ 880 $ 526 $ 22,998
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
(1) Does not include other commitments for the purchase of goods and services
which in the aggregate are immaterial.
(2) Includes amounts classified as interest.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The nature of our businesses exposes us to market risk. Market risk is
the risk of loss that may occur when changes in interest rates and public equity
prices adversely affect the value of invested assets.
Interest Rate Risk
LPAL is subject to risk from interest rate fluctuations when payments due
to policyholders are not matched in respect of amount and duration with income
from investments. LPAL attempts to minimize this risk by ensuring that payments
and income are matched as closely as possible while also maximizing investment
returns. LPAL has not used derivative financial instruments as part of its
investment strategy. Exposure to interest rate risk is estimated by performing
sensitivity tests to changes in interest rates.
For LPAL's business, the amount of policyholder liabilities is unaffected
by changes in interest rates. Given the existing policy and bond maturity
profiles, and that bonds will be held to maturity and early policy redemptions
are protected by a market value adjustment and surrender penalty, the bonds and
policies carry no interest rate risk. Excess cash from bond maturities, after
meeting redemptions and operating expenses, is expected to yield approximately
$0.2 million during 2003. For each 100 basis point move in market interest rates
this amount will vary by approximately $67,000 per annum.
As of December 31, 2002, $9.3 million was outstanding under our credit
facility with Bank of Scotland. In addition, $10.6 million of the remaining
$10.7 million under the facility was utilized in the form of guarantees and
letters of credit provided on behalf of certain former investee companies.
During February 2003, we sold certain listed equity securities for $4.7 million
and the proceeds were used to reduce our borrowings to $4.6 million and the
facility to $15.2 million. Under the terms of the loan facility, the total usage
must be reduced to $15.0 million by March 31, 2003 and by $5.0 million per
quarter thereafter. For every 100 basis point movement in market interest rates,
interest expense on our borrowings will increase by approximately $13,000 per
annum and exposure to liabilities relating to the guarantees will increase by
$151,000 per annum.
Equity Price Risk
We are exposed to equity price risk on the listed equity securities held
entirely in our trading portfolio. Changes in the level or volatility of equity
prices affect the value of the listed equity securities. These changes
34
in turn directly affect our consolidated net income because our holdings of
listed equity securities are marked to market, with changes in their market
value recognized in the income statement for the period in which the changes
occur. These listed equity securities are primarily in companies in the high
technology industry sector, many of which are small capitalization stocks.
If the fair value of our listed equity portfolio, as of December 31, 2002
and 2001, which totaled $16.5 million and $67.6 million, respectively, had
abruptly increased or decreased by 50%, the fair value of the listed equity
portfolio would have increased or decreased by $8.3 million and $33.8 million,
respectively.
Our listed equity securities largely represent investments that were
originally made as private equity investments in companies that subsequently
completed an initial public offering or were acquired by a larger publicly
traded company. The performance of these listed equity securities can be highly
volatile, but we attempt to manage this risk in various ways. The performance of
the listed equity securities are monitored daily. In addition, we seek to sell
investments after a period of time, particularly in the case of large public
company securities.
As of December 31, 2002, we held $7.2 million in private corporate equity
securities primarily in technology companies for which liquid markets do not
exist. Private equity prices do not fluctuate directly with public equity
markets, but significant market movements may trigger a review for
other-than-temporary adjustment of the carrying values of our private equity
securities. The risks inherent in these private equity investments relate
primarily to the viability of the investee companies. These risks are managed in
various ways. Extensive due diligence procedures are performed prior to making
an investment, and regular reviews of the progress of the investee companies are
carried out.
For additional information relating to our financial risk profile, see
Note 16 to the Consolidated Financial Statements in Item 8 "Financial Statements
and Supplementary Data" of this Form 10-K.
35
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Reports of Independent Certified Public Accountants......................... 37
Consolidated Balance Sheets as of December 31, 2002 and 2001................ 39
Consolidated Statements of Income for the Years Ended
December 31, 2002, 2001 and 2000............................................ 40
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000............................................ 42
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 2002, 2001 and 2000................................ 44
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2002, 2001 and 2000............................................ 46
Notes to Consolidated Financial Statements.................................. 47
36
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders of
London Pacific Group Limited
Jersey, Channel Islands
We have audited the accompanying consolidated balance sheet of London
Pacific Group Limited (the "Company") as of December 31, 2002 and the related
consolidated statements of income, shareholders' equity, cash flows, and
comprehensive income for the year then ended. We have also audited the schedules
on pages 91 to 96 in Item 15 (the "Schedules"). These financial statements and
the Schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
Schedules based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements and the Schedules
referred to above present fairly, in all material respects, the financial
position of London Pacific Group Limited at December 31, 2002 and the results of
its operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Notes 3 and 8 to the consolidated financial statements,
the Company changed its method of accounting for goodwill in 2002, in accordance
with Statement of Financial Accounting Standard No. 142, "Goodwill and Other
Intangible Assets."
/s/ BDO Seidman, LLP
San Francisco, California
February 28, 2003, except for Note 2 which is as of March 10, 2003
37
To the Board of Directors and Shareholders of
London Pacific Group Limited
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of London Pacific Group Limited and its subsidiaries at December 31,
2001, and the results of their operations and their cash flows for each of the
two years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedules listed in the accompanying index
appearing under Item 15 on page 88, present fairly, in all material respects,
the information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedules are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers
Chartered Accountants
Jersey, Channel Islands
April 1, 2002, except for Note 4 as for which the date is March 19, 2003
38
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 31,
--------------------------------
2002 2001(1)
-------------- --------------
ASSETS
Investments (principally of life insurance subsidiary):
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $30,481 and $116,853
as of December 31, 2002 and 2001, respectively)............................ $ 30,335 $ 117,701
Held-to-maturity, at amortized cost (fair value: $0 and $871
as of December 31, 2002 and 2001, respectively)............................ - 871
Equity securities:
Trading, at fair value (cost: $26,785 and $64,175 as of December 31,
2002 and 2001, respectively) .............................................. 16,505 67,617
Available-for-sale, at fair value (cost: $8,983 and $17,297 as of
December 31, 2002 and 2001, respectively) ................................. 7,233 15,303
-------------- --------------
Total investments ................................................................ 54,073 201,492
Cash and cash equivalents ........................................................ 16,272 61,317
Accrued investment income ........................................................ 900 3,214
Deferred policy acquisition costs ................................................ - 3,113
Property and equipment, net ...................................................... 3,301 4,168
Goodwill.......................................................................... 2,568 2,964
Other assets ..................................................................... 3,099 8,350
Total assets of discontinued operations .......................................... - 2,254,508
-------------- --------------
Total assets ..................................................................... $ 80,213 $2,539,126
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Life insurance policy liabilities ................................................ $35,441 $131,831
Notes payable .................................................................... 9,314 36,874
Accounts payable and accruals .................................................... 3,382 12,786
Guarantees under bank facility ................................................... 10,590 -
Total liabilities of discontinued operations ..................................... - 2,135,982
-------------- --------------
Total liabilities ................................................................ 58,727 2,317,473
-------------- --------------
Commitments and contingencies (See Notes 12 and 15)
Shareholders' equity:
Ordinary shares, $0.05 par value per share: 86,400,000 shares authorized;
64,439,073 shares issued and outstanding as of December 31, 2002
and 2001....................................................................... 3,222 3,222
Additional paid-in capital ....................................................... 68,394 68,346
Retained earnings ................................................................ 16,054 223,590
Employee benefit trusts, at cost (13,684,881 and 13,698,181 shares as of
December 31, 2002 and 2001, respectively) ..................................... (63,571) (63,599)
Accumulated other comprehensive loss ............................................. (2,613) (9,906)
-------------- --------------
Total shareholders' equity ....................................................... 21,486 221,653
-------------- --------------
Total liabilities and shareholders' equity ....................................... $ 80,213 $2,539,126
-------------- --------------
-------------- --------------
(1) Reclassifications have been made related to discontinued operations - see
Note 4.
See accompanying Notes to Consolidated Financial Statements.
39
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share and ADS amounts)
Years Ended December 31,
------------------------------------
Continuing operations: 2002 2001(1) 2000(1)
---------- ---------- ----------
Revenues:
Investment income............................................................ $ 6,647 $ 8,264 $ 3,813
Insurance policy charges (credits)........................................... 1,155 (7) -
Financial advisory services, asset management and other fee income(2) ...... 24,309 35,269 40,140
Net realized investment gains (losses)....................................... (21,507) 18,507 153,681
Change in net unrealized investment gains and losses on trading
securities ............................................................... (22,483) (230,981) (79,091)
---------- ---------- ----------
(11,879) (168,948) 118,543
Expenses:
Interest credited on insurance policyholder accounts......................... 6,031 6,314 1,201
Amortization of deferred policy acquisition costs............................ 2,952 932 115
Operating expenses........................................................... 35,841 44,676 50,056
Goodwill amortization and write-offs......................................... 396 221 248
Interest expense............................................................. 1,033 2,306 727
---------- ---------- ----------
46,253 54,449 52,347
---------- ---------- ----------
Income (loss) from continuing operations before income taxes................. (58,132) (223,397) 66,196
Income tax expense .......................................................... 4,078 648 201
---------- ---------- ----------
Income (loss) from continuing operations..................................... (62,210) (224,045) 65,995
Discontinued operations:
Loss from discontinued operations, net of income
tax benefit of $7,730, $57,091 and $17,648, respectively.................. (104,762) (120,739) (33,538)
Loss on disposal of discontinued operations, net of income
tax benefit of $0......................................................... (38,532) - -
---------- ---------- ----------
Loss on discontinued operations.............................................. (143,294) (120,739) (33,538)
---------- ---------- ----------
Net income (loss)............................................................ $ (205,504) $ (344,784) $ 32,457
---------- ---------- ----------
---------- ---------- ----------
(1) Reclassifications have been made related to discontinued operations - see
Note 4.
(2) Includes amounts of $3,632, $11,831 and $10,240 for revenues earned from
entities included in discontinued operations for the years ended December
31, 2002, 2001 and 2000.
See accompanying Notes to Consolidated Financial Statements.
40
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (continued)
(In thousands, except per share and ADS amounts)
Years Ended December 31,
------------------------------------
2002 2001(1) 2000(1)
---------- ---------- ----------
Basic earnings (loss) per share and ADS(2):
Basic earnings (loss) per share:
Continuing operations........................................................ $ (1.23) $ (4.39) $ 1.30
Discontinued operations...................................................... (2.82) (2.37) (0.66)
---------- ---------- ----------
$ (4.05) $ (6.76) $ 0.64
---------- ---------- ----------
---------- ---------- ----------
Basic earnings (loss) per ADS(2):
Continuing operations........................................................ $ (12.26) $ (43.94) $ 12.99
Discontinued operations...................................................... (28.23) (23.68) (6.60)
---------- ---------- ----------
$ (40.49) $ (67.62) $ 6.39
---------- ---------- ----------
---------- ---------- ----------
Diluted earnings (loss) per share and ADS(2):
Diluted earnings (loss) per share:
Continuing operations........................................................ $ (1.23) $ (4.39) $ 1.09
Discontinued operations...................................................... (2.82) (2.37) (0.55)
---------- ---------- ----------
$ (4.05) $ (6.76) $ 0.54
---------- ---------- ----------
---------- ---------- ----------
Diluted earnings (loss) per ADS(2):
Continuing operations........................................................ $ (12.26) $ (43.94) $ 10.87
Discontinued operations...................................................... (28.23) (23.68) (5.52)
---------- ---------- ----------
$ (40.49) $ (67.62) $ 5.35
---------- ---------- ----------
---------- ---------- ----------
(1) Reclassifications have been made related to discontinued operations - see
Note 4.
(2) ADS amounts have been restated to reflect the one-for-ten reverse split
in June 2002.
See accompanying Notes to Consolidated Financial Statements.
41
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
------------------------------------
2002 2001(1) 2000(1)
---------- ---------- ----------
Cash flows from continuing operating activities:
Net income (loss)............................................................ $ (62,210) $ (224,045) $ 65,995
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Loss on disposal of tangible assets.......................................... 245 - -
Depreciation and amortization ............................................... 1,734 1,332 808
Amortization of deferred policy acquisition costs ........................... 2,952 932 115
Deferred income tax expense (benefit) ....................................... 5,537 (1,066) 124
Interest credited on insurance policyholder accounts......................... 6,031 6,314 1,200
Net realized investment losses (gains)....................................... 21,507 (18,507) (153,681)
Change in net unrealized investment gains and losses
on trading securities..................................................... 22,483 230,981 79,091
Net amortization of investment premiums and discounts........................ 289 311 81
Stock based employee compensation expense.................................... - 530 2,943
Net changes in operating assets and liabilities:
Trading equity securities................................................. 32,623 (92,558) 119,509
Accrued investment income ................................................ 2,314 (1,284) (1,738)
Deferred policy acquisition costs ........................................ (250) (2,142) (1,505)
Other assets ............................................................. 848 3,209 3,581
Life insurance policy liabilities......................................... 4 175 389
Accounts payable, accruals and other liabilities ......................... (3,689) (7,929) (16,837)
Income taxes payable ..................................................... (2,846) 145 (718)
Other operating cash flows .................................................. (471) 1,349 1,149
---------- ---------- ----------
Net cash provided by (used in) continuing operations ........................ 27,101 (102,253) 100,506
---------- ---------- ----------
Write-off of doubtful receivables from discontinued operations............... (15,614) - -
Capital paid in to discontinued operations................................... - (48,377) (4,335)
Amounts due from discontinued operations..................................... (2,798) 22,011 (20,322)
---------- ---------- ----------
Net cash used in discontinued operations .................................... (18,412) (26,366) (24,657)
---------- ---------- ----------
Net cash provided by (used in) operating activities ......................... 8,689 (128,619) 75,849
---------- ---------- ----------
Cash flows from investing activities:
Purchases of held-to-maturity fixed maturity securities ..................... (2,828) (1,959) (1,913)
Purchases of available-for-sale fixed maturity securities ................... (7,447) (80,190) (48,509)
Purchases of available-for-sale equity securities............................ - (16,000) (106,055)
Proceeds from redemption of held-to-maturity fixed maturity securities....... - 1,733 6,317
Proceeds from sale of available-for-sale fixed maturity securities .......... 96,884 3,664 962
Proceeds from sale of available-for-sale equity securities .................. - 149,358 56,635
Capital expenditures......................................................... (712) (1,033) (3,392)
Other cash flows from investing activities .................................. - - 3,110
---------- ---------- ----------
Net cash provided by (used in) investing activities ......................... 85,897 55,573 (92,845)
---------- ---------- ----------
See accompanying Notes to Consolidated Financial Statements.
42
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
Years Ended December 31,
------------------------------------
2002 2001(1) 2000(1)
---------- ---------- ----------
Cash flows from financing activities:
Insurance policyholder contract deposits .................................... 6,827 74,368 52,838
Insurance policyholder benefits paid ........................................ (117,063) (2,999) (336)
Issuance of Ordinary Shares ................................................. - 3 -
Purchases of Ordinary Shares by the employee benefit trusts.................. - (6,005) (12,712)
Proceeds from disposal of shares by the employee benefit trusts.............. 43 440 8,407
Dividends paid .............................................................. (2,032) (11,802) (11,625)
Proceeds from issuance of notes payable...................................... 2,440 - 35,000
Repayments of notes payable.................................................. (30,000) - (593)
---------- ---------- ----------
Net cash provided by (used in) financing activities ......................... (139,785) 54,005 70,979
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents ........................ (45,199) (19,041) 53,983
Cash and cash equivalents at beginning of year (1) .......................... 61,317 80,395 26,795
Foreign currency translation adjustment ..................................... 154 (37) (383)
---------- ---------- ----------
Cash and cash equivalents at end of year (1)................................. $ 16,272 $ 61,317 $ 80,395
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosure of cash flow information(1):
Cash paid (received) during the year for:
Interest .................................................................... $ 1,024 $ 930 $ 50
Income taxes (net of amounts recovered) ..................................... $ 1,409 $ 1,584 $ 1,189
Supplemental disclosure of non-cash investing activities:
Exchange of available-for-sale equity securities for trading equity
securities................................................................ $ 22 $ 117 $ 56,523
Stock based employee compensation expense.................................... $ - $ 530 $ 2,943
(1) Amounts reflect continuing operations only.
See accompanying Notes to Consolidated Financial Statements.
43
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except per share and ADS amounts)
Accumulated
Other
Ordinary Shares Additional Employee Compre- Total
--------------------- Paid-in Retained Benefit hensive Shareholders'
Number Amount Capital Earnings Trusts Loss Equity
---------- ---------- ----------- ----------- --------- ----------- -------------
Balance as of January 1, 2000 64,433 $ 3,222 $ 62,307 $ 559,344 $ (54,033) $ (18,365) $ 552,475
Net income...................... - - - 32,457 - - 32,457
Change in net unrealized
gains and losses on
available-for-sale securities - - - - - (6,837) (6,837)
Foreign currency translation
adjustment................... - - - - - (42) (42)
Exercise of employee share
options, including income
tax effect................... - - 2,676 - 8,742 - 11,418
Extension of employee
share options................ - - 2,943 - - - 2,943
Net realized gains (losses) on
disposal of shares held by
the employee benefit trusts.. - - (335) - - - (335)
Cash dividends (23.2 cents
net per share and $2.32
per ADS)(1).................. - - - (11,625) - - (11,625)
Purchase of shares by the
employee benefit trusts...... - - - - (12,712) - (12,712)
---------- ---------- ----------- ----------- --------- ----------- ------------
Balance as of
December 31, 2000............ 64,433 $ 3,222 $ 67,591 $ 580,176 $ (58,003) $ (25,244) $ 567,742
---------- ---------- ----------- ----------- --------- ----------- ------------
---------- ---------- ----------- ----------- --------- ----------- ------------
Net loss........................ - $ - $ - $(344,784) $ - $ - $(344,784)
Change in net unrealized
gains and losses on
available-for-sale securities - - - - - 15,453 15,453
Foreign currency translation
adjustment................... - - - - - (115) (115)
Exercise of employee share
options, including income
tax effect................... 6 - 191 - 409 - 600
Grant of employee share
options below fair market
value........................ - - 530 - - - 530
Net realized gains on disposal
of shares held by the
employee benefit trusts...... - - 31 - - - 31
Cash dividends (23.2 cents
net per share and $2.32
per ADS)(1).................. - - - (11,802) - - (11,802)
Issuance of Ordinary Shares..... - - 3 - - - 3
Purchase of shares by the
employee benefit trusts...... - - - - (6,005) - (6,005)
---------- ---------- ----------- ----------- --------- ----------- ------------
Balance as of
December 31, 2001............ 64,439 $ 3,222 $ 68,346 $ 223,590 $ (63,599) $ (9,906) $ 221,653
---------- ---------- ----------- ----------- --------- ----------- ------------
---------- ---------- ----------- ----------- --------- ----------- ------------
(1) ADS amounts have been restated to reflect the one-for-ten reverse split in
June 2002.
See accompanying Notes to Consolidated Financial Statements.
44
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Continued)
(In thousands, except per share and ADS amounts)
Accumulated
Other
Ordinary Shares Additional Employee Compre- Total
--------------------- Paid-in Retained Benefit hensive Shareholders'
Number Amount Capital Earnings Trusts Loss Equity
---------- ---------- ----------- ----------- --------- ----------- -------------
Balance as of January 1, 2002... 64,439 $ 3,222 $ 68,346 $ 223,590 $ (63,599) $ (9,906) $ 221,653
Net loss........................ - - - (205,504) - - (205,504)
Change in net unrealized
gains and losses on
available-for-sale securities - - - - - 7,853 7,853
Foreign currency translation
adjustment................... - - - - - (560) (560)
Exercise of employee share
options, including income
tax effect................... - - 3 - 28 - 31
Warrants issued to bank ........ - - 30 - - - 30
Net realized gains on disposal..
of shares held by the
employee benefit trusts...... - - 15 - - - 15
Cash dividends ($0.04 net
per share and $0.40 per
ADS ) (1).................... - - - (2,032) - - (2,032)
------------------------------------------------------------------------------------
Balance as of
December 31, 2002............ 64,439 $ 3,222 $ 68,394 $ 16,054 $(63,571) $ (2,613) $ 21,486
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
(1) ADS amounts have been restated to reflect the one-for-ten reverse split in
June 2002.
See accompanying Notes to Consolidated Financial Statements.
45
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Years Ended December 31,
------------------------------------
2002 2001(1) 2000(1)
---------- ---------- ----------
Net income (loss)............................................................ $ (205,504) $ (344,784) $ 32,457
Other comprehensive income (loss), net of deferred
income taxes:
Foreign currency translation adjustments, net of income
taxes of $0............................................................... (560) (115) (42)
Change in net unrealized gains and losses related to
continuing operations:
Unrealized holding gains and losses on available-for-sale securities...... (1,116) (1,623) (149)
Less: reclassification adjustment for gains and losses included
in net income (loss).................................................... 366 836 -
Deferred policy acquisition cost amortization adjustments................. (551) 405 147
Change in net unrealized gains and losses related to
discontinued operations:
Change in net unrealized gains and losses on
available-for-sale securities........................................... 5,744 35,583 (16,110)
Deferred policy acquisition cost amortization adjustments................. (8,044) (13,398) 5,593
Deferred income taxes..................................................... 805 (6,350) 3,682
Reclassification adjustment for losses of discontinued
operations included in net income (loss)................................ 10,649 - -
---------- ---------- ----------
Other comprehensive income (loss) ........................................... 7,293 15,338 (6,879)
---------- ---------- ----------
Comprehensive income (loss) ................................................. $ (198,211) $ (329,446) $ 25,578
---------- ---------- ----------
---------- ---------- ----------
See accompanying Notes to Consolidated Financial Statements.
46
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Material Events
During the third quarter of 2002, London Pacific Life & Annuity Company
("LPLA"), the primary insurance company of London Pacific Group Limited (the
"Company"), was placed under regulatory control and rehabilitation based on
LPLA's statutory capital and surplus as of June 30, 2002. On August 6, 2002, on
petition of the Commissioner of Insurance of the State of North Carolina (the
"Commissioner") with the unanimous approval of LPLA's board of directors, the
Superior Court of Wake County in the State of North Carolina ordered the
Commissioner to take possession and control of all of the property, books and
accounts, documents and other records of LPLA. Based on this court order, the
Company no longer exercises control over LPLA. As a result of this event, the
Company has deconsolidated LPLA and recorded a charge to earnings in the third
quarter of 2002 of $38.5 million for losses resulting from the disposition of
LPLA.
For further information, see Note 4 "Discontinued Operations" below.
On July 2, 2002, the Company announced that further declines in the value
of LPLA's investment portfolio due to persistent negative events in the equity
and bond markets continued to erode significantly the statutory capital of LPLA
and that the Company had been unsuccessful in concluding a transaction to
enhance the capital of LPLA. As a consequence, LPLA discontinued the issuance of
new policies as of July 2, 2002. Although the statutory capital of the Company's
Jersey insurance subsidiary, London Pacific Assurance Limited ("LPAL"), had not
been affected by the adverse equity and bond markets to the same extent as the
statutory capital of LPLA, the Company also announced on July 2, 2002 that LPAL
would discontinue writing new policies effective immediately. The decision to
discontinue the issuance of new policies through LPAL was made to avoid the
increased capital requirements created by additional policyholder liabilities.
Subsequent to this announcement and other announcements relating to the Company
and LPLA, LPAL policy surrenders increased substantially. Approximately 75% of
LPAL's $140.2 million in policyholder liabilities as of June 30, 2002 had been
redeemed as of December 31, 2002.
Note 2. Subsequent Events
On March 10, 2003, the Company announced that it had entered into a
definitive agreement to sell substantially all of the business and operations of
Berkeley Capital Management ("BCM") to a company majority-owned by funds under
the management of Putnam Lovell NBF Private Equity ("Putnam Lovell"). The
agreement is subject to certain conditions, including receipt of sufficient
consents from clients of BCM to the assignment of their investment management
contracts to the acquiror. The purchase price consists of $7.75 million in cash
to be paid at closing subject to certain adjustments; and a further $1.0 million
cash installment to be paid on December 31, 2003 subject to certain adjustments.
In addition, up to $1.25 million of earn-out payments will be paid by the buyer
ratably over the four quarters of 2004 if revenues received in 2003 from a new
product planned for launch by BCM in 2003 exceed certain defined targets. The
definitive agreement is binding on both companies and is subject to regulatory
approvals and other conditions. Should the annualized revenues from BCM clients
who will become clients of the acquiror fall below 90% of a base revenue, the
acquiror will have the opportunity to either terminate the acquisition or
renegotiate terms. The Company expects the sale to close on or before May 15,
2003. As of December 31, 2002, BCM's assets under management were approximately
$1.2 billion.
47
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared by
the Company in conformity with United States generally accepted accounting
principles ("U.S. GAAP"). These consolidated financial statements include the
accounts of the Company, its subsidiaries (with the exception of LPLA as
discussed above in Note 1 "Material Events"), the Employee Share Option Trust
("ESOT") and the Agent Loyalty Opportunity Trust ("ALOT") (collectively, the
"Group"). Significant subsidiaries included in the continuing operations of the
Group and discussed in this document include: London Pacific Assurance Limited,
London Pacific Advisors, Berkeley Capital Management and Berkeley International
Capital Corporation. All intercompany transactions and balances have been
eliminated in consolidation except for intercompany transactions between
continuing and discontinued operations principally related to investment
management fees from LPLA (the discontinued operations) to the continuing
operations.
During the second quarter of 2002, the Company completed a one-for-ten
reverse split of its American Depositary Shares ("ADSs"). On June 24, 2002,
every ten of the Company's ADSs issued and outstanding were converted and
reclassified into one post-split ADS. Consequently, effective from the opening
of business on June 24, 2002, each ADS is equal to ten Ordinary Shares. All
dividend and earnings (loss) per ADS amounts disclosed in these financial
statements have been restated to reflect this split.
The consolidated balance sheet is presented in an unclassified format as
the majority of the Group's assets relate to its continuing life insurance and
annuities business. The Group's other businesses are financial advisory
services, asset management and venture capital management.
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 ("OTC") Bulletin Board in the form of ADSs, which are
evidenced by American Depositary Receipts ("ADRs"). Pursuant to the regulations
of the U.S. Securities and Exchange Commission ("SEC"), the Company is
considered a U.S. domestic registrant and must file financial statements
prepared under U.S. GAAP.
Cash and Cash Equivalents
The Group considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Investments
The Group's investments consist of fixed maturity and equity securities.
Fixed maturity securities are classified as either available-for-sale or
held-to-maturity, and equity securities are classified as either trading or
available-for-sale. The investments are accounted for as follows:
i) available-for-sale securities are recorded at fair value, with changes
in unrealized gains and losses excluded from net income, but reported net of
applicable income taxes and adjustments to deferred policy acquisition cost
amortization as a separate component of accumulated other comprehensive income;
ii) held-to-maturity securities are recorded at amortized cost unless
these securities become other-than-temporarily impaired; and
iii)trading securities are recorded at fair value with changes in
unrealized gains and losses included in net income.
48
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
When a quoted market price is available for a security, the Group uses
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 appropriate valuation methodologies. Management's valuation methodologies
include fundamental analysis that evaluates the investee company's progress in
developing products, building intellectual property portfolios and securing
customer relationships, as well as overall industry conditions, conditions in
and prospects for the investee's geographic region, overall equity market
conditions, and the level of financing already secured and available. This is
combined with analysis of comparable acquisition transactions and values to
determine if the security's liquidation preferences will ensure full recovery of
the Group's investment in a likely acquisition outcome. In its valuation
analysis, management also considers the most recent transaction in a company's
shares.
Amortization of premiums and accretion of discounts on fixed maturity
securities are reflected in earnings over the contractual terms of the
investments in a manner that produces a constant effective yield. Realized gains
and losses on securities are included in net income using the specific
identification method. Any other-than-temporary declines in the fair value of
available-for-sale or held-to-maturity securities, below the cost or amortized
cost basis, are recognized as realized losses in the consolidated statements of
income. The cost basis of such securities is adjusted to reflect the write-down
recorded.
Deferred Policy Acquisition Costs
Policy acquisition costs are the costs of producing life insurance and
annuity business: principally commissions and certain marketing expenses which
vary with, and are primarily related to, the acquisition of new business. Policy
acquisition costs are deferred and amortized over the estimated lives of the
policies in relation to their estimated future gross profits. Amortization is
adjusted in the current year when estimates of total profits to be realized from
a group of products are revised.
Deferred policy acquisition costs are adjusted for the change in
amortization that would have been recorded if fixed maturity securities
classified as available-for-sale had been sold at their stated aggregate fair
value and the proceeds reinvested at current yields. The impact of this
adjustment is included in accumulated other comprehensive income within
shareholders' equity.
During 2002, all deferred policy acquisition costs were written off.
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost less
accumulated depreciation. Depreciation is calculated on a straight-line basis at
rates sufficient to write-off such assets over their estimated useful lives on
the following basis:
Furniture and equipment - five years
Computer equipment, including software - three to five years
Motor vehicles - five years
Leasehold improvements - life of lease
In accordance with Statement of Position No. 98-1 ("SOP 98-1"),
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," the Group capitalizes certain internal and external costs
incurred to obtain or create internal use software. These capitalized costs are
amortized over five years with the amortization period beginning when the
software is ready for its intended use.
49
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Assets held under capital leases are included in property, equipment and
leasehold improvements and are depreciated over their estimated useful lives.
The future obligations under these leases are included in accounts payable,
accruals and other liabilities. Interest paid on capital leases is charged to
the income statement over the periods of the leases.
Goodwill
Goodwill is recorded at acquisition of subsidiaries. Goodwill at
acquisition arises where the consideration given exceeds the fair value
attributed to the separable net assets. All goodwill on acquisitions was
capitalized until January 1, 2002, and amortized on a straight-line basis over
its estimated useful economic life, generally 25 years. Beginning January 1,
2002, goodwill is no longer amortized, but is regularly evaluated for impairment
and any impairment losses are recognized in the consolidated income statement.
See the discussion in "Recently Issued Accounting Pronouncements" below.
Life Insurance Policy Liabilities, Revenues and Expenses
Life insurance policy liabilities, premium revenues and related expenses
are accounted for in accordance with Statement of Financial Accounting Standards
No. 97, "Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sale of
Investments," as follows:
i) Life insurance policy liabilities for deferred annuities are accounted
for as investment-type insurance products and are recorded at accumulated value
(premiums received, plus accrued interest to the balance sheet date, less
withdrawals and assessed fees).
ii) Revenues for investment-type insurance products consist of charges
assessed against policy account values for surrenders.
iii)Benefits for investment-type insurance products are charged to
expense when incurred and reflect the claim amounts in excess of the policy
account balance. Expenses for investment-type products include the interest
credited to the policy account balance.
Revenue Recognition
Interest income is accounted for on an accrual basis. Dividends are
accounted for when declared.
Listed equity securities received as a result of an acquisition of one of
the Group's investee companies by a publicly traded company that are held in
escrow by an escrow agent, are recognized in the financial statements when the
transaction is completed. Reductions are made to the number of shares of listed
equity securities held in escrow that are carried in the financial statements as
claims are made by the acquiring company against the escrow, or if evidence
exists that a claim is probable.
Management fees collected on investment management contracts are
recognized proportionately over the term of the related contracts. Generally,
management fees are billed in advance and calculated based upon the market value
of the managed portfolios at the end of the preceding quarter. Fees collected,
but not yet earned, are deferred and recognized over their respective contract
period.
London Pacific Advisors ("LPA") develops and implements web based systems
for creating, managing and monitoring fee based investment accounts. It also
provides investment advisory services to retail and institutional customers and
portfolio support services to other investment advisors. Its revenues for these
products and services are generally computed on a quarterly basis based upon the
assets maintained on its
50
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
systems, or for which it provides advisory or support services. The revenues are
recognized over the period to which they relate.
In certain circumstances, LPA also provides custom software development
and consulting implementation services for separately negotiated fees. During
the year ended December 31, 2002, LPA earned approximately $150,000 for these
consulting services. Revenues from consulting implementation services are
recognized as such services are performed.
Stock Based Compensation
The Group accounts for stock based compensation issued to employees in
accordance with Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees," which recognizes compensation
expense based upon the intrinsic value of the stock options as of the date of
grant. The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock Based
Compensation," which encourages, but does not require, companies to recognize
compensation expense for grants of stock options based on their fair value. The
Group has elected, as permitted by SFAS 123, to adopt the disclosure requirement
of SFAS 123 and to continue to account for stock based compensation under APB
25.
Had compensation expense for the Group's ESOT activity been determined
based upon the fair value method in accordance with SFAS 123, the Group's net
income (loss) and earnings (loss) per share and ADS would have been reduced
or increased to the pro forma amounts as follows:
51
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31,
------------------------------------
2002 2001(1) 2000(1)
---------- ---------- ----------
(In thousands, except per share
and ADS amounts)
Net income (loss) as reported................................................ $ (205,504) $ (344,784) $ 32,457
Add: Stock based employee compensation expense included in
reported income (loss), net of related tax effects........................ - 530 2,943
Deduct: Total stock based employee compensation expense determined
under fair value based methods for all awards, net of related tax effects. (796) (5,165) (1,561)
---------- ---------- ----------
Pro forma net income (loss) ................................................. $ (206,300) $ (349,419) $ 33,839
---------- ---------- ----------
---------- ---------- ----------
Basic earnings (loss) per share:
As reported.................................................................. (4.05) (6.76) 0.64
Pro forma.................................................................... (4.06) (6.85) 0.67
Basic earnings (loss) per ADS (1):
As reported.................................................................. (40.49) (67.62) 6.39
Pro forma.................................................................... (40.65) (68.53) 6.66
Diluted earnings (loss) per share:
As reported.................................................................. (4.05) (6.76) 0.54
Pro forma.................................................................... (4.06) (6.85) 0.56
Diluted earnings (loss) per ADS (1):
As reported.................................................................. (40.49) (67.62) 5.35
Pro forma.................................................................... (40.65) (68.53) 5.57
Weighted average fair value of options granted
at market price during year............................................... 0.23 2.38 9.24
Weighted average fair value of options granted
at less than market price during year..................................... - 2.86 -
(1) ADS amounts have been restated to reflect the one-for-ten reverse split in
June 2002.
The pro forma disclosures shown above were calculated for all options
granted after December 31, 1994 using a Black-Scholes option pricing model with
the following assumptions:
2002 2001 2000
---------- ---------- ----------
Expected dividend yield (2).................................................. - - -
Expected stock price volatility.............................................. 125% 76% 67%
Risk-free interest rate...................................................... 3.95% 5.09% 6.07%
Weighted average expected life (in years).................................... 5 5 5
(2) As the Company paid a constant dividend amount for 2001 and 2000, a
deduction to the share price was made in the amount of the net present value of
the dividend and the dividend yield in the option pricing model was set to zero.
For 2002, the deduction to the share price was zero, as future dividends have
not been assumed.
52
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income Taxes
The Group accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." Under SFAS 109, the Group recognizes taxes payable or refundable for the
current year, and deferred tax assets and liabilities due to temporary
differences in the basis of assets and liabilities between amounts recorded for
financial statement and tax purposes.
The Group provides a valuation allowance for deferred income tax assets
if it is more likely than not that some portion of the deferred income tax asset
will not be realized. The Group includes in income any increase or decrease in a
valuation allowance that results from a change in circumstances that causes a
change in judgment about the realization of the related deferred income tax
asset.
The Group includes in additional paid-in capital the tax benefit on share
options exercised during the period to the extent that such exercises result in
a permanent difference between financial statement and tax basis compensation
expense.
Earnings Per Share and ADS
The Group 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 Group 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, 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 which are determined based on the "Treasury Stock Method."
Foreign Currencies
The Group uses the (pound) sterling as the functional currency for LPAL
and the U.S. dollar as the functional currency for the Company and all other
significant subsidiaries. Foreign exchange gains and losses resulting from the
remeasurement of foreign currency assets and liabilities into an entity's
functional currency are included in other operating expense in the consolidated
statements of income. For entities using a (pound) sterling functional currency,
assets and liabilities denominated in foreign currencies are translated into
U.S. dollars at the prevailing exchange rates at the balance sheet date and
income and expense items are translated to U.S. dollars at average exchange
rates in effect during the period. The resulting translation adjustment is shown
as a separate component of other comprehensive income in shareholders' equity.
Foreign currency transaction gains and losses are recorded in the results of
operations, and were not material in all periods presented.
Comprehensive Income
Comprehensive income consists of net income; changes in unrealized gains
and losses on available-for-sale securities, net of income taxes and deferred
policy acquisition cost amortization adjustments; and foreign currency
translation gains or losses arising on the translation of the Group's non-U.S.
dollar based subsidiaries.
53
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Recently Issued Accounting Pronouncements
In June 2002, the FASB issued Statement of Financial Accounting Standard
No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal
Activities." SFAS 146 requires the Group to recognize costs associated with exit
or disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS 146 replaces Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." The provisions of SFAS 146 will be applied prospectively
to exit or disposal activities initiated after December 31, 2002. The Group's
management believes that the adoption of SFAS 146 will not have a significant
effect on its consolidated financial statements.
In December 2002, the FASB amended Statement of Financial Accounting
Standard No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") by
issuing Statement of Financial Accounting Standard No. 148 ("SFAS 148"),
"Accounting for Stock-Based Compensation, Transition and Disclosure." SFAS 148
provides alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock based employee
compensation. Additionally, the statement amends the disclosure requirements of
SFAS 123 to require prominent disclosures in the annual and interim financial
statements about the method of accounting for stock based employee compensation
and the effect of the method used on reported results. SFAS 148 is effective for
financial statements for fiscal years ending after December 15, 2002, and for
financial reports containing condensed financial statements for interim periods
beginning after December 15, 2002. In compliance with SFAS 148, the Group has
elected to continue to follow the intrinsic value method in accounting for its
stock based compensation and has made the applicable disclosures in this Note 3
above.
In November 2002, the FASB approved FASB Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness to Others". FIN 45 elaborates on
the existing disclosure requirements for most guarantees. It also clarifies that
at the time a company issues a guarantee, the company must recognize an initial
liability for the fair value, or market value, of the obligations it assumes
under that guarantee and must disclose that information in its interim and
annual financial statements. The disclosure requirements of FIN 45 are effective
for financial statements of interim or annual periods ending after December 15,
2002. The Group has adopted the disclosure provisions of this interpretation as
of December 31, 2002. The Group's management does not expect the initial
recognition and measurement provisions for guarantees issued or modified after
December 31, 2002 to have a material impact on its consolidated financial
statements.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," which requires the consolidation
of variable interest entities ("VIE"), as defined in FIN 46. FIN 46 is
applicable to financial statements to be issued by the Group after 2002;
however, disclosures are required currently if the Group expects to consolidate
any variable interest entities. As of December 31, 2002, the Group does not have
entities meeting the definition of a VIE and does not expect the adoption of FIN
46 to have an impact on its financial statements.
Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions affecting the reported amounts of assets and
liabilities and the disclosures of contingent assets and liabilities as of the
date of the financial statements, and the reported amounts of revenue and
expenses for the reporting period. Estimates are inherently subject to change
and actual results could differ from the estimates. Certain significant
estimates, including those used to determine the valuation of investments, life
insurance policy liabilities and deferred policy acquisition costs, are
disclosed throughout these notes to the financial statements.
54
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Reclassifications
Certain reclassifications were made to prior year amounts to conform with
the current year's presentation. These reclassifications had no effect on the
net income or shareholders' equity for the prior years.
Note 4. Discontinued Operations
As described above in Note 1 "Material Events," the Group, with the
unanimous approval of LPLA's board of directors, ceded control of LPLA to the
North Carolina insurance regulators on August 6, 2002. In connection therewith,
the Group deconsolidated LPLA and recorded a charge to earnings of $38.5
million. Although LPLA was placed under regulatory control and rehabilitation,
the Group will not regain control or receive any benefit from LPLA in the
future. As such, in accordance with SFAS 144, the results of operations of LPLA
(pre-rehabilitation) have been reported in discontinued operations. Under SFAS
144, the results of operations of a discontinued business, and any impairment
losses related to a discontinued business, are reported separately in the income
statement under discontinued operations for the current and prior periods, and
in the prior period balance sheet as total assets of discontinued operations and
total liabilities of discontinued operations.
A summary of LPLA's pre-tax operating results for the years ended
December 31, 2002, 2001 and 2000, and LPLA's total assets and total liabilities
as of December 31, 2001, are shown below.
Years ended December 31,
------------------------------------
2002 (1) 2001 2000
---------- ---------- ----------
(In thousands)
Revenues:
Investment income before intercompany management fee expense................. $ 62,453 $ 134,758 $ 112,192
Intercompany management fee expense (2)...................................... (3,632) (11,831) (10,240)
Other income................................................................. 4,176 7,048 9,084
Net realized and change in net unrealized investment gains
and losses................................................................ (97,618) (164,773) (40,058)
---------- ---------- ----------
Total revenues and net investment gains (losses)............................. (34,621) (34,798) 70,978
Expenses:
Interest credited on insurance policyholder accounts......................... 56,133 112,651 92,864
Amortization of deferred policy acquisition costs............................ 17,145 22,808 21,040
Other expenses............................................................... 4,593 7,573 8,260
---------- ---------- ----------
Total expenses............................................................... 77,871 143,032 122,164
---------- ---------- ----------
Loss before income taxes..................................................... $ (112,492) $ (177,830) $ (51,186)
---------- ---------- ----------
---------- ---------- ----------
(1) Though the Group did not lose control of LPLA until August 6, 2002, the
Group was not able to obtain LPLA's financial results on a U.S. GAAP basis for
the period July 1, 2002 up to August 6, 2002. Therefore, the Group's
consolidated income statement includes LPLA's results only through June 30,
2002. These results are reflected as discontinued operations in the consolidated
income statement.
(2) These fees were paid to and included in the revenues of the venture capital
management and asset management business segments of continuing operations.
55
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
2001
--------------
(In thousands)
Assets of discontinued operations:
Cash and investments.................................................................... $1,755,260
Deferred policy acquisition costs....................................................... 165,713
Assets held in separate accounts........................................................ 227,675
Reinsurance assets...................................................................... 42,025
Other assets............................................................................ 63,835
------------
Total assets of discontinued operations................................................. $2,254,508
------------
------------
Liabilities of discontinued operations:
Life insurance policy liabilities....................................................... $1,900,022
Liabilities related to separate accounts................................................ 226,015
Accounts payable, accruals and other liabilities........................................ 9,945
------------
Total liabilities of discontinued operations............................................ $2,135,982
------------
------------
LPLA had been included in the Group's life insurance and annuities
business segment.
The loss on disposal of discontinued operations, net of tax, was recorded
in the third quarter of 2002 and reported in the Group's Form 10-Q as follows:
(In thousands)
Net unrealized losses on available-for-sale securities, net of
deferred policy acquisition cost amortization adjustments and deferred income taxes... $ 10,649
Impairment on long-lived assets (LPLA's net assets)...................................... 12,269
Write-off of doubtful receivables from LPLA.............................................. 15,614
------------
38,532
Income tax benefit....................................................................... -
------------
Net loss on disposal of discontinued operations.......................................... $ 38,532
------------
------------
56
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 5. Investments
Summary Cost and Fair Value Information
Fixed Maturity Securities
An analysis of fixed maturity securities is as follows:
December 31,
--------------------------------------------------------------------------------------------------
2002 2001
---------------------------------------------- ----------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(In thousands)
Available-for-Sale:
Non-U.S. government
debt securities.......... $ - $ - $ - $ - $ 7,629 $ 97 $ - $ 7,726
Non-U.S. corporate
debt securities.......... 12,709 115 (9) 12,815 64,323 981 (359) 64,945
Corporate debt securities 17,772 90 (342) 17,520 44,901 477 (348) 45,030
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 30,481 $ 205 $ (351) $ 30,335 $ 116,853 $ 1,555 $ (707) $ 117,701
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Held-to-Maturity:
Private corporate debt
securities............... $ - $ - $ - $ - $ 871 $ - $ - $ 871
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total fixed maturity
securities............... $ 30,481 $ 205 $ (351) $ 30,335 $ 117,724 $ 1,555 $ (707) $ 118,572
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
No fixed maturity securities classified as held-to-maturity were sold
during 2002, 2001 or 2000. During 2002, $871,000 in private corporate debt
securities classified as held-to-maturity were considered by management to be
other-than-temporarily impaired and consequently their amortized cost was
reduced to zero during 2002.
During 2000, fixed maturity securities classified as held-to-maturity
with an aggregate carrying value of $23,397,000 were exchanged into preferred
stock and classified as available-for-sale. The exchanges resulted from
refinancings by the investee companies and there were no gains or losses
recorded in the consolidated income statement. There were no such transfers in
2001 or 2002.
As of December 31, 2002, there were no non-income producing fixed
maturity securities for the twelve months preceding December 31, 2002.
57
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Contractual Maturities
The amortized cost and estimated fair value of fixed maturity securities
as of December 31, 2002 by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities as certain issuers have the
right to call and certain borrowers have the right to prepay obligations without
penalty.
Available-for-Sale Held-to-Maturity
------------------------------- ------------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------------- -------------- -------------- --------------
(In thousands)
Due in one year or less .......................... $ 13,070 $ 13,213 $ - $ -
Due after one year through five years............. 17,411 17,122 - -
-------------- -------------- -------------- --------------
$ 30,481 $ 30,335 $ - $ -
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Equity Securities
Equity securities are comprised of available-for-sale and trading
securities. An analysis of equity securities is as follows:
December 31,
--------------------------------------------------------------------------------------------------
2002 2001
---------------------------------------------- ----------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Unrealized Unrealized Fair Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(In thousands)
Private corporate equity
securities............... $ 8,983 $ - $ (1,750) $ 7,233 $ 17,155 $ - $ (1,875) $ 15,280
Other equity securities ... - - - - 142 - (119) 23
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total available-for-sale
equity securities........ 8,983 - (1,750) 7,233 17,297 - (1,994) 15,303
Trading securities......... 26,785 5,236 (15,516) 16,505 64,175 16,317 (12,875) 67,617
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total equity securities.... $ 35,768 $ 5,236 $ (17,266) $ 23,738 $ 81,472 $ 16,317 $ (14,869) $ 82,920
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Trading securities are carried at fair value with changes in net
unrealized gains and losses of $(22,483,000), $(230,981,000) and $(79,091,000)
included in earnings for the years ended December 31, 2002, 2001 and 2000,
respectively. During 2002, the loss from the change in net unrealized gains and
losses on trading securities included a reclassification adjustment of
$8,761,000 related to securities purchased from LPLA at above the Group's
original cost.
58
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Investment Concentration and Risk
As of December 31, 2002, fixed maturity securities held by the Group
included investments in General Motors of $7,974,000, British Telecom of
$3,270,000, Daimler Chrysler of $3,269,000, Ford Motor Credit of $3,220,000,
Fiat Finance of $2,871,000, North American Capital of $2,819,000 and Clarica of
$2,771,000. Equity securities held by the Group primarily included investments
in Agility Communications, Inc. of $3,375,000, Alacritech, Inc. of $2,250,000,
New Focus, Inc. of $2,496,000 and Packeteer, Inc. of $11,402,000. These eleven
corporate issuers each represented more than ten percent of shareholders' equity
as of December 31, 2002.
As of December 31, 2001, there were no investments in either fixed
maturity or equity securities in any one issuer representing more than ten
percent of shareholders' equity. Fixed maturity securities considered less than
investment grade approximated 10.7% and 7.5% of total fixed maturity securities
as of December 31, 2002 and 2001, respectively.
Net Unrealized Gains (Losses) on Available-for-Sale Securities
The net unrealized losses on fixed maturity securities classified as
available-for-sale as of December 31, 2002 totaled $146,000. There were no
related deferred policy acquisition cost adjustments or income taxes. As of
December 31, 2001, for continuing operations, the net unrealized gains on fixed
maturity securities classified as available-for-sale after deferred policy
acquisition cost adjustments were $1,399,000.
The net unrealized losses on equity securities classified as
available-for-sale as of December 31, 2002 totaled $1,750,000. There were no
related income taxes. As of December 31, 2001, for continuing operations, the
net unrealized losses on equity securities classified as available-for-sale
totaled $1,994,000.
59
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Changes in net unrealized gains and losses on available-for-sale
securities included in other comprehensive income for the years ended December
31, 2000 and 2001 and 2002 were as follows:
Net Unrealized Gains (Losses)
------------------------------------
Fixed
Maturity Equity
Securities Securities Total
- ---------- ---------- ----------
(In thousands)
Net unrealized losses on available-for-sale securities as of
December 31, 1999.......................................................... $ (16,030) $ (2,335) $ (18,365)
Changes during the year ended December 31, 2000 for continuing operations:
Unrealized holding gains and losses on available-for-sale securities...... (335) 186 (149)
Reclassification adjustment for gains and losses included in net income (loss) - - -
Decrease in amortization of deferred policy acquisition costs............. 147 - 147
Changes during the year ended December 31, 2000 for discontinued operations:
Change in net unrealized gains and losses on available-for-sale securities (9,862) (6,248) (16,110)
Decrease in amortization of deferred policy acquisition costs............. 5,593 - 5,593
Decrease in deferred income tax liabilities............................... 1,494 2,188 3,682
---------- ---------- ----------
Net unrealized losses on available-for-sale securities as of
December 31, 2000......................................................... (18,993) (6,209) (25,202)
Changes during the year ended December 31, 2001 for continuing operations:
Unrealized holding gains and losses on available-for-sale securities...... 458 (2,081) (1,623)
Reclassification adjustment for gains and losses included in net income (loss) 724 112 836
Decrease in amortization of deferred policy acquisition costs............. 405 - 405
Changes during the year ended December 31, 2001 for discontinued operations:
Change in net unrealized gains and losses on available-for-sale securities 27,687 7,896 35,583
Increase in amortization of deferred policy acquisition costs............. (13,398) - (13,398)
Increase in deferred income tax liabilities............................... (5,001) (1,349) (6,350)
---------- ---------- ----------
Net unrealized losses on available-for-sale securities as of
December 31, 2001......................................................... (8,118) (1,631) (9,749)
Changes during the year ended December 31, 2002 for continuing operations:
Unrealized holding gains and losses on available-for-sale securities...... (116) (1,000) (1,116)
Reclassification adjustment for gains and losses included in net income (loss) (878) 1,244 366
Increase in amortization of deferred policy acquisition costs............. (551) - (551)
Changes during the year ended December 31, 2002 for discontinued operations:
Change in net unrealized gains and losses on available-for-sale securities 16,584 (10,840) 5,744
Increase in amortization of deferred policy acquisition costs............. (8,044) - (8,044)
Decrease (increase) in deferred income tax liabilities.................... (2,989) 3,794 805
Reclassification adjustment for losses of discontinued operations included
in net income (loss)..................................................... 3,966 6,683 10,649
---------- ---------- ----------
Net unrealized losses on available-for-sale securities as of
December 31, 2002......................................................... $ (146) $ (1,750) $ (1,896)
---------- ---------- ----------
---------- ---------- ----------
60
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net Investment Income
The details of investment income, net of investment expenses, are as
follows:
Years Ended December 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
(In thousands)
Interest on fixed maturity securities........................................ $ 5,972 $ 6,040 $ 1,412
Interest on cash and cash equivalents........................................ 686 2,230 2,401
---------- ---------- ----------
Gross investment income...................................................... 6,658 8,270 3,813
Investment expenses.......................................................... (11) (6) -
---------- ---------- ----------
6,647 8,264 3,813
Interest credited on insurance policyholder accounts......................... (6,031) (6,314) (1,201)
---------- ---------- ----------
Net investment income........................................................ $ 616 $ 1,950 $ 2,612
---------- ---------- ----------
---------- ---------- ----------
Investment expenses included costs of investment administration,
primarily custodial fees.
Realized Gains and Losses
Information about gross and net realized gains and losses on securities
transactions is as follows:
Years Ended December 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
(In thousands)
Realized gains (losses) on securities transactions:
Fixed maturities, available-for-sale:
Gross gains............................................................... $ 1,798 $ 13 $ 3
Gross losses ............................................................. (15,611) (7,042) -
---------- ---------- ----------
Net realized gains (losses) on fixed maturities, available-for-sale ......... (13,813) (7,029) 3
---------- ---------- ----------
Fixed maturities, held-to-maturity:
Gross losses.............................................................. (2,125) (434) (1,336)
---------- ---------- ----------
Equity securities, trading:
Gross gains............................................................... 5,601 36,070 155,521
Gross losses.............................................................. (1,629) - (300)
---------- ---------- ----------
Net realized gains on equity securities, trading ............................ 3,972 36,070 155,221
---------- ---------- ----------
Equity securities, available-for-sale:
Gross gains............................................................... - 456 110
Gross losses.............................................................. (9,541) (10,556) (317)
---------- ---------- ----------
Net realized losses on equity securities, available-for-sale ................ (9,541) (10,100) (207)
---------- ---------- ----------
Net realized investment gains (losses) on securities transactions............ $ (21,507) $ 18,507 $ 153,681
---------- ---------- ----------
---------- ---------- ----------
61
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During 2002, management determined that two private equity investments in
technology companies were other-than-temporarily impaired and consequently
realized losses of $8.2 million were recorded in the consolidated income
statement. Certain other private corporate debt and equity investments were
considered by management to be other-than-temporarily impaired and realized
losses totaling $12.7 million were recorded in the consolidated income
statement. In addition during 2002, one public corporate debt security
classified as available-for-sale was considered by management to be
other-than-temporarily impaired and a realized loss of $0.3 million was recorded
in the consolidated income statement for the difference between the amortized
cost and the fair value of this security.
During 2001, management determined that one private equity investment in
a technology company was other-than-temporarily impaired and consequently a
realized loss of $10.0 million was recorded in the consolidated income
statement. Certain other private corporate debt investments were considered by
management to be other-than-temporarily impaired and realized losses totaling
$0.4 million were recorded in the consolidated income statement. In addition
during 2001, one public corporate debt security classified as available-for-sale
was considered by management to be other-than-temporarily impaired and a
realized loss of $7.0 million was recorded in the consolidated income statement
for the difference between the amortized cost and the fair value of this
security.
Note 6. Deferred Policy Acquisition Costs
Deferred policy acquisition cost activity was as follows:
Years Ended December 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
(In thousands)
Balance as of January 1...................................................... $ 3,113 $ 1,509 $ -
Deferral of costs relating to:
Commissions ................................................................. 169 1,737 1,153
Other ....................................................................... 81 405 352
---------- ---------- ----------
250 2,142 1,505
Amortization relating to:
Operations .................................................................. 2,952 262 115
Investment gains ............................................................ - 670 -
---------- ---------- ----------
2,952 932 115
---------- ---------- ----------
Net deferral ................................................................ (2,702) 1,210 1,390
Adjustment for unrealized losses (gains) on available-for-sale fixed
maturity securities....................................................... (551) 405 146
Increase (decrease) due to foreign exchange.................................. 140 (11) (27)
---------- ---------- ----------
Balance as of December 31 ................................................... $ - $ 3,113 $ 1,509
---------- ---------- ----------
---------- ---------- ----------
Due to the events described in Note 1 "Material Events," LPAL
discontinued the issuance of new policies on July 2, 2002 and since that date
experienced a substantial increase in policy redemptions. Based on revised
estimates of the gross profits on the remaining block of business, management
determined that the balance of deferred policy acquisition costs should be
written-off in full as of September 30, 2002.
62
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7. Property and Equipment
Property and equipment are carried at cost and consisted of the
following:
December 31,
-----------------------
2002 2001
---------- ----------
(In thousands)
Property, equipment and leasehold improvements.................................... $ 5,029 $ 5,010
Capitalized software development costs............................................ 2,923 2,553
---------- ----------
7,952 7,563
Accumulated depreciation.......................................................... (4,651) (3,395)
---------- ----------
Property and equipment, net....................................................... $ 3,301 $ 4,168
---------- ----------
---------- ----------
Note 8. Goodwill
Goodwill activity was as follows:
Years Ended
December 31,
-----------------------
2002 2001
---------- ----------
(In thousands)
Cost:
Balance as of January 1 .......................................................... $ 5,276 $ 5,276
Goodwill written-off.............................................................. (396) -
---------- ----------
Balance as of December 31 ........................................................ 4,880 5,276
Accumulated amortization:
Accumulated amortization as of January 1 ......................................... 2,312 2,091
Amortization recorded............................................................. - 221
---------- ----------
Accumulated amortization as of December 31 ....................................... 2,312 2,312
---------- ----------
Net book value as of December 31 ................................................. $ 2,568 $ 2,964
---------- ----------
---------- ----------
63
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Had SFAS 142 been in effect prior to January 1, 2002, the Group's
reported net loss and loss per share and ADS would have been as follows:
Years Ended
December 31,
-----------------------
2002 2001
---------- ----------
(In thousands, except per
share and ADS amounts)
Net loss from continuing operations:
As reported....................................................................... $ (62,210) $ (224,045)
Goodwill adjustment............................................................... - 221
---------- ----------
Adjusted.......................................................................... $ (62,210) $ (223,824)
---------- ----------
---------- ----------
Basic and diluted loss per share (continuing operations):
As reported....................................................................... $ (1.23) $ (4.39)
Effect of goodwill amortization................................................... - -
---------- ----------
Adjusted.......................................................................... $ (1.23) $ (4.39)
---------- ----------
---------- ----------
Basic and diluted loss per ADS (continuing operations):
As reported....................................................................... $ (12.26) $ (43.94)
Effect of goodwill amortization................................................... - 0.04
---------- ----------
Adjusted.......................................................................... $ (12.26) $ (43.90)
---------- ----------
---------- ----------
In accordance with SFAS 142, the Group evaluated its carrying value of
goodwill during 2002 and determined that the goodwill carried on the books of
two of its subsidiaries was impaired. Advisors Insurance Services of Texas has
been inactive and is in the process of being liquidated; consequently,
approximately $7,000 of goodwill was written-off. Subsequent to the loss of
control of LPLA and the termination of the investment management contract for
LPLA's investment portfolio, the value of BICC's technology venture capital
business is less certain. Consequently, BICC's goodwill balance of approximately
$389,000 was written-off during 2002.
64
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 9. Other Assets
An analysis of other assets is as follows:
December 31,
-----------------------
2002 2001
---------- ----------
(In thousands)
Deferred income tax assets ....................................................... $ - $ 5,504
Prepayments ...................................................................... 1,684 1,763
Receivables:
Income tax refunds receivable.................................................. 61 -
Fee income receivable.......................................................... 686 774
Allowance for doubtful accounts................................................ (12) (5)
Other receivables.............................................................. 182 311
Due from brokers............................................................... 472 -
Other assets ..................................................................... 26 3
---------- ----------
Total other assets .............................................................. $ 3,099 $ 8,350
---------- ----------
---------- ----------
Note 10. Life Insurance Policy Liabilities
An analysis of life insurance policy liabilities is as follows:
December 31,
-----------------------
2002 2001
---------- ----------
(In thousands)
Deferred annuities - policyholder contract deposits .............................. $ 35,441 $ 131,765
Other policy claims and benefits ................................................. - 66
---------- ----------
$ 35,441 $ 131,831
---------- ----------
---------- ----------
The liability for future policy benefits and policyholder contract
deposits was determined based on the following assumptions:
Interest Rate Assumptions
Guaranteed reset rates were 3.0% for seven year annuity products issued
in 2002. For three and five year annuity products, credited interest rates
generally ranged from 3.30% to 7.40% in 2002, 3.45% to 7.40% in 2001, and from
6.50% to 7.40% in 2000.
Mortality Assumptions
Assumed mortality rates were based on standard tables commonly used in
the U.K. life insurance industry, namely the AM80 table for male lives and the
AF80 table for female lives.
Withdrawal Assumptions
Withdrawal charges on deferred annuities generally ranged from 1% to 7%,
grading to zero over a period of up to 7 years.
65
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 11. Statutory Financial Information and Restrictions
LPAL is regulated by the Jersey Financial Services Commission ("JFSC")
and under Article 6 of the Insurance Business (Jersey) Law 1996 is permitted to
conduct long-term insurance business. LPAL is required to submit annual audited
financial statements (prepared under U.S. GAAP which is permitted), and an
audited annual filing to the JFSC in the format consistent with that required by
the Insurance Directorate of HM Treasury in the United Kingdom. The annual
filing submitted by LPAL must be accompanied by a Certificate from the Appointed
Actuary that based on sufficiently prudent assumptions, assets are sufficient to
cover all liabilities. The annual filing contains a report from the Appointed
Actuary on the matching of investments to liabilities.
The JFSC sets out the conditions with which LPAL must comply and
determines the reporting requirements and the frequency of reporting. These
conditions include: (i) LPAL must hold, at all times, approved assets at least
equal to the long-term insurance fund plus the required minimum solvency margin,
(ii) the margin of solvency must be the greater of (pound)50,000 or 2.5% of the
value of the long-term business fund, (iii) a maximum of 20% of the approved
assets necessary to cover the long-term insurance fund and the required minimum
solvency margin may be held in private equity investments, and (iv) assets equal
to not less than 90% of liabilities must be placed with approved independent
custodians. As of December 31, 2002, LPAL met all of these conditions.
LPAL is also required under the insurance laws to appoint an actuary. The
actuary must be qualified as defined under the laws and is required to supervise
the long-term insurance fund. No transfers, except in satisfaction of long-term
insurance business liabilities, including dividends, are permitted from the
long-term insurance fund without written consent from the actuary.
Note 12. Notes Payable
The Group's consolidated results for the quarters ended June 30, 2002 and
September 30, 2002 resulted in breaches of the net worth, operating
profit/interest charge and intangible asset ratio financial covenants under its
bank facility with Bank of Scotland. On December 20, 2002, the Company and Bank
of Scotland agreed to the terms and conditions of an amended credit facility.
The new facility provided up to $23.0 million of borrowings, with an interest
rate of 3.5% above the LIBOR rate on borrowings up to $10.0 million and 4.5%
above the LIBOR rate on borrowings between $10.0 million and $23.0 million. (The
one month LIBOR rate on December 31, 2002 was 1.38%.) The facility limit
decreases at the end of each quarter, such that the facility must be repaid in
full no later than December 31, 2003; however, the bank has agreed to consider
an extension of the final facility expiration date in light of the overall
circumstances prevailing at the time of any such request by the Company. In
addition to providing the bank with security interest over certain of the
Group's listed equity securities having an aggregate market value of $4.5
million as of February 28, 2003, the Company has given the bank other
guarantees, pledges and security interests over certain other Group assets. The
Company agreed to pay the bank a one-time restructuring fee of (pound)180,000,
monthly management fees of (pound)10,000 and quarterly facility fees which begin
at 0.5% per annum and increase each quarter until they reach 2.5% per annum in
the third quarter of 2003 based on the average facility usage during the
quarter. The Company also granted to the bank warrants to subscribe for
1,933,172 Ordinary Shares of the Company. The warrants have a subscription price
of (pound)0.1143 ($0.184 at (pound)1 = $1.61) and may be exercised any time
prior to February 14, 2010. New financial covenants have been set under this
reducing credit facility with testing to take place as of the end of each
quarter. As of December 31, 2002, the Group met the financial covenants under
the facility.
66
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During December 2002, the Group repaid $3.0 million to Bank of Scotland
in permanent reduction of the facility to $20.0 million. As of December 31,
2002, $9.3 million was outstanding under the facility. In addition, $10.6
million of the remaining $10.7 million under the facility was utilized in the
form of guarantees and letters of credit provided on behalf of certain former
investee companies. During February 2003, the Group sold certain of its listed
equity securities for $4.7 million and the proceeds were used to reduce the
Group's borrowings to $4.6 million and the facility to $15.2 million.
The Group's management believes that it is unlikely that the former
investee companies will have the ability to repay any of their borrowings
totaling $10.6 million according to the bank's quarterly repayment schedule
during 2003, and thus the Group will be obligated to pay this amount on their
behalf. The Group has recorded the maximum guarantee obligation of $10.6 million
at December 31, 2002 on its consolidated balance sheet and has taken
other-than-temporary impairment losses on the related investments in its
consolidated income statement for 2002.
The Group intends to use a combination of existing cash, proceeds from
listed equity security sales and the net proceeds from the sale of BCM in order
to meet the paydown schedule under the bank facility described above. In the
event that the sale of BCM to Putnam Lovell (see Note 2 "Subsequent Events"
above) is not completed, in order to meet its near-term obligations, the Company
will be required to identify other sources of liquidity. The Group's management
believes that it will still be able to meet its near-term obligations through
the sale of BCM to another party or the sale of other assets.
Note 13. Income Taxes
The Group is subject to taxation on its income in all countries in which
it operates based upon the taxable income arising in each country. However,
realized gains on certain investments are exempt from Jersey and Guernsey
taxation. This and other tax benefits which may not recur have reduced the tax
charge in 2002, 2001 and 2000.
The Group is subject to income tax in Jersey at a rate of 20%. In the
United States, the Group is subject to both federal and California taxes charged
at 34% and 8.84%, respectively.
A breakdown of the Group's book income (loss) from continuing operations
before income taxes by tax jurisdiction follows:
Years Ended December 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
(In thousands)
Income (loss) from continuing operations before income taxes:
Jersey, Guernsey and United Kingdom.......................................... $ (52,539) $ (224,085) $ 70,227
United States................................................................ (5,593) 688 (4,031)
---------- ---------- ----------
Total income (loss) from continuing operations before income taxes .......... $ (58,132) $ (223,397) $ 66,196
---------- ---------- ----------
---------- ---------- ----------
67
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The provision for income taxes differs from the amount computed by
applying the Jersey, Channel Islands statutory income tax rate of 20% to income
(loss) from continuing operations before income taxes. The sources and tax
effects of the difference are as follows:
Years Ended December 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
(In thousands)
Income taxes computed at Jersey statutory income tax rate of 20%............. $ (11,626) $ (44,679) $ 13,239
Realized and unrealized investment losses (gains) not subject to taxation
in Jersey ................................................................ 4,880 30,550 (37,344)
Other losses not deductible in Jersey........................................ 2,611 627 1,676
Losses not deductible in Guernsey............................................ 2,970 15,141 23,171
Taxes on income (benefits on losses) at higher than 20% statutory
Jersey rate:
Net income (loss) on continuing operations in the U.S..................... (1,277) 148 (908)
Non-deductible compensation in the U.S....................................... - 1,012 383
Exercise of employee stock options (additional paid-in capital
adjustment)............................................................... - - (1,809)
Adjustment of prior years' provisions........................................ (1,563) 59 (251)
Increase (decrease) in valuation allowance .................................. 23,958 (2,660) 1,920
Less: valuation allowance related to discontinued operations................. (16,309) - -
Other........................................................................ 434 450 124
---------- ---------- ----------
Actual tax expense for continuing operations ................................ $ 4,078 $ 648 $ 201
---------- ---------- ----------
---------- ---------- ----------
The components of the actual tax expense for continuing operations are as
follows:
Years Ended December 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
(In thousands)
Jersey, Guernsey and United Kingdom:
Current tax expense (benefit)............................................. $ (671) $ 1,601 $ 1,549
Deferred tax expense...................................................... - - -
United States:
Current tax expense (benefit)............................................. (755) 128 (1,078)
Deferred tax expense (benefit)............................................ 5,504 (1,081) (270)
---------- ---------- ----------
Total actual tax expense..................................................... $ 4,078 $ 648 $ 201
---------- ---------- ----------
---------- ---------- ----------
The components of the actual tax expense (benefit) for discontinued
operations are as follows:
United States:
Current tax expense (benefit)............................................. $ (8,307) $ 8,635 $ (5,416)
Deferred tax expense (benefit)............................................ 577 (65,726) (12,232)
---------- ---------- ----------
$ (7,730) $ (57,091) $ (17,648)
---------- ---------- ----------
---------- ---------- ----------
68
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Group recognizes assets and liabilities for the deferred tax
consequences of temporary differences between the tax basis of assets and
liabilities and their reported amounts in the financial statements. These
temporary differences will result in taxable or deductible amounts in future
years when the reported amounts of assets and liabilities are recovered or
settled. The deferred income tax assets are reviewed periodically for
recoverability and valuation allowances are provided as necessary. Deferred
income tax assets and liabilities are disclosed net in the consolidated
financial statements when they arise within the same tax jurisdiction and tax
return.
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets and deferred income tax liabilities
are presented below. Net deferred income tax assets existed as of December 31,
2001 in the U.S. subsidiaries of continuing operations which file consolidated
federal tax returns for two separate groups. As of December 31, 2002, full
valuation allowances were provided on the net deferred tax assets of both U.S.
tax groups due to the uncertainty of generating future taxable income or capital
gains to benefit from the deferred tax assets. The net increase in the valuation
allowance during 2002 was $23,958,000 ($7,649,000 related to continuing
operations).
December 31,
-----------------------
2002 2001
---------- ----------
(In thousands)
U.S. subsidiaries (continuing operations):
Deferred income tax assets:
Net operating loss carryforwards.................................................. $ 8,539 $ 5,713
Capital loss carryforwards........................................................ 18,774 2,687
Unrealized losses on investments.................................................. 376 186
Deferred compensation............................................................. 137 1,122
Other assets...................................................................... 27 19
Valuation allowance............................................................... (27,420) (3,462)
---------- ----------
Deferred income tax assets, net of valuation allowance............................ 433 6,265
Deferred income tax liabilities:
Depreciation, amortization and other.............................................. (431) (402)
Other liabilities ................................................................ (2) (359)
---------- ----------
(433) (761)
---------- ----------
Net deferred income tax assets - U.S. subsidiaries
(continuing operations)........................................................ $ - $ 5,504
---------- ----------
---------- ----------
As of December 31, 2002, the U.S. subsidiaries of continuing operations
had pre-tax federal net operating loss carryforwards of approximately $21.5
million expiring as follows: approximately $1.5 million from 2003 to 2012, and
approximately $20.0 million from 2020 to 2022. These subsidiaries have
California net operating loss carryforwards of approximately $13.8 million
expiring as follows: approximately $0.5 million in 2004, and approximately $13.3
million from 2010 to 2012. The Group has recorded a full valuation allowance for
the deferred tax assets arising from these carryforward amounts as of December
31, 2002.
LPLA, the U.S. life insurance subsidiary (discontinued operations), had
net deferred tax assets of $17,804,000 as of December 31, 2001 and $18,031,000
as of June 30, 2002. LPLA files a separate U.S. federal tax return.
69
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 14. Shareholders' Equity
The Company has authorized 86,400,000 Ordinary Shares with a par value of
$0.05 per share. As of December 31, 2002 and 2001, there were 64,439,073
Ordinary Shares issued and outstanding.
A final dividend for 2001 of $0.05 gross per Ordinary Share ($0.04 net of
20% Jersey tax) and $0.40 per ADS (net of 20% Jersey tax) or $2,032,000 in total
was declared and paid during 2002. Total dividends declared and paid were $0.29
gross per Ordinary Share ($0.232 net of 20% Jersey tax) and $2.32 per ADS (net
of 20% Jersey tax) during each of the years ended December 31, 2001 and 2000, or
$11,802,000 and $11,625,000, respectively, in total. Dividends per ADS have been
restated to reflect the one-for-ten reverse split in June 2002.
Accumulated other comprehensive income (loss) consists of two components,
foreign currency translation adjustments and net unrealized gains and losses on
available-for-sale securities. Accumulated foreign currency translation
adjustments were $(717,000), $(157,000) and $(42,000) as of December 31, 2002,
2001 and 2000, respectively. The net unrealized losses on available-for-sale
securities after deferred policy acquisition cost amortization adjustments and
income taxes were $(1,896,000), $(9,749,000) and $(25,202,000) as of December
31, 2002, 2001 and 2000, respectively. Of these amounts, $0, $(9,154,000) and
$(24,989,000) related to discontinued operations as of December 31, 2002, 2001
and 2000, respectively.
The Group has two share incentive plans as described in Note 18 to the
Consolidated Financial Statements. Under the terms of these plans, shares of the
Company may be purchased in the open market and held in trust. These shares are
owned by the employee benefit trusts, which are subsidiaries of the Company for
financial reporting purposes.
Changes in the number of shares held by The London Pacific Group 1990
Employee Share Option Trust ("ESOT") and the Agent Loyalty Opportunity Trust
("ALOT") were as follows:
Years Ended December 31,
----------------------------------------------------------------------------
2002 2001 2000
----------------------- ----------------------- ------------------------
ESOT ALOT ESOT ALOT ESOT ALOT
---------- ---------- ---------- ---------- ---------- ----------
(In thousands)
Shares held as of January 1 .......... 13,260 438 12,374 438 14,682 650
Purchased ............................ - - 1,027 - 694 -
Exercised ............................ (13) - (141) - (3,214) -
Transferred between trusts ........... - - - - 212 (212)
---------- ---------- ---------- ---------- ---------- ----------
Shares held as of December 31......... 13,247* 438 13,260* 438 12,374* 438
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
* 834,000, 834,000 and 604,000 were held in ADR form for the years ended
December 31, 2002, 2001 and 2000, respectively.
70
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Warrants
On November 11, 2002, the Company agreed to grant 1,933,172 warrants to
subscribe for the Company's Ordinary Shares to Bank of Scotland in connection
with the extension of the Group's credit facility. The warrants were granted on
February 14, 2003 and have an exercise price of (pound)0.1143 (based on the
average of the closing prices of the Ordinary Shares over the trading days from
November 1, 2002 through November 11, 2002), which was higher than the market
price of (pound)0.09 on November 11, 2002. These warrants are exercisable at any
time prior to February 14, 2010 and their fair value was determined to be
$251,125, based on a risk-free rate of 2.80%, volatility of 179% and a dividend
yield of zero. The Company recognized $30,625 of expense relating to these
warrants in 2002. The balance of $220,500 will be recognized as an expense pro
rata in 2003, with the corresponding entries to additional paid in capital.
Note 15. Commitments and Contingencies
Lease Commitments
The Group leases furniture, fixtures and equipment under capital and
operating leases with terms in excess of one year. The Group also leases office
space under operating leases. Total rent expense on operating leases in the
continuing operations was $1,085,000, $933,000 and $792,000 for the years ended
December 31, 2002, 2001 and 2000, respectively.
Future minimum lease payments required under capital and non-cancellable
operating leases with terms of one year or more, as of December 31, 2002, were
as follows:
Capital Operating
Leases Leases
----------- -----------
(In thousands)
2003 ............................................................................. $ 166 $ 455
2004 ............................................................................. 65 490
2005 ............................................................................. 29 483
2006.............................................................................. 2 453
2007.............................................................................. - 425
2008 and thereafter .............................................................. - 526
------------ ---------
Total ............................................................................ 262 $2,832
---------
---------
Less amounts representing interest ............................................... (18)
------------
Present value of net minimum lease payments ...................................... $ 244
------------
------------
Commitments eliminated as a result of the actions of the North Carolina
Department of Insurance ("NCDOI") with respect to LPLA (as described in Note 1
"Material Events") for operating and capital lease commitments were
approximately $10.8 million and $0, respectively.
71
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Guarantees and Letters of Credit
For disclosure of guarantees and letters of credit, see Note 12 to the
Consolidated Financial Statements.
In the course of the administration of LPLA in rehabilitation, the NCDOI
requested information concerning the history of a limited number of investments
in securities of portfolio companies during November 2002. These portfolio
investments have been associated with LPLA for more than seven years, and
involve intercompany transfers. The history of their investment performance and
ownership is complex. The Company has complied with these requests. The Company
is not able at this time to predict what conclusions the NCDOI will reach after
evaluation of this information.
The Group is involved in various legal proceedings, including claims for
damages from clients of a nature considered to be normal to its business. The
Company believes the ultimate settlement or other resolution of the claims will
not materially affect its consolidated financial position, results of operations
or cash flows.
Note 16. Fair Value of Financial Instruments
Substantially all financial instruments used in the Group's trading and
investing activities are carried at fair value or amounts that approximate fair
value. Fair value is based generally on listed market prices or broker-dealer
price quotations. To the extent that prices are not readily available, estimated
fair value is based on valuation methodologies performed by management, which
evaluate company, industry, geographical and overall equity market factors that
would influence the security's fair value.
With the exception of the fixed maturity securities classified as
held-to-maturity, which are held at amortized cost, the carrying values of the
Group's financial assets are equal to estimated fair value.
Considerable judgment is required in interpreting market data used to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that could be realized in a
current market exchange. The use of different market assumptions or estimation
methodologies may have a material effect on the estimated fair value amounts.
72
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The carrying values and estimated fair values of the Group's financial
instruments were as follows:
December 31,
------------------------------------------------------------------
2002 2001
-------------------------------- --------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
--------------- --------------- --------------- ---------------
(In thousands)
Financial assets:
Cash and cash equivalents ....................... $ 16,272 $ 16,272 $ 61,317 $ 61,317
Investments:
Fixed maturities:
Available-for-sale........................ 30,335 30,335 117,701 117,701
Held-to-maturity.......................... - - 871 871
Equity securities:
Trading................................... 16,505 16,505 67,617 67,617
Available-for-sale........................ 7,233 7,233 15,303 15,303
Financial liabilities:
Life insurance policy liabilities ............... 35,441 35,430 131,831 127,409
Notes payable.................................... 9,314 9,314 36,874 36,874
The following methods and assumptions were used by the Group in
estimating the fair value of the financial instruments presented:
Cash and Cash Equivalents: The carrying amounts reported in the consolidated
balance sheet for these instruments approximated fair value.
Fixed Maturity Securities: Fair values for actively traded fixed maturity
securities classified as available-for-sale and held-to-maturity were generally
based upon quoted market prices. Fair values for private corporate debt
securities were based on the results of valuation methodologies performed by
management.
Equity Securities:
a) Trading Securities: Fair values for equity securities classified as trading
were based on quoted market prices.
b) Available-for-Sale Securities: Fair values for equity securities classified
as available-for-sale were based upon the results of management's valuation
methodologies, including analysis of company, industry, geographical and overall
equity market factors which influence fair value.
Life Insurance Policy Liabilities: The balance sheet caption "life insurance
policy liabilities" includes investment-type insurance contracts (i.e., deferred
annuities). The estimated fair values of deferred annuity policies were based on
their account values after deduction of surrender charges.
Notes Payable: The carrying amounts reported in the consolidated balance sheet
for these instruments approximated fair value as the bank borrowings bear
interest at a variable rate.
73
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 17. Employee Benefit Plan
1993 Deferred Compensation Plan
Until June 2002, the Group sponsored a deferred compensation plan for
certain U.S. employees. It was designed to allow these employees the opportunity
to participate in the potential gains to be realized by the Group from selected
private company investments made by the Group. Plan participants elected to
defer payment of all or a portion of their compensation and then to invest in,
on a "phantom" basis, securities which mirrored the performance of private
investments made by the Group. The participants did not own the underlying
securities and did not risk their original principal amount deemed to be
invested in the underlying securities. The plan was terminated in June 2002, and
all participating employees elected to take cash distributions from the plan.
The Group's liability under this plan was as follows:
December 31,
-----------------------
2002 2001
---------- ----------
(In thousands)
Employee deferrals and realized appreciation of underlying investments
credited to participants....................................................... $ - $ 2,227
Unrealized appreciation of underlying investments not yet credited to
participants................................................................... - 20
---------- ----------
Deferred compensation liability .................................................. $ - $ 2,247
---------- ----------
---------- ----------
The Group recognized expense related to this deferred compensation plan
of $1,428,000 for the year ended December 31, 2000. For the years ended December
31, 2002 and 2001 there were credits to expense of $12,000 and $658,000,
respectively, due to the reversal of unrealized appreciation on certain
underlying listed investments.
Note 18. Share Incentive Plans
The Group has two share incentive plans for employees, agents and
directors of London Pacific Group Limited and its subsidiaries that provide for
the issuance of share options and stock appreciation rights.
Employee Share Option Trust
The London Pacific Group 1990 Employee Share Option Trust ("ESOT"), which
was approved by shareholders in 1990, provides for the granting of share options
to employees and directors. The objectives of this plan include retaining the
best personnel and providing for additional performance incentives. Options are
generally granted with an exercise price equal to the fair market value at the
date of grant. Such grants to employees are generally exercisable in four equal
annual installments beginning one year from the date of grant, subject to
employment continuation, and expire seven or ten years from the date of grant.
Such grants to directors are fully vested on the date of grant and expire seven
or ten years from the date of the grant.
74
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The ESOT may purchase shares of the Company in the open market, funded
each year by a loan from the Company or its subsidiaries. While the loan is
limited up to an annual maximum of 5% of the consolidated net assets of the
Group, the ESOT is not limited as to the number of options that may be granted.
The loan is secured by the shares held in the trust, is interest free, and is
eliminated in the consolidated financial statements. The ESOT has waived its
entitlement to dividends on any shares held. See Note 14 to the Consolidated
Financial Statements for a summary of the share activity within the ESOT.
Share option activity for the years ended December 31, 2002, 2001 and
2000 was as follows:
2002 2001 2000
------------------- ------------------ --------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
(Options in thousands) Options Price Options Price Options Price
--------- --------- --------- --------- --------- ---------
Outstanding as of January 1...................... 13,263 $ 4.59 12,213 $ 4.32 15,256 $ 3.61
Granted.......................................... 5,165 0.32 2,388 5.19(1) 431 19.55
Exercised........................................ (13) 3.26 (141) 3.13 (3,214) 2.62
Forfeited........................................ (4,496) 4.35 (89) 12.44 (160) 12.59
Expired.......................................... (344) 2.42 (1,108) 2.48 (100) 2.50
-------- -------- -------- -------- -------- --------
Outstanding as of December 31.................... 13,575 $ 3.10 13,263 $ 4.59 12,213 $ 4.32
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Options exercisable as of December 31............ 9,297 $ 4.13 11,757 $ 4.44 9,632 $ 4.05
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
(1) Of the options granted during 2001, those granted at market price had a
weighted average exercise price of $5.44 and those granted at less than market
price had a weighted average exercise price of $2.46. All options granted during
2002 and 2000 were granted at market price.
The Group accounts for stock based compensation using the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees." In accordance with APB 25, the Group
recorded compensation expense relating to stock options of $530,000 in 2001 and
$2,943,000 in 2000. This expense represented the difference between the exercise
price of options and the market value of the underlying shares at the date of
grant or modification and was recognized in full as all options were fully
vested. The Group extended the expiration date on 310,000 outstanding options
during 2000. Of the options modified, 250,000 were extended for an additional
three years from the original date of expiration, and 60,000 were extended for
an additional ten years from the date of modification.
See Note 3 for a reconciliation of net income (loss) as reported and as
adjusted under SFAS 123.
75
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Summary information about the Group's share options outstanding as of
December 31, 2002 is as follows:
Options Outstanding Options Exercisable
------------------------------------------------- --------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ------------ --------------- ----------- ------------ --------------- ------------
(In thousands) (Years) (In thousands)
$ 0.10 - $0.50 4,290 9.63 $0.30 300 $0.43
0.51 - 5.00 6,483 1.91 3.31 6,435 3.30
5.01 - 10.00 2,576 7.57 5.78 2,399 5.69
10.01 - 21.00 226 7.67 19.19 163 20.30
- -------------- --------------- ----------- ------------ --------------- ------------
$0.10 - $21.00 13,575 5.52 $3.10 9,297 $4.13
- -------------- --------------- ----------- ------------ --------------- ------------
- -------------- --------------- ----------- ------------ --------------- ------------
Agent Loyalty Opportunity Trust
The Agent Loyalty Opportunity Trust ("ALOT") provides for the granting of
stock appreciation rights ("SARs") on the Company's Ordinary Shares to agents of
LPLA. The ALOT was established in 1997 without shareholders' approval. Each
award unit entitles the holder to cash compensation equal to the difference
between the Company's prevailing share price and the exercise price. The award
units are exercisable in four equal annual installments commencing on the first
anniversary of the date of grant and are forfeited upon termination of the
agency contract. Vesting of the award in any given year is also contingent on
the holder of the award surpassing a predetermined benchmark tied to sales and
persistency. The SARs expire seven years from the date of grant. Given that LPLA
is under the administrative supervision of the NCDOI and is no longer selling
policies, the status of these awards is unclear.
The ALOT may purchase Ordinary Shares in the open market, funded by a
loan from a Group subsidiary. The loan is secured by the shares held in the
trust and bears interest based upon the trust's net income before interest for
each financial period. The trust receives dividends on all Ordinary Shares held.
The loan, interest income and dividend income are eliminated in the consolidated
financial statements. See Note 14 to the Consolidated Financial Statements for a
summary of the share activity within the ALOT.
76
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SAR activity for the years ended December 31, 2002, 2001 and 2000 was as
follows:
2002 2001 2000
---------------------- --------------------- ---------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Award Exercise of Award Exercise of Award Exercise
(Award units in thousands) Units Price Units Price Units Price
------------ --------- ---------- ---------- ---------- ----------
Outstanding as of January 1...................... 404 $3.73 438 $3.71 576 $3.65
Granted.......................................... - - - - - -
Exercised........................................ - - (10) 3.46 (109) 3.50
Forfeited........................................ (16) $3.88 (24) 3.41 (29) 3.35
------------ --------- ---------- ---------- ---------- ----------
Outstanding as of December 31.................... 388 $3.73 404 $3.73 438 $3.71
------------ --------- ---------- ---------- ---------- ----------
------------ --------- ---------- ---------- ---------- ----------
Award units exercisable as of December 31........ 284 $3.62 173 $3.64 68 $3.62
------------ --------- ---------- ---------- ---------- ----------
------------ --------- ---------- ---------- ---------- ----------
Summary information about the Group's SARs outstanding as of December 31,
2002 is as follows:
Award Units Outstanding Award Units Exercisable
----------------------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ------------------ --------------- ----------- ------------ -------------- ------------
(In thousands) (Years) (In thousands)
$ 3.35 309 1.99 $3.35 243 $3.35
5.19 79 3.28 5.19 41 5.19
- ------------------- --------------- ---------- ------------- -------------- ------------
$3.35 - $5.19 388 2.25 $3.73 284 $3.62
- ------------------- --------------- ---------- ------------- -------------- ------------
- ------------------- --------------- ---------- ------------- -------------- ------------
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation, an Interpretation of APB Opinion No. 25," which was
effective for all awards granted after July 1, 2000.
Compensation expense relating to award grants in the ALOT was accounted
for under APB 25, prior to the issuance of FIN 44. Thus, no expense was
recognized at the grant dates because all awards were made with an exercise
price equal to the prevailing market value. However, upon exercise of the
awards, compensation expense of $0, $20,000 and $1,943,000 for the years ended
December 31, 2002, 2001 and 2000, respectively, was recognized in the
consolidated income statements as part of the loss from discontinued operations.
This compensation expense was capitalized in the consolidated balance sheets as
deferred policy acquisition costs, in accordance with the Group's accounting
policy as stated in Note 3 to the Consolidated Financial Statements.
77
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 19. Pension Plans
Jersey Plan
The Group provides a defined benefit pension plan for Jersey, Channel
Islands, employees. The plan provides benefits on retirement at age sixty based
on one sixtieth of an employee's final average salary over the employee's last
three years of employment for each full year of service, and life insurance
coverage for current employees. There are nine individuals (five current
employees and four ex-employees) who are entitled to future benefits under the
plan. The plan is funded by contributions from the Group. The assets of the plan
are held in a trust for the benefit of the employees and are managed by an
external asset manager.
An actuarial valuation by an independent actuary, including a funding and
contribution review, is required every three years. The last actuarial valuation
was carried out as of December 31, 2000. At that time the trust had assets of
$1,153,000 and the actuarial valuation of past service ongoing liabilities was
$1,746,000, indicating a past service deficit of $593,000 in the plan. There
were, as at that date, twelve individuals (nine current employees and three
ex-employees) who were entitled to future benefits under the plan. The company
funding rate prior to the valuation was 20% of participants' salaries. The
actuary recommended that the past service deficit be made up and that
contributions be increased to 21.5% of participants' salaries to cover future
liabilities. Additional contributions, sufficient to cover the deficit indicated
in the actuarial valuation, were made to the trust during 2002 and contributions
on salaries were increased to 21.5% effective from the beginning of 2001. The
next actuarial valuation will be carried out as of December 31, 2003.
Contributions of $731,000, $361,000 and $189,000 were made to the trust
in 2002, 2001 and 2000, respectively. Assets held by the trust were $1,721,000,
$1,247,000 and $1,153,000 as of December 31, 2002, 2001 and 2000, respectively.
U.K. Plan
The Group provides a defined contribution plan for U.K. employees. There
is currently one participant in the plan. The Group has no ongoing liabilities
associated with the plan. Contributions of $143,000, $52,000 and $17,000 were
made to the plan in 2002, 2001 and 2000, respectively. Of the 2002 contribution,
$94,000 was offset by a salary waiver.
Note 20. Earnings Per Share and ADS
Earnings per ADS are equivalent to ten times earnings per Ordinary Share,
following the one-for-ten reverse split in June 2002. All ADS amounts shown
below have been restated to reflect this split.
78
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of the numerators and denominators for the basic and
diluted earnings per share calculations in accordance with Statement of
Financial Accounting Standard No. 128 ("SFAS 128"), "Earnings per Share," is as
follows:
Years Ended December 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
(In thousands, except share, per share
and ADS amounts)
Income (loss) from continuing operations............................... $ (62,210) $ (224,045) $ 65,995
Loss on discontinued operations........................................ (143,294) (120,739) (33,538)
---------- ---------- ----------
Net income (loss)...................................................... $ (205,504) $ (344,784) $ 32,457
---------- ---------- ----------
---------- ---------- ----------
Basic earnings (loss) per share and ADS:
Weighted average number of Ordinary Shares outstanding,
excluding shares held by the employee benefit trusts................. 50,753,084 50,984,146 50,794,731
---------- ---------- ----------
---------- ---------- ----------
Basic earnings (loss) per share:
Continuing operations ................................................. $ (1.23) $ (4.39) $ 1.30
Discontinued operations................................................ (2.82) (2.37) (0.66)
---------- ---------- ----------
$ (4.05) $ (6.76) $ 0.64
---------- ---------- ----------
---------- ---------- ----------
Basic earnings (loss) per ADS:
Continuing operations.................................................. $ (12.26) $ (43.94) $ 12.99
Discontinued operations................................................ (28.23) (23.68) (6.60)
---------- ---------- ----------
$ (40.49) $ (67.62) $ 6.39
---------- ---------- ----------
---------- ---------- ----------
Diluted earnings (loss) per share and ADS:
Weighted average number of Ordinary Shares outstanding,
excluding shares held by the employee benefit trusts................ 50,753,084 50,984,146 50,794,731
Effect of dilutive securities (warrants and employee share options) .. - - 9,932,897
---------- ---------- ----------
Weighted average number of Ordinary Shares used in diluted
earnings per share calculations..................................... 50,753,084 50,984,146 60,727,628
---------- ---------- ----------
---------- ---------- ----------
Diluted earnings (loss) per share:
Continuing operations ................................................. $ (1.23) $ (4.39) $ 1.09
Discontinued operations................................................ (2.82) (2.37) (0.55)
---------- ---------- ----------
$ (4.05) $ (6.76) $ 0.54
---------- ---------- ----------
---------- ---------- ----------
Diluted earnings (loss) per ADS:
Continuing operations.................................................. $ (12.26) $ (43.94) $ 10.87
Discontinued operations................................................ (28.23) (23.68) (5.52)
---------- ---------- ----------
$ (40.49) $ (67.62) $ 5.35
---------- ---------- ----------
---------- ---------- ----------
79
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As the Group recorded a net loss for the years ended December 31, 2002
and 2001, the calculation of diluted earnings per share for these years do not
include potentially dilutive employee share options and warrants issued to Bank
of Scotland as they are anti-dilutive and, if included, would have resulted in a
reduction of the net loss per share. If the Group had reported net income for
the years ended December 31, 2002 and 2001, there would have been an additional
347,258 and 3,022,963 shares, respectively, included in the calculations of
diluted earnings per share for these years.
Note 21. Transactions with Related Parties
The Group paid legal fees of approximately $130,000, $60,000 and $418,000
during 2002, 2001 and 2000, respectively, to a law firm of which one of its
directors, Victor A. Hebert, is a member.
Note 22. Business Segment and Geographical Information
The Group's reportable operating segments are classified according to its
principal businesses, which are the following: life insurance and annuities,
financial advisory services, asset management and venture capital management.
Intercompany transfers between reportable operating segments are
accounted for at prices which are designed to be representative of unaffiliated
third party transactions. During the years ended December 31, 2002, 2001 and
2000, there were included in the asset management and venture capital management
segments, portfolio management fees from LPLA (discontinued operations) of
$3,632,000, $11,831,000 and $10,240,000, respectively. These portfolio
management fees are included in the revenues of continuing operations and have
not been eliminated in the consolidated financial statements. These management
fees were approved by the insurance regulatory body in LPLA's U.S. state of
domicile.
Summary revenue and investment gain (loss) information by geographic
segment, based on the domicile of the Group company generating those revenues,
is as follows:
Years Ended December 31,
------------------------------------
2002 2001 2000
----------- ---------- ----------
(In thousands)
Jersey................................................................. $ (22,215) $ (145,358) $ 181,516
Guernsey............................................................... (13,671) (59,268) (99,098)
United States.......................................................... 24,007 35,678 36,125
---------- ---------- ----------
Consolidated revenues and net investment gains (losses)
for continuing operations.......................................... $ (11,879) $ (168,948) $ 118,543
---------- ---------- ----------
---------- ---------- ----------
80
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Total assets by geographic segment were as follows:
December 31,
-----------------------
2002 2001
---------- ----------
(In thousands)
Jersey............................................................................. $ 52,221 $ 50,319
Guernsey........................................................................... 8,148 166,657
United States...................................................................... 19,844 67,642
---------- ----------
Consolidated total assets - continuing operations ................................. $ 80,213 284,618
----------
----------
Discontinued operations (United States)............................................ 2,254,508
Elimination due to intercompany balances........................................... (2,798)
----------
Consolidated total assets as previously reported .................................. $2,536,328
----------
----------
Revenues and income (loss) before income taxes for the Group's reportable
operating segments included in continuing operations, based on management's
internal reporting structure, were as follows:
Years Ended December 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
(In thousands)
Revenues:
Life insurance and annuities (1), (2) ................................. $ (9,349) $ (155,673) $ 185,680
Financial advisory services............................................ 16,184 18,627 22,952
Asset management (2) .................................................. 5,256 6,764 7,799
Venture capital management (3) ........................................ (24,519) (40,670) (99,462)
---------- ---------- ----------
(12,428) (170,952) 116,969
Reconciliation of segment amounts to consolidated amounts:
Interest income ....................................................... 549 2,004 1,574
---------- ---------- ----------
Consolidated revenues and net investment gains (losses)
for continuing operations.......................................... $ (11,879) $ (168,948) $ 118,543
---------- ---------- ----------
---------- ---------- ----------
Income (loss) from continuing operations before income taxes:
Life insurance and annuities (1), (2).................................. $ (19,637) $ (163,873) $ 183,857
Financial advisory services ........................................... (4,211) (3,638) (2,261)
Asset management (2)................................................... 615 1,533 1,778
Venture capital management (3) ........................................ (28,149) (51,262) (110,444)
---------- ---------- ----------
(51,382) (217,240) 72,930
Reconciliation of segment amounts to consolidated amounts:
Interest income ....................................................... 549 2,004 1,574
Corporate expenses .................................................... (5,870) (5,634) (7,333)
Goodwill amortization and write-offs................................... (396) (221) (248)
Interest expense (4)................................................... (1,033) (2,306) (727)
---------- ---------- ----------
Consolidated income (loss) from continuing operations
before income taxes ............................................... $ (58,132) $ (223,397) $ 66,196
---------- ---------- ----------
---------- ---------- ----------
81
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1) Netted against the revenues (investment income) of the life insurance and
annuities segment are management fees paid to the asset management segment of
$39,000, $47,000 and $9,000 in 2002, 2001 and 2000, respectively.
(2) Included in the revenues of the asset management segment are management fees
from the life insurance and annuities segment of $39,000, $47,000 and $9,000 in
2002, 2001 and 2000, respectively. In addition, revenues of the asset management
segment also included management fees from LPLA (discontinued operations) of
$724,000, $1,907,000 and $2,766,000 in 2002, 2001 and 2000, respectively.
(3) Included in the revenues of the venture capital management segment are
management fees from LPLA (discontinued operations) of $2,908,000, $9,924,000
and $7,474,000 in 2002, 2001 and 2000, respectively.
(4) Included in interest expense is interest paid to LPLA (discontinued
operations) of $30,000, $58,000 and $55,000 in 2002, 2001 and 2000,
respectively.
Assets attributable to each of the Group's reportable operating segments,
based on management's reporting structure, were as follows:
December 31,
-----------------------
2002 2001
---------- ----------
(In thousands)
Assets:
Life insurance and annuities..................................................... $ 51,557 $ 165,190
Financial advisory services...................................................... 6,394 10,199
Asset management................................................................. 8,197 8,334
Venture capital management....................................................... 7,710 46,253
Corporate and other.............................................................. 6,355 54,642
---------- ----------
Consolidated total assets - continuing operations ............................... $ 80,213 284,618
----------
----------
Discontinued operations (U.S. life insurance and annuities)........................ 2,254,508
Elimination due to intercompany balances........................................... (2,798)
----------
Consolidated total assets as previously reported .................................. $2,536,328
----------
----------
82
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 23. Selected Quarterly Financial Information (Unaudited)
Unaudited quarterly financial information (in thousands, except per share
and ADS amounts) is as follows:
2002
---------------------------------------------------------
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
--------- --------- --------- --------- ---------
Continuing operations:
Revenues including net investment gains (losses)........ $ 1,781 $ (7,916) $ (32) $ (5,712) $ (11,879)
Loss before income taxes ............................... (10,492) (21,454) (11,800) (14,386) (58,132)
Net loss................................................ (11,305) (23,333) (11,619) (15,953) (62,210)
Discontinued operations:
Net loss................................................ (19,000) (85,762) (38,532) - (143,294)
Basic loss per share:
Continuing operations .................................. (0.22) (0.46) (0.23) (0.31) (1.23)
Discontinued operations................................. (0.37) (1.69) (0.76) - (2.82)
--------- --------- --------- --------- ---------
(0.59) (2.15) (0.99) (0.31) (4.05)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic loss per ADS(1):
Continuing operations .................................. (2.23) (4.60) (2.29) (3.14) (12.26)
Discontinued operations................................. (3.74) (16.90) (7.59) - (28.23)
--------- --------- --------- --------- ---------
(5.97) (21.50) (9.88) (3.14) (40.49)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted loss per share:
Continuing operations .................................. (0.22) (0.46) (0.23) (0.31) (1.23)
Discontinued operations................................. (0.37) (1.69) (0.76) - (2.82)
--------- --------- --------- --------- ---------
(0.59) (2.15) (0.99) (0.31) (4.05)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted loss per ADS(1):
Continuing operations .................................. (2.23) (4.60) (2.29) (3.14) (12.26)
Discontinued operations................................. (3.74) (16.90) (7.59) - (28.23)
--------- --------- --------- --------- ---------
(5.97) (21.50) (9.88) (3.14) (40.49)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
(1) ADS amounts have been restated to reflect the one-for-ten reverse split in
June 2002.
83
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2001
---------------------------------------------------------
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
--------- --------- --------- --------- ---------
Continuing operations:
Revenues including net investment gains (losses)........ $(145,703) $ 51,074 $ (94,565) $ 20,246 $(168,948)
Income (loss) before income taxes ...................... (158,498) 36,758 (108,394) 6,737 (223,397)
Net income (loss)....................................... (158,737) 36,358 (107,370) 5,704 (224,045)
Discontinued operations:
Net loss................................................ (21,489) (6,975) (37,075) (55,200) (120,739)
Basic earnings (loss) per share:
Continuing operations .................................. (3.08) 0.72 (2.12) 0.11 (4.39)
Discontinued operations................................. (0.42) (0.14) (0.73) (1.09) (2.37)
--------- --------- --------- --------- ---------
(3.50) 0.58 (2.85) (0.98) (6.76)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic earnings (loss) per ADS(1):
Continuing operations .................................. (30.79) 7.15 (21.16) 1.12 (43.94)
Discontinued operations................................. (4.17) (1.37) (7.31) (10.88) (23.68)
--------- --------- --------- --------- ---------
(34.96) 5.78 (28.47) (9.76) (67.62)
--------- --------- --------- --------- ---------
Diluted earnings (loss) per share:
Continuing operations .................................. (3.08) 0.67 (2.12) 0.11 (4.39)
Discontinued operations................................. (0.42) (0.13) (0.73) (1.09) (2.37)
--------- --------- --------- --------- ---------
(3.50) 0.54 (2.85) (0.98) (6.76)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted earnings (loss) per ADS(1):
Continuing operations .................................. (30.79) 6.67 (21.16) 1.12 (43.94)
Discontinued operations................................. (4.17) (1.28) (7.31) (10.88) (23.68)
--------- --------- --------- --------- ---------
(34.96) 5.39 (28.47) (9.76) (67.62)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
(1) ADS amounts have been restated to reflect the one-for-ten reverse split in
June 2002.
Due to the method required by SFAS 128 to calculate per share and ADS
amounts, the quarterly per share and ADS amounts do not total to the full year
per share and ADS amounts.
84
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required by this Item is incorporated by reference to our
Form 8-K filed on June 26, 2002, containing information announcing that on June
19, 2002, PricewaterhouseCoopers notified us of its resignation as the auditors
for the Group.
The information required by this Item is also incorporated by reference
to our Form 8-K filed on July 31, 2002, containing information announcing the
appointment of BDO International and BDO Seidman, LLP as auditors for the Group
with effect from July 31, 2002.
PART III
Certain information required by Part III is omitted from this Form 10-K
and is incorporated by reference to our definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on June 12, 2003 (the "Proxy
Statement"), which will be filed with the SEC not later than 120 days after the
end of the fiscal year covered by this Form 10-K.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are as follows:
Arthur I. Trueger, Executive Chairman: Mr. Trueger, age 54, is the
founder and a principal shareholder of London Pacific Group Limited. He has
worked for us for more than 26 years and holds A.B., M.A. and J.D. degrees from
the University of California.
Ian K. Whitehead, Chief Financial Officer: Mr. Whitehead, age 48, has
held the position of Chief Financial Officer of London Pacific Group Limited
since he joined us in 1990. Mr. Whitehead is a member of the Institute of
Chartered Accountants in England and Wales.
Information regarding our directors is incorporated by reference to the
sections entitled "Proposal 2 - Election of Director" and "Board of Directors
and Committees" in the Proxy Statement.
Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934 is incorporated by reference to the section entitled "Other
Information About Directors and Executive Officers" in the Proxy Statement.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
sections entitled "Executive Compensation" and "Directors' Compensation" in the
Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information regarding security ownership of certain beneficial owners
and management is incorporated by reference to the section entitled "Information
Regarding Beneficial Ownership of Principal Shareholders, Directors and
Executive Officers" in the Proxy Statement.
85
The following table is a summary of selected information for our equity
compensation plans as of December 31, 2002.
Number of Shares
Number of Shares to Weighted Average Remaining Available for
be Issued Upon Exercise Exercise Price of Future Issuance Under
of Outstanding Options, Outstanding Options, Equity Compensation
Warrants and Rights Warrants and Rights Plans
------------------------ -------------------- ------------------------
Equity compensation plans
approved by shareholders.............. 13,575,312(1) $3.10 (1)
Equity compensation plans not
approved by shareholders.............. 388,100(1) 3.73 (1)
---------- -------
Total................................... 13,963,412 $3.12
---------- -------
---------- -------
(1) Our equity compensation plans do not contain a limit on the number of
options that may be granted to employees. However, the plans do not allow for
the issuance of previously authorized and unissued shares to meet the
obligations of the plans upon an employee option exercise. When an option is
granted, the trust that administers the plan borrows funds from us or one of our
subsidiaries and uses those funds to purchase the number of shares underlying
the option grant. The maximum loan allowed in any given year is equal to 5% of
consolidated net assets as of the end of the previous fiscal year.
Information regarding the features of the equity compensation plan not
approved by shareholders is incorporated by reference to Note 18 to the
Consolidated Financial Statements presented in Item 8 "Financial Statements and
Supplementary Data" of this Form 10-K.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
section entitled "Other Information About Directors and Executive Officers" in
the Proxy Statement.
86
PART IV
Item 14. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our filings under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the periods specified in the rules and forms of the Securities and
Exchange Commission. Such information is accumulated and communicated to our
management, including our principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosure. Our management, including the principal executive officer and the
principal financial officer, recognizes that any set of controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives.
Within 90 days prior to the filing date of this annual report on Form
10-K, we carried out an evaluation, under the supervision and with the
participation of our management, including our principal executive officer and
principal financial officer, of the effectiveness of the design and operation of
our disclosure controls and procedures. Based on such evaluation, our principal
executive officer and principal financial officer concluded that our disclosure
controls and procedures are effective.
There have been no significant changes in our internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date of their evaluation in connection with the preparation of this
annual report on Form 10-K.
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Form 10-K:
1. Financial Statements: Page
The following consolidated financial statements of us and subsidiaries
are included in Item 8:
Reports of Independent Certified Public Accountants............... 37
Consolidated Balance Sheets as of December 31, 2002 and 2001 ..... 39
Consolidated Statements of Income for the Years Ended
December 31, 2002, 2001 and 2000 ............................. 40
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000 ............................. 42
Consolidated Statements of Changes in Shareholders' Equity for
the Years Ended December 31, 2002, 2001 and 2000 ............. 44
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2002, 2001 and 2000 ............................. 46
Notes to the Consolidated Financial Statements ................... 47
87
2. Financial Statement Schedules: Page
The following financial statement schedules of London Pacific Group
Limited and subsidiaries are included in this Form 10-K immediately
following Item 15 and should be read in conjunction with the consolidated
financial statements and notes thereto included in Item 8:
Schedule I - Summary of Investments - Other Than Investments
in Related Parties ........................................... 91
Schedule II - Condensed Financial Information of Registrant
Condensed Balance Sheets as of December 31, 2002 and 2001 .... 92
Condensed Statements of Income for the Years Ended
December 31, 2002, 2001 and 2000 .......................... 93
Condensed Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000 .......................... 94
Note to Condensed Financial Statements ....................... 95
Schedule III - Supplementary Insurance Information ............... 96
All other financial statement schedules required by Regulation S-X have
been omitted because they are not applicable or the required information
is included in the applicable consolidated financial statements or notes
thereto in Item 8 "Financial Statements and Supplementary Data" of this
Form 10-K.
3. Exhibits:
The following exhibits of London Pacific Group limited and subsidiaries
are filed herewith or incorporated by reference as indicated below:
Exhibit
Number Description
- ------- -----------------
3.(I) Memorandum and Articles of Association of London Pacific Group
Limited, as amended and restated on April 18, 2000 (filed previously
as Exhibit 3.(I) to our Form 10-Q for the quarter ended June 30,
2000).
4.1 Specimen Ordinary Share certificate (filed previously as Exhibit 4.1
to our Form 10-K for the year ended December 31, 2000).
4.2 Form of Deposit Agreement dated September 25, 1992, as amended and
restated as of November 24, 1993, as further amended and restated as
of March 14, 2000, among us, The Bank of New York as Depositary, and
all Owners and Holders from time to time of American Depositary
Receipts issued thereunder (filed previously as Exhibit A to our
Registration Statement on Form F-6 (Registration No. 333-11658) dated
March 14, 2000).
4.3 Letter Agreement dated August 25, 1992 between The Bank of New York
and us covering the Basic Administration Charge relating to the
Deposit Agreement (shown above as Exhibit 4.2) (filed previously as
Exhibit 3.8 to our Post-Effective Amendment No. 2 to our Registration
Statement on Form 20-F/A dated August 31, 1993).
88
4.4 Form of Deposit Agreement as amended and restated as of June 24, 2002,
among us, The Bank of New York as Depositary, and all Owners and
Holders from time to time of American Depositary Receipts issued
thereunder (filed previously as Exhibit 4.4 to our Form 10-Q for the
quarter ended June 30, 2002).
10.1.1 Multicurrency Term Facility Agreement dated May 2, 2000 between us and
the Governor and Company of the Bank of Scotland (filed previously as
Exhibit 10.1.1 to our Form 10-Q for the quarter ended September 30,
2000).
10.1.2 Term Loan and Guarantee Facility of up to $23,000,000, dated December
20, 2002 between us and the Governor and Company of the Bank of
Scotland.
10.2.1 Settlement dated February 16, 1990 among (1) us, (2) John Gerald
Patrick Wheeler and (3) Ian Walter Strang, constituting The Govett &
Company 1990 Employee Share Option Trust (filed previously as Exhibit
3.2 to our Post-Effective Amendment No. 2 to Registration Statement on
Form 20-F/A dated August 31, 1993).
10.2.2 Executed Instrument dated March 18, 1994 among (1) John Gerald Patrick
Wheeler, (2) Ian Walter Strang and (3) Richard John Pirouet, relating
to The Govett & Company 1990 Employee Share Option Trust.
10.2.3 Executed Instrument dated September 27, 1994 among (1) Ian Walter
Strang, (2) Richard John Pirouet and (3) Clive Aubrey Charles Chaplin,
relating to The Govett & Company 1990 Employee Share Option Trust.
10.2.4 Executed Instrument dated March 3, 1995 among (1) Ian Walter Strang,
(2) Richard John Pirouet and (3) Clive Aubrey Charles Chaplin,
relating to The Govett & Company 1990 Employee Share Option Trust.
10.2.5 Executed Instrument dated August 22, 1996 among (1) Richard John
Pirouet, (2) Clive Aubrey Charles Chaplin and (3) Ronald William
Green, relating to The London Pacific Group 1990 Employee Share Option
Trust.
10.2.6 Executed Instrument dated August 29, 1998 among (1) Richard John
Pirouet, (2) Clive Aubrey Charles Chaplin, (3) Ronald William Green
and (4) Victor Aloysius Hebert, relating to The London Pacific Group
1990 Employee Share Option Trust.
10.2.7 Executed Instrument dated May 31, 2000 among (1) Richard John Pirouet,
(2) Clive Aubrey Charles Chaplin, (3) Ronald William Green and (4)
Victor Aloysius Hebert, relating to The London Pacific Group 1990
Employee Share Option Trust (filed previously as Exhibit 10.2.1 to our
Form 10-Q for the quarter ended September 30, 2000).
10.2.8 Executed Instrument dated May 31, 2000 among (1) Richard John Pirouet,
(2) Clive Aubrey Charles Chaplin, (3) Ronald William Green, (4) Victor
Aloysius Hebert and (5) Christopher Byrne, relating to The London
Pacific Group 1990 Employee Share Option Trust (filed previously as
Exhibit 10.2.2 to our Form 10-Q for the quarter ended September 30,
2000).
10.3.1(1) Agreement dated July 1, 1990 between us and Ian Kenneth Whitehead
(filed previously as Exhibit 10.3.1 to our Form 10-K for the year
ended December 31, 2000).
10.3.2(1) Berkeley (USA) Holdings Limited Amended and Restated 1993 Deferred
Compensation Plan dated December 16, 1999 (filed previously as Exhibit
10.3.2 to our Form 10-K for the year ended December 31, 2000).
89
10.3.3(1) London Pacific Advisers Limited Retirement Scheme confirmation dated
December 5, 2000 for Ian Kenneth Whitehead (filed previously as
Exhibit 10.3.3 to our Form 10-K for the year ended December 31, 2001).
10.4.1 Settlement dated May 23, 1997 among BG Services Limited and A.L.O.T.
Trustee Limited establishing Agent Loyalty Opportunity Trust (filed
previously as Exhibit 10.4.1 to our Form 10-K for the year ended
December 31, 2001).
10.4.2 Executed Deed dated July 16, 1997 by A.L.O.T. Trustee Limited relating
to Agent Loyalty Opportunity Trust (filed previously as Exhibit 10.4.2
to our Form 10-K for the year ended December 31, 2001).
10.4.3 Executed Deed dated August 13, 1997 by A.L.O.T. Trustee Limited
relating to Agent Loyalty Opportunity Trust (filed previously as
Exhibit 10.4.3 to our Form 10-K for the year ended December 31, 2001).
10.4.4 Executed Deed dated August 20, 1998 by A.L.O.T. Trustee Limited
relating to Agent Loyalty Opportunity Trust (filed previously as
Exhibit 10.4.4 to our Form 10-K for the year ended December 31, 2001).
10.4.5 Executed Deed of Amendment and Appointment dated December 11, 2001
among Berkeley International Capital Limited and A.L.O.T. Trustee
Limited relating to Agent Loyalty Opportunity Trust (filed previously
as Exhibit 10.4.5 to our Form 10-K for the year ended December 31,
2001).
21 Subsidiaries as of February 28, 2003.
99.1 Certification by our Executive Chairman pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Certification by our Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
____________
(1) Management contract or compensatory arrangement filed in response to
Item 15(a)(3) of the instructions to Form 10-K.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by us during the quarter ended December
31, 2002.
(c) The exhibits of us and our subsidiaries are listed in Item 15(a)(3)
above.
(d) The financial statement schedules for us and our subsidiaries follow on
pages 91 through 96.
90
SCHEDULE I - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
As of December 31, 2002
Column A Column B Column C Column D
Amount at
Which Shown
in Consolidated
Fair Balance
Type of Investments Cost (1) Value Sheet (2)
- ---------------------------------------------------------------- -------------- -------------- ---------------
(In thousands)
Fixed maturity securities:
Bonds:
United States government and government
agencies and authorities................................... $ - $ - $ -
States, municipalities and political subdivisions............ - - -
Foreign governments.......................................... - - -
Public utilities............................................. - - -
Convertibles and bonds with warrants attached................ - - -
All other corporate bonds.................................... 30,481 30,335 30,335
Redeemable preferred stock...................................... - - -
-------------- -------------- -------------
Total fixed maturity securities................................. 30,481 $ 30,335 30,335
-------------- -------------- -------------
--------------
Equity securities:
Common stocks:
Industrial, miscellaneous and all other...................... 26,785 16,505 16,505
Non-redeemable preferred stocks................................. 8,983 7,233 7,233
-------------- -----------------------------
Total equity securities......................................... 35,768 $ 23,738 23,738
-------------- -----------------------------
--------------
Total investments............................................... $ 66,249 $ 54,073
-------------- -------------
-------------- -------------
- ----------------------------
(1) Cost of fixed maturity securities is original cost, reduced by
other-than-temporary impairments, repayments and adjusted for
amortization of premiums and accretion of discounts. Cost of equity
securities is original cost, reduced by other-than-temporary impairments.
(2) Differences between amounts reflected in Column B or Column C and amounts
at which shown in the consolidated balance sheet reflected in Column D
result from the application of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Fixed maturity securities are classified as either
available-for-sale or held-to-maturity. Available-for-sale securities are
recorded at fair value, with changes in unrealized gains and losses
excluded from net income, but reported net of applicable taxes and
adjustments to deferred policy acquisition cost amortization as a
separate component of comprehensive income. Held-to-maturity securities
are recorded at amortized cost.
91
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
LONDON PACIFIC GROUP LIMITED
CONDENSED BALANCE SHEETS
December 31,
-----------------------
2002 2001 (1)
---------- ----------
(In thousands, except share amounts)
ASSETS
Cash and cash equivalents .................................................... $ 27 $ 8,497
Investment in subsidiaries ................................................... (74,519) 33,717
Intercompany balances ........................................................ 121,720 65,777
Other assets ................................................................. 620 563
Total assets and investments in discontinued operations....................... - 2,254,508
---------- ----------
Total assets ................................................................. $ 47,848 $2,363,062
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accruals ................................................ $ 403 $ 2,814
Guarantees under bank facility................................................ 10,590 -
Intercompany balances ........................................................ 15,369 2,613
Total liabilities of discontinued operations.................................. - 2,135,982
---------- ----------
Total liabilities ............................................................ 26,362 2,141,409
---------- ----------
Commitments and contingencies
Shareholders' equity:
Ordinary shares, $0.05 par value per share: 86,400,000 shares authorized;
64,439,073 shares issued and outstanding as of December 31, 2002
and 2001................................................................... 3,222 3,222
Additional paid-in capital ................................................... 68,394 68,346
Retained earnings ............................................................ 16,054 223,590
Employee benefit trusts, at cost (13,684,881 and 13,698,181 shares as of
December 31, 2002 and 2001, respectively) ................................. (63,571) (63,599)
Accumulated other comprehensive loss ......................................... (2,613) (9,906)
---------- ----------
Total shareholders' equity ................................................... 21,486 221,653
---------- ----------
Total liabilities and shareholders' equity ................................... $ 47,848 $2,363,062
---------- ----------
---------- ----------
(1) Reclassifications have been made related to discontinued operations - see
Note 4 to the Consolidated Financial Statements in Item 8 of Form 10-K for the
year ended December 31, 2002.
See accompanying Note to Condensed Financial Statements.
92
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
LONDON PACIFIC GROUP LIMITED
CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
------------------------------------
2002 2001(1) 2000(1)
---------- ---------- ----------
(In thousands)
Revenues:
Investment income.......................................................... $ 128 $ 605 $ 1,092
Interest and fees from subsidiaries, net (2)............................... 307 15,047 15,994
Financial advisory services, asset management and other fee income......... - - 2,092
Distribution from subsidiary (2)........................................... - 52,462 -
Net realized investment losses............................................. (10,827) - -
---------- ---------- ----------
(10,392) 68,114 19,178
Expenses:
Staff costs................................................................ 2,277 3,180 5,944
Escrow release............................................................. (100) (100) (1,000)
Other operating expenses................................................... 2,840 2,579 3,488
---------- ---------- ----------
5,017 5,659 8,432
---------- ---------- ----------
Income (loss) before income tax expense and equity in
undistributed net income (loss) of subsidiaries.......................... (15,409) 62,455 10,746
Income tax expense (benefit)............................................... (683) 1,579 1,550
---------- ---------- ----------
Income before equity in undistributed net income (loss) of
subsidiaries............................................................. (14,726) 60,876 9,196
Equity in undistributed net income (loss) of subsidiaries (2).............. (190,317) (284,921) 56,799
---------- ---------- ----------
Income (loss) from continuing operations .................................. (205,043) (224,045) 65,995
---------- ---------- ----------
Discontinued operations:
Loss on disposal of discontinued operations, net of income tax
benefit of $0........................................................... (461) - -
Equity in undistributed net loss of discontinued operations (2)............ - (120,739) (33,538)
---------- ---------- ----------
Loss on discontinued operations............................................ (461) (120,739) (33,538)
---------- ---------- ----------
Net income (loss) ......................................................... $ (205,504) $ (344,784) $ 32,457
---------- ---------- ----------
---------- ---------- ----------
(1) Reclassifications have been made related to discontinued operations - see
Note 4 to the Consolidated Financial Statements in Item 8 of Form 10-K for the
year ended December 31, 2002.
(2) Eliminated on consolidation.
See accompanying Note to Condensed Financial Statements.
93
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
LONDON PACIFIC GROUP LIMITED
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------------------
2002 2001(1) 2000(1)
---------- ---------- ----------
(In thousands)
Cash flows from continuing operating activities:
Net income (loss)............................................................ $ (205,043) $ (224,045) $ 65,995
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Equity in undistributed net income (loss) of subsidiaries.................... 190,317 284,921 (56,799)
Distribution from subsidiary................................................. - (52,462) -
Net realized investment (gains) losses....................................... 10,827 - -
Taxes........................................................................ (2,162) - -
Other operating cash flows .................................................. (532) 299 923
---------- ---------- ----------
Net cash provided by (used in) operating activities ......................... (6,593) 8,713 10,119
---------- ---------- ----------
Cash flows from investing activities:
Investment in subsidiaries .................................................. - (33,380) (7,668)
Distributions from subsidiary ............................................... - 52,462 -
Advances to subsidiaries .................................................... - (39,410) -
Other cash flows from investing activities .................................. - (23) (42)
---------- ---------- ----------
Net cash used in investing activities ....................................... - (20,351) (7,710)
---------- ---------- ----------
Cash flows from financing activities:
Dividends paid .............................................................. (2,032) (11,801) (11,777)
Issuance of Ordinary Shares ................................................. - 3 -
Repayments from subsidiaries ................................................ 155 - 16,351
---------- ---------- ----------
Net cash provided by (used in) financing activities ......................... (1,877) (11,798) 4,574
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents ........................ (8,470) (23,436) 6,983
Cash and cash equivalents at beginning of year .............................. 8,497 31,933 24,950
---------- ---------- ----------
Cash and cash equivalents at end of year .................................... $ 27 $ 8,497 $ 31,933
---------- ---------- ----------
---------- ---------- ----------
(1) Reclassifications have been made related to discontinued operations - see
Note 4 to the Consolidated Financial Statements in Item 8 of Form 10-K for the
year ended December 31, 2002.
See accompanying Note to Condensed Financial Statements.
94
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
LONDON PACIFIC GROUP LIMITED
NOTE TO CONDENSED FINANCIAL STATEMENTS
Note 1. Basis of Presentation and Significant Accounting Policies
The accompanying financial statements comprise a condensed presentation
of financial position, results of operations and cash flows of London Pacific
Group Limited (the "Company") on a separate company basis. These condensed
financial statements do not include the accounts of the Company's subsidiaries,
but instead include the Company's investment in those subsidiaries, stated at
amounts which are equal to the Company's equity in the subsidiaries' net assets.
The consolidated financial statements of the Company and its subsidiaries are
included in Item 8 of Form 10-K for the year ended December 31, 2002.
Additional information about the significant accounting policies applied
by the Company and its subsidiaries is included in Note 3 to the Consolidated
Financial Statements in Item 8 of Form 10-K for the year ended December 31,
2002.
95
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Life Insurance and Annuities Segment (Continuing Operations)
Years Ended/As of December 31,
------------------------------------
2002 2001(1) 2000(1)
---------- ---------- ----------
(In thousands)
Deferred policy acquisition costs.......................................... $ - $ 3,113 $ 1,509
Future policy benefits, losses, claims and loss expenses (2) .............. 35,441 131,765 52,781
Unearned premiums.......................................................... N/A N/A N/A
Other policy claims and benefits payable (2)............................... - 66 1,344
Premium revenue (3)........................................................ 1,155 (7) -
Net investment income (4) ................................................. 6,060 6,214 1,957
Benefits, claims, losses and settlement expenses........................... N/A N/A N/A
Amortization of deferred policy acquisition costs.......................... 2,952 932 115
Other operating expenses................................................... 1,294 955 507
Premiums written........................................................... N/A N/A N/A
- ---------------------------
(1) Reclassifications have been made related to discontinued operations - see
Note 4 to the Consolidated Financial Statements in Item 8 of Form 10-K
for the year ended December 31, 2002.
(2) For additional disclosure regarding life insurance policy liabilities,
see Note 10 to the Consolidated Financial Statements in Item 8 of Form
10-K for the year ended December 31, 2002.
(3) Insurance policy charges.
(4) Expenses related to the management and administration of investments have
been netted with investment income in the determination of net investment
income.
96
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LONDON PACIFIC GROUP LIMITED
(Registrant)
By /s/ Arthur I. Trueger
Date: March 19, 2003 Arthur I. Trueger
Executive Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Arthur I. Trueger
Date: March 19, 2003 Arthur I. Trueger
Executive Chairman
(Principal Executive Officer)
/s/ Ian K. Whitehead
Date: March 19, 2003 Ian K. Whitehead
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Victor A. Hebert
Date: March 19, 2003 Victor A. Hebert
Deputy Chairman and Non-Executive Director
/s/ John Clennett
Date: March 19, 2003 John Clennett
Non-Executive Director
/s/ Harold E. Hughes, Jr.
Date: March 19, 2003 Harold E. Hughes, Jr.
Non-Executive Director
/s/ The Viscount Trenchard
Date: March 19, 2003 The Viscount Trenchard
Non-Executive Director
97
CERTIFICATION
I, Arthur I. Trueger, certify that:
(1) I have reviewed this annual report on Form 10-K of London Pacific
Group Limited;
(2) Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
(4) The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this annual report ("the Evaluation
Date"); and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors (or
persons performing the equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
(6) The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 19, 2003 By: /s/ Arthur I. Trueger
Arthur I. Trueger
Executive Chairman
98
CERTIFICATION
I, Ian K. Whitehead, certify that:
(1) I have reviewed this annual report on Form 10-K of London Pacific
Group Limited;
(2) Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
(4) The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this annual report ("the Evaluation
Date"); and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors (or
persons performing the equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
(6) The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 19, 2003 By: /s/ Ian K. Whitehead
Ian K. Whitehead
Chief Financial Officer
99
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
EXHIBIT INDEX FOR THE ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2002
Exhibit
Number Description
- ------- -----------------
3.(I) Memorandum and Articles of Association of London Pacific Group
Limited, as amended and restated on April 18, 2000 (filed previously
as Exhibit 3.(I) to our Form 10-Q for the quarter ended June 30,
2000).
4.1 Specimen Ordinary Share certificate (filed previously as Exhibit 4.1
to our Form 10-K for the year ended December 31, 2000).
4.2 Form of Deposit Agreement dated September 25, 1992, as amended and
restated as of November 24, 1993, as further amended and restated as
of March 14, 2000, among us, The Bank of New York as Depositary, and
all Owners and Holders from time to time of American Depositary
Receipts issued thereunder (filed previously as Exhibit A to our
Registration Statement on Form F-6 (Registration No. 333-11658) dated
March 14, 2000).
4.3 Letter Agreement dated August 25, 1992 between The Bank of New York
and us covering the Basic Administration Charge relating to the
Deposit Agreement (shown above as Exhibit 4.2) (filed previously as
Exhibit 3.8 to our Post-Effective Amendment No. 2 to our Registration
Statement on Form 20-F/A dated August 31, 1993).
4.4 Form of Deposit Agreement as amended and restated as of June 24, 2002,
among us, The Bank of New York as Depositary, and all Owners and
Holders from time to time of American Depositary Receipts issued
thereunder (filed previously as Exhibit 4.4 to our Form 10-Q for the
quarter ended June 30, 2002).
10.1.1 Multicurrency Term Facility Agreement dated May 2, 2000 between us and
the Governor and Company of the Bank of Scotland (filed previously as
Exhibit 10.1.1 to our Form 10-Q for the quarter ended September 30,
2000).
10.1.2 Term Loan and Guarantee Facility of up to $23,000,000, dated December
20, 2002 between us and the Governor and Company of the Bank of
Scotland.
10.2.1 Settlement dated February 16, 1990 among (1) us, (2) John Gerald
Patrick Wheeler and (3) Ian Walter Strang, constituting The Govett &
Company 1990 Employee Share Option Trust (filed previously as Exhibit
3.2 to our Post-Effective Amendment No. 2 to Registration Statement on
Form 20-F/A dated August 31, 1993).
10.2.2 Executed Instrument dated March 18, 1994 among (1) John Gerald Patrick
Wheeler, (2) Ian Walter Strang and (3) Richard John Pirouet, relating
to The Govett & Company 1990 Employee Share Option Trust.
10.2.3 Executed Instrument dated September 27, 1994 among (1) Ian Walter
Strang, (2) Richard John Pirouet and (3) Clive Aubrey Charles Chaplin,
relating to The Govett & Company 1990 Employee Share Option Trust.
10.2.4 Executed Instrument dated March 3, 1995 among (1) Ian Walter Strang,
(2) Richard John Pirouet and (3) Clive Aubrey Charles Chaplin,
relating to The Govett & Company 1990 Employee Share Option Trust.
100
10.2.5 Executed Instrument dated August 22, 1996 among (1) Richard John
Pirouet, (2) Clive Aubrey Charles Chaplin and (3) Ronald William
Green, relating to The London Pacific Group 1990 Employee Share Option
Trust.
10.2.6 Executed Instrument dated August 29, 1998 among (1) Richard John
Pirouet, (2) Clive Aubrey Charles Chaplin, (3) Ronald William Green
and (4) Victor Aloysius Hebert, relating to The London Pacific Group
1990 Employee Share Option Trust.
10.2.7 Executed Instrument dated May 31, 2000 among (1) Richard John Pirouet,
(2) Clive Aubrey Charles Chaplin, (3) Ronald William Green and (4)
Victor Aloysius Hebert, relating to The London Pacific Group 1990
Employee Share Option Trust (filed previously as Exhibit 10.2.1 to our
Form 10-Q for the quarter ended September 30, 2000).
10.2.8 Executed Instrument dated May 31, 2000 among (1) Richard John Pirouet,
(2) Clive Aubrey Charles Chaplin, (3) Ronald William Green, (4) Victor
Aloysius Hebert and (5) Christopher Byrne, relating to The London
Pacific Group 1990 Employee Share Option Trust (filed previously as
Exhibit 10.2.2 to our Form 10-Q for the quarter ended September 30,
2000).
10.3.1(1) Agreement dated July 1, 1990 between us and Ian Kenneth Whitehead
(filed previously as Exhibit 10.3.1 to our Form 10-K for the year
ended December 31, 2000).
10.3.2(1) Berkeley (USA) Holdings Limited Amended and Restated 1993 Deferred
Compensation Plan dated December 16, 1999 (filed previously as Exhibit
10.3.2 to our Form 10-K for the year ended December 31, 2000).
10.3.3(1) London Pacific Advisers Limited Retirement Scheme confirmation dated
December 5, 2000 for Ian Kenneth Whitehead (filed previously as
Exhibit 10.3.3 to our Form 10-K for the year ended December 31, 2001).
10.4.1 Settlement dated May 23, 1997 among BG Services Limited and A.L.O.T.
Trustee Limited establishing Agent Loyalty Opportunity Trust (filed
previously as Exhibit 10.4.1 to our Form 10-K for the year ended
December 31, 2001).
10.4.2 Executed Deed dated July 16, 1997 by A.L.O.T. Trustee Limited relating
to Agent Loyalty Opportunity Trust (filed previously as Exhibit 10.4.2
to our Form 10-K for the year ended December 31, 2001).
10.4.3 Executed Deed dated August 13, 1997 by A.L.O.T. Trustee Limited
relating to Agent Loyalty Opportunity Trust (filed previously as
Exhibit 10.4.3 to our Form 10-K for the year ended December 31, 2001).
10.4.4 Executed Deed dated August 20, 1998 by A.L.O.T. Trustee Limited
relating to Agent Loyalty Opportunity Trust (filed previously as
Exhibit 10.4.4 to our Form 10-K for the year ended December 31, 2001).
10.4.5 Executed Deed of Amendment and Appointment dated December 11, 2001
among Berkeley International Capital Limited and A.L.O.T. Trustee
Limited relating to Agent Loyalty Opportunity Trust (filed previously
as Exhibit 10.4.5 to our Form 10-K for the year ended December 31,
2001).
21 Subsidiaries of the Company as of February 28, 2003.
99.1 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.
101
99.2 Certification by the Company's Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
____________
(1) Management contract or compensatory arrangement filed in response to Item
15(a)(3) of the instructions to Form 10-K.
102