UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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)
(Zip Code)
011 44 (1534) 607700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ____ No |X|
As of May 15, 2003, the registrant had outstanding 64,439,073 Ordinary
Shares, par value $0.05 per share.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Page
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of March 31, 2003
and December 31, 2002 ........................................ 3
Condensed Consolidated Statements of Income for the three
months ended March 31, 2003 and 2002.......................... 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2003 and 2002.......................... 6
Consolidated Statement of Changes in Shareholders' Equity
for the three months ended March 31, 2003 .................... 7
Consolidated Statements of Comprehensive Income for the
three months ended March 31, 2003 and 2002.................... 8
Notes to Interim Consolidated Financial Statements.............. 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .......................... 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk ..... 33
Item 4. Controls and Procedures ........................................ 34
PART II
OTHER INFORMATION
Item 1. Legal Proceedings .............................................. 35
Item 2. Changes in Securities and Use of Proceeds ...................... 35
Item 3. Defaults Upon Senior Securities ................................ 35
Item 5. Other Information .............................................. 36
Item 6. Exhibits and Reports on Form 8-K ............................... 40
Signature ................................................................ 42
Certifications ............................................................ 43
Exhibit Index ............................................................. 45
2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share amounts)
March 31, December 31,
2003 2002 (1)
------------ ------------
ASSETS
Investments (principally of life insurance subsidiary):
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $26,975 and $30,481
as of March 31, 2003 and December 31, 2002, respectively)................ $ 26,963 $ 30,335
Equity securities:
Trading, at fair value (cost: $14,738 and $26,785 as of March 31, 2003
and December 31, 2002, respectively) ...................................... 12,772 16,505
Available-for-sale, at fair value (cost: $6,437 and $8,983 as of
March 31, 2003 and December 31, 2002, respectively) ....................... 5,687 7,233
------------ ------------
Total investments ................................................................ 45,422 54,073
Cash and cash equivalents ........................................................ 19,025 15,871
Accrued investment income ........................................................ 735 900
Property and equipment, net....................................................... 2,928 3,176
Goodwill.......................................................................... 1,301 1,301
Other assets ..................................................................... 2,044 2,894
Total assets held for sale........................................................ 2,022 2,002
------------ ------------
Total assets ..................................................................... $ 73,477 $ 80,217
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Life insurance policy liabilities ................................................ $ 34,336 $ 35,441
Notes payable .................................................................... 4,370 9,314
Accounts payable and accruals .................................................... 3,014 2,973
Guarantees under bank facility.................................................... 10,590 10,590
Total liabilities held for sale................................................... 369 413
------------ ------------
Total liabilities ................................................................ 52,679 58,731
------------ ------------
Commitments and contingencies (see Notes 7 and 8)
Shareholders' equity:
Ordinary shares, $0.05 par value per share: 86,400,000 shares authorized;
64,439,073 shares issued and outstanding as of March 31, 2003 and
December 31, 2002.............................................................. 3,222 3,222
Additional paid-in capital ....................................................... 68,450 68,394
Retained earnings ................................................................ 14,200 16,054
Employee benefit trusts, at cost (13,684,881 shares as of March 31, 2003
and December 31, 2002) ........................................................ (63,571) (63,571)
Accumulated other comprehensive loss ............................................. (1,503) (2,613)
------------ ------------
Total shareholders' equity ....................................................... 20,798 21,486
------------ ------------
Total liabilities and shareholders' equity ....................................... $ 73,477 $ 80,217
------------ ------------
------------ ------------
(1) Reclassifications have been made related to discontinued operations - see Note 4.
See accompanying Notes which are an integral part of these Condensed Interim
Consolidated Financial Statements.
3
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share and ADS amounts)
Three Months Ended
March 31,
------------------------------
2003 2002 (1)
------------ ------------
Continuing operations:
Revenues:
Investment income................................................................. $ 534 $ 2,381
Insurance policy charges.......................................................... 4 1
Financial advisory services and other fee income (2).............................. 3,564 7,006
Net realized investment gains (losses)............................................ (7,324) 3,722
Change in net unrealized investment gains and losses on trading securities........ 8,313 (12,883)
------------ ------------
5,091 227
Expenses:
Amounts credited on insurance policyholder accounts............................... 519 1,980
Amortization of deferred policy acquisition costs................................. - 294
Operating expenses................................................................ 6,292 8,500
Interest expense.................................................................. 142 304
------------ ------------
6,953 11,078
------------ ------------
Loss from continuing operations before income taxes............................... (1,862) (10,851)
Income tax expense ............................................................... 11 752
------------ ------------
Loss from continuing operations................................................... (1,873) (11,603)
Discontinued operations:
Income (loss) from discontinued operations, net of income
tax expense (benefit) of $1 and $(10,169), respectively........................ 19 (18,702)
------------ ------------
Income (loss) on discontinued operations.......................................... 19 (18,702)
------------ ------------
Net loss.......................................................................... $ (1,854) $ (30,305)
------------ ------------
------------ ------------
(1) Reclassifications have been made related to discontinued operations - see
Note 4.
(2) Includes amounts of $0 and $2,573 for revenues earned from entities
included in discontinued operations for the three months ended March 31,
2003 and 2002, respectively.
See accompanying Notes which are an integral part of these Condensed Interim
Consolidated Financial Statements.
4
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Continued)
(Unaudited)
(In thousands, except per share and ADS amounts)
Three Months Ended
March 31,
------------------------------
2003 2002 (1)
------------ ------------
Basic and diluted loss per share and ADS: (2)
Basic and diluted loss per share:
Continuing operations............................................................. $ (0.04) $ (0.23)
Discontinued operations........................................................... - (0.37)
------------ ------------
$ (0.04) $ (0.60)
------------ ------------
------------ ------------
Basic and diluted loss per ADS: (2)
Continuing operations............................................................. $ (0.37) $ (2.29)
Discontinued operations........................................................... - (3.68)
------------ ------------
$ (0.37) $ (5.97)
------------ ------------
------------ ------------
(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 which are an integral part of these Condensed Interim
Consolidated Financial Statements.
5
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
March 31,
------------------------------
2003 2002
------------ ------------
Net cash provided by continuing operations........................................ $ 6,527 $ 19,567
Net cash used in discontinued operations ......................................... (45) (19,874)
------------ ------------
Net cash provided by (used in) operating activities .............................. 6,482 (307)
------------ ------------
Cash flows from investing activities:
Purchases of held-to-maturity fixed maturity securities .......................... - (81)
Purchases of available-for-sale fixed maturity securities ........................ (140) (5,033)
Proceeds from sale of available-for-sale fixed maturity securities................ 2,914 -
Capital expenditures ............................................................. (46) (402)
------------ ------------
Net cash provided by (used in) investing activities .............................. 2,728 (5,516)
------------ ------------
Cash flows from financing activities:
Insurance policyholder contract deposits ......................................... - 3,585
Insurance policyholder benefits paid ............................................. (986) (811)
Proceeds from disposal of shares by the employee benefit trusts................... - 43
Repayment of notes payable........................................................ (4,944) -
------------ ------------
Net cash provided by (used in) financing activities .............................. (5,930) 2,817
------------ ------------
Net increase (decrease) in cash and cash equivalents ............................. 3,280 (3,006)
Cash and cash equivalents at beginning of period (1) ............................. 15,871 61,212
Foreign currency translation adjustment .......................................... (126) (65)
------------ ------------
Cash and cash equivalents at end of period (1) ................................... $ 19,025 $ 58,141
------------ ------------
------------ ------------
(1) Amounts reflect continuing operations only.
See accompanying Notes which are an integral part of these Condensed Interim
Consolidated Financial Statements.
6
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands)
Accumulated
Other
Ordinary Shares Additional Employee Compre- Total
-------------------- Paid-in Retained Benefit hensive Shareholders'
Number Amount Capital Earnings Trusts Loss Equity
--------- --------- ---------- ---------- ---------- ----------- ------------
Balance as of
December 31, 2002............ 64,439 $ 3,222 $ 68,394 $ 16,054 $(63,571) $ (2,613) $ 21,486
Net loss........................ - - - (1,854) - - (1,854)
Change in net unrealized
gains and losses on
available-for-sale securities - - - - - 1,134 1,134
Foreign currency translation
adjustment................... - - - - - (24) (24)
Warrants issued to bank ........ - - 56 - - - 56
--------- --------- ---------- ---------- ---------- ----------- ----------
Balance as of March 31, 2003.... 64,439 $ 3,222 $ 68,450 $ 14,200 $(63,571) $ (1,503) $ 20,798
--------- --------- ---------- ---------- ---------- ----------- ----------
--------- --------- ---------- ---------- ---------- ----------- ----------
See accompanying Notes which are an integral part of these Condensed Interim
Consolidated Financial Statements.
7
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
Three Months Ended
March 31,
------------------------------
2003 2002
------------ ------------
Net loss.......................................................................... $ (1,854) $ (30,305)
Other comprehensive income (loss), net of deferred income taxes:
Foreign currency translation adjustments, net of income taxes of $0............... (24) 194
Change in net unrealized gains and losses related to continuing operations:
Unrealized holding gains and losses on available-for-sale securities........... 134 671
Less: reclassification adjustment for gains and losses included in
net loss..................................................................... 1,000 119
Deferred policy acquisition cost amortization adjustments...................... - (1,428)
Change in net unrealized gains and losses related to discontinued operations:
Change in net unrealized gains and losses on available-for-sale securities..... - (6,897)
Deferred policy acquisition cost amortization adjustments...................... - 4,173
Deferred income taxes.......................................................... - 953
------------ ------------
Other comprehensive income (loss) ................................................ 1,110 (2,215)
------------ ------------
Comprehensive loss ............................................................... $ (744) $ (32,520)
------------ ------------
------------ ------------
See accompanying Notes which are an integral part of these Condensed Interim
Consolidated Financial Statements.
8
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 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 discussion, 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 76% of
LPAL's $140.2 million in policyholder liabilities as of June 30, 2002 had been
redeemed as of March 31, 2003.
On March 7, 2003, the Company entered into a definitive agreement to sell
substantially all of the assets and operations of Berkeley Capital Management
("BCM"), its U.S. based asset management subsidiary. Consequently, the Company
deconsolidated BCM as of March 31, 2003 and BCM's results of operations have
been reported separately in the income statement under discontinued operations.
Note 2. Subsequent Events
On May 7, 2003, the Company completed the sale of substantially all of
the assets and operations of BCM to a company majority-owned by funds under the
management of Putnam Lovell NBF Private Equity ("Putnam Lovell"). The Company
received initial proceeds of $8.06 million in cash upon the sale of BCM and will
receive a further $1.0 million in cash on December 31, 2003 subject to certain
adjustments. The Company may also receive up to $1.25 million in cash earnout
payments 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; however, the Company believes that these earnout payments are unlikely.
As of March 31, 2003, BCM's assets under management were approximately $1.1
billion.
For further discussion, see Note 4 "Discontinued Operations" below.
On May 9, 2003, the Company entered into a definitive agreement to sell
all of the outstanding stock of London Pacific Advisory Services, Inc., London
Pacific Securities, Inc. and LPA Insurance Agency, Inc. together with the
associated assets of the advisory business held within London Pacific
Technologies, Inc. and LP Advisors, Inc. (together, "LPA" or the "LPA business")
for total consideration of up to $16.2 million, to a wholly-owned subsidiary of
SunGard Data Systems Inc. ("SunGard"). The purchase price consists of $8.2
million in
9
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
cash to be paid upon closing of the sale of the LPA business (less $1.25 million
to be held back to cover any shortfall to the agreed minimum tangible net asset
value of the LPA assets minus the liabilities acquired in the transaction, and
to cover any indemnity obligations) and up to a further $8.0 million cash
earnout payment that will be equal in amount to one-half of the cumulative
operating profits from the LPA business in the three year period immediately
following closing of the sale to SunGard. This earnout payment will be paid
within approximately 60 days following the third anniversary of the closing of
the transaction. There is no guarantee that any portion of the earnout payment
will be received by the Company. The definitive agreement is binding on both
companies and is subject to customary corporate and regulatory approvals. The
Company expects the sale to close on or before June 9, 2003. As of March 31,
2003, LPA's assets under management, consulting or administration were
approximately $2.3 billion.
See Part II, Item 5 "Other Information" for unaudited pro forma financial
information.
Note 3. Basis of Presentation and Principles of Consolidation
The accompanying condensed interim consolidated financial statements are
unaudited and have been prepared by the Company in conformity with United States
generally accepted accounting principles ("U.S. GAAP"). These condensed interim
consolidated financial statements include the accounts of the Company, its
subsidiaries (with the exception of LPLA and BCM as discussed above in Note 1
"Material Events" and Note 2 "Subsequent 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 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
(discontinued operations) to the continuing operations which are disclosed in
Note 4 and Note 9 below.
Certain information and note disclosures normally included in the
Company's annual consolidated financial statements have been condensed or
omitted. In the opinion of management, the condensed interim consolidated
financial statements reflect all adjustments (consisting of normal recurring
accruals) which are necessary for a fair statement of the results for the
interim periods presented.
While the Group's management believes that the disclosures presented are
adequate to make the information not misleading, these condensed interim
consolidated financial statements should be read in conjunction with the audited
financial statements and related notes for the year ended December 31, 2002,
which are contained in the Company's Annual Report on Form 10-K, filed with the
U.S. Securities and Exchange Commission ("SEC") on March 19, 2003. The year-end
condensed balance sheet data was derived from audited financial statements but
does not include all disclosures required by U.S. GAAP.
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of these condensed interim consolidated financial
statements as well as the reported amount of revenues and expenses during this
reporting period. Actual results could differ from these estimates. Certain
estimates such as fair value and actuarial assumptions have a significant impact
on the gains and losses recorded on investments and balance of life insurance
policy liabilities.
Because of the events described above in Note 1 "Material Events" and in
Note 2 "Subsequent Events," as well as other unknown events that may occur
during the next nine months, the results for the three month period ended March
31, 2003, are not indicative of the results to be expected for the full fiscal
year.
10
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The Company's Ordinary Shares are traded on the London Stock Exchange and
on the Over-the-Counter ("OTC") Bulletin Board in the U.S. in the form of
American Depositary Shares ("ADSs"), which are evidenced by American Depositary
Receipts ("ADRs"). During the second quarter of 2002, the Company completed a
one-for-ten reverse split of its 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.
Share Incentive Plan
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," and related interpretations which
recognizes compensation expense based upon the intrinsic value of the stock
options as of the date of grant. The Financial Accounting Standards Board
("FASB") 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
loss and loss per share and ADS would have been increased to the pro forma
amounts as reflected below:
Three Months Ended
March 31,
------------------------------
2003 2002
------------ ------------
(In thousands, except per
share and ADS amount)
Net loss as reported.............................................................. $ (1,854) $ (30,305)
Add: Stock based employee compensation expense included in
reported income (loss), net of related tax effects............................ - -
Deduct: Total stock based employee compensation expense determined
under fair value based methods for all awards, net of related tax effects..... (251) (266)
------------ ------------
Pro forma net loss................................................................ $ (2,105) $ (30,571)
------------ ------------
------------ ------------
Basic and diluted loss per share:
As reported....................................................................... (0.04) (0.60)
Pro forma......................................................................... (0.04) (0.60)
Basic and diluted loss per ADS: (1)
As reported....................................................................... (0.37) (5.97)
Pro forma......................................................................... (0.41) (6.02)
(1) ADS amounts have been restated to reflect the one-for-ten split in June
2002.
11
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
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:
Three Months Ended
March 31,
------------------------------
2003 (1) 2002
------------ ------------
Expected dividend yield (2)....................................................... - -
Expected stock price volatility................................................... - 125%
Risk-free interest rate........................................................... - 3.95%
Weighted average expected life (in years)......................................... - 5
(1) No grants were made in the first quarter of 2003.
(2) The deduction to the share price was zero, as future dividends have not
been assumed.
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
during the third quarter of 2002. 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 Statement of
Financial Accounting Standard No. 144 ("SFAS 144") "Accounting for the
Impairment or Disposal of Long Lived Assets," 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.
A summary of LPLA's pre-tax operating results for the three month period
ended March 31, 2002 is shown below.
Three Months
Ended
March 31, 2002
--------------
(In thousands)
Revenues:
Investment income before intercompany management fee expense..................................... $ 32,081
Intercompany management fee expense (1).......................................................... (3,042)
Other income..................................................................................... 1,647
Net realized and change in net unrealized investment gains and losses............................ (25,882)
------------
Total revenues and net investment losses......................................................... 4,804
Expenses:
Interest credited on insurance policyholder accounts............................................. 27,921
Amortization of deferred policy acquisition costs................................................ 3,882
Other expenses................................................................................... 2,231
------------
Total expenses................................................................................... 34,034
------------
Loss before income taxes ........................................................................ $ (29,230)
------------
------------
(1) These fees were paid to and included in the revenues of the venture
capital management business segment of continuing operations and asset
management business segment of discontinued operations.
12
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
LPLA had been included in the Group's life insurance and annuities
business segment.
As described in Note 1 "Material Events" and Note 2 "Subsequent Events,"
the Group entered into a definitive agreement to sell substantially all of the
assets and operations of BCM on March 7, 2003, and on May 7, 2003 the sale was
completed. In connection therewith, the Group deconsolidated BCM as of March 31,
2003 and BCM's assets and liabilities have been shown as held for sale in the
current and prior period consolidated balance sheets, in accordance with SFAS
144. The Group does not expect to receive any material amounts of income from
its asset management segment in the foreseeable future. The results of
operations of BCM and, in addition for the first quarter of 2002, the results of
Berkeley International Limited ("BIL") (the remainder of the asset management
segment in that period) have been reported in discontinued operations.
A summary of BCM's pre-tax operating results (including the results of
the remainder of the asset management segment in the prior period from BIL) for
the three month periods ended March 31, 2003 and 2002, and BCM's total assets
and total liabilities held for sale as of March 31, 2003 and December 31, 2002,
are shown below.
Three Months Ended
March 31,
------------------------------
2003 2002
------------ ------------
(In thousands)
Revenues:
Asset management fees............................................................. $ 1,028 $ 1,164
Intercompany management fee income (1)............................................ 4 483
------------ ------------
Total revenues.................................................................... 1,032 1,647
Expenses:
Operating expenses................................................................ 1,012 1,288
------------ ------------
Income before income taxes........................................................ $ 20 $ 359
------------ ------------
------------ ------------
(1) Fees were paid from and included in the net revenues of the life
insurance and annuities business segment of continuing operations (LPAL)
of $4,000 and $15,000 for the three months ended March 31, 2003 and 2002,
respectively. For the three months ended March 31, 2002, these fees also
include $468,000 received from LPLA (discontinued operations).
March 31, December 31,
2003 2002
------------ ------------
(In thousands)
Assets held for sale:
Cash and investments.............................................................. $ 453 $ 401
Property and equipment, net....................................................... 112 125
Goodwill, net..................................................................... 1,266 1,267
Other assets...................................................................... 191 209
------------ ------------
Total assets held for sale........................................................ $ 2,022 $ 2,002
------------ ------------
------------ ------------
Liabilities held for sale:
Accounts payable, accruals and other liabilities.................................. $ 369 $ 413
------------ ------------
Total liabilities held for sale................................................... $ 369 $ 413
------------ ------------
------------ ------------
13
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
BCM had been included in the Group's asset management business segment.
On May 7, 2003, the Group sold substantially all of the assets and
operations of BCM in an all cash transaction to a newly formed company
majority-owned by funds under the management of Putnam Lovell. The total fixed
consideration of $9.06 million, less any required provisions for indemnity
obligations under the purchase and sale agreement; direct costs relating to the
sale including taxes; and the approximate $1.1 million book value of the net
assets being disposed of, will be recorded as a gain on sale of discontinued
operations. The estimated book gain is approximately $7.6 million.
Note 5. 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 and warrants which are determined based on the "Treasury Stock
Method." As the Group recorded a net loss for both of the three month periods
ended March 31, 2003 and 2002, the calculation of diluted earnings per share for
these periods 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 both of the three month periods ended March 31, 2003 and
2002, there would have been an additional zero and 478,921 shares, respectively,
included in the calculations of diluted earnings per share for these periods.
14
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
A reconciliation of the numerators and denominators for the basic and
diluted earnings per share calculations is as follows:
Three Months Ended
March 31,
------------------------------
2003 2002
------------ ------------
(In thousands, except share,
per share and ADS amounts)
Loss from continuing operations................................................... $ (1,873) $ (11,603)
Income (loss) on discontinued operations.......................................... 19 (18,702)
------------ ------------
Net loss.......................................................................... $ (1,854) $ (30,305)
------------ ------------
------------ ------------
Basic and diluted loss per share and ADS: (1)
Weighted average number of Ordinary Shares outstanding,
excluding shares held by the employee benefit trusts............................ 50,754,192 50,754,192
------------ ------------
Basic and diluted loss per share:
Continuing operations............................................................. $ (0.04) $ (0.23)
Discontinued operations........................................................... - (0.37)
------------ ------------
$ (0.04) $ (0.60)
------------ ------------
------------ ------------
Basic and diluted loss per ADS: (1)
Continuing operations............................................................. $ (0.37) $ (2.29)
Discontinued operations........................................................... - (3.68)
------------ ------------
$ (0.37) $ (5.97)
------------ ------------
------------ ------------
(1) ADS amounts have been restated to reflect the one-for-ten reverse split in
June 2002.
Note 6. 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.
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.
15
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For a discussion of the Group's accounting policies with respect to the
determination of fair value of investments and other-than-temporary impairments,
see the section entitled "Critical Accounting Policies" in Part I, Item 2
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" below. The Group's private securities consist primarily of
convertible preferred stock holdings in technology companies. Financial
information with respect to the issuers of these equity securities is received
and reviewed periodically by the Group's management. In addition, the Group's
management maintains contact with the management of these issuers through
ongoing dialogue to examine the issuers' future plans and prospects.
The Group's fixed maturity securities are principally comprised of U.S.
and non-U.S. corporate debt. Generally, quoted market prices are available for
these securities.
Fixed Maturity Securities
An analysis of fixed maturity securities is as follows:
March 31, 2003 December 31, 2002
------------------------------------------- -------------------------------------------
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. corporate
debt securities.......... $ 9,534 $ 67 $ - $ 9,601 $ 12,709 $ 115 $ (9) $ 12,815
Corporate debt securities . 17,441 90 (169) 17,362 17,772 90 (342) 17,520
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total fixed maturity securities $ 26,975 $ 157 $ (169) $ 26,963 $ 30,481 $ 205 $ (351) $ 30,335
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Equity Securities
Equity securities are comprised of available-for-sale and trading
securities. An analysis of equity securities is as follows:
March 31, 2003 December 31, 2002
------------------------------------------- -------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(In thousands)
Private corporate equity
securities............... $ 6,437 $ - $ (750) $ 5,687 $ 8,983 $ - $ (1,750) $ 7,233
---------- ---------- ---------- ----------- ---------- ---------- ---------- ----------
Total available-for-sale
equity securities........ 6,437 - (750) 5,687 8,983 - (1,750) 7,233
Trading securities......... 14,738 7,396 (9,362) 12,772 26,785 5,236 (15,516) 16,505
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total equity securities.... $ 21,175 $ 7,396 $ (10,112) $ 18,459 $ 35,768 $ 5,236 $ (17,266) $ 23,738
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Trading securities are carried at fair value with changes in net
unrealized gains and losses of $8,313,000 and $(12,883,000) included in the
losses for the three month periods ended March 31, 2003 and 2002, respectively.
16
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Investment Concentration and Risk
As of March 31, 2003, fixed maturity securities held by the Group
included investments in General Motors of $7,968,000, British Telecom of
$3,199,000, Daimler Chrysler of $3,193,000, Ford Motor Credit of $3,195,000,
North American Capital of $2,714,000 and Clarica of $2,720,000. Equity
securities held by the Group primarily included investments in Agility
Communications, Inc. of $3,375,000, Alacritech, Inc. of $2,250,000 and
Packeteer, Inc. of $12,368,000. These nine corporate issuers each represented
more than ten percent of shareholders' equity as of March 31, 2003.
As of March 31, 2003, 100% of the Group's $27.0 million in fixed maturity
securities, 99% of the Group's $5.7 million in available-for-sale private equity
securities, and 62% of the Group's $12.8 million in trading securities were
owned by the Group's Jersey based life insurance subsidiary, LPAL. LPAL's
investments are not currently available to fund the operations or commitments of
any other Group company.
Net Unrealized Gains (Losses) on Available-for-Sale Securities
Net unrealized losses on fixed maturity securities classified as
available-for-sale as of March 31, 2003 and December 31, 2002 totaled $12,000
and $146,000, respectively. There were no related deferred policy acquisition
cost adjustments or income taxes.
Net unrealized losses on equity securities classified as
available-for-sale as of March 31, 2003 and December 31, 2002 totaled $750,000
and $1,750,000, respectively. There were no related income taxes.
Changes in net unrealized gains and losses on available-for-sale
securities included in other comprehensive income for the period ended March 31,
2003 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, 2002................................................................. $ (146) $ (1,750) $ (1,896)
Changes during the three month period ended March 31, 2003 for continuing operations:
Unrealized holding gains and losses on available-for-sale securities.............. 134 - 134
Reclassification adjustment for gains and losses included in net income (loss).... - 1,000 1,000
---------- ---------- -----------
Net unrealized losses on available-for-sale securities as of
March 31, 2003.................................................................... $ (12) $ (750) $ (762)
---------- ---------- -----------
---------- ---------- -----------
17
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Realized Gains and Losses
Information about gross and net realized gains and losses on securities
transactions is as follows:
Three Months Ended
March 31,
------------------------------
2003 2002
------------ ------------
(In thousands)
Realized gains (losses) on securities transactions:
Fixed maturities, available-for-sale:
Gross losses.................................................................. $ (178) $ -
------------ ------------
Equity securities, trading:
Gross gains................................................................... 1,623 3,841
Gross losses.................................................................. (6,222) -
------------ ------------
Net realized gains on equity securities, trading.................................. (4,599) 3,841
------------ ------------
Equity securities, available-for-sale:
Gross losses.................................................................. (2,547) (119)
------------ ------------
Net realized investment gains (losses) on securities transactions................. $ (7,324) $ 3,722
------------ ------------
------------ ------------
During the three month period ended March 31, 2003, the Group's
management determined that one private equity investment in a technology company
was other-than-temporarily impaired and consequently recorded a realized loss of
$2.5 million in the condensed interim consolidated income statement.
Note 7. Notes Payable
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
March 31, 2003 was 1.3%). 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 $6.6 million as of April 30, 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 using an exchange rate of (pound)1 =
$1.61) and may be exercised at any time prior to February 14, 2010. The fair
value of these warrants was determined by the Company to be $251,125 on the
grant date and this amount is being amortized to expense over the term of the
bank facility, with the corresponding entries to additional paid-in capital. The
Company agreed to new financial covenants under this reducing credit facility
and must formally meet such covenants as of the end of each quarter. The Group's
consolidated results for the quarter ended March 31, 2003 resulted in a breach
of the core operating profit financial covenant under the facility. The Company
has been granted a written waiver of this breach by Bank of Scotland.
18
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (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 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 $4.4
million and the facility to $15.0 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 March 31, 2003 and December 31, 2002 on its consolidated balance sheets and
has taken other-than-temporary impairment losses on the related investments in
its consolidated income statement for 2002.
As discussed in Note 2 "Subsequent Events," on May 7, 2003, the sale of
BCM was completed and the Group received initial sale proceeds of $8.06 million.
On May 8, 2003, the Company paid $7.75 million to Bank of Scotland which reduced
the Group's borrowings to zero and the amounts due under its guarantee
obligations to $7.25 million.
In June 2003, the Group will use the initial proceeds from the sale of
LPA to SunGard (see Note 2 "Subsequent Events" above) and its cash or the
proceeds from the sale of its listed equity securities in order to pay off the
remaining $7.25 million in guarantee obligations under the bank facility
described above. In the event that the sale of LPA is not completed, in order to
meet its obligations to the bank as of the end of the third and fourth quarters
of 2003, 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 LPA to another party or the sale of its listed
equity securities.
Note 8. Commitments and Contingencies
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 the Group considers to be normal for its
business. The Group believes the ultimate settlement or other resolution of the
claims will not materially affect its consolidated financial position, results
of operations or cash flows.
Guarantees
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45")
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others -- an interpretation of FASB
Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34." The
following is a summary of the Company's agreements that the Company has
determined are within the scope of FIN 45.
Under its Memorandum and Articles of Association, the Company has agreed
to indemnify its officers and directors for certain events or occurrences
arising as a result of the officer or director serving in such
19
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
capacity. The maximum potential amount of future payments the Company could be
required to make under these indemnification agreements is unlimited. However,
the Company maintains directors and officers liability insurance that limits the
Company's exposure and enables it to recover a portion of any future amounts
paid. As a result of its insurance coverage, the Company believes the estimated
fair value of these indemnification agreements is minimal and has no liabilities
recorded for these agreements as of March 31, 2003.
The Company enters into indemnification provisions under its agreements
with other companies in its ordinary course of business, typically with business
partners, clients and landlords. Under these provisions, the Company generally
indemnifies and holds harmless the indemnified party for losses suffered or
incurred by the indemnified party as a result of the Company's activities under
the agreement. These indemnification provisions sometimes include
indemnifications relating to representations made by the Company with regard to
intellectual property rights. These indemnification provisions generally survive
termination of the underlying agreement. The maximum potential amount of future
payments the Company could be required to make under these indemnification
provisions is unlimited. The Company believes the estimated fair value of these
agreements is minimal. Accordingly, the Company has no liabilities recorded for
these agreements as of March 31, 2003.
For disclosure of guarantee obligations under the Group's bank facility,
see Note 7 above.
Note 9. Business Segment and Geographical Information
The Group's reportable operating segments are classified according to its
principal businesses of life insurance and annuities, financial advisory
services and venture capital management.
Due to the sale of BCM (see Note 1 and Note 2 above), the asset
management segment has been classified as discontinued operations as of March
31, 2003.
Intercompany transfers between reportable operating segments are
accounted for at prices which are designed to be representative of unaffiliated
third party transactions.
During the three month periods ended March 31, 2003 and 2002, the venture
capital management segment generated portfolio management fees from LPLA
(discontinued operations) of $0 and $2,573,000, respectively. These portfolio
management fees are included in the revenues of continuing operations and have
not been eliminated in the condensed interim consolidated financial statements.
Net realized investment losses in the amount of $31,368,000 were recorded
during the first three months of 2002 by the venture capital management segment,
related to intersegmental investment sales to the life insurance and annuities
segment. These net realized investment losses were offset by a corresponding
reclassification adjustment in unrealized investment gains and losses on trading
securities for the same amount. These gains and losses have been eliminated in
the Group's condensed interim consolidated financial statements.
Summary revenue and investment gain (loss) information by geographic
segment, based on the domicile of the Group company generating those revenues,
is as follows:
20
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Three Months Ended
March 31,
------------------------------
2003 2002
------------ ------------
(In thousands)
Jersey............................................................................ $ (562) $ (3,118)
Guernsey.......................................................................... 2,008 (3,433)
United States..................................................................... 3,645 6,778
------------ ------------
Consolidated revenues and net investment gains (losses)
from continuing operations.................................................... $ 5,091 $ 227
------------ ------------
------------ ------------
Revenues and income (loss) before taxes for the Group's reportable
operating segments included in continuing operations, based on management's
internal reporting structure, were as follows:
Three Months Ended
March 31,
------------------------------
2003 2002
------------ ------------
(In thousands)
Revenues:
Life insurance and annuities (1).................................................. $ (360) $ (1,630)
Financial advisory services....................................................... 3,564 4,433
Venture capital management (2) ................................................... 1,867 (2,903)
------------ ------------
5,071 (100)
Reconciliation of segment amounts to consolidated amounts:
Interest income .................................................................. 20 327
------------ ------------
Consolidated revenues and net investment gains (losses)
for continuing operations..................................................... $ 5,091 $ 227
----------- ------------
------------ ------------
Income (loss) from continuing operations before income taxes:
Life insurance and annuities (1).................................................. $ (1,123) $ (4,133)
Financial advisory services....................................................... (994) (948)
Venture capital management (2) ................................................... 1,669 (3,981)
------------ ------------
(448) (9,062)
Reconciliation of segment amounts to consolidated amounts:
Interest income................................................................... 20 327
Corporate expenses................................................................ (1,292) (1,812)
Interest expense (3).............................................................. (142) (304)
------------ ------------
Consolidated loss from continuing operations
before income taxes .......................................................... $ (1,862) $ (10,851)
------------ ------------
------------ ------------
(1) Netted against the revenues (investment income) of the life insurance and
annuities segment are management fees paid to BCM (discontinued
operations) of $4,000 and $15,000 in the first quarters of 2003 and 2002,
respectively.
(2) Included in the revenues of the venture capital management segment are
management fees from LPLA (discontinued operations) of $0 and $2,573,000
in the first quarters of 2003 and 2002, respectively.
(3) Included in interest expense is interest paid to LPLA (discontinued
operations) of $0 and $15,000 in the first quarters of 2003 and 2002,
respectively.
21
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Material changes in segmental assets of continuing operations during the
first quarter of 2003 occurred in: (a) the venture capital management segment,
where assets decreased by $2,752,000 from $7,710,000 to $4,958,000, primarily
due to the sale of $4,739,000 of trading securities, the proceeds from which
were used to repay part of the bank loan, partially offset by a gain from the
change in net unrealized gains and losses on listed equity securities in the
trading account; and (b) the corporate and other segment, where assets decreased
by $2,479,000 from $6,355,000 to $3,876,000, primarily due to the use of cash to
fund LPA's operations ($0.9 million) and to pay for corporate expenses
(primarily professional fees and payments related to the bank facility) during
the first quarter of 2003.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As used herein, the terms "registrant," "Company," "we," "us" and "our"
refer to London Pacific Group Limited. Except as the context otherwise requires,
the term "Group" refers collectively to the registrant and its subsidiaries.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the unaudited condensed
interim consolidated financial statements, and the notes thereto, and the
December 31, 2002 audited consolidated financial statements, and the notes
thereto, included in our recent Annual Report on Form 10-K. The condensed
interim consolidated financial statements are prepared in accordance with U.S.
GAAP. This item should also be read in conjunction with the "Forward-Looking
Statements and Factors That May Affect Future Results" which are set forth below
and in our other filings with the SEC.
Forward-Looking Statements and Factors That May Affect Future Results
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this report contain forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Such forward-looking statements are based on current
expectations, estimates, forecasts and projections about the industries in which
we operate, management's current beliefs and assumptions made by management.
Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," "goals," variations of such words and similar expressions are
intended to identify such forward-looking statements. These statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions that are difficult to predict. Future outcomes and results may
differ materially from what is expressed or 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 report and in our other filings with the SEC. The factors include, but are
not limited to, (i) the risks described in Item 3 "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) our ability to meet
our debt obligations, (vi) fluctuations in the performance of debt and equity
markets worldwide, (vii) the enactment of adverse state, federal or foreign
regulation or changes in government policy or regulation (including accounting
standards) affecting our operations, (viii) the effect of economic conditions
and interest rates in the U.S., the U.K. or internationally, (ix) the ability of
our subsidiaries to compete in their respective businesses, (x) our ability to
attract and retain key personnel, and (xi) actions by governmental authorities
that regulate our businesses, including insurance commissions.
22
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
Life Insurance and Annuities
Certain information regarding our life insurance and annuities segment's
results of operations (continuing operations only) is as follows:
Three Months Ended
March 31,
------------------------------
2003 2002
------------ ------------
(In thousands)
Revenues:
Investment income................................................................. $ 514 $ 2,054
Insurance policy charges ......................................................... 4 1
Net realized investment gains (losses)............................................ (23,405) 3,841
Change in net unrealized investment gains and losses on trading securities ....... 22,527 (7,526)
------------ ------------
Total revenues and net investment losses.......................................... (360) (1,630)
Expenses:
Amounts credited on insurance policyholder accounts .............................. 519 1,980
Amortization of deferred policy acquisition costs................................. - 294
General and administrative expenses .............................................. 244 229
------------ ------------
Total expenses related to operations.............................................. 763 2,503
------------ ------------
Loss from continuing operations before income taxes .............................. $ (1,123) $ (4,133)
------------ ------------
------------ ------------
As previously disclosed in our 2002 Annual Report on Form 10-K, during
2002, 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 I, Item 2.
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, LPAL policy surrenders increased substantially. Approximately 76% of
LPAL's policyholder liabilities as of June 30, 2002 had been redeemed as of
March 31, 2003.
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.
23
First quarter of 2003 compared to first quarter of 2002
In the first quarter of 2003, LPAL contributed a loss before income taxes
of $1.1 million to our overall loss before income taxes, compared to a loss
before income taxes of $4.1 million in the first quarter of 2002. Net realized
investment losses in the first quarter of 2003 were $23.4 million compared to
net realized investment gains of $3.8 million in the first quarter of 2002. The
gain from the change in net unrealized investment gains and losses was $22.5
million in the first quarter of 2003, compared to a loss of $7.5 million in the
first quarter of 2002. In the first quarter of 2003, the spread between
investment income and interest credited to policyholders decreased by $0.1
million; amortization of deferred policy acquisition costs ("DPAC") decreased by
$0.3 million; and general and administration expenses remained flat, each as
compared to the first quarter of 2002.
LPAL did not generate any premiums during the first quarter of 2003,
during the first quarter of 2002, $3.6 million of premiums were received. LPAL
discontinued selling new policies on July 2, 2002 as a result of the events
described above.
Interest and dividend income on investments was $0.5 million in the first
quarter of 2003, compared with $2.1 million in the first quarter of 2002. This
$1.6 million decrease was due primarily to a decline in the level of invested
bonds and cash.
During the first quarter of 2003, $1.0 million of bond proceeds and cash
were used to meet policy redemptions. Following this reduction, and further
expected bond realizations and maturities required to meet policy maturities
during the remaining nine months of 2003, interest income is expected to decline
to approximately $1.6 million for the full year 2003.
Policyholder liabilities as of March 31, 2003 were $34.3 million of which
$9.9 million is scheduled to mature during the remaining nine months of 2003.
These maturities are expected to be met by a combination of cash of
approximately $9.2 million held at the beginning of April 2003 and bond
maturities of approximately $13.0 million during the remaining nine months of
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 and operating
expenses are expected to be approximately $0.9 million during the full year
2003. Unrealized investment gains on LPAL's listed equity securities were $2.6
million for the month of April 2003.
Net investment losses totaled $0.9 million in the first quarter of 2003,
compared to net investment losses of $3.7 million in the first quarter of 2002.
Net investment losses in the first quarter of 2003 were comprised of net
realized investment losses of $23.4 million and $22.5 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 $8.9 million as of
December 31, 2002 to $7.9 million as of March 31, 2003. LPAL sold certain
trading positions during the first quarter of 2003, which resulted in net
realized losses of $20.8 million based on an aggregate original cost of $23.7
million. These disposals represented shares held in companies that had completed
initial public offerings of their securities. These realized losses were
increased by an other-than-temporary impairment charge on one private equity
security holding of $2.5 million.
Total invested assets (defined as total assets excluding DPAC and other
assets) decreased to $50.4 million as of March 31, 2003, compared to $51.6
million as of December 31, 2002. On total average invested assets in the first
quarter of 2003, the average annualized net return, including both realized and
unrealized investment gains and losses, was -2.9%, compared with -4.2% in the
first quarter of 2002.
Interest credited on policyholder accounts decreased by $1.5 million in
the first quarter of 2003 to $0.5 million, compared with $2.0 million in the
first quarter of 2002. The decrease was due primarily to substantial increases
in policyholder surrenders in the second half of 2002. The average rate credited
to policyholders was 5.8% in the first quarter of 2003, compared with 5.9% in
the first quarter of 2002.
24
Amortization of DPAC was zero in the first quarter of 2003, compared to
$0.3 million in the first quarter of 2002. This was due to the acceleration of
DPAC amortization to fully write-off DPAC as of September 30, 2002. The reason
for the write-off was 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 remained at $0.2 million in the first
quarter of 2003, compared with the first quarter of 2002.
Financial Advisory Services
On May 9, 2003, we entered into a definitive agreement to sell the LPA
business. See Note 2 "Subsequent Events" to the condensed interim consolidated
financial statements in Part I, Item 1.
Certain information regarding our financial advisory services segment's
results of operations is as follows:
Three Months Ended
March 31,
------------------------------
2003 2002
------------ ------------
(In thousands)
Gross financial advisory services fees............................................ $ 3,564 $ 4,433
Payments due to independent advisors.............................................. (2,176) (2,864)
------------ ------------
1,388 1,569
Operating expenses................................................................ 2,382 2,517
------------ ------------
Loss before income taxes ......................................................... $ (994) $ (948)
------------ ------------
------------ ------------
First quarter of 2003 compared to first quarter of 2002
Net revenues in the financial advisory services segment decreased from
$1.6 million in the first quarter of 2002 to $1.4 million in the first quarter
of 2003. Net asset management and consulting fees decreased from the prior year
period as a result of an overall decrease in assets under management upon which
these fees are based. Net revenues from brokerage and commission product sales
also decreased. Assets under management, consulting or administration decreased
from $2.5 billion as of March 31, 2002 to $2.3 billion as of March 31, 2003. 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 decreased to $2.4 million in the first quarter of
2003, compared with $2.5 million in the first quarter of 2002. Before the
capitalization and amortization of web development costs, expenses totaled $2.5
million in the first quarter of 2003, compared with $2.8 million in the first
quarter of 2002. Segment-wide operating expense reductions were made over the
course of the last year in response to negative market conditions resulting in a
$0.3 million decrease in first quarter expenses over the same period in the
prior year.
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 March 31, 2003
was $3.6 million, including $150,000 in the first quarter of 2002. Of this
total, $2.9 million has been capitalized as software development costs, although
no additional costs were capitalized in the first quarter of 2003. The costs are
being amortized
25
(as a component of operating expenses) over five years; amortization of these
costs began in May 2001. The amount amortized during first quarter 2003 and 2002
was $0.1 million in each period.
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 institutions, and
additional contracts are currently under negotiation. The revenue impact of
these contracts increased during 2003 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 myOfficeOnlineSM platform. However, this will be for the benefit of the
purchaser of the LPA business. See Note 2 "Subsequent Events" to the condensed
interim consolidated financial statements in Part I, Item 1.
Venture Capital Management
Certain information regarding our venture capital management segment's
results of operations is as follows:
Three Months Ended
March 31,
------------------------------
2003 2002
------------ ------------
(In thousands)
Revenues:
Management fees................................................................... $ - $ 2,573
Net realized investment gains (losses) (1)........................................ (5,249) (31,487)
Change in net unrealized investment gains and losses on trading securities (1).... 7,116 26,011
------------ ------------
Total revenues and net investment gains (losses).................................. 1,867 (2,903)
Operating expenses................................................................ 198 1,078
------------ ------------
Income (loss) before income taxes................................................. $ 1,669 $ (3,981)
------------ ------------
------------ ------------
(1) Net realized investment losses in the amounts of $0 and $31,368,000 were
recorded in the first quarters of 2003 and 2002, respectively, by the
venture capital management segment, related to intersegmental investment
sales to the life insurance and annuities segment. These net realized
investment losses were offset by a corresponding reclassification
adjustment in unrealized investment gains and losses on trading
securities for the same amount. These gains and losses have been
eliminated in our condensed interim consolidated financial statements.
First quarter of 2003 compared to first quarter of 2002
In the first quarter of 2003, the venture capital management segment
contributed income before income taxes of $1.7 million, compared to a loss
before income taxes of $4.0 million in the first quarter of 2002. The income and
loss in those periods, respectively, was attributable primarily to net realized
and unrealized investment gains and 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 the first quarter of 2003 was a gain of $7.1 million,
which was partially offset by net realized losses of $5.2 million. The trading
portfolio decreased from $7.6 million as of December 31, 2002 to $4.9 million as
of March 31, 2003. We sold certain trading positions during the first quarter of
2003, which resulted in net realized losses of $5.1 million based on an
aggregate original cost of $9.8 million. These realized losses were increased by
an other-than-temporary impairment write-down of $0.1 million on one private
investment relating to the guarantees as discussed in Note 7 to the condensed
interim consolidated financial statements. All intersegmental investment gains
and losses, other than those arising from sales to LPLA (discontinued
operations), have been eliminated in our condensed interim consolidated
statements of income.
26
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.
The venture capital management segment earned portfolio management fees
from LPLA of $2.6 million in the first quarter of 2002, and none in the first
quarter of 2003. Due to the events described in the section entitled "Life
Insurance and Annuities," Berkeley International Capital Corporation ("BICC")
has not received fees from the management of LPLA's investment portfolio since
the second quarter of 2002.
Operating expenses in the first quarter of 2003 were $0.2 million,
compared to $1.1 million in the first quarter of 2002. The $0.9 million decrease
was attributable primarily to lower staff costs, reflecting the reduction in
business and staffing during the latter half of 2002.
BICC is seeking to redevelop its venture capital business. BICC's
business relationships are extensive among Silicon Valley companies seeking
later stage capital and in the investor community globally. There has continued
to be a difficult operating environment in early 2003 for the venture capital
industry. The operating results for this business segment, and for the Group as
a whole, for the remainder of 2003 will be largely driven by portfolio
performance in uncertain market conditions.
Corporate and Other
First quarter of 2003 compared to first quarter of 2002
Corporate expenses decreased by $0.5 million to $1.3 million in the first
quarter of 2003, as compared to $1.8 million for the first quarter of 2002. This
decrease was primarily due to decreases in staff compensation and audit fees
partially offset by higher bank facility costs.
Interest income earned by us and our subsidiaries (excluding the life
insurance and annuities segment) decreased by $0.3 million to $20,000 in the
first quarter of 2003 as compared with the first quarter of 2002, 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 $0.2 million to $0.1 million in the first quarter of 2003
as compared with the first quarter of 2002, primarily due to the partial
repayment of bank borrowings. A discussion of our sources and uses of cash is
discussed in "Liquidity and Capital Resources" below.
Consolidated Income (Loss) from Continuing Operations Before Income Taxes
First quarter of 2003 compared to first quarter of 2002
The consolidated loss from continuing operations before income taxes
decreased from $10.9 million in the first quarter of 2002 to $1.9 million in the
first quarter of 2003. Net realized and unrealized investment losses were $8.2
million higher in the first quarter of 2002 compared to the first quarter of
2003.
Consolidated income before income taxes for the remainder of 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 our 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 3 "Quantitative and
Qualitative Disclosures About Market Risk" below.
See discussion of events relating to LPLA, LPAL, BCM and LPA in the
"Liquidity and Capital Resources" section below.
After completion of the sale of the LPA business, the Group's focus will
be on its venture capital placement business. The market environment for venture
capital continues to be very weak but we believe that there will be
opportunities in the future. However, there is no guarantee that we will be
successful in redeveloping our venture capital operations.
27
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.
First quarter of 2003 (continuing operations)
Although the loss from continuing operations before income taxes was $1.9
million for the first quarter of 2003, an income tax expense of $11,000 resulted
for the period. No tax benefits were provided for the $1.4 million in losses
attributable to our U.S. subsidiaries as full valuation allowances have been
taken against all net deferred tax assets due to doubt about our ability to
utilize operating loss carryovers. In addition, $0.4 million of losses were
contributed by our Jersey and Guernsey operations during the quarter for which
no tax benefits will be realized.
Discontinued Operations
In the first three months of 2002, prior to the loss of management
control over LPLA, we recorded an after-tax loss from operations of LPLA of
$19.1 million. The loss in the first quarter of 2002 was primarily due to net
realized investment losses and the change in net unrealized investment gains and
losses totaling $25.9 million. For further information see Note 4 to the
condensed interim consolidated financial statements in Part I, Item 1.
As we entered into a definitive agreement to sell substantially all of
the assets and operations of BCM on March 7, 2003, we deconsolidated BCM as of
March 31, 2003 and BCM's results of operations (together with the remaining
asset management segment for 2002) have been reported separately in the income
statement under discontinued operations. In the first quarter of 2003, the asset
management segment (comprised of BCM only) reported income before taxes of
$20,000, as compared to $359,000 for the first quarter of 2002 (which also
included the results of BIL of $247,000). The reduction in net income was
primarily due to the loss of management contracts relating to LPLA's investment
portfolios during the third quarter of 2002. For further information see Note 4
to the condensed interim consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
Management has identified those accounting policies that are most
important to the accurate portrayal of our financial condition and results of
operations and that require management's most complex or subjective judgments,
often as a result of the need to make estimates about the effect of matters that
are inherently uncertain. These most critical accounting policies pertain to our
investments and to the accounting for life insurance policy liabilities. In
addition, for 2002 and for the first quarter of 2003, 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
28
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 by us when we
determine 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
29
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 condensed interim consolidated financial statements include the
accounts of the Company, its subsidiaries (with the exception of LPLA and BCM
which were deconsolidated during 2002 and 2003, respectively, 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 report include: London Pacific
Assurance Limited, London Pacific Advisors 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 condensed
interim 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 SFAS 144, 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.
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 the third quarter of
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.
As we entered into a definitive agreement to sell substantially all of
the assets and operations of BCM on March 7, 2003, we deconsolidated BCM as of
March 31, 2003 and BCM's results of operations have been reported separately in
the income statement under discontinued operations for the current and prior
period. BCM's assets and liabilities have been classified as assets held for
sale and liabilities held for sale in the current and prior period consolidated
balance sheets. Due to the loss of the management contracts related to
30
LPLA's investment portfolios during the third quarter of 2002, both BCM and BIL
will no longer receive fees from LPLA in future periods. We do not expect to
receive any material amounts of income from our asset management segment in the
foreseeable future.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents increased during the first quarter of 2003
by $3.2 million to $19.0 million. This increase resulted from $6.5 million and
$2.7 million provided by operating and investing activities, respectively,
partially offset by $5.9 million of cash used in financing activities. Cash
provided by operating activities primarily related to the proceeds from the
sales of trading securities by the life insurance and annuities and venture
capital management segments. The cash used in financing activities related to
the partial repayment of the bank facility together with policy surrender
benefits paid by the life insurance and annuities segment. As of March 31, 2003,
our cash and cash equivalents, excluding the life insurance and annuities
segment, amounted to $10.3 million, a decrease of $2.1 million from December 31,
2002. Excluding the life insurance and annuities segment, we also held $4.9
million of listed equity securities which could be sold within a short period of
time as of March 31, 2003, compared to $7.7 million as of December 31, 2002.
Shareholders' equity decreased during the first quarter of 2003 by $0.7
million from $21.5 million at December 31, 2002 to $20.8 million at March 31,
2003, primarily due to a net loss for the period of $1.9 million, offset by the
change in unrealized gains and losses on available-for-sale securities of $1.3
million included in accumulated other comprehensive income (loss). As of March
31, 2003 and December 31, 2002, $63.6 million of our Ordinary Shares, at cost,
held by the employee benefit trusts have been netted against shareholders'
equity.
As more fully disclosed in our 2002 Annual Report on Form 10-K, on
December 20, 2002, we and the 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 March 31,
2003 was 1.3%). 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
$6.6 million as of April 30, 2003, we gave the bank other guarantees, pledges
and security interests over certain other Group 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 of the Company. The
warrants have a subscription price of (pound)0.1143 ($0.184 using an exchange
rate of (pound)1 = $1.61) and may be exercised at any time prior to February 14,
2010. We agreed to new financial covenants under this reducing credit facility
and must formally meet such covenants as of the end of each quarter. Our
consolidated results for the quarter ended March 31, 2003 resulted in a breach
of the core operating profit financial covenant under the facility. We have been
granted a written waiver of this breach by Bank of Scotland. See additional
disclosure below.
As of December 31, 2002, $9.3 million was outstanding under the bank
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 our
borrowings to $4.4 million and the facility to $15.0 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
will be obligated to pay this amount on their behalf. We have recorded the
maximum guarantee obligation of $10.6 million at March 31, 2003 and December 31,
2002 on our consolidated balance sheets and have been
31
taken other-than-temporary impairment losses on the related investments in our
consolidated income statement for 2002.
On May 7, 2003, we sold substantially all of the assets and operations of
BCM to a newly formed company majority-owned by funds under the management of
Putnam Lovell. The purchase price consists of: (1) $8.06 million in cash which
we received at closing, (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 in cash earnout
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. We currently believe that these earnout payments
are unlikely. As part of the agreement, BCM and its shareholder made certain
representations and warranties, and related indemnities, and these and other
customary obligations are guaranteed by the Company. As of March 31, 2003, BCM's
assets under management were approximately $1.1 billion, including approximately
$0.2 billion of assets under a subadvisory agreement with LPA.
On May 8, 2003, we paid $7.75 million to Bank of Scotland which reduced
our borrowings to zero and the amounts due under our guarantee obligations to
$7.25 million.
On May 9, 2003, we entered into a definitive agreement to sell the stock
of London Pacific Advisory Services, Inc., London Pacific Securities, Inc. and
LPA Insurance Agency, Inc., together with the associated assets of the advisory
business held within London Pacific Technologies, Inc. and LP Advisors, Inc.
(together, the "LPA business") for total consideration of up to $16.2 million,
to SunGard. The purchase price consists of $8.2 million in cash to be paid at
closing (less $1.25 million to be held back to cover any shortfall to the agreed
minimum tangible net asset value of the LPA assets minus the liabilities
acquired in the transaction, and to cover any indemnity obligations) and up to a
further $8.0 million cash earnout payment that will be equal in amount to
one-half of the cumulative operating profits from the LPA business in the three
year period immediately following closing of the sale to SunGard. This earnout
payment will be paid within approximately 60 days following the third
anniversary of the closing of the transaction. There is no guarantee that we
will receive any portion of the earnout payment. LPA's net liability
(approximately $10.3 million as of March 31, 2003) to BICC will not be assumed
by SunGard. The definitive agreement is binding on both companies and is subject
to customary corporate and regulatory approvals. We expect the sale to close on
or before June 9, 2003. As of March 31, 2003, LPA's assets under management,
consulting or administration were approximately $2.3 billion.
We will use the initial proceeds from the sale of LPA to SunGard,
expected in early June 2003, and our cash or the proceeds from the sale of our
listed equity securities to pay off the remaining $7.25 million in guarantee
obligations under the bank facility. In the unlikely event that the sale of LPA
is not completed in June 2003, 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 LPA to another party or the sale of
our listed equity securities. As of April 30, 2003, our listed equity securities
(excluding those held by LPAL) had a market value of $6.6 million and we had
cash and cash equivalents of $9.9 million (excluding cash held by LPAL). If we
are unable to pay off the remaining $7.25 million in guarantee obligations under
the bank facility should a sale of LPA not be completed by the end of September
2003, we will need to pay down the facility by $2.25 million on September 30,
2003 and by $5.0 million on December 31, 2003.
Our consolidated results for the quarter ended March 31, 2003 resulted in
a breach of the core operating profit financial covenant under the bank
facility. We have been granted a written waiver of this breach by Bank of
Scotland. It is possible that we may again fail to meet the bank's core
operating profit financial covenant at the quarterly reporting dates of June 30,
2003 or September 30, 2003. 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 that
the bank facility becomes immediately repayable, we believe the balances of
existing cash, proceeds from the sale of listed equity securities and the net
proceeds from a sale of LPA will be sufficient to repay the bank facility and to
meet other obligations for the next twelve months, including working capital for
operations.
32
As disclosed in our Annual Report on Form 10-K for 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.
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.
During 2002, LPLA paid investment management fees to our asset management
and venture capital management segments totaling $3.6 million. 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.
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 surrenders substantially increased.
Approximately 76% of LPAL's $140.2 million policyholder liabilities as of June
30, 2002 had been redeemed as of March 31, 2003. Policy surrenders for the first
quarter of 2003 totaled $1.0 million. We do not expect significant surrender
activity during the remainder of 2003; however, approximately $9.8 million of
policyholder liabilities are scheduled to mature during the remaining nine
months of 2003. These maturities are expected to be met by a combination of cash
held as of March 31, 2003 of $9.2 million and the proceeds from maturing bonds
which are estimated to be $12.6 million during the remaining nine months of
2003. Assuming the reinvestment of excess cash in bonds, investment income
should approximately equal the amount credited to policies during the remainder
of 2003.
During the first quarter of 2003, LPAL continued to service its
policyholders. Policyholder liabilities for LPAL fell slightly during the first
quarter of 2003 from $35.4 million as of December 31, 2002 to $34.3 million as
of March 31, 2003. To date, the capital base is sufficient to support
liabilities. As of March 31, 2003, LPAL's corporate bonds, cash and accrued
interest totaled $36.9 million, listed equity securities were $7.9 million and
the book value of private equity securities was $5.6 million. Due to the
weakened economic environment, in February 2003, the Jersey Financial Services
Commission ("JFSC") amended LPAL's insurance permit such that private equity
investments are no longer approved assets. Therefore, declines in the market
value of LPAL's listed equity securities, which totaled $8.9 million as of March
31, 2003, could have a significant impact on LPAL's statutory capital level.
As of March 31, 2003, we had no material commitments outstanding for
capital expenditures or additional funding for private equity portfolio
companies.
Item 3. 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
33
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 the full year 2003. For each 100 basis point move in market
interest rates this amount will vary by approximately $67,000 per annum.
As of March 31, 2003, $4.4 million was outstanding under our credit
facility with Bank of Scotland. In addition, $10.6 million remaining under the
facility was utilized in the form of guarantees provided on behalf of certain
former investee companies. During May 2003, we sold substantially all of the
assets and operations of BCM and used $7.75 million of the initial proceeds from
the sale to reduce our borrowings to zero and the guarantee liability under the
facility to $7.25 million. Under the terms of the loan facility, the total usage
must be reduced to $5.0 million by September 30, 2003 and the final $5.0 million
will expire on December 31, 2003. In the event that the sale of the LPA business
is not completed and the bank facility is not repaid in full during June 2003,
for every 100 basis point movement in market interest rates, our exposure to
liabilities relating to the guarantees will increase by approximately $73,000
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 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 volatile high
technology industry sector, many of which are small capitalization stocks.
If the fair value of our listed equity portfolio, as of March 31, 2003
and 2002, which totaled $12.8 million and $70.6 million, respectively, had
abruptly increased or decreased by 50%, the fair value of the listed equity
portfolio would have increased or decreased by $6.4 million and $35.3 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 March 31, 2003, we held $5.7 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. We try to mitigate these
risks in various ways including performing extensive due diligence prior to
making an investment, and regularly reviewing the progress of the investee
companies.
Item 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in our filings under the Securities
Exchange Act of 1934, as amended, 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 chief
34
executive officer and chief financial officer, as appropriate, to allow timely
decisions regarding required disclosure. Our management, including the chief
executive officer and the chief 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 quarterly report on Form
10-Q, we carried out an evaluation, under the supervision and with the
participation of our management, including our chief executive officer and chief
financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on such evaluation, our chief
executive officer and chief 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
quarterly report on Form 10-Q.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Under the terms of our bank facility, no dividends may be declared
without the prior consent of Bank of Scotland.
Item 3. DEFAULTS UPON SENIOR SECURITIES
On December 20, 2002, we and the Bank of Scotland agreed to the terms and
conditions of an amended credit facility. We agreed to new financial covenants
under this reducing credit facility and must formally meet such covenants as of
the end of each quarter. Our consolidated results for the quarter ended March
31, 2003 resulted in a breach of the core operating profit financial covenant
under the facility. We have been granted a written waiver of this breach by Bank
of Scotland.
It is possible that we may not be able to meet one of the bank's
financial covenants at the quarterly reporting dates of 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 our 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 immediately repayable, we believe the balances of existing cash and
proceeds from the sale of listed equity securities will be sufficient to repay
the bank facility and to meet other obligations for the next twelve months,
including working capital for operations.
We will use the initial proceeds from the sale of LPA to SunGard, which
are expected in early June 2003, and our cash or the proceeds from the sale of
our listed equity securities in order to pay off the remaining $7.25 million in
guarantee obligations under the bank facility. In the event that the sale of LPA
is not completed in June 2003, in order to meet our obligations to the bank as
of the end of the third and fourth quarters of 2003, we will be required to
identify other sources of liquidity. We believe that we will still be able to
meet our near-term obligations through the sale of LPA to another party or the
sale of our listed equity securities.
35
Item 5. OTHER INFORMATION
Unaudited Pro Forma Financial Information
Pro forma financial information has been presented below to show what the
significant effects on the historical financial information might have been had
the subsequent events described in the third paragraph of Note 2. "Subsequent
Events" occurred on or before March 31, 2003. The condensed pro forma balance
sheet was prepared assuming that we had sold all of the outstanding stock of
London Pacific Advisory Services, Inc., London Pacific Securities, Inc. and LPA
Insurance Agency, Inc. together with the associated assets of the advisory
business held within London Pacific Technologies, Inc., and LP Advisors Inc.
(together, "LPA" or the "LPA business") on or before March 31, 2003. It includes
pro forma adjustments that are directly attributable to this transaction.
Condensed pro forma income statements for the three months ended March 31, 2003
and year ended December 31, 2002 have also been prepared on the assumption that
the sale was consummated at the beginning of each respective period.
The pro forma statements do not purport to represent what the Group's
financial position or results of operations would have been if the sale of the
LPA business had in fact occurred on or before March 31, 2003 or to project the
Group's financial position or results of operations at any future date or for
any future periods. Consequently, any gain on sale, taxes and costs directly
relating to the sale of the LPA business that would be included in the
consolidated income statement of the Group within twelve months of the sale have
not been included in the condensed pro forma income statements.
36
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONDENSED PRO FORMA CONSOLIDATED BALANCE SHEET
(Unaudited)
(In thousands)
As Pro Forma As
Reported ------------------------- Adjusted
March 31, LPA March 31,
2003 Adjustments Adjustments 2003
ASSETS ------------ ------------ ------------ ------------
(1) (2)
Investments:
Fixed maturities:
Available-for-sale, at fair value............................ $ 26,963 $ - $ - $ 26,963
Equity securities:
Trading, at fair value ...................................... 12,772 - - 12,772
Available-for-sale, at fair value ........................... 5,687 (3) - 5,684
------------ ----------------------------------------
Total investments ................................................ 45,422 (3) - 45,419
Cash and cash equivalents......................................... 19,025 (647) - 18,378
Accrued investment income ........................................ 735 - - 735
Property and equipment, net ...................................... 2,928 (2,757) - 171
Goodwill.......................................................... 1,301 (1,301) - -
Other assets...................................................... 2,044 (1,466) 1,250 1,828
Total assets held for sale........................................ 2,022 - - 2,022
------------ ------------ ------------ ------------
Total assets ..................................................... $ 73,477 $ (6,174) $ 1,250 $ 68,553
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Life insurance policy liabilities ................................ $ 34,336 $ - $ - $ 34,336
Notes payable .................................................... 4,370 - - 4,370
Accounts payable and accruals..................................... 3,014 (2,114) - 900
Guarantees under bank facility.................................... 10,590 - (6,390) 4,200
Total liabilities held for sale .................................. 369 - - 369
------------ ------------ ------------ ------------
Total liabilities ................................................ 52,679 (2,114) (6,390) 44,175
------------ ------------ ------------ ------------
Commitments and contingencies
Shareholders' equity:
Ordinary shares, $0.05 par value per share........................ 3,222 - - 3,222
Additional paid-in capital ....................................... 68,450 - - 68,450
Retained earnings ................................................ 14,200 (4,060) 7,640 17,780
Employee benefit trusts, at cost ................................. (63,571) - - (63,571)
Accumulated other comprehensive loss ............................. (1,503) - - (1,503)
------------ ------------ ------------ ------------
Total shareholders' equity ....................................... 20,798 (4,060) 7,640 24,378
------------ ------------ ------------ ------------
Total liabilities and shareholders' equity ....................... $ 73,477 $ (6,174) $ 1,250 $ 68,553
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
(1) The pro forma adjustments for LPA reflect the elimination of all assets
to be sold and liabilities to be assumed in the sale transaction, and
equity from the consolidated group.
(2) Upon the closing of the sale of LPA, the Group will: (a) have $1.25
million of receivables due to holdbacks on the initial sale proceeds of
$8.2 million, (b) be required to repay approximately $6.4 million to the
bank related to guarantees under the facility, and (c) record a gain on
sale of approximately $3.6 million (based on March 31, 2003 book values
of LPA's assets and liabilities). Adjustments for these amounts have been
made in the condensed pro forma consolidated balance sheet.
37
Pro forma net income represents the results of operations adjusted to
reflect the Group's operations excluding LPA. The condensed pro forma statements
of income below were prepared assuming that we sold the LPA business at the
beginning of each respective period.
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONDENSED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(In thousands, except share, per share and ADS amounts)
As Pro Forma As
Reported -------------------------- Adjusted
Three Months Three Months
Ended Ended
March 31, LPA March 31,
2003 Adjustments Adjustments 2003
Continuing operations: ------------ ------------ ------------ ------------
(1)
Revenues:
Investment income................................................. $ 534 $ (3) $ 39 $ 570
Insurance policy charges.......................................... 4 - - 4
Financial advisory services and other fee income.................. 3,564 (3,564) - -
Net realized investment losses.................................... (7,324) - - (7,324)
Change in net unrealized investment gains and losses
on trading securities ......................................... 8,313 - - 8,313
------------ ------------ ------------ ------------
5,091 (3,567) 39 1,563
Expenses:
Amounts credited on insurance policyholder accounts............... 519 - - 519
Operating expenses................................................ 6,292 (4,558) - 1,734
Interest expense.................................................. 142 (45) 39 136
------------ ------------ ------------ ------------
6,953 (4,603) 39 2,389
------------ ------------ ------------ ------------
Loss from continuing operations before
income taxes................................................... (1,862) 1,036 - (826)
Income tax expense................................................ 11 (4) - 7
------------ ------------ ------------ ------------
Loss from continuing operations................................... $ (1,873) $ 1,040 $ - $ (833)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Basic and diluted weighted average number of shares .............. 50,754,192 50,754,192
Basic and diluted loss per share and ADS from
continuing operations:
Basic and diluted loss per share from
continuing operations ......................................... $ (0.04) $ (0.02)
------------ ------------
------------ ------------
Basic and diluted loss per ADS from
continuing operations ......................................... $ (0.37) $ (0.16)
------------ ------------
------------ ------------
(1) Adjustments to the condensed pro forma consolidated statement of income
are for interest paid by LPA to BICC of $39,000 for the three months
ended March 31, 2003.
38
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONDENSED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(In thousands, except share, per share and ADS amounts)
As Pro Forma As
Reported -------------------------- Adjusted
Year Year
Ended Ended
December LPA December
31, 2002 Adjustments Adjustments 31, 2002
------------ ------------ ------------ ------------
(1) (2) (3)
Continuing operations:
Revenues:
Investment income.............................................. $ 6,607 $ (18) $ 173 $ 6,762
Insurance policy charges....................................... 1,155 - - 1,155
Financial advisory services and other fee income............... 19,092 (16,184) - 2,908
Net realized investment losses................................. (21,507) - - (21,507)
Change in net unrealized investment gains and
losses on trading securities ............................... (22,483) - - (22,483)
------------ ------------ ------------ ------------
(17,136) (16,202) 173 (33,165)
Expenses:
Amounts credited on insurance policyholder accounts............ 6,031 - - 6,031
Amortization of deferred policy acquisition costs.............. 2,952 - - 2,952
Operating expenses............................................. 31,200 (20,395) - 10,804
Goodwill amortization and write-offs........................... 396 (7) - 389
Interest expense............................................... 1,031 (240) 173 965
------------ ------------ ------------ ------------
41,610 (20,642) 173 21,141
------------ ------------ ------------ ------------
Loss from continuing operations
before income taxes......................................... (58,746) 4,440 - (54,306)
Income tax expense............................................. 3,864 (2,573) - 1,291
------------ ------------ ------------ ------------
Loss from continuing operations................................ $ (62,610) $ 7,013 $ - $ (55,597)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Basic and diluted weighted average number of shares............ 50,753,084 50,753,084
Basic and diluted loss per share and ADS (4) from
continuing operations:
Basic and diluted loss per share from
continuing operations ...................................... $ (1.23) $ (1.10)
------------ ------------
------------ ------------
Basic and diluted loss per ADS (4) from
continuing operations ...................................... $ (12.34) $ (10.95)
------------ ------------
------------ ------------
(1) Reclassifications have been made related to discontinued operations
treatment for BCM as held for sale as of March 31, 2003 (together with
the remaining asset management segment for 2002).
(2) Adjustments to the condensed pro forma consolidated statement of income
are for interest paid by LPA to BICC of $173,000 for the year ended
December 31, 2002.
39
(3) As of December 31, 2002, total operating and capital lease commitments of
the Group were approximately $2.8 million and $0.3 million, respectively.
Commitments that would be eliminated as a result of the sale of LPA for
operating and capital lease commitments are approximately $2.0 million
and $0.1 million, respectively.
(4) ADS amounts have been restated to reflect the one-for-ten reverse split
in June 2002.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)EXHIBITS
The following exhibits are filed herewith:
Exhibit
Number Description
- ------- -----------------
4.5 Warrant Agreement dated February 14, 2003 between us and the
Governor and Company of the Bank of Scotland relating to the Term
Loan and Guarantee Facility dated December 20, 2002.
10.1.3 Stock Pledge Agreement dated January 29, 2003 between Berkeley
International Capital Limited and the Governor and Company of the
Bank of Scotland, relating to the Term Loan and Guarantee Facility
dated December 20, 2002.
10.1.4 Stock Pledge Agreement dated February 7, 2003 between Berkeley
International Capital Limited and the Governor and Company of the
Bank of Scotland, relating to the Term Loan and Guarantee Facility
dated December 20, 2002.
10.1.5 Stock Pledge Agreement dated February 19, 2003 between Berkeley
(USA) Holdings Limited and the Governor and Company of the Bank of
Scotland, relating to the Term Loan and Guarantee Facility dated
December 20, 2002.
10.1.6 Security Agreement dated February 28, 2003 between us and the
Governor and Company of the Bank of Scotland relating to the Term
Loan and Guarantee Facility dated December 20, 2002.
10.5 Asset Purchase Agreement dated March 7, 2003 between Berkeley
Capital Management ("BCM"), Berkeley (USA) Holdings Limited and
Berkeley Capital Management LLC relating to the sale of
substantially all of the assets and operations of BCM.
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.
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.
40
(b) REPORTS ON FORM 8-K:
We filed three Current Reports on Form 8-K during the first quarter of
2003 as follows:
The Report filed on March 10, 2003 contained information announcing that
Berkeley (USA) Holdings Limited, one of our wholly-owned subsidiaries, had
signed a definitive agreement to sell substantially all of the business and
operations of our primary asset management subsidiary, Berkeley Capital
Management, to a newly formed company majority-owned by funds under the
management of Putnam Lovell NBF Private Equity.
The Report filed on March 20, 2003 contained information announcing our
preliminary financial results for the year ended December 31, 2002.
The Report filed on March 28, 2003 contained information announcing that,
effective March 28, 2003, Mr. Harold Hughes, Jr. was appointed as a member of
the Compensation Committee of the Company's board of directors.
41
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LONDON PACIFIC GROUP LIMITED
(Registrant)
Date: May 15, 2003 By: /s/ Ian K. Whitehead
Ian K. Whitehead
Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer of the Registrant)
42
CERTIFICATION
I, Arthur I. Trueger, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of London Pacific
Group Limited;
(2) Based on my knowledge, this quarterly 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 quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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
we 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
quarterly 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 quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly 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
quarterly 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: May 15, 2003 By: /s/ Arthur I. Trueger
----------------------
Arthur I. Trueger
Executive Chairman
43
CERTIFICATION
I, Ian K. Whitehead, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of London Pacific
Group Limited;
(2) Based on my knowledge, this quarterly 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 quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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
we 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
quarterly 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 quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly 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
quarterly 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: May 15, 2003 By: /s/ Ian K. Whitehead
-----------------------
Ian K. Whitehead
Chief Financial Officer
44
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
EXHIBIT INDEX FOR THE QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2003
Exhibit
Number Description
- ------- -----------------
4.5 Warrant Agreement dated February 14, 2003 between us and the
Governor and Company of the Bank of Scotland relating to the Term
Loan and Guarantee Facility dated December 20, 2002.
10.1.3 Stock Pledge Agreement dated January 29, 2003 between Berkeley
International Capital Limited and the Governor and Company of the
Bank of Scotland, relating to the Term Loan and Guarantee Facility
dated December 20, 2002.
10.1.4 Stock Pledge Agreement dated February 7, 2003 between Berkeley
International Capital Limited and the Governor and Company of the
Bank of Scotland, relating to the Term Loan and Guarantee Facility
dated December 20, 2002.
10.1.5 Stock Pledge Agreement dated February 19, 2003 between Berkeley
(USA) Holdings Limited and the Governor and Company of the Bank of
Scotland, relating to the Term Loan and Guarantee Facility dated
December 20, 2002.
10.1.6 Security Agreement dated February 28, 2003 between us and the
Governor and Company of the Bank of Scotland relating to the Term
Loan and Guarantee Facility dated December 20, 2002.
10.5 Asset Purchase Agreement dated March 7, 2003 between Berkeley
Capital Management ("BCM"), Berkeley (USA) Holdings Limited and
Berkeley Capital Management LLC relating to the sale of
substantially all of the assets and operations of BCM.
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.
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.
45