Item 1. BUSINESS
OVERVIEW
We are based in Jersey, Channel Islands, and are a diversified international financial services company. Our operating subsidiaries gather assets through distribution networks, primarily in the U.S. Assets under the Group's management, consulting or administration as of December 31, 2002 totaled approximately $3.2 billion.
We evolved from a financial consulting business, The Berkeley Consulting Group, formed in 1977. That business focused on financial consulting services and venture capital finance for U.S. high technology companies from non-U.S. institutional financing sources. The Company (originally named Berkeley Technology Limited) was incorporated in 1985 in Jersey, Channel Islands. We obtained a listing on the London Stock Exchange in that same year and our Ordinary Shares currently trade under the symbol LPG. Since 1985, we grew with the establishment of life insurance and annuity businesses in both the U.S. and Jersey, and through acquisitions in the financial advisory services and asset management areas. In 2002, we lost management control of the U.S. life insurance business due to the dilution in the level of the life insurance company's capital arising from bond and equity losses in poor market conditions.
American Depositary Receipts ("ADRs") representing our Ordinary Shares began trading in the U.S. market in 1992. The Company obtained a listing on The Nasdaq Stock MarketSM in 1993 and in November 1999 migrated to the New York Stock Exchange ("NYSE") where its ADRs were traded under the symbol LDP. During 2002, the Company's ADR price fell below the minimum required by the NYSE; consequently, the ADRs were withdrawn from listing and registration on the NYSE. The Company's shares currently trade on the Over-the-Counter ("OTC") Bulletin Board under the symbol LDPGY.PK.
During the first quarter of 2000, we completed a four-for-one split of our ADRs. Effective from the close of business on March 23, 2000, each American Depositary Share ("ADS"), represented by an ADR, equaled one Ordinary Share. During the second quarter of 2002, we completed a one-for-ten reverse split of our ADRs. Effective from the opening of business on June 24, 2002, each ADS represents ten Ordinary Shares.
We currently have offices in Jersey (Channel Islands) and California.
BUSINESS SEGMENTS
We have four business segments that we operate through our subsidiaries: life insurance and annuities, financial advisory services, asset management and venture capital management. The Group's principal operating subsidiaries, by business segment and location, are set forth below:
On March 10, 2003, we announced that a definitive agreement had been signed to sell substantially all of the business and operations of Berkeley Capital Management ("BCM") to a company majority-owned by funds under the management of Putnam Lovell NBF Private Equity.
See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations by Business Segment" and Note 22 to the Consolidated Financial Statements in Item 8 of this Form 10-K for a summary of the Group's financial information by business segment and geographical location.
Life Insurance and Annuities
Our U.S. life insurance company, London Pacific Life & Annuity Company ("LPLA"), was established in 1989 and provided tax advantaged annuity products. By the end of 2001, LPLA grew to approximately $2.3 billion in assets; however, during 2002, the life insurance and annuities segment suffered from the adverse conditions in the bond and equity markets. On July 2, 2002, we announced that further declines in the value of LPLA's investment portfolio, due to persistent negative events in the equity and bond markets, continued to erode significantly the statutory capital of LPLA and that we had been unsuccessful in concluding a transaction to enhance the capital of LPLA. Subsequently, LPLA was placed under regulatory control and rehabilitation based on LPLA's statutory capital and surplus as of June 30, 2002. On August 6, 2002, on petition of the Commissioner of Insurance of the State of North Carolina (the "Commissioner") with the consent of LPLA and unanimous approval of its board of directors, the Superior Court of Wake County in the State of North Carolina ordered the Commissioner to take possession and control of all of the property, books and accounts, documents and other records of LPLA. Based on this court order, we no longer exercise control over LPLA. As a result of this event, we deconsolidated LPLA and recorded a charge to earnings in 2002 of approximately $38.5 million for losses resulting from the disposition of LPLA.
London Pacific Assurance Limited
Formed in 1999, our Jersey, Channel Islands insurance subsidiary, London Pacific Assurance Limited ("LPAL"), has principally been engaged in marketing and servicing investment oriented insurance products. LPAL sold Sterling, U.S. dollar and Euro guaranteed return bonds in its home market of Jersey, Channel Islands, and in the UK, Guernsey, Isle of Man and other permitted jurisdictions. The products guarantee both capital and yield for the duration of the investment period, which are typically three or five years. From LPAL's start of operations in the first quarter of 2000 through the end of 2002, LPAL generated premiums totaling $135.0 million. LPAL generated sales directly to the public and through financial intermediaries in the Channel Islands, U.K., Isle of Man and other international locations.
On July 2, 2002, we announced that LPAL would discontinue writing new policies immediately. The decision to discontinue the issuance of policies was made to avoid the increased capital requirements created by additional policyholder liabilities. Subsequent to this announcement and other announcements relating to the Group and LPLA, LPAL policy surrenders increased substantially. The number of policyholders fell from
2,603 at June 30, 2002 to 925 at December 31, 2002. The primary financial impact of the high level of surrenders has been the reduction in the level of capital required to support the policyholder liabilities.
LPAL has over 200 sales agreements in place with financial intermediaries, giving the company access to over 9,000 independent financial advisers ("IFAs"). However, if LPAL's management decides to sell policies in the future, it is not clear how many IFAs in the network will sell LPAL policies again due to the negative announcements regarding LPLA in the U.S. Inevitably, the high level of surrenders and the discontinuation of policy issuances will also have a negative impact on this segment. Policy administration continues to be handled for a fee by LPLA in Raleigh, North Carolina.
Investment Portfolio
In turbulent market conditions, LPAL's portfolio strategy has sought to match the level of policyholder liabilities with corporate bonds and cash. At December 31, 2002, policyholder liabilities amounted to $35.4 million and the market value of LPAL's corporate bonds, cash, accrued interest and amounts due from brokers amounted to $35.4 million. In addition, LPAL's portfolio included listed equities valued at $8.9 million and private equities valued at $7.2 million at December 31, 2002.
See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Life Insurance and Annuities" for additional information on LPAL's investment portfolio and its effect on the profitability of the insurance segment.
Competition
LPAL operates in a highly competitive environment. The industry consists of a large number of companies, many of which have greater financial resources, more diversified product lines and larger staffs than those of LPAL. An expanding number of other financial services companies also market insurance products or offer competing products. Competition is based on a number of factors, including product pricing, service provided to distributors and policyholders, and ratings.
We believe LPAL could compete again in the future but its distribution capability may be significantly weakened due to the ongoing discontinuation of sales activity, as well as the negative publicity associated with the loss of management control of LPLA. LPAL has had little pro-active contact with sales agents since the decision to discontinue issuing policies.
Financial Advisory Services
London Pacific Advisors
In September 1996, we completed the acquisition of London Pacific Advisory Services, Inc. ("LPAS") (formerly Select Advisors, Inc.), a registered investment adviser, London Pacific Securities, Inc. ("LPS") (formerly Select Capital Corporation), a registered broker-dealer, and Advisors Insurance Services of Texas ("AIST"), an insurance agency. LPAS, LPS and AIST are collectively known as London Pacific Advisors ("LPA"). LPA is located in Sacramento, California. The total value of assets under LPA management, consulting or administration as of December 31, 2002 was $2.2 billion.
LPA changed its business strategy in 2000. The LPA business previously focused on providing back office services to independent financial advisors (and small groups of advisors). In 2000, LPA expanded its focus considerably to include large institutional clients and to encompass a full range of web based front office and back office services. LPA has branded this new package of services as myOfficeOnline,(SM) and it now delivers these services primarily over the Internet, or through intranets maintained by institutional clients. We believe that the change in LPA's strategy will allow LPA to increase its revenues and greatly strengthen its competitive position.
LPA has partnerships with or provides services to several prominent institutions including First Mercantile Trust Co., H&R Block Financial Advisors, Harris Investor Services, ORBA(R) Financial Management,
SunGard Wealth Management Services, Union Planters Investment Advisors and Wells Fargo & Co. LPA has also developed a relationship with and is in the process of rolling out a platform to Lincoln Financial Advisors.
Products, Services and Revenues
LPA provides a comprehensive menu of services to financial institutions and investment advisors, with an emphasis on web based technologies, investment consulting and back office services. LPA's products and services are used primarily to research, create, manage and administer managed accounts comprised of separate account managers, mutual funds and exchange traded funds. The term "managed account" generally denotes an investment advisory program where the client pays one asset based fee for a package of services that includes some or all of the following: money management, asset allocation, trading, custody, clearing and back office services. This segment of the investment management industry is experiencing rapid and accelerating growth, as investors move away from mutual funds, which lack the flexibility of managed accounts and often carry higher fees and tax costs. To date, all of LPA's clients are U.S. based, but the managed account business is gaining momentum outside of the U.S., and LPA is positioned to address these developing markets.
LPA offers a full complement of services, including portfolio accounting, invoicing and performance reporting, to the managed account industry. The open, "menu driven" architecture of its software systems allows a client to select the specific capabilities it desires to utilize on the platform, and then to integrate those capabilities with its own, and third party, functionalities. The result is a customized, private labeled solution to maximize each client's brand awareness.
LPA's four principal revenue sources are: (i) asset management and consulting fees generated under contracts providing for fees calculated as a percentage of assets under management or consulting by its financial advisors and institutional clients; (ii) back office fees and web platform fees generated under contracts providing for fees calculated as a percentage of assets under management or administration by its clients; (iii) commissions received from the sale by advisors of insurance products, including annuities and life insurance; and (iv) brokerage fees received on trading activity handled through LPA's trading desk or via business placed directly with investment companies. The latter two sources of revenues are generated by LPA's broker-dealer subsidiary, London Pacific Securities, Inc.
A portion of LPA's revenues is paid out as commissions to its affiliated advisors. The percentage payouts apply only to business generated by those advisors, and the percentages vary based on the source of the revenue and the contractual relationship with the advisor.
Net asset management and consulting fees decreased to $4.4 million in 2002 from $4.7 million in 2001. These fees contributed approximately 71%, 72%, and 65% to net revenues (i.e., gross revenues less commissions) for the years ended December 31, 2002, 2001 and 2000, respectively. The composition of these fees is changing as new institutional client fees are realized and older back office fee contracts reach maturity. The overall decrease in fees for 2002 was a result of the significant decline in market values of the assets of LPA's financial advisors upon which the fees are based, offset by growth in the assets and net revenues of LPA's institutional clients.
Net commissions received from the sale by advisors of insurance products contributed approximately 4%, 3% and 5% to net revenues for 2002, 2001 and 2000, respectively, while net brokerage fees contributed approximately 16%, 17% and 22% to net revenues for 2002, 2001 and 2000, respectively.
When financial advisors affiliate with LPA, they generally transfer their clients' assets to LPA's registered investment adviser and broker-dealer. By themselves, such asset transfers may be a significant source of growth for LPA. In addition, once the financial advisor joins LPA, new assets from the sale of fee based services and commission products can be invested in LPA services or processed by LPA companies. Also, LPA achieves growth from existing clients in the form of new contributions, market appreciation and reinvested income.
A second source of growth for LPA is its focus on adding large financial institutions to its client base. In the typical scenario, LPA offers its web based consulting, administration and reporting services to the institution and to its financial advisor employees. LPA's fees for these back office services are tied to the assets under management in the institution's program and are at lower overall rates than full managed account services. LPA's revenues increase along with the growth of those program assets. Institutional net revenues, a component of net asset management and consulting revenues, increased in 2002 to $2.7 million from $2.1 million in 2001. These net revenues represented approximately 44%, 32% and 21% of total net revenues for the years ended December 31, 2002, 2001 and 2000, respectively.
Intellectual Property
LPA currently has one trademark registered with the U.S. Patent and Trademark Office. This trademark is for LPA's flagship asset management product, Global Leaders(R) and was registered on August 3, 1999. The registration has an initial ten year "in force" period, unless terminated earlier as provided by law, and is subject to unlimited renewals. In August 2000, LPA applied for a trademark registration for myOfficeOnline,(SM) the name given to LPA's web based services package. "MyOfficeOnline.com" is also the domain name for LPA's website. This trademark application remains outstanding, pending resolution of an alleged potential conflict with a trademark held by another company for a different package of computer based products and services. LPA believes that the existence of this alleged potential conflict with the other trademark should not prevent the registration of LPA's "myOfficeOnline" mark, as the products and services identified by LPA's mark differ substantially from the products and services identified by the other mark. However, there can be no assurances that LPA will be able successfully to register its "myOfficeOnline" mark, and no assurance can be given that LPA will be able successfully to enforce or protect its rights under the myOfficeOnline(SM) mark in the event it is subject to third party infringement claims.
Although we consider both the Global Leaders(R) and the myOfficeOnline(SM) marks to be important identifiers of LPA's products, we do not consider either of these marks to be material to our business.
Competition
LPA operates in a highly competitive industry. Competitors include other investment management firms, broker-dealers, commercial banks, trust companies, insurance companies, financial advisory firms, application software and service providers in the financial services sector, and mutual funds. Many of LPA's competitors operate across all of LPA's markets, offer a full range of products or financial services, and have greater financial capacity and other resources. We believe that the considerable experience and past success of LPA's investment, consulting and technical personnel, its growing base of prestigious clients, successful performance for those clients and its proprietary systems enable LPA to compete within the markets in which it operates.
Asset Management
BCM and Berkeley International Limited ("BIL") are our asset management companies. While BCM offers its services to third parties and Group affiliates, BIL is currently inactive.
On March 10, 2003, we announced that a definitive agreement had been signed to sell substantially all of the business and operations of BCM to a company majority-owned by funds under the management of Putnam Lovell NBF Private Equity. The agreement is subject to certain conditions, including receipt of sufficient consents from clients of BCM to the assignment of their investment management contracts to the acquiror. The purchase price consists of $7.75 million in cash to be paid at closing subject to certain adjustments; and a further $1.0 million cash installment to be paid on December 31, 2003 subject to certain adjustments. In addition, up to $1.25 million of earn-out payments will be paid by the buyer to the Group ratably over the four quarters of 2004 if revenues received in 2003 from a new product planned for launch by BCM in 2003 exceed certain defined targets. The definitive agreement is binding on both companies and is subject to regulatory approvals and other conditions. As of December 31, 2002, BCM's assets under management were approximately $1.2 billion, including approximately $0.2 billion of assets under a subadvisory agreement with LPA.
Berkeley Capital Management (See the immediately preceding paragraph regarding the definitive agreement to sell BCM)
Established in 1972, BCM is a San Francisco based investment manager and is our primary asset management subsidiary. BCM manages equity, balanced and bond accounts for institutional clients and for the wrap fee programs of major brokerage houses. Its investment approach involves strong fundamental research and is led by its senior portfolio managers, who have worked together at BCM since 1975. BCM derives revenue from the management of public equity and fixed income securities. The level of the bond and stock markets affects BCM's revenues, as BCM is generally compensated for its services with fees calculated as percentages of assets under management.
BCM has two principal equity products and a fixed income product. The Growth Equity style focuses on selecting companies with strong earnings growth potential. The median market capitalization of the portfolio is greater than that of the S&P 500. The Dividend Equity style (formerly named the Income Equity style) focuses on companies from the S&P 500 universe with high relative yields and is designed to produce superior returns with below average volatility. Both investment styles utilize bottom-up approaches and disciplined buy and sell processes. BCM's fixed income style seeks out the most attractive relative values in the marketplace. Risk levels are set in conjunction with client objectives and value is added around the benchmark by trading into those areas that BCM believes have the best relative values.
BCM also provides investment management services to institutional clients, which include pension plans, employee benefit plans, trusts, foundations and corporations, as well as to individual clients. BCM markets these services primarily through financial consultants, plan sponsors and brokerage firms. Most new business over the past three years has come from managed account programs.
The bond portfolio of our insurance subsidiary, LPAL, is managed by BCM's professional fixed income managers and utilizes a range of fixed income investments, including investment grade and high-yield corporate bonds.
BCM's principal revenue source is derived from the management of equity assets for individuals and institutions on a nationwide basis and consists of management fees which are calculated based upon the dollar value of assets managed. Additional fees, representing 9% and 29% of BCM's total fees during 2002 and 2001, respectively, were received from the Group's insurance subsidiaries (LPLA and LPAL), again based on a percentage of assets under management. The arrangement with LPLA was terminated effective October 31, 2002. Fees of $0.4 million and $0.8 million were received by BCM from LPLA during 2002 and 2001, respectively.
BCM has separately managed account marketing agreements with over 20 firms, and assets managed under these agreements represent the majority of BCM's assets under management for unaffiliated parties. Some of these agreements have been in place for more than ten years. Either party may terminate these agreements at will, though none of these contracts has ever been terminated by the other party at any time during the past ten years. BCM's largest customers are Morgan Stanley and PaineWebber. During 2002, fees from these two customers together represented more than 66% of BCM's revenues.
BCM is actively seeking to broaden its product array with firms with which it has existing relationships. Competition for positions in these programs is becoming increasingly fierce, enhancing the value of BCM's incumbent status.
Intellectual Property
We believe that the name and reputation of Berkeley Capital Management is a material asset. BCM registered with the U.S. Patent and Trademark Office a trademark for financial management and mutual fund investment (Berkeley Capital Management) on June 15, 1999. The registration has an initial ten year "in force" period, unless terminated earlier as provided by law.
Berkeley International Limited
BIL is located in Jersey, Channel Islands. Prior to the loss of control of LPLA, BIL managed the listed equity securities in LPLA's investment portfolio. BIL is currently inactive.
Competition
Numerous competitors offer asset management services. Within each brokerage firm managed account program, there are dozens of competitors and many more potential competitors. BCM competes based upon performance, service and marketing. Price is set by market conditions and is generally the same for all investment managers with managed account agreements with each brokerage firm. There are no dominant competitors in the managed account marketplace because brokerage firms seek to limit the total client assets with any manager and because performance records tend to vary from year to year. In relation to direct institutional and individual client relationships, BCM competes based on the same principal factors and price may be a secondary factor. There are, however, other firms with significantly greater assets under management than BCM in each category in which it competes. In addition to the above, there is intense competition within the securities industry with respect to obtaining and retaining the services of investment professionals.
Venture Capital Management
Berkeley International Capital Corporation ("BICC") and Berkeley International Capital Limited ("BICL") comprise the Group's venture capital management business. In recent years, our venture capital subsidiaries have focused primarily on U.S. high technology companies, with investments generally ranging from $5 million to $25 million.
Berkeley International Capital Corporation
BICC, based in San Francisco, arranges private equity placements into rapidly growing technology companies. Placements are typically arranged in later stage technology companies, which are near alpha test of their product and need to scale up their engineering, marketing and sales infrastructure. Within this strategy, BICC has been able to identify many promising young technology companies that have grown in prominence in their fields and gone on to successful public offerings or acquisition transactions.
Over the past 23 years, BICC arranged over $1.9 billion of placements in the private capital markets on behalf of Group companies and clients. Many of the companies are headquartered in close proximity to BICC's offices which allow for easier access to the companies' management. Most of these companies specialize in "business-to-business" Internet technologies, telecommunications (both central office and consumer premises), data communications, software, semiconductors and knowledge learning. These placements included investments in America Online, Oracle Corporation, Cadence Design Systems, Inc., Cypress Semiconductor, Inc., Packeteer, Inc. and New Focus, Inc.
Placement activity was reduced significantly in 2002 due to poor market conditions and the loss of management control of LPLA. In general, institutional investment demand for technology companies has weakened considerably, but we believe interest in high growth companies continues particularly where there is a potential strategic relationship.
The private technology investments arranged by BICC and currently held by LPAL are Agility Communications, Inc., Alacritech, Inc. and Ceon Corporation.
Due to the loss of control of LPLA, BICC will no longer receive fees from LPLA. Fees earned by BICC from LPLA during 2002 and 2001 were $2.9 million and $9.9 million, respectively.
Berkeley International Capital Limited
BICL, formed in 1988 and based in Guernsey, Channel Islands, takes principal positions in connection with private equity transactions arranged by its sister company, BICC. These private equity positions may become listed equity securities pursuant to initial public offerings or in connection with the acquisition of the private issuing company by a listed company. As of December 31, 2002, BICL held $7.6 million of such positions in listed equity securities.
Competition
The Group's venture capital management business faces competition primarily from commercial banks, investment banks, venture capital firms and insurance companies, many of which have substantially greater financial resources than the Group. The marketplace for venture capital is highly competitive, and demand for financing is also influenced by economic and stock market conditions. The pool of capital seeking opportunities to invest in later stage technology companies contracted further in 2002 but we believe demand continues for high value technology companies.
REGULATION
Life Insurance and Annuities - London Pacific Assurance Limited and London Pacific Life & Annuity Company
LPAL is regulated by the Jersey Financial Services Commission ("JFSC"). Under Article 6 of the Insurance Business (Jersey) Law 1996, LPAL is permitted to conduct long-term insurance business. LPAL is required to submit annual audited financial statements (prepared under U.S. GAAP as permitted by regulation), and an audited annual filing to the JFSC in the format consistent with that required by the Insurance Directorate of HM Treasury in the United Kingdom. The annual filing submitted by LPAL must be accompanied by a Certificate from the Appointed Actuary that based on sufficiently prudent assumptions, assets are sufficient to cover all liabilities. The annual filing contains a report from the Appointed Actuary on the matching of investments to liabilities.
The JFSC sets out the conditions with which LPAL must comply and determines the reporting requirements and the frequency of reporting. These conditions include: (i) LPAL must hold, at all times, approved assets at least equal to the long-term insurance fund plus the required minimum solvency margin, (ii) the margin of solvency must be the greater of (pound)50,000 or 2.5% of the value of the long-term business fund, (iii) a maximum of 20% of the approved assets necessary to cover the long-term insurance fund and the required minimum solvency margin may be held in private equity investments, and (iv) assets equal to not less than 90% of liabilities must be placed with approved independent custodians. As of December 31, 2002, LPAL met all of these conditions.
LPAL is also required under the insurance laws to appoint an actuary. The actuary must be qualified as defined under the laws and is required to supervise the long-term insurance fund. No transfers, except in satisfaction of long-term insurance business liabilities, including dividends, are permitted from the long-term insurance fund without written consent from the actuary.
LPLA, which was deconsolidated effective July 1, 2002, is subject to regulation and supervision by the insurance regulatory agencies of the U.S. states in which it transacts business. State laws generally establish supervisory agencies with broad regulatory authority, including the power to: (i) grant and revoke business licenses, (ii) regulate and supervise trade practices and market conduct, (iii) establish guaranty associations, (iv) license agents, (v) approve policy forms, (vi) establish reserve requirements, (vii) prescribe the form and content of required financial statements and reports, (viii) determine the reasonableness and adequacy of statutory capital and surplus, (ix) regulate the type and amount of permitted investments, and (x) limit the amount of dividends that may be paid without obtaining regulatory approval.
During 2002, LPLA was placed under regulatory control and rehabilitation due to the erosion of its statutory capital. On August 6, 2002, on petition of the Commissioner of Insurance of the State of North
Carolina, with the consent of LPLA and unanimous approval of its board of directors, the Superior Court of Wake County in the State of North Carolina ordered the Commissioner to take possession and control of all the property, books and accounts, documents and other records of LPLA.
Other Business Segments
Our U.S. investment adviser subsidiaries, London Pacific Advisory Services, Inc. and Berkeley Capital Management, are registered as investment advisers under the Investment Advisers Act of 1940, as amended (the "Advisers Act"). Because each of these subsidiaries has $25 million or more of assets under management, each is required to register with the U.S. Securities and Exchange Commission ("SEC"). The Advisers Act imposes detailed regulatory requirements on the activities of SEC registered investment advisers, including, but not limited to: contents of advisory contracts, recordkeeping, fee structures, performance advertising, fiduciary duty to clients and custody of client assets. Additionally, SEC registered investment advisers are subject to state statutes regulating fraudulent activity in all U.S. states in which they conduct business.
Our investment adviser subsidiaries provide investment management services to U.S. retirement plan accounts. Consequently, they are required to follow the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"), in addition to the provisions of the Advisers Act. ERISA sets forth specific rules governing the conduct of ERISA plan fiduciaries, including but not limited to: use of soft dollars, proxy voting, bonding requirements, tax considerations, performance fees, agency and principal transactions, and solicitation fees. ERISA falls under the governing authority of the SEC, the U.S. Department of Labor and the U.S. Internal Revenue Service.
Our broker-dealer subsidiary, London Pacific Securities, Inc., negotiates security transactions on behalf of its clients through registered affiliates in all 50 U.S. states and clears all transactions on a fully disclosed basis through two clearing broker-dealers which maintain the customer accounts. LPS is registered under the Securities Exchange Act of 1934, as amended ("Exchange Act") and is subject to regulation by the SEC. The Exchange Act and related rules generally regulate the conduct of business and the financial condition of registered broker-dealers. LPS is a member of the National Association of Securities Dealers, Inc. ("NASD"), a self-regulatory organization that oversees the activities of registered broker-dealers. The NASD requires compliance with its membership, registration, conduct and marketplace rules, which govern, among other things, the registration of personnel, finance and operations, recommendations to customers, sales practices, underwriting of securities and supervisory responsibilities.
Group
We employ compliance officers responsible for managing our subsidiaries' compliance with applicable regulatory requirements. Although the scope of regulation and form of supervision to which our subsidiaries are subject, as described above, may vary from jurisdiction to jurisdiction, the applicable laws and regulations often are complex and generally grant broad discretion to supervisory authorities in adopting regulations and supervising regulated activities. Our continuing ability to engage in the life insurance and annuities, financial advisory services, asset management and venture capital management businesses in the jurisdictions in which our subsidiaries currently operate is dependent upon its compliance with the rules and regulations promulgated from time to time by the appropriate authorities in each of these jurisdictions. The burden of such regulation weighs equally upon all companies carrying on activities similar to those of our subsidiaries, and we do not consider such regulations to adversely affect the competitive position of our subsidiaries.
EMPLOYEES
As of December 31, 2002, the Group had 106 employees. The breakdown by business segment was as follows: financial advisory services, 76; asset management, 18; corporate, 5; venture capital management, 4; and life insurance and annuities, 3. None of the Group's employees are covered by a collective bargaining agreement and the Group has not experienced any work stoppages.
Item 2.
Item 2. PROPERTIES
We operate from three offices located in Jersey (Channel Islands), San Francisco and Sacramento, currently consisting of approximately 34,000 square feet of space in the aggregate. All offices are leased. Approximately 1,000 square feet is leased in Jersey, under a lease expiring in 2010, pertaining to our life insurance and annuities segment. Approximately 17,000 square feet is leased in Sacramento, under a lease expiring in 2008, pertaining to our financial advisory services segment. Under a lease expiring in 2004, approximately 11,000 square feet is leased in San Francisco of which 60% pertains to our asset management segment and 40% to our venture capital management segment. Approximately 5,000 square feet is leased for corporate activities in Jersey and San Francisco, under leases expiring in 2010 and 2004, respectively. We believe that existing facilities are suitable and adequate for the conduct of our business. See Note 15 to the Consolidated Financial Statements in Item 8 of Part II for further information regarding our leases.
Item 3.
Item 3. LEGAL PROCEEDINGS
On August 6, 2002, on petition of the Commissioner of Insurance of the State of North Carolina (the "Commissioner"), with the consent of LPLA and unanimous approval of its board of directors, the Superior Court of Wake County in the State of North Carolina ordered the Commissioner to take possession and control of all the property, books and accounts, documents and other records of LPLA. LPLA and its officers, directors, agents, employees and all other persons were enjoined from disposing of LPLA's property and from transacting LPLA's business except with the consent of the Commissioner. The Court appointed the Commissioner as rehabilitator of LPLA. Based on the court order, the Company no longer exercises control over LPLA.
For further discussion, see the "Liquidity and Capital Resources" section in Item 7 of Part II.
We are involved in various legal proceedings, including claims for damages from clients of a nature we consider to be normal for our business. We believe the ultimate settlement or other resolution of the claims will not materially affect our consolidated financial position, results of operations or cash flows.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to our shareholders during the quarter ended December 31, 2002.
Part II
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The principal trading market for our Ordinary Shares is the London Stock Exchange ("LSE"), on which such shares have been listed since February 1985. ADSs, each representing ten Ordinary Shares, are represented by ADRs for which The Bank of New York is the Depositary. ADSs have been traded in the United States from September 1992 through August 1993 on the OTC Bulletin Board, from September 1993 through November 1999 on The Nasdaq Stock Market(SM) under the symbol "LPGL," from November 1999 through July 3, 2002 on the NYSE under the symbol "LDP" and since July 12, 2002 on the OTC Bulletin Board under the symbol "LDPGY.PK." As of December 31, 2002, there were 64,439,073 Ordinary Shares outstanding. Also as of that date, there were 1,807,742 ADSs outstanding, representing 18,077,420 Ordinary Shares or 28.1% of our outstanding shares. ADS holders may exercise their voting rights through the ADR Depositary.
In June 2002, we completed a one-for-ten reverse split of our ADSs. On June 24, 2002, every ten of our ADSs issued and outstanding were converted and reclassified into one post-split ADS. Consequently, effective from the opening of business on June 24, 2002, each ADS is equal to ten Ordinary Shares. Fractional new ADSs were sold by the Depositary Bank and paid in cash to the ADR holders. This ADS split did not affect our Ordinary Shares listed on the LSE.
On July 3, 2002, the NYSE halted trading of our ADRs in response to the administrative actions taken by the North Carolina Department of Insurance relating to LPLA. On July 9, 2002, trading of the ADRs was suspended and the securities were withdrawn from listing and registration from the NYSE. As a result of the delisting, the liquidity of our common stock and its price have been adversely affected. These actions may limit our ability to raise additional capital in the future, and there is no assurance that a significant trading market for the ADRs will develop. If an active trading market does not develop, ADR holders may be unable to sell their ADRs.
Subsequent to the delisting, the ability of ADR holders to buy and sell is limited to trading on the OTC Bulletin Board under the ticker symbol LDPGY.PK. Shares traded on the OTC market generally experience lower trading volume than those traded on the organized exchanges. The trading volume of the ADRs has decreased substantially since the NYSE delisting and the transfer of the ADRs to the OTC Bulletin Board.
The following table shows, for the quarters indicated, the reported highest and lowest middle market quotations (which represent an average of bid and asked prices) for our Ordinary Shares on the LSE, based on its Daily Official List, and the high and low trade price information of the ADSs as obtained from the NYSE through the second quarter of 2002 and on the OTC Bulletin Board from the third quarter of 2002 (as restated to reflect the one-for-ten reverse split on June 24, 2002):
Holders
As of February 28, 2003, we had approximately 1,752 shareholders of record and 45 ADS holders of record. Because many Ordinary Shares and ADSs are held by brokers and various institutions on behalf of other holders, we are unable to estimate the total number of beneficial holders represented by these holders of record.
Dividends
Until 2002, we paid dividends on our Ordinary Shares in every year since we became listed on the LSE in 1985. Dividends on our Ordinary Shares were paid twice a year. In view of our requirement to conserve cash during the current period of market instability and in order to meet the operating needs and growth opportunities of the business, and given undertakings made to the Bank of Scotland in connection with our
loan facility not to pay dividends without their consent, our Board of Directors suspended the 2002 interim dividend and will not recommend a final dividend for the year 2002.
Holders of ADSs are entitled to receive dividends paid, if any, on our Ordinary Shares through the ADR Depositary.
The table below shows the amounts of interim, final and total dividends together with the net dividends (after 20% Jersey tax) paid on each Ordinary Share for the last two years.
Under current practice, holders of ADSs who are residents of the United States for tax purposes receive the net dividend (the gross dividend less the associated Jersey income tax). See "Taxation - Taxation of Dividends" below.
Currently, Jersey does not have exchange control restrictions on the payment of dividends on the Ordinary Shares or on the conduct of the Group's operations. See Note 11 to the Consolidated Financial Statements in Item 8 of this Form 10-K for details regarding regulatory restrictions on dividends.
TAXATION
The following summary of certain Jersey and U.S. tax consequences regarding share ownership is based on law and published practice as of February 28, 2003, and is subject to any changes in Jersey and U.S. law or published practice or in the establishment of any double taxation convention between Jersey and the U.S. occurring after that date. The summary is not a complete analysis or listing of all the possible tax consequences and does not address the tax implications for special classes of holders, such as banks, insurance companies and dealers in securities. The summary also does not address U.S. state income tax consequences. Owners of Ordinary Shares and ADSs should consult their own tax advisors as to the tax consequences of such ownership.
There is no double tax treaty or similar convention between the U.S. and Jersey. For the purposes of the U.S. Internal Revenue Code of 1986, as amended, it is assumed that beneficial owners of ADSs, in accordance with the terms of the Deposit Agreement, will be treated as the owners of the underlying Ordinary Shares represented by the ADSs.
Taxation of Dividends
Dividends are declared gross in U.S. dollars. Dividends paid by us are treated as having suffered Jersey income tax at the standard rate (currently 20%) on the gross amount thereof.
Charities, superannuation funds and certain assurance companies in the U.K., together with individual investors who are Commonwealth citizens or citizens of a member state of the European Community, may be entitled to a full or partial repayment of the Jersey income tax credit suffered on distributions, on submission of a claim to the Jersey Comptroller of Income Tax. Shareholders who are unsure of their tax position should consult their tax advisor.
Generally, the net dividend paid to a holder or owner who is a U.S. citizen, a U.S. resident, a U.S. domestic corporation or a trust or estate whose income is subject to U.S. federal income taxation regardless of source (a "U.S. holder") will be included in gross income and treated as foreign source dividend income for U.S. federal income tax purposes to the extent payment is made out of the Company's current or accumulated earnings and profits as determined under U.S. federal income tax principles. Such dividends generally will not be eligible for the "dividends received" deduction permitted to be taken by U.S. corporations.
However, special rules apply for purposes of determining the dividend income and potential foreign tax credits available to a U.S. corporation that controls 10% or more of the Company's voting stock. Any such shareholder should consult its tax advisor with respect to the U.S. tax treatment of its interest in us.
Taxation of Capital Gains
Currently, there are no Jersey taxes levied on capital gains. A U.S. holder that sells or exchanges an ADR or Ordinary Share will generally recognize a gain or loss for U.S. federal income tax purposes, in an amount equal to the difference between the amount realized and the holder's tax basis in either the ADS represented by the ADR or the Ordinary Share. Such a gain or loss will generally be a capital gain or loss if the ADR or the Ordinary Share was a capital asset in the hands of the U.S. holder and will generally be a long-term capital gain or loss if the ADR or Ordinary Share was held for more than one year (including, in the case of an ADR, the period during which the Ordinary Shares surrendered in exchange therefore were held). In general, the long-term capital gain of a non-corporate U.S. holder is subject to a maximum tax rate of 20% (18% if the ADR or Ordinary Share is held for more than five years and was acquired after December 31, 2000).
Backup Withholding Tax
A U.S. holder may be subject to U.S. backup withholding tax (currently at a rate of 30%) with respect to dividends received or gross proceeds from the sale of ADRs or Ordinary Shares unless the holder provides a taxpayer identification number and certain certifications or otherwise establishes an exemption from backup withholding. Certain classes of persons, such as corporations, are exempt from backup withholding. Backup withholding is not an additional tax; the amount withheld may be credited against the holder's U.S. federal income tax liability, and a refund of any excess may be obtained from the U.S. Internal Revenue Service.
Estate and Gift Tax
No death, estate, gift, inheritance or capital transfer taxes are levied in Jersey.
Stamp Duty and Stamp Duty Reserve Tax
No U.K. stamp duty should be payable on any transfer of an Ordinary Share, or of an ADS, provided it is executed and retained outside the U.K. Therefore, a transfer of an ADS in the United States would not ordinarily give rise to a U.K. stamp duty charge.
An instrument transferring Ordinary Shares, or an ADS, could be subject to U.K. stamp duty if its execution relates to anything done or to be done in the U.K. For example, a U.K. stamp duty may apply if such instrument is executed in the U.K. or is brought into the U.K. after execution. If the transfer is on a sale then the rate of stamp duty will be 0.5% of the consideration given. This charge is rounded up to the nearest (pound)5. Gifts and other transfers which are neither sales, nor made in contemplation of a sale, are not subject to this charge. Instead, they will either be exempt or subject to a fixed duty of (pound)5 per transfer.
A transfer from the Depositary to an ADS holder of the underlying Ordinary Shares may be subject to a fixed stamp duty of (pound)5 if the instrument of transfer relates to anything done or to be done in the U.K. For example, a fixed stamp duty of (pound)5 may apply if such transfer is executed in the U.K. or is to be brought into the U.K. after execution. A transfer of Ordinary Shares from the Depositary directly to a purchaser on behalf of an
ADS holder may be subject to a stamp duty at a rate of 0.5% of the consideration (rounded up to the nearest (pound)5) if execution of the instrument of transfer relates to anything done or to be done in the U.K.; for example, if such transfer is executed in the U.K. or is to be brought into the U.K. after execution.
U.K. stamp duty reserve tax will not be payable on an agreement to transfer the Ordinary Shares or ADSs.
EQUITY COMPENSATION PLANS
The following table is a summary of selected information for our equity compensation plans as of December 31, 2002.
Information regarding the features of the equity compensation plan not approved by shareholders is incorporated by reference to Note 18 to the Consolidated Financial Statements presented in Item 8 "Financial Statements and Supplementary Data" of this Form 10-K.
WARRANTS
On November 11, 2002, we agreed to grant 1,933,172 warrants to subscribe for our Ordinary Shares to Bank of Scotland in connection with the extension of our credit facility. The warrants were granted on February 14, 2003 and have an exercise price of (pound)0.1143 (based on the average of the closing prices of the Ordinary Shares over the trading days from November 1, 2002 through November 11, 2002), which was higher than the market price of (pound)0.09 on November 11, 2002. These warrants are exercisable at any time prior to February 14, 2010.
Item 6.
Item 6. SELECTED FINANCIAL DATA
The following is a summary of selected financial data for the Group. This data should be read in conjunction with the audited consolidated financial statements, and the notes thereto, presented in Item 8 "Financial Statements and Supplementary Data" of this Form 10-K. ADS amounts have been restated to reflect the four-for-one split in March 2000 and the one-for-ten reverse split in June 2002.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the audited consolidated financial statements, and the notes thereto, presented in Item 8 "Financial Statements and Supplementary Data" of this Form 10-K. The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. This item should also be read in conjunction with the "Forward-Looking Statements and Factors That May Affect Future Results" set forth below and our other filings with the SEC.
Forward-Looking Statements and Factors That May Affect Future Results
This Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form 10-K contain forward-looking statements within the meaning of Section 21E of the Exchange Act. Such forward-looking statements are based on current expectations, estimates, forecasts and projections about the industries in which we operate, management's current beliefs and assumptions made by management. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "goals," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Future outcomes and results may differ materially from what is expressed or forecast in such forward-looking statements. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future developments or otherwise.
Factors that could cause or contribute to deviations from the forward-looking statements include those discussed in this section, elsewhere in this Form 10-K and in our other filings with the SEC. The factors include, but are not limited to, (i) the risks described in Item 7A
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The nature of our businesses exposes us to market risk. Market risk is the risk of loss that may occur when changes in interest rates and public equity prices adversely affect the value of invested assets.
Interest Rate Risk
LPAL is subject to risk from interest rate fluctuations when payments due to policyholders are not matched in respect of amount and duration with income from investments. LPAL attempts to minimize this risk by ensuring that payments and income are matched as closely as possible while also maximizing investment returns. LPAL has not used derivative financial instruments as part of its investment strategy. Exposure to interest rate risk is estimated by performing sensitivity tests to changes in interest rates.
For LPAL's business, the amount of policyholder liabilities is unaffected by changes in interest rates. Given the existing policy and bond maturity profiles, and that bonds will be held to maturity and early policy redemptions are protected by a market value adjustment and surrender penalty, the bonds and policies carry no interest rate risk. Excess cash from bond maturities, after meeting redemptions and operating expenses, is expected to yield approximately $0.2 million during 2003. For each 100 basis point move in market interest rates this amount will vary by approximately $67,000 per annum.
As of December 31, 2002, $9.3 million was outstanding under our credit facility with Bank of Scotland. In addition, $10.6 million of the remaining $10.7 million under the facility was utilized in the form of guarantees and letters of credit provided on behalf of certain former investee companies. During February 2003, we sold certain listed equity securities for $4.7 million and the proceeds were used to reduce our borrowings to $4.6 million and the facility to $15.2 million. Under the terms of the loan facility, the total usage must be reduced to $15.0 million by March 31, 2003 and by $5.0 million per quarter thereafter. For every 100 basis point movement in market interest rates, interest expense on our borrowings will increase by approximately $13,000 per annum and exposure to liabilities relating to the guarantees will increase by $151,000 per annum.
Equity Price Risk
We are exposed to equity price risk on the listed equity securities held entirely in our trading portfolio. Changes in the level or volatility of equity prices affect the value of the listed equity securities. These changes
in turn directly affect our consolidated net income because our holdings of listed equity securities are marked to market, with changes in their market value recognized in the income statement for the period in which the changes occur. These listed equity securities are primarily in companies in the high technology industry sector, many of which are small capitalization stocks.
If the fair value of our listed equity portfolio, as of December 31, 2002 and 2001, which totaled $16.5 million and $67.6 million, respectively, had abruptly increased or decreased by 50%, the fair value of the listed equity portfolio would have increased or decreased by $8.3 million and $33.8 million, respectively.
Our listed equity securities largely represent investments that were originally made as private equity investments in companies that subsequently completed an initial public offering or were acquired by a larger publicly traded company. The performance of these listed equity securities can be highly volatile, but we attempt to manage this risk in various ways. The performance of the listed equity securities are monitored daily. In addition, we seek to sell investments after a period of time, particularly in the case of large public company securities.
As of December 31, 2002, we held $7.2 million in private corporate equity securities primarily in technology companies for which liquid markets do not exist. Private equity prices do not fluctuate directly with public equity markets, but significant market movements may trigger a review for other-than-temporary adjustment of the carrying values of our private equity securities. The risks inherent in these private equity investments relate primarily to the viability of the investee companies. These risks are managed in various ways. Extensive due diligence procedures are performed prior to making an investment, and regular reviews of the progress of the investee companies are carried out.
For additional information relating to our financial risk profile, see Note 16 to the Consolidated Financial Statements in Item 8
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders of London Pacific Group Limited Jersey, Channel Islands
We have audited the accompanying consolidated balance sheet of London Pacific Group Limited (the "Company") as of December 31, 2002 and the related consolidated statements of income, shareholders' equity, cash flows, and comprehensive income for the year then ended. We have also audited the schedules on pages 91 to 96 in Item 15 (the "Schedules"). These financial statements and the Schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the Schedules based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements and the Schedules referred to above present fairly, in all material respects, the financial position of London Pacific Group Limited at December 31, 2002 and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
As discussed in Notes 3 and 8 to the consolidated financial statements, the Company changed its method of accounting for goodwill in 2002, in accordance with Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets."
/s/ BDO Seidman, LLP San Francisco, California February 28, 2003, except for Note 2 which is as of March 10, 2003
To the Board of Directors and Shareholders of London Pacific Group Limited
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of London Pacific Group Limited and its subsidiaries at December 31, 2001, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index appearing under Item 15 on page 88, present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers Chartered Accountants Jersey, Channel Islands April 1, 2002, except for Note 4 as for which the date is March 19, 2003
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)
See accompanying Notes to Consolidated Financial Statements.
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share and ADS amounts)
See accompanying Notes to Consolidated Financial Statements.
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (continued) (In thousands, except per share and ADS amounts)
See accompanying Notes to Consolidated Financial Statements.
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
See accompanying Notes to Consolidated Financial Statements.
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (In thousands)
See accompanying Notes to Consolidated Financial Statements.
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands, except per share and ADS amounts)
See accompanying Notes to Consolidated Financial Statements.
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Continued) (In thousands, except per share and ADS amounts)
See accompanying Notes to Consolidated Financial Statements.
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands)
See accompanying Notes to Consolidated Financial Statements.
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Material Events
During the third quarter of 2002, London Pacific Life & Annuity Company ("LPLA"), the primary insurance company of London Pacific Group Limited (the "Company"), was placed under regulatory control and rehabilitation based on LPLA's statutory capital and surplus as of June 30, 2002. On August 6, 2002, on petition of the Commissioner of Insurance of the State of North Carolina (the "Commissioner") with the unanimous approval of LPLA's board of directors, the Superior Court of Wake County in the State of North Carolina ordered the Commissioner to take possession and control of all of the property, books and accounts, documents and other records of LPLA. Based on this court order, the Company no longer exercises control over LPLA. As a result of this event, the Company has deconsolidated LPLA and recorded a charge to earnings in the third quarter of 2002 of $38.5 million for losses resulting from the disposition of LPLA.
For further information, see Note 4 "Discontinued Operations" below.
On July 2, 2002, the Company announced that further declines in the value of LPLA's investment portfolio due to persistent negative events in the equity and bond markets continued to erode significantly the statutory capital of LPLA and that the Company had been unsuccessful in concluding a transaction to enhance the capital of LPLA. As a consequence, LPLA discontinued the issuance of new policies as of July 2, 2002. Although the statutory capital of the Company's Jersey insurance subsidiary, London Pacific Assurance Limited ("LPAL"), had not been affected by the adverse equity and bond markets to the same extent as the statutory capital of LPLA, the Company also announced on July 2, 2002 that LPAL would discontinue writing new policies effective immediately. The decision to discontinue the issuance of new policies through LPAL was made to avoid the increased capital requirements created by additional policyholder liabilities. Subsequent to this announcement and other announcements relating to the Company and LPLA, LPAL policy surrenders increased substantially. Approximately 75% of LPAL's $140.2 million in policyholder liabilities as of June 30, 2002 had been redeemed as of December 31, 2002.
Note 2. Subsequent Events
On March 10, 2003, the Company announced that it had entered into a definitive agreement to sell substantially all of the business and operations of Berkeley Capital Management ("BCM") to a company majority-owned by funds under the management of Putnam Lovell NBF Private Equity ("Putnam Lovell"). The agreement is subject to certain conditions, including receipt of sufficient consents from clients of BCM to the assignment of their investment management contracts to the acquiror. The purchase price consists of $7.75 million in cash to be paid at closing subject to certain adjustments; and a further $1.0 million cash installment to be paid on December 31, 2003 subject to certain adjustments. In addition, up to $1.25 million of earn-out payments will be paid by the buyer ratably over the four quarters of 2004 if revenues received in 2003 from a new product planned for launch by BCM in 2003 exceed certain defined targets. The definitive agreement is binding on both companies and is subject to regulatory approvals and other conditions. Should the annualized revenues from BCM clients who will become clients of the acquiror fall below 90% of a base revenue, the acquiror will have the opportunity to either terminate the acquisition or renegotiate terms. The Company expects the sale to close on or before May 15, 2003. As of December 31, 2002, BCM's assets under management were approximately $1.2 billion.
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared by the Company in conformity with United States generally accepted accounting principles ("U.S. GAAP"). These consolidated financial statements include the accounts of the Company, its subsidiaries (with the exception of LPLA as discussed above in Note 1 "Material Events"), the Employee Share Option Trust ("ESOT") and the Agent Loyalty Opportunity Trust ("ALOT") (collectively, the "Group"). Significant subsidiaries included in the continuing operations of the Group and discussed in this document include: London Pacific Assurance Limited, London Pacific Advisors, Berkeley Capital Management and Berkeley International Capital Corporation. All intercompany transactions and balances have been eliminated in consolidation except for intercompany transactions between continuing and discontinued operations principally related to investment management fees from LPLA (the discontinued operations) to the continuing operations.
During the second quarter of 2002, the Company completed a one-for-ten reverse split of its American Depositary Shares ("ADSs"). On June 24, 2002, every ten of the Company's ADSs issued and outstanding were converted and reclassified into one post-split ADS. Consequently, effective from the opening of business on June 24, 2002, each ADS is equal to ten Ordinary Shares. All dividend and earnings (loss) per ADS amounts disclosed in these financial statements have been restated to reflect this split.
The consolidated balance sheet is presented in an unclassified format as the majority of the Group's assets relate to its continuing life insurance and annuities business. The Group's other businesses are financial advisory services, asset management and venture capital management.
The Company is incorporated under the laws of Jersey, Channel Islands. Its Ordinary Shares are traded on the London Stock Exchange and in the U.S. on the Over-the-Counter ("OTC") Bulletin Board in the form of ADSs, which are evidenced by American Depositary Receipts ("ADRs"). Pursuant to the regulations of the U.S. Securities and Exchange Commission ("SEC"), the Company is considered a U.S. domestic registrant and must file financial statements prepared under U.S. GAAP.
Cash and Cash Equivalents
The Group considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Investments
The Group's investments consist of fixed maturity and equity securities. Fixed maturity securities are classified as either available-for-sale or held-to-maturity, and equity securities are classified as either trading or available-for-sale. The investments are accounted for as follows:
i) available-for-sale securities are recorded at fair value, with changes in unrealized gains and losses excluded from net income, but reported net of applicable income taxes and adjustments to deferred policy acquisition cost amortization as a separate component of accumulated other comprehensive income;
ii) held-to-maturity securities are recorded at amortized cost unless these securities become other-than-temporarily impaired; and
iii)trading securities are recorded at fair value with changes in unrealized gains and losses included in net income.
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
When a quoted market price is available for a security, the Group uses this price in the determination of fair value. If a quoted market price is not available for a security, management estimates the security's fair value based on appropriate valuation methodologies. Management's valuation methodologies include fundamental analysis that evaluates the investee company's progress in developing products, building intellectual property portfolios and securing customer relationships, as well as overall industry conditions, conditions in and prospects for the investee's geographic region, overall equity market conditions, and the level of financing already secured and available. This is combined with analysis of comparable acquisition transactions and values to determine if the security's liquidation preferences will ensure full recovery of the Group's investment in a likely acquisition outcome. In its valuation analysis, management also considers the most recent transaction in a company's shares.
Amortization of premiums and accretion of discounts on fixed maturity securities are reflected in earnings over the contractual terms of the investments in a manner that produces a constant effective yield. Realized gains and losses on securities are included in net income using the specific identification method. Any other-than-temporary declines in the fair value of available-for-sale or held-to-maturity securities, below the cost or amortized cost basis, are recognized as realized losses in the consolidated statements of income. The cost basis of such securities is adjusted to reflect the write-down recorded.
Deferred Policy Acquisition Costs
Policy acquisition costs are the costs of producing life insurance and annuity business: principally commissions and certain marketing expenses which vary with, and are primarily related to, the acquisition of new business. Policy acquisition costs are deferred and amortized over the estimated lives of the policies in relation to their estimated future gross profits. Amortization is adjusted in the current year when estimates of total profits to be realized from a group of products are revised.
Deferred policy acquisition costs are adjusted for the change in amortization that would have been recorded if fixed maturity securities classified as available-for-sale had been sold at their stated aggregate fair value and the proceeds reinvested at current yields. The impact of this adjustment is included in accumulated other comprehensive income within shareholders' equity.
During 2002, all deferred policy acquisition costs were written off.
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis at rates sufficient to write-off such assets over their estimated useful lives on the following basis:
Furniture and equipment - five years Computer equipment, including software - three to five years Motor vehicles - five years Leasehold improvements - life of lease
In accordance with Statement of Position No. 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," the Group capitalizes certain internal and external costs incurred to obtain or create internal use software. These capitalized costs are amortized over five years with the amortization period beginning when the software is ready for its intended use.
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Assets held under capital leases are included in property, equipment and leasehold improvements and are depreciated over their estimated useful lives. The future obligations under these leases are included in accounts payable, accruals and other liabilities. Interest paid on capital leases is charged to the income statement over the periods of the leases.
Goodwill
Goodwill is recorded at acquisition of subsidiaries. Goodwill at acquisition arises where the consideration given exceeds the fair value attributed to the separable net assets. All goodwill on acquisitions was capitalized until January 1, 2002, and amortized on a straight-line basis over its estimated useful economic life, generally 25 years. Beginning January 1, 2002, goodwill is no longer amortized, but is regularly evaluated for impairment and any impairment losses are recognized in the consolidated income statement. See the discussion in "Recently Issued Accounting Pronouncements" below.
Life Insurance Policy Liabilities, Revenues and Expenses
Life insurance policy liabilities, premium revenues and related expenses are accounted for in accordance with Statement of Financial Accounting Standards No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments," as follows:
i) Life insurance policy liabilities for deferred annuities are accounted for as investment-type insurance products and are recorded at accumulated value (premiums received, plus accrued interest to the balance sheet date, less withdrawals and assessed fees).
ii) Revenues for investment-type insurance products consist of charges assessed against policy account values for surrenders.
iii)Benefits for investment-type insurance products are charged to expense when incurred and reflect the claim amounts in excess of the policy account balance. Expenses for investment-type products include the interest credited to the policy account balance.
Revenue Recognition
Interest income is accounted for on an accrual basis. Dividends are accounted for when declared.
Listed equity securities received as a result of an acquisition of one of the Group's investee companies by a publicly traded company that are held in escrow by an escrow agent, are recognized in the financial statements when the transaction is completed. Reductions are made to the number of shares of listed equity securities held in escrow that are carried in the financial statements as claims are made by the acquiring company against the escrow, or if evidence exists that a claim is probable.
Management fees collected on investment management contracts are recognized proportionately over the term of the related contracts. Generally, management fees are billed in advance and calculated based upon the market value of the managed portfolios at the end of the preceding quarter. Fees collected, but not yet earned, are deferred and recognized over their respective contract period.
London Pacific Advisors ("LPA") develops and implements web based systems for creating, managing and monitoring fee based investment accounts. It also provides investment advisory services to retail and institutional customers and portfolio support services to other investment advisors. Its revenues for these products and services are generally computed on a quarterly basis based upon the assets maintained on its
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
systems, or for which it provides advisory or support services. The revenues are recognized over the period to which they relate.
In certain circumstances, LPA also provides custom software development and consulting implementation services for separately negotiated fees. During the year ended December 31, 2002, LPA earned approximately $150,000 for these consulting services. Revenues from consulting implementation services are recognized as such services are performed.
Stock Based Compensation
The Group accounts for stock based compensation issued to employees in accordance with Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," which recognizes compensation expense based upon the intrinsic value of the stock options as of the date of grant. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock Based Compensation," which encourages, but does not require, companies to recognize compensation expense for grants of stock options based on their fair value. The Group has elected, as permitted by SFAS 123, to adopt the disclosure requirement of SFAS 123 and to continue to account for stock based compensation under APB 25.
Had compensation expense for the Group's ESOT activity been determined based upon the fair value method in accordance with SFAS 123, the Group's net income (loss) and earnings (loss) per share and ADS would have been reduced or increased to the pro forma amounts as follows:
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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:
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income Taxes
The Group accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." Under SFAS 109, the Group recognizes taxes payable or refundable for the current year, and deferred tax assets and liabilities due to temporary differences in the basis of assets and liabilities between amounts recorded for financial statement and tax purposes.
The Group provides a valuation allowance for deferred income tax assets if it is more likely than not that some portion of the deferred income tax asset will not be realized. The Group includes in income any increase or decrease in a valuation allowance that results from a change in circumstances that causes a change in judgment about the realization of the related deferred income tax asset.
The Group includes in additional paid-in capital the tax benefit on share options exercised during the period to the extent that such exercises result in a permanent difference between financial statement and tax basis compensation expense.
Earnings Per Share and ADS
The Group calculates earnings per share in accordance with Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share." This statement requires the presentation of basic and diluted earnings per share. Basic earnings per share is calculated by dividing net income or loss by the weighted average number of Ordinary Shares outstanding during the applicable period, excluding shares held by the ESOT and the ALOT which are regarded as treasury stock for the purposes of this calculation. The Group has issued employee share options, which are considered potential common stock under SFAS 128. The Company has also issued Ordinary Share warrants to Bank of Scotland in connection with the Company's bank facility, which are also considered potential common stock under SFAS 128. Diluted earnings per share is calculated by dividing net income by the weighted average number of Ordinary Shares outstanding during the applicable period as adjusted for these potentially dilutive options which are determined based on the "Treasury Stock Method."
Foreign Currencies
The Group uses the (pound) sterling as the functional currency for LPAL and the U.S. dollar as the functional currency for the Company and all other significant subsidiaries. Foreign exchange gains and losses resulting from the remeasurement of foreign currency assets and liabilities into an entity's functional currency are included in other operating expense in the consolidated statements of income. For entities using a (pound) sterling functional currency, assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the prevailing exchange rates at the balance sheet date and income and expense items are translated to U.S. dollars at average exchange rates in effect during the period. The resulting translation adjustment is shown as a separate component of other comprehensive income in shareholders' equity. Foreign currency transaction gains and losses are recorded in the results of operations, and were not material in all periods presented.
Comprehensive Income
Comprehensive income consists of net income; changes in unrealized gains and losses on available-for-sale securities, net of income taxes and deferred policy acquisition cost amortization adjustments; and foreign currency translation gains or losses arising on the translation of the Group's non-U.S. dollar based subsidiaries.
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Recently Issued Accounting Pronouncements
In June 2002, the FASB issued Statement of Financial Accounting Standard No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146 requires the Group to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS 146 replaces Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The provisions of SFAS 146 will be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Group's management believes that the adoption of SFAS 146 will not have a significant effect on its consolidated financial statements.
In December 2002, the FASB amended Statement of Financial Accounting Standard No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") by issuing Statement of Financial Accounting Standard No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation, Transition and Disclosure." SFAS 148 provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock based employee compensation. Additionally, the statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in the annual and interim financial statements about the method of accounting for stock based employee compensation and the effect of the method used on reported results. SFAS 148 is effective for financial statements for fiscal years ending after December 15, 2002, and for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. In compliance with SFAS 148, the Group has elected to continue to follow the intrinsic value method in accounting for its stock based compensation and has made the applicable disclosures in this Note 3 above.
In November 2002, the FASB approved FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others". FIN 45 elaborates on the existing disclosure requirements for most guarantees. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The Group has adopted the disclosure provisions of this interpretation as of December 31, 2002. The Group's management does not expect the initial recognition and measurement provisions for guarantees issued or modified after December 31, 2002 to have a material impact on its consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities," which requires the consolidation of variable interest entities ("VIE"), as defined in FIN 46. FIN 46 is applicable to financial statements to be issued by the Group after 2002; however, disclosures are required currently if the Group expects to consolidate any variable interest entities. As of December 31, 2002, the Group does not have entities meeting the definition of a VIE and does not expect the adoption of FIN 46 to have an impact on its financial statements.
Use of Estimates
The preparation of financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenue and expenses for the reporting period. Estimates are inherently subject to change and actual results could differ from the estimates. Certain significant estimates, including those used to determine the valuation of investments, life insurance policy liabilities and deferred policy acquisition costs, are disclosed throughout these notes to the financial statements.
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Reclassifications
Certain reclassifications were made to prior year amounts to conform with the current year's presentation. These reclassifications had no effect on the net income or shareholders' equity for the prior years.
Note 4. Discontinued Operations
As described above in Note 1 "Material Events," the Group, with the unanimous approval of LPLA's board of directors, ceded control of LPLA to the North Carolina insurance regulators on August 6, 2002. In connection therewith, the Group deconsolidated LPLA and recorded a charge to earnings of $38.5 million. Although LPLA was placed under regulatory control and rehabilitation, the Group will not regain control or receive any benefit from LPLA in the future. As such, in accordance with SFAS 144, the results of operations of LPLA (pre-rehabilitation) have been reported in discontinued operations. Under SFAS 144, the results of operations of a discontinued business, and any impairment losses related to a discontinued business, are reported separately in the income statement under discontinued operations for the current and prior periods, and in the prior period balance sheet as total assets of discontinued operations and total liabilities of discontinued operations.
A summary of LPLA's pre-tax operating results for the years ended December 31, 2002, 2001 and 2000, and LPLA's total assets and total liabilities as of December 31, 2001, are shown below.
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
LPLA had been included in the Group's life insurance and annuities business segment.
The loss on disposal of discontinued operations, net of tax, was recorded in the third quarter of 2002 and reported in the Group's Form 10-Q as follows:
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 5. Investments
Summary Cost and Fair Value Information
Fixed Maturity Securities
An analysis of fixed maturity securities is as follows:
No fixed maturity securities classified as held-to-maturity were sold during 2002, 2001 or 2000. During 2002, $871,000 in private corporate debt securities classified as held-to-maturity were considered by management to be other-than-temporarily impaired and consequently their amortized cost was reduced to zero during 2002.
During 2000, fixed maturity securities classified as held-to-maturity with an aggregate carrying value of $23,397,000 were exchanged into preferred stock and classified as available-for-sale. The exchanges resulted from refinancings by the investee companies and there were no gains or losses recorded in the consolidated income statement. There were no such transfers in 2001 or 2002.
As of December 31, 2002, there were no non-income producing fixed maturity securities for the twelve months preceding December 31, 2002.
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Contractual Maturities
The amortized cost and estimated fair value of fixed maturity securities as of December 31, 2002 by contractual maturity, are shown below. Expected maturities may differ from contractual maturities as certain issuers have the right to call and certain borrowers have the right to prepay obligations without penalty.
Equity Securities
Equity securities are comprised of available-for-sale and trading securities. An analysis of equity securities is as follows:
Trading securities are carried at fair value with changes in net unrealized gains and losses of $(22,483,000), $(230,981,000) and $(79,091,000) included in earnings for the years ended December 31, 2002, 2001 and 2000, respectively. During 2002, the loss from the change in net unrealized gains and losses on trading securities included a reclassification adjustment of $8,761,000 related to securities purchased from LPLA at above the Group's original cost.
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Investment Concentration and Risk
As of December 31, 2002, fixed maturity securities held by the Group included investments in General Motors of $7,974,000, British Telecom of $3,270,000, Daimler Chrysler of $3,269,000, Ford Motor Credit of $3,220,000, Fiat Finance of $2,871,000, North American Capital of $2,819,000 and Clarica of $2,771,000. Equity securities held by the Group primarily included investments in Agility Communications, Inc. of $3,375,000, Alacritech, Inc. of $2,250,000, New Focus, Inc. of $2,496,000 and Packeteer, Inc. of $11,402,000. These eleven corporate issuers each represented more than ten percent of shareholders' equity as of December 31, 2002.
As of December 31, 2001, there were no investments in either fixed maturity or equity securities in any one issuer representing more than ten percent of shareholders' equity. Fixed maturity securities considered less than investment grade approximated 10.7% and 7.5% of total fixed maturity securities as of December 31, 2002 and 2001, respectively.
Net Unrealized Gains (Losses) on Available-for-Sale Securities
The net unrealized losses on fixed maturity securities classified as available-for-sale as of December 31, 2002 totaled $146,000. There were no related deferred policy acquisition cost adjustments or income taxes. As of December 31, 2001, for continuing operations, the net unrealized gains on fixed maturity securities classified as available-for-sale after deferred policy acquisition cost adjustments were $1,399,000.
The net unrealized losses on equity securities classified as available-for-sale as of December 31, 2002 totaled $1,750,000. There were no related income taxes. As of December 31, 2001, for continuing operations, the net unrealized losses on equity securities classified as available-for-sale totaled $1,994,000.
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Changes in net unrealized gains and losses on available-for-sale securities included in other comprehensive income for the years ended December 31, 2000 and 2001 and 2002 were as follows:
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net Investment Income
The details of investment income, net of investment expenses, are as follows:
Investment expenses included costs of investment administration, primarily custodial fees.
Realized Gains and Losses
Information about gross and net realized gains and losses on securities transactions is as follows:
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During 2002, management determined that two private equity investments in technology companies were other-than-temporarily impaired and consequently realized losses of $8.2 million were recorded in the consolidated income statement. Certain other private corporate debt and equity investments were considered by management to be other-than-temporarily impaired and realized losses totaling $12.7 million were recorded in the consolidated income statement. In addition during 2002, one public corporate debt security classified as available-for-sale was considered by management to be other-than-temporarily impaired and a realized loss of $0.3 million was recorded in the consolidated income statement for the difference between the amortized cost and the fair value of this security.
During 2001, management determined that one private equity investment in a technology company was other-than-temporarily impaired and consequently a realized loss of $10.0 million was recorded in the consolidated income statement. Certain other private corporate debt investments were considered by management to be other-than-temporarily impaired and realized losses totaling $0.4 million were recorded in the consolidated income statement. In addition during 2001, one public corporate debt security classified as available-for-sale was considered by management to be other-than-temporarily impaired and a realized loss of $7.0 million was recorded in the consolidated income statement for the difference between the amortized cost and the fair value of this security.
Note 6. Deferred Policy Acquisition Costs
Deferred policy acquisition cost activity was as follows:
Due to the events described in Note 1 "Material Events," LPAL discontinued the issuance of new policies on July 2, 2002 and since that date experienced a substantial increase in policy redemptions. Based on revised estimates of the gross profits on the remaining block of business, management determined that the balance of deferred policy acquisition costs should be written-off in full as of September 30, 2002.
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7. Property and Equipment
Property and equipment are carried at cost and consisted of the following:
Note 8. Goodwill
Goodwill activity was as follows:
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Had SFAS 142 been in effect prior to January 1, 2002, the Group's reported net loss and loss per share and ADS would have been as follows:
In accordance with SFAS 142, the Group evaluated its carrying value of goodwill during 2002 and determined that the goodwill carried on the books of two of its subsidiaries was impaired. Advisors Insurance Services of Texas has been inactive and is in the process of being liquidated; consequently, approximately $7,000 of goodwill was written-off. Subsequent to the loss of control of LPLA and the termination of the investment management contract for LPLA's investment portfolio, the value of BICC's technology venture capital business is less certain. Consequently, BICC's goodwill balance of approximately $389,000 was written-off during 2002.
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 9. Other Assets
An analysis of other assets is as follows:
Note 10. Life Insurance Policy Liabilities
An analysis of life insurance policy liabilities is as follows:
The liability for future policy benefits and policyholder contract deposits was determined based on the following assumptions:
Interest Rate Assumptions
Guaranteed reset rates were 3.0% for seven year annuity products issued in 2002. For three and five year annuity products, credited interest rates generally ranged from 3.30% to 7.40% in 2002, 3.45% to 7.40% in 2001, and from 6.50% to 7.40% in 2000.
Mortality Assumptions
Assumed mortality rates were based on standard tables commonly used in the U.K. life insurance industry, namely the AM80 table for male lives and the AF80 table for female lives.
Withdrawal Assumptions
Withdrawal charges on deferred annuities generally ranged from 1% to 7%, grading to zero over a period of up to 7 years.
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 11. Statutory Financial Information and Restrictions
LPAL is regulated by the Jersey Financial Services Commission ("JFSC") and under Article 6 of the Insurance Business (Jersey) Law 1996 is permitted to conduct long-term insurance business. LPAL is required to submit annual audited financial statements (prepared under U.S. GAAP which is permitted), and an audited annual filing to the JFSC in the format consistent with that required by the Insurance Directorate of HM Treasury in the United Kingdom. The annual filing submitted by LPAL must be accompanied by a Certificate from the Appointed Actuary that based on sufficiently prudent assumptions, assets are sufficient to cover all liabilities. The annual filing contains a report from the Appointed Actuary on the matching of investments to liabilities.
The JFSC sets out the conditions with which LPAL must comply and determines the reporting requirements and the frequency of reporting. These conditions include: (i) LPAL must hold, at all times, approved assets at least equal to the long-term insurance fund plus the required minimum solvency margin, (ii) the margin of solvency must be the greater of (pound)50,000 or 2.5% of the value of the long-term business fund, (iii) a maximum of 20% of the approved assets necessary to cover the long-term insurance fund and the required minimum solvency margin may be held in private equity investments, and (iv) assets equal to not less than 90% of liabilities must be placed with approved independent custodians. As of December 31, 2002, LPAL met all of these conditions.
LPAL is also required under the insurance laws to appoint an actuary. The actuary must be qualified as defined under the laws and is required to supervise the long-term insurance fund. No transfers, except in satisfaction of long-term insurance business liabilities, including dividends, are permitted from the long-term insurance fund without written consent from the actuary.
Note 12. Notes Payable
The Group's consolidated results for the quarters ended June 30, 2002 and September 30, 2002 resulted in breaches of the net worth, operating profit/interest charge and intangible asset ratio financial covenants under its bank facility with Bank of Scotland. On December 20, 2002, the Company and Bank of Scotland agreed to the terms and conditions of an amended credit facility. The new facility provided up to $23.0 million of borrowings, with an interest rate of 3.5% above the LIBOR rate on borrowings up to $10.0 million and 4.5% above the LIBOR rate on borrowings between $10.0 million and $23.0 million. (The one month LIBOR rate on December 31, 2002 was 1.38%.) The facility limit decreases at the end of each quarter, such that the facility must be repaid in full no later than December 31, 2003; however, the bank has agreed to consider an extension of the final facility expiration date in light of the overall circumstances prevailing at the time of any such request by the Company. In addition to providing the bank with security interest over certain of the Group's listed equity securities having an aggregate market value of $4.5 million as of February 28, 2003, the Company has given the bank other guarantees, pledges and security interests over certain other Group assets. The Company agreed to pay the bank a one-time restructuring fee of (pound)180,000, monthly management fees of (pound)10,000 and quarterly facility fees which begin at 0.5% per annum and increase each quarter until they reach 2.5% per annum in the third quarter of 2003 based on the average facility usage during the quarter. The Company also granted to the bank warrants to subscribe for 1,933,172 Ordinary Shares of the Company. The warrants have a subscription price of (pound)0.1143 ($0.184 at (pound)1 = $1.61) and may be exercised any time prior to February 14, 2010. New financial covenants have been set under this reducing credit facility with testing to take place as of the end of each quarter. As of December 31, 2002, the Group met the financial covenants under the facility.
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During December 2002, the Group repaid $3.0 million to Bank of Scotland in permanent reduction of the facility to $20.0 million. As of December 31, 2002, $9.3 million was outstanding under the facility. In addition, $10.6 million of the remaining $10.7 million under the facility was utilized in the form of guarantees and letters of credit provided on behalf of certain former investee companies. During February 2003, the Group sold certain of its listed equity securities for $4.7 million and the proceeds were used to reduce the Group's borrowings to $4.6 million and the facility to $15.2 million.
The Group's management believes that it is unlikely that the former investee companies will have the ability to repay any of their borrowings totaling $10.6 million according to the bank's quarterly repayment schedule during 2003, and thus the Group will be obligated to pay this amount on their behalf. The Group has recorded the maximum guarantee obligation of $10.6 million at December 31, 2002 on its consolidated balance sheet and has taken other-than-temporary impairment losses on the related investments in its consolidated income statement for 2002.
The Group intends to use a combination of existing cash, proceeds from listed equity security sales and the net proceeds from the sale of BCM in order to meet the paydown schedule under the bank facility described above. In the event that the sale of BCM to Putnam Lovell (see Note 2 "Subsequent Events" above) is not completed, in order to meet its near-term obligations, the Company will be required to identify other sources of liquidity. The Group's management believes that it will still be able to meet its near-term obligations through the sale of BCM to another party or the sale of other assets.
Note 13. Income Taxes
The Group is subject to taxation on its income in all countries in which it operates based upon the taxable income arising in each country. However, realized gains on certain investments are exempt from Jersey and Guernsey taxation. This and other tax benefits which may not recur have reduced the tax charge in 2002, 2001 and 2000.
The Group is subject to income tax in Jersey at a rate of 20%. In the United States, the Group is subject to both federal and California taxes charged at 34% and 8.84%, respectively.
A breakdown of the Group's book income (loss) from continuing operations before income taxes by tax jurisdiction follows:
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The provision for income taxes differs from the amount computed by applying the Jersey, Channel Islands statutory income tax rate of 20% to income (loss) from continuing operations before income taxes. The sources and tax effects of the difference are as follows:
The components of the actual tax expense for continuing operations are as follows:
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Group recognizes assets and liabilities for the deferred tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of assets and liabilities are recovered or settled. The deferred income tax assets are reviewed periodically for recoverability and valuation allowances are provided as necessary. Deferred income tax assets and liabilities are disclosed net in the consolidated financial statements when they arise within the same tax jurisdiction and tax return.
The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and deferred income tax liabilities are presented below. Net deferred income tax assets existed as of December 31, 2001 in the U.S. subsidiaries of continuing operations which file consolidated federal tax returns for two separate groups. As of December 31, 2002, full valuation allowances were provided on the net deferred tax assets of both U.S. tax groups due to the uncertainty of generating future taxable income or capital gains to benefit from the deferred tax assets. The net increase in the valuation allowance during 2002 was $23,958,000 ($7,649,000 related to continuing operations).
As of December 31, 2002, the U.S. subsidiaries of continuing operations had pre-tax federal net operating loss carryforwards of approximately $21.5 million expiring as follows: approximately $1.5 million from 2003 to 2012, and approximately $20.0 million from 2020 to 2022. These subsidiaries have California net operating loss carryforwards of approximately $13.8 million expiring as follows: approximately $0.5 million in 2004, and approximately $13.3 million from 2010 to 2012. The Group has recorded a full valuation allowance for the deferred tax assets arising from these carryforward amounts as of December 31, 2002.
LPLA, the U.S. life insurance subsidiary (discontinued operations), had net deferred tax assets of $17,804,000 as of December 31, 2001 and $18,031,000 as of June 30, 2002. LPLA files a separate U.S. federal tax return.
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 14. Shareholders' Equity
The Company has authorized 86,400,000 Ordinary Shares with a par value of $0.05 per share. As of December 31, 2002 and 2001, there were 64,439,073 Ordinary Shares issued and outstanding.
A final dividend for 2001 of $0.05 gross per Ordinary Share ($0.04 net of 20% Jersey tax) and $0.40 per ADS (net of 20% Jersey tax) or $2,032,000 in total was declared and paid during 2002. Total dividends declared and paid were $0.29 gross per Ordinary Share ($0.232 net of 20% Jersey tax) and $2.32 per ADS (net of 20% Jersey tax) during each of the years ended December 31, 2001 and 2000, or $11,802,000 and $11,625,000, respectively, in total. Dividends per ADS have been restated to reflect the one-for-ten reverse split in June 2002.
Accumulated other comprehensive income (loss) consists of two components, foreign currency translation adjustments and net unrealized gains and losses on available-for-sale securities. Accumulated foreign currency translation adjustments were $(717,000), $(157,000) and $(42,000) as of December 31, 2002, 2001 and 2000, respectively. The net unrealized losses on available-for-sale securities after deferred policy acquisition cost amortization adjustments and income taxes were $(1,896,000), $(9,749,000) and $(25,202,000) as of December 31, 2002, 2001 and 2000, respectively. Of these amounts, $0, $(9,154,000) and $(24,989,000) related to discontinued operations as of December 31, 2002, 2001 and 2000, respectively.
The Group has two share incentive plans as described in Note 18 to the Consolidated Financial Statements. Under the terms of these plans, shares of the Company may be purchased in the open market and held in trust. These shares are owned by the employee benefit trusts, which are subsidiaries of the Company for financial reporting purposes.
Changes in the number of shares held by The London Pacific Group 1990 Employee Share Option Trust ("ESOT") and the Agent Loyalty Opportunity Trust ("ALOT") were as follows:
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Warrants
On November 11, 2002, the Company agreed to grant 1,933,172 warrants to subscribe for the Company's Ordinary Shares to Bank of Scotland in connection with the extension of the Group's credit facility. The warrants were granted on February 14, 2003 and have an exercise price of (pound)0.1143 (based on the average of the closing prices of the Ordinary Shares over the trading days from November 1, 2002 through November 11, 2002), which was higher than the market price of (pound)0.09 on November 11, 2002. These warrants are exercisable at any time prior to February 14, 2010 and their fair value was determined to be $251,125, based on a risk-free rate of 2.80%, volatility of 179% and a dividend yield of zero. The Company recognized $30,625 of expense relating to these warrants in 2002. The balance of $220,500 will be recognized as an expense pro rata in 2003, with the corresponding entries to additional paid in capital.
Note 15. Commitments and Contingencies
Lease Commitments
The Group leases furniture, fixtures and equipment under capital and operating leases with terms in excess of one year. The Group also leases office space under operating leases. Total rent expense on operating leases in the continuing operations was $1,085,000, $933,000 and $792,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
Future minimum lease payments required under capital and non-cancellable operating leases with terms of one year or more, as of December 31, 2002, were as follows:
Commitments eliminated as a result of the actions of the North Carolina Department of Insurance ("NCDOI") with respect to LPLA (as described in Note 1 "Material Events") for operating and capital lease commitments were approximately $10.8 million and $0, respectively.
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Guarantees and Letters of Credit
For disclosure of guarantees and letters of credit, see Note 12 to the Consolidated Financial Statements.
In the course of the administration of LPLA in rehabilitation, the NCDOI requested information concerning the history of a limited number of investments in securities of portfolio companies during November 2002. These portfolio investments have been associated with LPLA for more than seven years, and involve intercompany transfers. The history of their investment performance and ownership is complex. The Company has complied with these requests. The Company is not able at this time to predict what conclusions the NCDOI will reach after evaluation of this information.
The Group is involved in various legal proceedings, including claims for damages from clients of a nature considered to be normal to its business. The Company believes the ultimate settlement or other resolution of the claims will not materially affect its consolidated financial position, results of operations or cash flows.
Note 16. Fair Value of Financial Instruments
Substantially all financial instruments used in the Group's trading and investing activities are carried at fair value or amounts that approximate fair value. Fair value is based generally on listed market prices or broker-dealer price quotations. To the extent that prices are not readily available, estimated fair value is based on valuation methodologies performed by management, which evaluate company, industry, geographical and overall equity market factors that would influence the security's fair value.
With the exception of the fixed maturity securities classified as held-to-maturity, which are held at amortized cost, the carrying values of the Group's financial assets are equal to estimated fair value.
Considerable judgment is required in interpreting market data used to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions or estimation methodologies may have a material effect on the estimated fair value amounts.
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The carrying values and estimated fair values of the Group's financial instruments were as follows:
The following methods and assumptions were used by the Group in estimating the fair value of the financial instruments presented:
Cash and Cash Equivalents: The carrying amounts reported in the consolidated balance sheet for these instruments approximated fair value.
Fixed Maturity Securities: Fair values for actively traded fixed maturity securities classified as available-for-sale and held-to-maturity were generally based upon quoted market prices. Fair values for private corporate debt securities were based on the results of valuation methodologies performed by management.
Equity Securities:
a) Trading Securities: Fair values for equity securities classified as trading were based on quoted market prices.
b) Available-for-Sale Securities: Fair values for equity securities classified as available-for-sale were based upon the results of management's valuation methodologies, including analysis of company, industry, geographical and overall equity market factors which influence fair value.
Life Insurance Policy Liabilities: The balance sheet caption "life insurance policy liabilities" includes investment-type insurance contracts (i.e., deferred annuities). The estimated fair values of deferred annuity policies were based on their account values after deduction of surrender charges.
Notes Payable: The carrying amounts reported in the consolidated balance sheet for these instruments approximated fair value as the bank borrowings bear interest at a variable rate.
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 17. Employee Benefit Plan
1993 Deferred Compensation Plan
Until June 2002, the Group sponsored a deferred compensation plan for certain U.S. employees. It was designed to allow these employees the opportunity to participate in the potential gains to be realized by the Group from selected private company investments made by the Group. Plan participants elected to defer payment of all or a portion of their compensation and then to invest in, on a "phantom" basis, securities which mirrored the performance of private investments made by the Group. The participants did not own the underlying securities and did not risk their original principal amount deemed to be invested in the underlying securities. The plan was terminated in June 2002, and all participating employees elected to take cash distributions from the plan.
The Group's liability under this plan was as follows:
The Group recognized expense related to this deferred compensation plan of $1,428,000 for the year ended December 31, 2000. For the years ended December 31, 2002 and 2001 there were credits to expense of $12,000 and $658,000, respectively, due to the reversal of unrealized appreciation on certain underlying listed investments.
Note 18. Share Incentive Plans
The Group has two share incentive plans for employees, agents and directors of London Pacific Group Limited and its subsidiaries that provide for the issuance of share options and stock appreciation rights.
Employee Share Option Trust
The London Pacific Group 1990 Employee Share Option Trust ("ESOT"), which was approved by shareholders in 1990, provides for the granting of share options to employees and directors. The objectives of this plan include retaining the best personnel and providing for additional performance incentives. Options are generally granted with an exercise price equal to the fair market value at the date of grant. Such grants to employees are generally exercisable in four equal annual installments beginning one year from the date of grant, subject to employment continuation, and expire seven or ten years from the date of grant. Such grants to directors are fully vested on the date of grant and expire seven or ten years from the date of the grant.
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The ESOT may purchase shares of the Company in the open market, funded each year by a loan from the Company or its subsidiaries. While the loan is limited up to an annual maximum of 5% of the consolidated net assets of the Group, the ESOT is not limited as to the number of options that may be granted. The loan is secured by the shares held in the trust, is interest free, and is eliminated in the consolidated financial statements. The ESOT has waived its entitlement to dividends on any shares held. See Note 14 to the Consolidated Financial Statements for a summary of the share activity within the ESOT.
Share option activity for the years ended December 31, 2002, 2001 and 2000 was as follows:
The Group accounts for stock based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." In accordance with APB 25, the Group recorded compensation expense relating to stock options of $530,000 in 2001 and $2,943,000 in 2000. This expense represented the difference between the exercise price of options and the market value of the underlying shares at the date of grant or modification and was recognized in full as all options were fully vested. The Group extended the expiration date on 310,000 outstanding options during 2000. Of the options modified, 250,000 were extended for an additional three years from the original date of expiration, and 60,000 were extended for an additional ten years from the date of modification.
See Note 3 for a reconciliation of net income (loss) as reported and as adjusted under SFAS 123.
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Summary information about the Group's share options outstanding as of December 31, 2002 is as follows:
Agent Loyalty Opportunity Trust
The Agent Loyalty Opportunity Trust ("ALOT") provides for the granting of stock appreciation rights ("SARs") on the Company's Ordinary Shares to agents of LPLA. The ALOT was established in 1997 without shareholders' approval. Each award unit entitles the holder to cash compensation equal to the difference between the Company's prevailing share price and the exercise price. The award units are exercisable in four equal annual installments commencing on the first anniversary of the date of grant and are forfeited upon termination of the agency contract. Vesting of the award in any given year is also contingent on the holder of the award surpassing a predetermined benchmark tied to sales and persistency. The SARs expire seven years from the date of grant. Given that LPLA is under the administrative supervision of the NCDOI and is no longer selling policies, the status of these awards is unclear.
The ALOT may purchase Ordinary Shares in the open market, funded by a loan from a Group subsidiary. The loan is secured by the shares held in the trust and bears interest based upon the trust's net income before interest for each financial period. The trust receives dividends on all Ordinary Shares held. The loan, interest income and dividend income are eliminated in the consolidated financial statements. See Note 14 to the Consolidated Financial Statements for a summary of the share activity within the ALOT.
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SAR activity for the years ended December 31, 2002, 2001 and 2000 was as follows:
Summary information about the Group's SARs outstanding as of December 31, 2002 is as follows:
In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25," which was effective for all awards granted after July 1, 2000.
Compensation expense relating to award grants in the ALOT was accounted for under APB 25, prior to the issuance of FIN 44. Thus, no expense was recognized at the grant dates because all awards were made with an exercise price equal to the prevailing market value. However, upon exercise of the awards, compensation expense of $0, $20,000 and $1,943,000 for the years ended December 31, 2002, 2001 and 2000, respectively, was recognized in the consolidated income statements as part of the loss from discontinued operations. This compensation expense was capitalized in the consolidated balance sheets as deferred policy acquisition costs, in accordance with the Group's accounting policy as stated in Note 3 to the Consolidated Financial Statements.
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 19. Pension Plans
Jersey Plan
The Group provides a defined benefit pension plan for Jersey, Channel Islands, employees. The plan provides benefits on retirement at age sixty based on one sixtieth of an employee's final average salary over the employee's last three years of employment for each full year of service, and life insurance coverage for current employees. There are nine individuals (five current employees and four ex-employees) who are entitled to future benefits under the plan. The plan is funded by contributions from the Group. The assets of the plan are held in a trust for the benefit of the employees and are managed by an external asset manager.
An actuarial valuation by an independent actuary, including a funding and contribution review, is required every three years. The last actuarial valuation was carried out as of December 31, 2000. At that time the trust had assets of $1,153,000 and the actuarial valuation of past service ongoing liabilities was $1,746,000, indicating a past service deficit of $593,000 in the plan. There were, as at that date, twelve individuals (nine current employees and three ex-employees) who were entitled to future benefits under the plan. The company funding rate prior to the valuation was 20% of participants' salaries. The actuary recommended that the past service deficit be made up and that contributions be increased to 21.5% of participants' salaries to cover future liabilities. Additional contributions, sufficient to cover the deficit indicated in the actuarial valuation, were made to the trust during 2002 and contributions on salaries were increased to 21.5% effective from the beginning of 2001. The next actuarial valuation will be carried out as of December 31, 2003.
Contributions of $731,000, $361,000 and $189,000 were made to the trust in 2002, 2001 and 2000, respectively. Assets held by the trust were $1,721,000, $1,247,000 and $1,153,000 as of December 31, 2002, 2001 and 2000, respectively.
U.K. Plan
The Group provides a defined contribution plan for U.K. employees. There is currently one participant in the plan. The Group has no ongoing liabilities associated with the plan. Contributions of $143,000, $52,000 and $17,000 were made to the plan in 2002, 2001 and 2000, respectively. Of the 2002 contribution, $94,000 was offset by a salary waiver.
Note 20. Earnings Per Share and ADS
Earnings per ADS are equivalent to ten times earnings per Ordinary Share, following the one-for-ten reverse split in June 2002. All ADS amounts shown below have been restated to reflect this split.
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of the numerators and denominators for the basic and diluted earnings per share calculations in accordance with Statement of Financial Accounting Standard No. 128 ("SFAS 128"), "Earnings per Share," is as follows:
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As the Group recorded a net loss for the years ended December 31, 2002 and 2001, the calculation of diluted earnings per share for these years do not include potentially dilutive employee share options and warrants issued to Bank of Scotland as they are anti-dilutive and, if included, would have resulted in a reduction of the net loss per share. If the Group had reported net income for the years ended December 31, 2002 and 2001, there would have been an additional 347,258 and 3,022,963 shares, respectively, included in the calculations of diluted earnings per share for these years.
Note 21. Transactions with Related Parties
The Group paid legal fees of approximately $130,000, $60,000 and $418,000 during 2002, 2001 and 2000, respectively, to a law firm of which one of its directors, Victor A. Hebert, is a member.
Note 22. Business Segment and Geographical Information
The Group's reportable operating segments are classified according to its principal businesses, which are the following: life insurance and annuities, financial advisory services, asset management and venture capital management.
Intercompany transfers between reportable operating segments are accounted for at prices which are designed to be representative of unaffiliated third party transactions. During the years ended December 31, 2002, 2001 and 2000, there were included in the asset management and venture capital management segments, portfolio management fees from LPLA (discontinued operations) of $3,632,000, $11,831,000 and $10,240,000, respectively. These portfolio management fees are included in the revenues of continuing operations and have not been eliminated in the consolidated financial statements. These management fees were approved by the insurance regulatory body in LPLA's U.S. state of domicile.
Summary revenue and investment gain (loss) information by geographic segment, based on the domicile of the Group company generating those revenues, is as follows:
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Total assets by geographic segment were as follows:
Revenues and income (loss) before income taxes for the Group's reportable operating segments included in continuing operations, based on management's internal reporting structure, were as follows:
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1) Netted against the revenues (investment income) of the life insurance and annuities segment are management fees paid to the asset management segment of $39,000, $47,000 and $9,000 in 2002, 2001 and 2000, respectively.
(2) Included in the revenues of the asset management segment are management fees from the life insurance and annuities segment of $39,000, $47,000 and $9,000 in 2002, 2001 and 2000, respectively. In addition, revenues of the asset management segment also included management fees from LPLA (discontinued operations) of $724,000, $1,907,000 and $2,766,000 in 2002, 2001 and 2000, respectively.
(3) Included in the revenues of the venture capital management segment are management fees from LPLA (discontinued operations) of $2,908,000, $9,924,000 and $7,474,000 in 2002, 2001 and 2000, respectively.
(4) Included in interest expense is interest paid to LPLA (discontinued operations) of $30,000, $58,000 and $55,000 in 2002, 2001 and 2000, respectively.
Assets attributable to each of the Group's reportable operating segments, based on management's reporting structure, were as follows:
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 23. Selected Quarterly Financial Information (Unaudited)
Unaudited quarterly financial information (in thousands, except per share and ADS amounts) is as follows:
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Due to the method required by SFAS 128 to calculate per share and ADS amounts, the quarterly per share and ADS amounts do not total to the full year per share and ADS amounts.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The information required by this Item is incorporated by reference to our Form 8-K filed on June 26, 2002, containing information announcing that on June 19, 2002, PricewaterhouseCoopers notified us of its resignation as the auditors for the Group.
The information required by this Item is also incorporated by reference to our Form 8-K filed on July 31, 2002, containing information announcing the appointment of BDO International and BDO Seidman, LLP as auditors for the Group with effect from July 31, 2002.
PART III
Certain information required by Part III is omitted from this Form 10-K and is incorporated by reference to our definitive Proxy Statement for the Annual Meeting of Shareholders to be held on June 12, 2003 (the "Proxy Statement"), which will be filed with the SEC not later than 120 days after the end of the fiscal year covered by this Form 10-K.
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are as follows:
Arthur I. Trueger, Executive Chairman: Mr. Trueger, age 54, is the founder and a principal shareholder of London Pacific Group Limited. He has worked for us for more than 26 years and holds A.B., M.A. and J.D. degrees from the University of California.
Ian K. Whitehead, Chief Financial Officer: Mr. Whitehead, age 48, has held the position of Chief Financial Officer of London Pacific Group Limited since he joined us in 1990. Mr. Whitehead is a member of the Institute of Chartered Accountants in England and Wales.
Information regarding our directors is incorporated by reference to the sections entitled "Proposal 2 - Election of Director" and "Board of Directors and Committees" in the Proxy Statement.
Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the section entitled "Other Information About Directors and Executive Officers" in the Proxy Statement.
Item 11.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the sections entitled "Executive Compensation" and "Directors' Compensation" in the Proxy Statement.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information regarding security ownership of certain beneficial owners and management is incorporated by reference to the section entitled "Information Regarding Beneficial Ownership of Principal Shareholders, Directors and Executive Officers" in the Proxy Statement.
The following table is a summary of selected information for our equity compensation plans as of December 31, 2002.
(1) Our equity compensation plans do not contain a limit on the number of options that may be granted to employees. However, the plans do not allow for the issuance of previously authorized and unissued shares to meet the obligations of the plans upon an employee option exercise. When an option is granted, the trust that administers the plan borrows funds from us or one of our subsidiaries and uses those funds to purchase the number of shares underlying the option grant. The maximum loan allowed in any given year is equal to 5% of consolidated net assets as of the end of the previous fiscal year.
Information regarding the features of the equity compensation plan not approved by shareholders is incorporated by reference to Note 18 to the Consolidated Financial Statements presented in Item 8 "Financial Statements and Supplementary Data" of this Form 10-K.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the section entitled "Other Information About Directors and Executive Officers" in the Proxy Statement.
PART IV
Item 14.
Item 14. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Our management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Within 90 days prior to the filing date of this annual report on Form 10-K, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on such evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective.
There have been no significant changes in our internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this annual report on Form 10-K.
Item 15.
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Form 10-K:
1. Financial Statements: Page
The following consolidated financial statements of us and subsidiaries are included in Item 8:
2. Financial Statement Schedules: Page
The following financial statement schedules of London Pacific Group Limited and subsidiaries are included in this Form 10-K immediately following Item 15 and should be read in conjunction with the consolidated financial statements and notes thereto included in Item 8:
All other financial statement schedules required by Regulation S-X have been omitted because they are not applicable or the required information is included in the applicable consolidated financial statements or notes thereto in Item 8 "Financial Statements and Supplementary Data" of this Form 10-K.
3. Exhibits:
The following exhibits of London Pacific Group limited and subsidiaries are filed herewith or incorporated by reference as indicated below:
Exhibit Number Description - ------- -----------------
3.(I) Memorandum and Articles of Association of London Pacific Group Limited, as amended and restated on April 18, 2000 (filed previously as Exhibit 3.(I) to our Form 10-Q for the quarter ended June 30, 2000).
4.1 Specimen Ordinary Share certificate (filed previously as Exhibit 4.1 to our Form 10-K for the year ended December 31, 2000).
4.2 Form of Deposit Agreement dated September 25, 1992, as amended and restated as of November 24, 1993, as further amended and restated as of March 14, 2000, among us, The Bank of New York as Depositary, and all Owners and Holders from time to time of American Depositary Receipts issued thereunder (filed previously as Exhibit A to our Registration Statement on Form (Registration No. 333-11658) dated March 14, 2000).
4.3 Letter Agreement dated August 25, 1992 between The Bank of New York and us covering the Basic Administration Charge relating to the Deposit Agreement (shown above as Exhibit 4.2) (filed previously as Exhibit 3.8 to our Post-Effective Amendment No. 2 to our Registration Statement on Form 20-F/A dated August 31, 1993).
4.4 Form of Deposit Agreement as amended and restated as of June 24, 2002, among us, The Bank of New York as Depositary, and all Owners and Holders from time to time of American Depositary Receipts issued thereunder (filed previously as Exhibit 4.4 to our Form 10-Q for the quarter ended June 30, 2002).
10.1.1 Multicurrency Term Facility Agreement dated May 2, 2000 between us and the Governor and Company of the Bank of Scotland (filed previously as Exhibit 10.1.1 to our Form 10-Q for the quarter ended September 30, 2000).
10.1.2 Term Loan and Guarantee Facility of up to $23,000,000, dated December 20, 2002 between us and the Governor and Company of the Bank of Scotland.
10.2.1 Settlement dated February 16, 1990 among (1) us, (2) John Gerald Patrick Wheeler and (3) Ian Walter Strang, constituting The Govett & Company 1990 Employee Share Option Trust (filed previously as Exhibit 3.2 to our Post-Effective Amendment No. 2 to Registration Statement on Form 20-F/A dated August 31, 1993).
10.2.2 Executed Instrument dated March 18, 1994 among (1) John Gerald Patrick Wheeler, (2) Ian Walter Strang and (3) Richard John Pirouet, relating to The Govett & Company 1990 Employee Share Option Trust.
10.2.3 Executed Instrument dated September 27, 1994 among (1) Ian Walter Strang, (2) Richard John Pirouet and (3) Clive Aubrey Charles Chaplin, relating to The Govett & Company 1990 Employee Share Option Trust.
10.2.4 Executed Instrument dated March 3, 1995 among (1) Ian Walter Strang, (2) Richard John Pirouet and (3) Clive Aubrey Charles Chaplin, relating to The Govett & Company 1990 Employee Share Option Trust.
10.2.5 Executed Instrument dated August 22, 1996 among (1) Richard John Pirouet, (2) Clive Aubrey Charles Chaplin and (3) Ronald William Green, relating to The London Pacific Group 1990 Employee Share Option Trust.
10.2.6 Executed Instrument dated August 29, 1998 among (1) Richard John Pirouet, (2) Clive Aubrey Charles Chaplin, (3) Ronald William Green and (4) Victor Aloysius Hebert, relating to The London Pacific Group 1990 Employee Share Option Trust.
10.2.7 Executed Instrument dated May 31, 2000 among (1) Richard John Pirouet, (2) Clive Aubrey Charles Chaplin, (3) Ronald William Green and (4) Victor Aloysius Hebert, relating to The London Pacific Group 1990 Employee Share Option Trust (filed previously as Exhibit 10.2.1 to our Form 10-Q for the quarter ended September 30, 2000).
10.2.8 Executed Instrument dated May 31, 2000 among (1) Richard John Pirouet, (2) Clive Aubrey Charles Chaplin, (3) Ronald William Green, (4) Victor Aloysius Hebert and (5) Christopher Byrne, relating to The London Pacific Group 1990 Employee Share Option Trust (filed previously as Exhibit 10.2.2 to our Form 10-Q for the quarter ended September 30, 2000).
10.3.1(1) Agreement dated July 1, 1990 between us and Ian Kenneth Whitehead (filed previously as Exhibit 10.3.1 to our Form 10-K for the year ended December 31, 2000).
10.3.2(1) Berkeley (USA) Holdings Limited Amended and Restated 1993 Deferred Compensation Plan dated December 16, 1999 (filed previously as Exhibit 10.3.2 to our Form 10-K for the year ended December 31, 2000).
10.3.3(1) London Pacific Advisers Limited Retirement Scheme confirmation dated December 5, 2000 for Ian Kenneth Whitehead (filed previously as Exhibit 10.3.3 to our Form 10-K for the year ended December 31, 2001).
10.4.1 Settlement dated May 23, 1997 among BG Services Limited and A.L.O.T. Trustee Limited establishing Agent Loyalty Opportunity Trust (filed previously as Exhibit 10.4.1 to our Form 10-K for the year ended December 31, 2001).
10.4.2 Executed Deed dated July 16, 1997 by A.L.O.T. Trustee Limited relating to Agent Loyalty Opportunity Trust (filed previously as Exhibit 10.4.2 to our Form 10-K for the year ended December 31, 2001).
10.4.3 Executed Deed dated August 13, 1997 by A.L.O.T. Trustee Limited relating to Agent Loyalty Opportunity Trust (filed previously as Exhibit 10.4.3 to our Form 10-K for the year ended December 31, 2001).
10.4.4 Executed Deed dated August 20, 1998 by A.L.O.T. Trustee Limited relating to Agent Loyalty Opportunity Trust (filed previously as Exhibit 10.4.4 to our Form 10-K for the year ended December 31, 2001).
10.4.5 Executed Deed of Amendment and Appointment dated December 11, 2001 among Berkeley International Capital Limited and A.L.O.T. Trustee Limited relating to Agent Loyalty Opportunity Trust (filed previously as Exhibit 10.4.5 to our Form 10-K for the year ended December 31, 2001).
21 Subsidiaries as of February 28, 2003.
99.1 Certification by our Executive Chairman pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification by our Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ____________
(1) Management contract or compensatory arrangement filed in response to Item 15(a)(3) of the instructions to Form 10-K.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by us during the quarter ended December 31, 2002.
(c) The exhibits of us and our subsidiaries are listed in Item 15(a)(3) above.
(d) The financial statement schedules for us and our subsidiaries follow on pages 91 through 96.
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
As of December 31, 2002
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
LONDON PACIFIC GROUP LIMITED CONDENSED BALANCE SHEETS
See accompanying Note to Condensed Financial Statements.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
LONDON PACIFIC GROUP LIMITED CONDENSED STATEMENTS OF INCOME
See accompanying Note to Condensed Financial Statements.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
LONDON PACIFIC GROUP LIMITED CONDENSED STATEMENTS OF CASH FLOWS
See accompanying Note to Condensed Financial Statements.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
LONDON PACIFIC GROUP LIMITED NOTE TO CONDENSED FINANCIAL STATEMENTS
Note 1. Basis of Presentation and Significant Accounting Policies
The accompanying financial statements comprise a condensed presentation of financial position, results of operations and cash flows of London Pacific Group Limited (the "Company") on a separate company basis. These condensed financial statements do not include the accounts of the Company's subsidiaries, but instead include the Company's investment in those subsidiaries, stated at amounts which are equal to the Company's equity in the subsidiaries' net assets. The consolidated financial statements of the Company and its subsidiaries are included in Item 8 of Form 10-K for the year ended December 31, 2002.
Additional information about the significant accounting policies applied by the Company and its subsidiaries is included in Note 3 to the Consolidated Financial Statements in Item 8 of Form 10-K for the year ended December 31, 2002.
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Life Insurance and Annuities Segment (Continuing Operations)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LONDON PACIFIC GROUP LIMITED (Registrant)
By /s/ Arthur I. Trueger
Date: March 19, 2003 Arthur I. Trueger Executive Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Arthur I. Trueger Date: March 19, 2003 Arthur I. Trueger Executive Chairman (Principal Executive Officer)
/s/ Ian K. Whitehead Date: March 19, 2003 Ian K. Whitehead Chief Financial Officer (Principal Financial and Accounting Officer)
/s/ Victor A. Hebert Date: March 19, 2003 Victor A. Hebert Deputy Chairman and Non-Executive Director
/s/ John Clennett Date: March 19, 2003 John Clennett Non-Executive Director
/s/ Harold E. Hughes, Jr. Date: March 19, 2003 Harold E. Hughes, Jr. Non-Executive Director
/s/ The Viscount Trenchard Date: March 19, 2003 The Viscount Trenchard Non-Executive Director
CERTIFICATION
I, Arthur I. Trueger, certify that:
(1) I have reviewed this annual report on Form 10-K of London Pacific Group Limited;
(2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
(3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
(4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report ("the Evaluation Date"); and
(c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):
(a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
(6) The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 19, 2003 By: /s/ Arthur I. Trueger Arthur I. Trueger Executive Chairman
CERTIFICATION
I, Ian K. Whitehead, certify that:
(1) I have reviewed this annual report on Form 10-K of London Pacific Group Limited;
(2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
(3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
(4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report ("the Evaluation Date"); and
(c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):
(a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
(6) The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 19, 2003 By: /s/ Ian K. Whitehead Ian K. Whitehead Chief Financial Officer
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
EXHIBIT INDEX FOR THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002
Exhibit Number Description - ------- -----------------
3.(I) Memorandum and Articles of Association of London Pacific Group Limited, as amended and restated on April 18, 2000 (filed previously as Exhibit 3.(I) to our Form 10-Q for the quarter ended June 30, 2000).
4.1 Specimen Ordinary Share certificate (filed previously as Exhibit 4.1 to our Form 10-K for the year ended December 31, 2000).
4.2 Form of Deposit Agreement dated September 25, 1992, as amended and restated as of November 24, 1993, as further amended and restated as of March 14, 2000, among us, The Bank of New York as Depositary, and all Owners and Holders from time to time of American Depositary Receipts issued thereunder (filed previously as Exhibit A to our Registration Statement on Form (Registration No. 333-11658) dated March 14, 2000).
4.3 Letter Agreement dated August 25, 1992 between The Bank of New York and us covering the Basic Administration Charge relating to the Deposit Agreement (shown above as Exhibit 4.2) (filed previously as Exhibit 3.8 to our Post-Effective Amendment No. 2 to our Registration Statement on Form 20-F/A dated August 31, 1993).
4.4 Form of Deposit Agreement as amended and restated as of June 24, 2002, among us, The Bank of New York as Depositary, and all Owners and Holders from time to time of American Depositary Receipts issued thereunder (filed previously as Exhibit 4.4 to our Form 10-Q for the quarter ended June 30, 2002).
10.1.1 Multicurrency Term Facility Agreement dated May 2, 2000 between us and the Governor and Company of the Bank of Scotland (filed previously as Exhibit 10.1.1 to our Form 10-Q for the quarter ended September 30, 2000).
10.1.2 Term Loan and Guarantee Facility of up to $23,000,000, dated December 20, 2002 between us and the Governor and Company of the Bank of Scotland.
10.2.1 Settlement dated February 16, 1990 among (1) us, (2) John Gerald Patrick Wheeler and (3) Ian Walter Strang, constituting The Govett & Company 1990 Employee Share Option Trust (filed previously as Exhibit 3.2 to our Post-Effective Amendment No. 2 to Registration Statement on Form 20-F/A dated August 31, 1993).
10.2.2 Executed Instrument dated March 18, 1994 among (1) John Gerald Patrick Wheeler, (2) Ian Walter Strang and (3) Richard John Pirouet, relating to The Govett & Company 1990 Employee Share Option Trust.
10.2.3 Executed Instrument dated September 27, 1994 among (1) Ian Walter Strang, (2) Richard John Pirouet and (3) Clive Aubrey Charles Chaplin, relating to The Govett & Company 1990 Employee Share Option Trust.
10.2.4 Executed Instrument dated March 3, 1995 among (1) Ian Walter Strang, (2) Richard John Pirouet and (3) Clive Aubrey Charles Chaplin, relating to The Govett & Company 1990 Employee Share Option Trust.
10.2.5 Executed Instrument dated August 22, 1996 among (1) Richard John Pirouet, (2) Clive Aubrey Charles Chaplin and (3) Ronald William Green, relating to The London Pacific Group 1990 Employee Share Option Trust.
10.2.6 Executed Instrument dated August 29, 1998 among (1) Richard John Pirouet, (2) Clive Aubrey Charles Chaplin, (3) Ronald William Green and (4) Victor Aloysius Hebert, relating to The London Pacific Group 1990 Employee Share Option Trust.
10.2.7 Executed Instrument dated May 31, 2000 among (1) Richard John Pirouet, (2) Clive Aubrey Charles Chaplin, (3) Ronald William Green and (4) Victor Aloysius Hebert, relating to The London Pacific Group 1990 Employee Share Option Trust (filed previously as Exhibit 10.2.1 to our Form 10-Q for the quarter ended September 30, 2000).
10.2.8 Executed Instrument dated May 31, 2000 among (1) Richard John Pirouet, (2) Clive Aubrey Charles Chaplin, (3) Ronald William Green, (4) Victor Aloysius Hebert and (5) Christopher Byrne, relating to The London Pacific Group 1990 Employee Share Option Trust (filed previously as Exhibit 10.2.2 to our Form 10-Q for the quarter ended September 30, 2000).
10.3.1(1) Agreement dated July 1, 1990 between us and Ian Kenneth Whitehead (filed previously as Exhibit 10.3.1 to our Form 10-K for the year ended December 31, 2000).
10.3.2(1) Berkeley (USA) Holdings Limited Amended and Restated 1993 Deferred Compensation Plan dated December 16, 1999 (filed previously as Exhibit 10.3.2 to our Form 10-K for the year ended December 31, 2000).
10.3.3(1) London Pacific Advisers Limited Retirement Scheme confirmation dated December 5, 2000 for Ian Kenneth Whitehead (filed previously as Exhibit 10.3.3 to our Form 10-K for the year ended December 31, 2001).
10.4.1 Settlement dated May 23, 1997 among BG Services Limited and A.L.O.T. Trustee Limited establishing Agent Loyalty Opportunity Trust (filed previously as Exhibit 10.4.1 to our Form 10-K for the year ended December 31, 2001).
10.4.2 Executed Deed dated July 16, 1997 by A.L.O.T. Trustee Limited relating to Agent Loyalty Opportunity Trust (filed previously as Exhibit 10.4.2 to our Form 10-K for the year ended December 31, 2001).
10.4.3 Executed Deed dated August 13, 1997 by A.L.O.T. Trustee Limited relating to Agent Loyalty Opportunity Trust (filed previously as Exhibit 10.4.3 to our Form 10-K for the year ended December 31, 2001).
10.4.4 Executed Deed dated August 20, 1998 by A.L.O.T. Trustee Limited relating to Agent Loyalty Opportunity Trust (filed previously as Exhibit 10.4.4 to our Form 10-K for the year ended December 31, 2001).
10.4.5 Executed Deed of Amendment and Appointment dated December 11, 2001 among Berkeley International Capital Limited and A.L.O.T. Trustee Limited relating to Agent Loyalty Opportunity Trust (filed previously as Exhibit 10.4.5 to our Form 10-K for the year ended December 31, 2001).
21 Subsidiaries of the Company as of February 28, 2003.
99.1 Certification by the Company's Executive Chairman pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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.
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(1) Management contract or compensatory arrangement filed in response to Item 15(a)(3) of the instructions to Form 10-K.