---




UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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FORM 10-Q





QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)


OF THE SECURITIES EXCHANGE ACT OF 1934





For the Three Months Ended September 30, 2002





Commission File No. 0-30889





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HARBOR GLOBAL COMPANY LTD.


(exact name of
registrant as specified in its charter)








Bermuda

52-2256071(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)





One Faneuil Hall Marketplace 4th
Floor Boston, Massachusetts

02109-1820(Address of principal executive offices)

(Zip Code)





(617) 878-1600


(Registrants telephone number, including area code)





No
Changes


(Former name, former address and former fiscal year, if changes since last report)





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Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No  ̈





As of November 1, 2002, the Registrant had 5,655,311 common shares, par value $.0025 per share, issued and outstanding.





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PART IFINANCIAL INFORMATION





Item 1.Financial Statements





HARBOR GLOBAL COMPANY LTD.





CONSOLIDATED
BALANCE SHEETS


(Dollars in Thousands Except Per Share Amounts)





September 30, 2002


December 31, 2001(Unaudited)ASSETSCash and Cash Equivalents

$
10,809


$
4,660Restricted Cash


5,824



4,440Marketable Securities


22,377



19,653Accounts Receivable


782



469Note Receivable


2,000



Other Current Assets


1,063



940Net Current Assets of Discontinued Operations






6,479Total Current Assets


42,855



36,641Long-Term Restricted Cash and Investments


5,000



5,000Polish Venture Capital Investment


837



1,235Marketable Securities


19,736



18,800Long-term Investments


5,673



5,322Building


22,869



23,370Other Long-term Assets


1,029



1,022Note Receivable


7,454



9,229Goodwill


953



953Total Assets

$
106,406


$
101,572LIABILITIES AND SHAREHOLDERS EQUITYAccounts Payable

$
1,187


$
1,299Dividend Payable


3,909



2,549Accrued Expenses


2,536



2,403Accrued Fees Payable to Calypso Management


2,530



2,160Amount Due to Officer on Compensation Liability


1,800



1,800Foreign Taxes Payable


369



2,162Total Current Liabilities


12,331



12,373Deferred Taxes


2,065



2,086Note Payable


5,000



5,000Total Liabilities


19,396



19,459Minority Interest


28,016



25,480STOCKHOLDERS EQUITYCommon shares, par value $.0025 per share; authorized 48,000,000 shares; 5,649,311 shares issued and outstanding as of
September 30, 2002 and December 31, 2001


14



14Preferred shares, par value $.01 per share; authorized 1,000,000 shares; none issued






Paid-in Capital


62,768



62,768Accumulated Deficit


(7,421
)


(9,453
)Other Comprehensive IncomeNet Unrealized Gains on Available for Sale Marketable Securities (Net of Deferred Taxes of $2,065 and $2,086 and
Minority Interest of $2,668 and $2,953 as of September 30, 2002 and December 31, 2001, respectively)


3,633



3,304Total Stockholders Equity


58,994



56,633Total Liabilities and Stockholders Equity

$
106,406


$
101,572





The accompanying notes are an integral part of these consolidated financial
statements.




2




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HARBOR GLOBAL COMPANY LTD.





CONSOLIDATED STATEMENTS OF OPERATIONS


(Dollars in Thousands Except Per Share
Amounts)


(Unaudited)





Three Months Ended September 30,


Nine Months Ended September 30,2002


2001


2002


2001Revenues:Real Estate Revenue

$
1,971


$
1,615


$
5,805


$
4,741Interest Income


866



894



2,270



2,935Other Income


607



410



1,258



1,155Total Revenues


3,444



2,919



9,333



8,831Operating Expenses:Salary and Benefit Expenses


(717
)


(1,046
)


(2,205
)


(3,130
)Facility Expenses


(318
)


(325
)


(938
)


(1,000
)Building and Property Management Expenses


(549
)


(528
)


(1,522
)


(1,947
)Management Fee Expense


(635
)


(2,024
)


(2,000
)


(3,417
)Other Expenses


(1,306
)


(1,056
)


(4,411
)


(4,034
)Total Operating Expenses


(3,525
)


(4,979
)


(11,076
)


(13,528
)Operating Loss


(81
)


(2,060
)


(1,743
)


(4,697
)Other Income (Expense):Net Unrealized and Realized Gains on Securities


1,111



382



10,661



3,255Write-down of Venture Capital Investments














(5,283
)Gain on Sale of Tas-Yurjah














7,303Write-Off of Investment in Polish Real Estate Fund














(1,875
)Total Other Income, Net


1,111



382



10,661



3,400Income (Loss) from Continuing Operations before Provision for Income Taxes, Minority Interest and Equity Loss on
Investment


1,030



(1,678
)


8,918



(1,297
)Provision for Income Taxes


(471
)


(278
)


(3,154
)


(1,282
)Income (Loss) from Continuing Operations before Minority Interest and Equity Loss on Investment


559



(1,956
)


5,764



(2,579
)Minority Interest (Expense) Income


(522
)


294



(3,758
)


5,186Equity Loss on Venture Capital Investments


(14
)






(398
)


Net Income (Loss) from Continuing Operations before Discontinued Operations


23



(1,662
)


1,608



2,607Discontinued Operations:Net Loss from Operations






(1,192
)






(980
)(Loss) Gain on Disposal


(29
)






424



Net (Loss) Income

$
(6
)

$
(2,854
)

$
2,032


$
1,627(Loss) Earnings Per ShareBasic and Diluted:Continuing Operations

$



$
(0.29
)

$
0.28


$
0.46Discontinued Operations






(0.21
)


0.08



(0.17
)Basic and Diluted (Loss) Earnings Per share

$



$
(0.50
)

$
0.36


$
0.29Weighted Average Basic and Diluted Shares Outstanding


5,649



5,643



5,649



5,643





The accompanying notes are an integral part of these consolidated financial
statements.




3




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HARBOR GLOBAL COMPANY LTD.





CONSOLIDATED STATEMENTS OF CASH FLOWS


(Dollars in Thousands)


(Unaudited)





Nine Months Ended September 30,2002


2001Cash Flows from Operating Activities:Net Income

$
2,032


$
1,627Net Income (Loss) from Discontinued Operations


424



(980
)Net Income from Continuing Operations


1,608



2,607Adjustments to Reconcile Net Loss to Net Cash Used inOperating ActivitiesDepreciation and Amortization


597



855Unrealized and Realized (Gains) Losses on Venture Capital, Marketable Securities, and Long-term Investments,
Net


(10,416
)


2,877Gain on Sale of Tas-Yurjah






(7,303
)Write-Off of Investment in Polish Real Estate Fund






1,875Cash Costs of Polish Real Estate Fund Liquidation






(1,590
)Minority Interest


3,758



(5,186
)Non-cash Interest Income on Note Receivable


(725
)


(856
)Interest Earned on Restricted Cash


(23
)


(59
)Changes in Operating Assets and LiabilitiesOther Current Assets


(3,160
)


(26,179
)Other Long-term Assets


335



5,913Accrued Expenses and Accounts Payable


(1,402
)


(3,373
)Total Adjustments and Changes in Operating Assets and Liabilities


(11,036
)


(33,026
)Net Cash Used in Continuing Operating Activities


(9,428
)


(30,419
)Net Cash (Used In) Provided By Discontinued Operations


(100
)


258Cash Flows from Investing Activities:Building






(81
)Net Proceeds from Sale of Tas-Yurjah






8,255Net Proceeds from Sale of Russian Timber Operations


5,003



Purchase of Long-term Investments and Marketable Securities


(8,855
)


(5,697
)Proceeds from Sale of Long-term Investments and Marketable Securities


18,536



5,299Net Cash Flow from Other Investing Activities






1,473Proceeds from Payment on Note Receivable


2,500



2,500Net Cash Provided by Investing Activities


17,184



11,749Cash Flows from Financing Activities:Dividends Paid


(147
)


Reclassification of Restricted Cash


(1,360
)


(1,994
)Net Cash Used in Financing Activities


(1,507
)


(1,994
)Effect of Foreign Currency Exchange Rate Changes on Cash and Cash Equivalents






(86
)Net Increase (Decrease) in Cash and Cash Equivalents


6,149



(20,492
)Cash and Cash Equivalents, Beginning of Period


4,660



23,786Cash and Cash Equivalents, End of Period

$
10,809


$
3,294





The accompanying notes are an integral part of these consolidated financial
statements.




4




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HARBOR GLOBAL COMPANY LTD.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


September 30, 2002





(1)    BACKGROUND
AND BASIS OF PRESENTATION





Background





Harbor Global Company Ltd., a Bermuda limited duration company (Harbor Global or the Company), was formed in May 2000 as a wholly owned subsidiary
of The Pioneer Group, Inc., a Delaware corporation (Pioneer), to facilitate the merger between Pioneer and UniCredito Italiano, S.p.A., an Italian financial institution (UniCredito). As a condition to closing the merger and
pursuant to a Distribution Agreement dated as of October 24, 2000 by and among the Company, Pioneer and Harbor Global II Ltd. (the Distribution Agreement), Pioneer agreed to transfer certain of its assets to Harbor Global and to
distribute all of the outstanding Harbor Global common shares to its stockholders. Pioneer transferred to Harbor Global all of the assets required to be transferred pursuant to the Merger Agreement and the Distribution Agreement and, on October 24,
2000, Pioneer distributed all of the outstanding common shares of Harbor Global to its stockholders (the Spin-off). Pioneer stockholders received one Harbor Global common share for every five shares of Pioneer common stock held on that
date.





At present, the Companys assets primarily consist of the following: Russian real estate management
and investment management operations; real estate management operations; and the Companys other assets and operations (Other). Other includes approximately $25.0 million in cash and marketable securities held directly by Harbor
Global of which $5 million is restricted to satisfy liabilities associated with Pioneers former gold mining operations and $1.8 million was restricted to satisfy a compensation liability payable to Harbor Globals Chief Executive Officer.
Other also includes a non-interest-bearing promissory note with an original face value of $13.8 million and a balance outstanding of $8.8 million, payable to Pioglobal Goldfields II Limited, a wholly-owned subsidiary of the Company (Pioglobal
Goldfields II) and a $2.0 million non-interest bearing promissory note payable on May 28, 2003 from the sale of the Companys Russian timber operations.





Harbor Global seeks to liquidate its assets in a timely fashion on economically advantageous terms and continues to operate its assets as going concern businesses until
they are liquidated. Harbor Globals memorandum of association provides that the liquidation of its assets must be completed upon the earlier of October 24, 2005, the fifth anniversary of the date of the Spin-off, or the distribution by Harbor
Global of all its assets to its shareholders. If Harbor Global has not liquidated all of its assets before October 24, 2005, the Harbor Global board of directors, in its discretion, may authorize Harbor Global to continue to operate its assets for
up to three additional one year periods.





Basis of Presentation





In the opinion of management, the accompanying financial statements contain all adjustments necessary to present fairly the financial
position as of September 30, 2002 and the results of operations for the three and nine months ended September 30, 2002 and 2001 and cash flows for the nine months ended September 30, 2002 and 2001. Results for interim periods may not be necessarily
indicative of the results to be expected for the year. These interim financial statements should be read in conjunction with the Companys 2001 Annual Report on Form 10-K for the year ended December 31, 2001 filed with the Securities and
Exchange Commission.





The consolidated financial statements included herein have been prepared using the
historical cost basis of the assets and liabilities and historical results of operations related to the Companys businesses.





Since Harbor Global is a Bermuda limited duration company, the Company expects that for United States federal income tax purposes it will be taxed as a partnership and, as a result, all United States federal income tax




5




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HARBOR GLOBAL COMPANY LTD.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




expenses have been and will be borne by its shareholders. The income tax provisions and deferred taxes included in the accompanying consolidated financial statements relate to the Companys
corporate subsidiaries that are located primarily in Russia.





(2)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
PRINCIPLES OF CONSOLIDATION





Consolidation





The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses.
Actual results could differ from those estimates. The most significant estimates with regard to these consolidated financial statements relate to the valuation of investments of Open Joint-Stock Company PIOGLOBAL Investment Fund
(PIOGLOBAL Investment Fund) and venture capital investments.





Polish Venture Capital Investment





The Company reports its approximately 8% limited partnership interest in the Prospect Poland Fund on the
equity basis of accounting. No market quotes are available for the venture capital investments. Most of these investments are valued at fair value, as determined by Prospect Poland Funds management. For the three and nine months ended
September 30, 2002, the Company recorded write-downs of approximately $0 and $325,000, respectively on its investment, which is included in equity loss on venture capital investments in the consolidated statement of operations. Prior to 2002, the
Company fully consolidated the Prospect Poland Fund due to its role as general partner. The Company relinquished this position on November 1, 2001. For the three and nine months ended September 30, 2001, the carrying value of investments in the
venture capital portfolio was written down by approximately $0 and $5,283,000, respectively. Approximately 92% of the write-down for the nine months ended September 30, 2002 was attributable to minority shareholders.





Russian Investments





Russian investments consist of equity securities held in the portfolio of the PIOGLOBAL Investment Fund. Such securities are either classified as available-for-sale and recorded at fair value pursuant to Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities or as long-term investments.





Management has determined that for certain of these equity securities there was sufficient liquidity in the Russian market to account for them as long-term marketable
securities based on quoted prices on the Russian Trading System. Unrealized gains and losses are recorded directly in stockholders equity as other comprehensive income. The cost of securities sold is based on the specific identification
method. Realized gains or losses and any other-than-temporary declines in value are reported in other income and expense. The Company classifies Russian investments that do not meet its liquidity threshold as long-term investments and carries such
investments at cost with adjustments made for other-than-temporary impairment. Of PIOGLOBAL Investment Funds equity portfolio, approximately $19.7 million of $25.4 million and $18.8 million of $24.1 million were carried at quoted market prices
at September 30, 2002 and December 31, 2001, respectively.





Concentration of Risk





The Companys operations are generally concentrated in Russia. The Company performs ongoing evaluations of its subsidiaries and
investments and endeavors to mitigate its exposure in foreign countries. The Company does not maintain political risk insurance for any of its businesses.




6




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HARBOR GLOBAL COMPANY LTD.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Recent Accounting Pronouncements





The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets effective January 1, 2002. SFAS No. 142 requires that
goodwill not be amortized but rather be tested for impairment at least annually at the reporting unit level. For the three and nine months ended September 30, 2001, the Company recorded approximately $72,000 and $215,000, respectively, of
amortization. The Company no longer amortizes goodwill. There was no transitional adjustment resulting from the intangible asset impairment test. The following table reflects the adoption of SFAS No. 142 for the three and nine months ended September
30, 2002 and 2001.





Three Months Ended September 30,


Nine Months Ended September 30,2002


2001


2002

2001(In Thousands)


(In Thousands)Reported Net (Loss) Income

$
(6
)

$
(2,854
)

$
2,032

$
1,627Goodwill Amortization






72






215Adjusted Net (Loss) Income

$
(6
)

$
(2,782
)

$
2,032

$
1,842Basic and Diluted Earnings (Loss) Per Share:Reported





$
(0.50
)

$
0.36

$
0.29Goodwill Amortization






0.01






0.04Adjusted

$



$
(0.49
)

$
0.36

$
0.33





(3)    EARNINGS (LOSS) PER SHARE





Basic and diluted earnings (loss) per share (EPS) are computed by dividing reported earnings by weighted average shares
outstanding not including contingently issuable shares. There are currently no potentially dilutive securities.





(4)    NOTE RECEIVABLE





As part of the Spin-off, Harbor Global
succeeded to Pioneers rights and obligations relative to Pioneers earlier sale of its gold mining operations in Ghana to Ashanti Goldfields Teberebie Limited (Ashanti). In connection with the sale to Ashanti, each of
Pioglobal Goldfields II and Pioneer agreed to indemnify Ashanti for the breach of any representation or warranty of Pioglobal Goldfields II contained in the purchase agreement for an amount not to exceed the total purchase price actually paid by
Ashanti to Pioglobal Goldfields II under the purchase agreement. The representations and warranties contained in the purchase agreement, other than those relating to tax and environmental issues, survived until June 19, 2002. The tax and
environmental representations and warranties survive until June 19, 2005. Under the Distribution Agreement, Harbor Global has agreed to reimburse Pioneer for any liability it incurs in connection with any claim brought by Ashanti for indemnification
under the purchase agreement.





As described above, Harbor Global succeeded to Pioneers rights and
obligations. These included proceeds from the sale of the gold mining operation, including $5.0 million in cash, a $13.8 million non-interest bearing promissory note and the right to receive payments of up to $5.0 million, contingent upon prevailing
gold prices and productivity. However, Harbor Global agreed that promptly after the fifth anniversary of the closing of the purchase agreement with Ashanti, it would return to Pioneer the lesser of $5.0 million or the proceeds received by Pioglobal
Goldfields II from Ashanti under the purchase agreement less any indemnification claims paid under the purchase agreement. The foregoing liability is currently recorded as a $5.0 million note payable insomuch as management believes that this is the
most likely settlement amount as of the balance sheet date.




7




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HARBOR GLOBAL COMPANY LTD.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




Additionally, $5.0 million has been set aside to satisfy this liability and is classified as long term restricted cash and investments. The terms of the promissory note obligate Ashanti to pay
the face value over five years, with principal amounts of between $2.5 million and $3.75 million due annually.





As
of September 30, 2002, the Company had received $5.0 million of the $13.8 million promissory note from Ashanti. For the three and nine months ended September 30, 2002, the Company recognized interest income on the Ashanti note of approximately
$226,000 and $725,000, respectively. For the three and nine months ended September 30, 2001, the Company recognized interest income of approximately $272,000 and $856,000, respectively. The discounted carrying value of the promissory note is
recorded as a long-term note receivable in the accompanying consolidated balance sheets.





(5)    COMPREHENSIVE
INCOME (LOSS)





For the three and nine months ended September 30, 2002 and 2001, the Company reported changes
in stockholders equity and other comprehensive income (loss) as follows:





Three Months Ended September 30,2002


2001(In Thousands)Net Loss

$
(6
)

$
(2,854
)Net Unrealized (Losses) Gains on Long term Marketable Securities (Net of deferred tax credit of $403,000 and deferred
tax expense of $572,000 and minority interest of $625,000 and $887,000 for the three months ended September 30, 2002 and September 30, 2001, respectively)


(656
)


924Foreign Currency Translation Adjustment






36Total Comprehensive Loss

$
(662
)

$
(1,894
)





Nine Months Ended September 302002

2001(In Thousands)Net Income

$
2,032

$
1,627Net Unrealized Gains (Losses) on Long term Marketable Securities (Net of deferred tax credit of $21,000 and deferred tax
expense of $572,000 and minority interest of $285,000 and $887,000 for the nine months ended September 30, 2002 and September 30, 2001, respectively)


329


924Foreign Currency Translation Adjustment





12Total Comprehensive Income

$
2,361

$
2,563





(6)    RELATED PARTY TRANSACTIONS





On August 7, 2000, the Company entered into an administration and liquidation agreement with Calypso Management LLC (Calypso
Management or the Manager), under which Calypso Management manages the liquidation of the Company and operates the Companys assets as going concern businesses until they are liquidated. The principal executive officers of the
Company also serve as the principal executive officers of the Manager. The Manager is owned and operated by the Companys President and Chief Executive Officer as well as the Companys Chief Operating Officer and Chief Financial Officer.




8




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HARBOR GLOBAL COMPANY LTD.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Under the administration and liquidation agreement, the Company pays
expenses of the Manager incurred in connection with its provision of services and a percentage of the net proceeds realized from the liquidation of its assets that are ultimately distributed to the Companys shareholders, generally according to
the following schedule:





| |  |  | with respect to the first $36 million in net proceeds to be distributed, Calypso Management shall receive a payment equal to 10% of such net proceeds;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | with respect to the next $72 million in net proceeds to be distributed, Calypso Management shall receive a payment equal to 7.5% of such net proceeds; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | with respect to any additional net proceeds to be distributed, Calypso Management shall receive a payment equal to 10% of such net proceeds.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------




Net proceeds do not include any unexpended portion of the $19.1 million contributed by Pioneer to Harbor
Global at the time of the Spin-Off. However, pursuant to Amendment 2 dated as of February 1, 2001 to the administration and liquidation agreement, the definition of net proceeds was amended so that the the Manager is now entitled to share in
distributions of $5.4 million of the unexpended cash contributed by Pioneer. In addition, the proceeds received by Pioglobal Goldfields II in connection with the sale of its Ghanaian gold mine to Ashanti are not subject to the preceding schedule.
Instead, Calypso Management will receive only 5% of the Ashanti proceeds that are distributed, if any. In accordance with the administration and liquidation agreement, net proceeds from the liquidation of Harbor Globals assets, which occurred
prior to the second anniversary of the distribution date and, to which Calypso Management was entitled, were aggregated and paid to Calypso Management on October 24, 2002, the second anniversary of the distribution date. Harbor Global accrues such
management fees at the earlier of (1) the formal declaration by the Board of Directors of a distribution and (2) the time when a distributable amount is estimable following the sale or liquidation of an asset.





For the three months ended September 30, 2002 and 2001, the Company incurred management fee expenses of approximately $635,000 and
$574,000, respectively, related to the reimbursement of expenses. For the nine months ended September 30, 2002 and 2001, the Company incurred management fee expenses of approximately $2,000,000 and $1,967,000, respectively, related to the
reimbursement of expenses. Of this management fee, approximately $555,000 and $500,000 was outstanding at September 30, 2002 and 2001, respectively.





As of September 30, 2002, the Company had liabilities outstanding of $1,450,000 owed to Calypso Management, which were paid on October 24, 2002 in connection with the distribution paid to shareholders
on November 15, 2001, and an estimate of $525,000 payable to Calypso Management based on the distribution from the sale of the Companys Russian timber operations.





(7)    COMMITMENTS





On October 16,
1996, Pioglobal Omega, L.L.C. (Pioglobal Omega), a wholly-owned subsidiary of the Company, Pioglobal First Russia, Inc. (Pioglobal First Russia), a majority-owned subsidiary of the Company and the International Finance
Corporation (IFC), an unrelated party, entered into a put and call agreement with respect to IFCs ownership of shares of stock of Pioglobal First Russia, Inc. Under this agreement, from October 2000 to October 2004, upon written
notice to Pioglobal Omega, IFC will have the right to cause Pioglobal Omega to purchase all of IFCs shares of Pioglobal First Russia common stock. From October 2004 to October 2006, upon written notice to IFC, Pioglobal Omega will have the
right to buy all of IFCs shares of Pioglobal First Russia common stock.




9




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HARBOR GLOBAL COMPANY LTD.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Under the administration and liquidation agreement, Harbor Global was
obligated to pay a $1,800,000 signing and retention bonus to Stephen G. Kasnet, President and Chief Executive Officer of Harbor Global. In accordance with the administration and liquidation agreement, the bonus was paid on October 24, 2002.





As previously mentioned in the most recent Quarterly Report on Form 10-Q, in written and oral communications,
IFC, a minority shareholder of Pioglobal First Russia, has raised questions about the appropriateness of certain services that were charged to Pioglobal First Russia and its subsidiaries by Harbor Global, its predecessor, Pioneer, and certain of
their affiliates and about the settlement of a 1999 insurance claim relating to the operation of Pioneer Bank. Harbor Global believes that these services were properly charged to Pioglobal First Russia and its subsidiaries and that the 1999
insurance settlement was appropriate.





Noah Gotbaum filed a complaint against PIOGlobal Corporation, an indirect
wholly-owned subsidiary of the Company (PIOGlobal Corporation), Pioneer and Pioneer Investment Management USA, Inc., in the Massachusetts Superior Court, Suffolk County. An amended complaint was served on PIOGlobal Corporation on October
25, 2002. The amended complaint alleges that Mr. Gotbaum was terminated as President and Chief Investment Officer of an investment fund managed by Pioneer. Mr. Gotbaum brings claims for breach of contract, violation of the Massachusetts Wage Act and
Quantum Meruit and seeks unspecified monetary damages. The Company believes Mr. Gotbaums claims against it are without merit.





(8)    DISCONTINUED OPERATIONS





On February 5, 2002, the Companys
Board of Directors approved the disposition of the Russian timber operations based on a review of purchase proposals. On April 22, 2002, Harbor Globals wholly owned subsidiary, Pioneer Forest, Inc. (Pioneer Forest), entered into a
definitive agreement for the sale of its Russian timber business conducted through Closed Joint-Stock Company Forest-Starma (Forest-Starma). On May 28, 2002, Pioneer Forest sold its entire interest in Pioglobal Forest,
L.L.C., the sole shareholder of Forest-Starma, to a British Virgin Islands company for an aggregate purchase price of $7.55 million, of which $5.5 million was payable in cash at the closing and $2.0 million is payable by a twelve month promissory
note. At closing the cash received, net of cash retained in the business, amounted to approximately $5.0 million. The promissory note is recorded in current assets as a note receivable in the accompanying consolidated balance sheets.





All representations and warranties made by the buyer or the seller under the purchase and sale agreement expire on the one-year
anniversary of the closing date, except to the extent of claims, if any: (a) asserted in writing prior to such date identified as a claim for indemnification or (b) which are based on fraud by the seller or buyer, as the case may be; which shall
survive until finally resolved and satisfied in full. The maximum aggregate liability of each of the buyer and seller under the indemnification provisions of the agreement is $1.5 million except for claims by the seller with respect to liabilities
relating to the business and activities of Pioglobal Forest and Forest-Starma arising out of acts or omissions occurring following the closing.





Previously the Company reported its Russian timber operations as a separate segment. Due to the sale of the Russian timber operations segment on May 28, 2002, these results have been segregated from
continuing operations.




10




---



HARBOR GLOBAL COMPANY LTD.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







The following is a summary of the results of the discontinued
operations of the Russian timber segment for the three and nine months ended September 30, 2002 and 2001, respectively:





Three Months Ended September 30,2002


2001(Dollars in Thousands)Revenues from Timber Sales

$



$
4,313Net Loss from Operations






(1,192
)Previously Accrued Estimate of Operating Losses






Change in Estimated Loss on Disposal of Russian Timber Operations


(29
)


Net Loss from Discontinued Russian Timber Operations

$
(29
)

$
(1,192
)





Nine Months Ended September
30,2002


2001(Dollars in Thousands)Revenues from Timber Sales

$
4,444


$
11,656Net Income (Loss) from Operations


486



(980
)Previously Accrued Estimate of Operating Losses


506



Change in Estimated Loss on Disposal of Russian Timber Operations


(568
)


Net Income (Loss) from Discontinued Russian Timber Operations

$
424


$
(980
)





(9)    SUBSEQUENT EVENTS





On October 22, 2002, the Board of Directors of the Company declared a dividend of approximately $5.7 million or $1.00 per share on Harbor
Globals common shares. Pursuant to the administration and liquidation agreement, the Manager will receive a payment equal to 10% of such dividend or $0.10 per share. The balance of $5.1 million or $0.90 per share will be payable on November
22, 2002 to shareholders of record as of November 8, 2002.





On October 24, 2002, the Company issued 1,500 shares
of its common stock to each of its four directors pursuant to, and in accordance with, the Companys Non-Employee Director Share Plan. Pursuant to the plan, on each anniversary of October 24, 2000, each director of the Company who is not an
employee will be granted 1,500 common shares in consideration of each non-employee directors service as a director.





(10)    FINANCIAL INFORMATION BY BUSINESS SEGMENT





In accordance with
SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, the Company presents its segment information for continuing operations using the management approach. The management approach is based on the way that
management organizes the segments within a company for making operating decisions and assessing performance. The Companys operating segments are organized around services and products provided, as well as geographic regions.





Previously the Company reported its Russian timber operations and Polish venture capital operations as separate segments. Due
to the sale of the Russian timber operations segment, these results have been segregated from continuing operations. In 2001, the Company sold its general partnership interest in the Polish venture capital operations and as a result no longer
reports these operations as a separate segment. The segment disclosures previously reported have been reformatted to reflect the Companys continuing segments.





The Company derives its revenues from the following products and services by segment:





| |  |  | Russian Real Estate Management and Investment Management Operations:    investment and management services
| | - |  | ----------------------------------------------------------------------------------------------------------




| |  |  | Real Estate Management Operations:    real estate management services including property management and advisory services
| | - |  | -------------------------------------------------------------------------------------------------------------------------




| |  |  | Other:    management services
| | - |  | -----------------------------



11




---



HARBOR GLOBAL COMPANY LTD.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




SEGMENT DISCLOSURES





Russian Real Estate Management and Investment Management Operations


Real Estate Management Operations


Other


TotalAs of and for the three months ended September 30, 2002Net Revenues and Sales

$
2,763


$
333


$
348


$
3,444Income (Loss) from Continuing Operations before Provision for Income Taxes and Minority Interest


722



(244
)


552



1,030Provision for Income Taxes


(471
)










(471
)Minority Interest Expense


(522
)










(522
)Equity Loss on Venture Capital Investment










(14
)


(14
)Net (Loss) Income from Continuing Operations

$
(271
)

$
(244
)

$
538


$
23Depreciation

$
189


$
9


$



$
198





Russian Real Estate Management and Investment Management Operations


Real Estate Management Operations


Other


TotalAs of and for the three months ended September 30, 2001Net Revenues and Sales

$
1,984


$
336


$
599


$
2,919Loss from Continuing Operations before Provision for Income Taxes and Minority Interest


(96
)


(642
)


(940
)


(1,678
)Provision for Income Taxes


(271
)






(7
)


(278
)Minority Interest (Expense) Income


(22
)






316



294Net Loss from Continuing Operations

$
(389
)

$
(642
)

$
(631
)

$
(1,662
)Depreciation and Amortization

$
284


$
9


$
4


$
297




12




---



HARBOR GLOBAL COMPANY LTD.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Russian Real Estate Management and Investment Management Operations


Real Estate Management Operations


Other


TotalAs of and for the nine months ended September 30, 2002Net Revenues and Sales

$
7,456


$
727


$
1,150


$
9,333Income (Loss) from Continuing Operations before Provision for Income Taxes and Minority Interest


8,235



(781
)


1,464



8,918Provision for Income Taxes


(3,154
)










(3,154
)Minority Interest Expense


(3,758
)










(3,758
)Equity Loss on Venture Capital Investment










(398
)


(398
)Net Income (Loss) from Continuing Operations

$
1,323


$
(781
)

$
1,066


$
1,608Depreciation

$
574


$
23


$



$
597Total Assets

$
72,950


$
551


$
32,905


$
106,406











Russian Real Estate Management
and Investment Management Operations


Real Estate Management Operations


Other


TotalAs of and for the nine months ended September 30, 2001Net Revenues and Sales

$
5,947


$
984


$
1,900


$
8,831Income (Loss) from Continuing Operations before Provision for Income Taxes and Minority Interest


1,723



(3,652
)


632



(1,297
)Provision for Income Taxes


(1,267
)






(15
)


(1,282
)Minority Interest (Expense) Income


(667
)






5,853



5,186Net (Loss) Income from Continuing Operations

$
(211
)

$
(3,652
)

$
6,470


$
2,607Depreciation and Amortization

$
798


$
47


$
10


$
855Total Assets

$
54,883


$
590


$
83,401


$
138,874




13




---




Item 2.Managements Discussion and Analysis of Financial
Condition and Results of Operations





Overview





The consolidated financial statements of Harbor Globals principal operations include its Russian real estate management and investment management operations and its
real estate management operations. During 2002, virtually all of the real estate management operations revenues were derived from managing the Meridian Commercial Tower for PIOGLOBAL Investment Fund. Managements Discussion and Analysis
of Financial Condition and Results of Operations is presented in three sections: Results of Operations for the three and nine months ended September 30, 2002 and 2001, respectively, Liquidity and Capital Resources, and Future Operating Results.





Previously the Company reported its Russian timber operations and Polish venture capital operations as separate
segments. Due to the sale of the Russian timber operations segment on May 28, 2002, these results have been segregated from continuing operations. In 2001, the Company sold its general partnership interest in the Polish venture capital operations
and as a result no longer reports these operations as a separate segment. The segment disclosures previously reported have been reformatted to reflect the Companys continuing segments.





Results of Operations for the Three and Nine Months ended September 30, 2002 and 2001





Consolidated Operations.





Harbor Global broke even on
revenues of $3.4 million in the third quarter of 2002 compared with a net loss of $2.9 million ($0.50 per share) on revenues of $2.9 million for the third quarter of 2001. Continuing operations also broke even for the third quarter of 2002 compared
to a net loss of $1.7 million ($0.29 per share) in the third quarter of 2001. During the third quarter of 2001, the Company declared a distribution of $14.5 million to its shareholders and recorded management fees payable to the Manager of
approximately $1.5 million in accordance with the administration and liquidation agreement. In addition, the Company recorded $0.4 million increase in realized portfolio gains from the Russian real estate and investment management operations. The
loss from discontinued timber operations was $1.2 million ($0.21 per share) in the third quarter of 2001.





For the
nine months ended September 30, 2002, the Company reported net income of $2.0 million ($0.36 per share) compared with net income of $1.6 million ($0.29 per share) for the nine months ended September 30, 2001. Net income from continuing operations
was $1.6 million ($0.28 per share), a decrease of $1.0 million compared with net income from continuing operations of $2.6 million ($0.46 per share) during the first nine months of 2001. The decrease was attributable primarily to the $7.3 million
gain recorded on the sale of Tas-Yurjah in 2001 and a $1.1 million increase in expenses during 2002 related to a marketing and sales initiative to increase assets and develop the Russian unit fund business. These decreases were offset partially by a
$3.3 million increase in realized portfolio gains from the Russian real estate management and investment management operations and a $0.5 million revenue increase from Meridian Commercial Tower in 2002. In addition, the Company wrote-off a $1.9
million investment associated with the closure of the Pioneer Polish Real Estate Fund (the Fund) in 2001 and recorded $1.5 million in management fees payable to the Manager in connection with the 2001 distribution to shareholders. Income
from discontinued timber operations for the nine months ended September 30, 2002 was $0.4 million ($0.08 per share). During the first nine months of 2001, the loss from discontinued timber operations was $1.0 million ($0.17 per share).




14




---




Set forth on the following table are the details of revenues and net income
(loss) by business segment for each of the three and nine months ended September 30, 2002 and 2001:





REVENUES AND NET
INCOME (LOSS)


(Dollars in Millions)





Revenues

Net Income (Loss)


Revenues

Net Income (Loss)Three Months Ended September 30,

Three Months Ended September 30,


Nine Months Ended September 30,

Nine Months Ended September 30,2002

2001

2002


2001


2002

2001

2002


2001Business SegmentRussian Real Estate Management and Investment Management Operations

$
2.8

$
2.0

$
(0.3
)

$
(0.4
)

$
7.5

$
5.9

$
1.3


$
(0.2
)Real Estate Management Operations


0.3


0.3


(0.3
)


(0.7
)


0.7


1.0


(0.8
)


(3.7
)Other


0.3


0.6


0.6



(0.6
)


1.1


1.9


1.1



6.5Total from continuing operations.

$
3.4

$
2.9

$



$
(1.7
)

$
9.3

$
8.8

$
1.6


$
2.6(Loss) Income from discontinued operations












(1.2
)








0.4



(1.0
)Totals

$
3.4

$
2.9

$



$
(2.9
)

$
9.3

$
8.8

$
2.0


$
1.6





Russian Real Estate Management and Investment Management
Operations.





The Russian real estate management and investment management operations reported a net loss of
$0.3 million for the third quarter 2002 compared with a net loss of $0.4 million reported in the third quarter of 2001. The $0.1 million decrease in losses was attributable to a $0.4 million increase in realized portfolio gains and $0.2 million of
additional rental revenue from Meridian Commercial Tower; offset partially by a $0.4 million increase in corporate overhead costs and $0.1 million of additional expenses related to the marketing and sales initiative of PIOGLOBAL Asset Management to
raise assets and develop the Russian unit investment fund business.





During the nine months ended September 30,
2002, the Russian real estate management and investment management business reported net income of $1.3 million, an increase of $1.5 million compared with the corresponding period in 2001. The increase in income was attributable principally to a
$3.3 million increase in realized portfolio gains. In addition, increased occupancy at Meridian Commercial Tower resulted in $0.5 million of additional rental revenue. These increases were offset, in part, by increases of $1.1 million in expenses
related to the previously discussed marketing and sales initiative and $1.2 million in corporate overhead expenses reflecting the reallocation of such expenses as segments were discontinued.





Real Estate Management Operations.





The real estate management operations reported losses of $0.3 million in the third quarter of 2002 compared with losses of $0.7 million in the third quarter of 2001. The $0.4 million decrease in losses was due primarily to a
reduction in corporate overhead costs. For the nine months ended September 30, 2002, the real estate management operations reported losses of $0.8 million compared to losses of $3.7 million for the corresponding period in 2001. During 2001, the
Company commenced the closure of its Poland real estate operation and the Fund. Consequently, the $2.9 million decrease in losses is due to the $1.9 million write-off of Harbor Globals investment in the Fund during 2001 and $0.2 million
reduction in legal expenses associated with the closure of the Fund, a $0.6 million reduction in corporate overhead expenses and a reduction in losses of $0.2 million reported by the Companys office in Poland during 2001.




15




---




Other.





Harbor Globals other operations reported net income of $0.6 million for the three months ended September 30, 2002 compared to a net loss of $0.6 million for the
corresponding period in 2001. The $1.2 million reduction in losses reflects $0.8 million in management fees associated with the sale of Tas-Yurjah, which were recorded in 2001 upon declaring a distribution to shareholders and $0.4 million of
corporate overhead costs allocated to venture capital operations in 2001. For the nine months ended September 30, 2002, Harbor Globals other operations reported income of $1.1 million compared to $6.5 million for the nine months ended
September 30, 2001. The $5.4 million decrease reflects the $7.3 million gain on the sale of Tas-Yurjah less $1.1 million of corporate overhead costs allocated to venture capital operations in 2001 and the $0.8 million Calypso Management fee.





Discontinued Operations.





On April 22, 2002, the Companys wholly owned subsidiary, Pioneer Forest, entered into a definitive agreement for the sale of its Russian timber operations segment for
an aggregate purchase price of $7.55 million. The transaction closed on May 28, 2002. Based on the purchase price and costs incurred through the date of disposal, the Company recorded a credit of approximately $0.5 million in the first quarter of
2002. Losses of $1.2 million and $1.0 million for the three and nine months ended September 30, 2001, respectively, reflect operating losses of the Russian timber operations.





All representations and warranties made by the buyer or the seller under the purchase and sale agreement expire on the one-year anniversary of the closing date, except to
the extent of claims, if any: (a) asserted in writing prior to such date identified as a claim for indemnification or (b) which are based on fraud by the seller or buyer, as the case may be; which shall survive until finally resolved and satisfied
in full. The maximum aggregate liability of each of the buyer and seller under the indemnification provisions of the agreement is $1.5 million except for claims by the seller with respect to liabilities relating to the business and activities of
Pioglobal Forest and Forest-Starma arising out of acts or omissions occurring following the closing.





Critical
Accounting Policies.





The Companys discussion and analysis of its financial condition and results of
operations are based upon the Companys consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of assets, liabilities, and income. On an ongoing basis, the Company evaluates its estimates, including those related to the fair value of Russian Investments classified as
available-for-sale pursuant to SFAS 115, valuations of its Polish venture capital holdings, accrued management fees, and deferred taxes.





Russian investments consist of equity securities held in the portfolio of the PIOGLOBAL Investment Fund. Such securities are classified as available-for-sale and recorded at fair value pursuant to SFAS 115. In determining
fair value, individual securities must first satisfy certain trading volume and bid-ask spread criteria established by management, to demonstrate that there is sufficient breadth and scope in the market for that security. Securities that satisfy
these criteria are recorded in long-term marketable securities based on the quoted price in the Russian Trading System. Unrealized gains and losses are recorded in stockholders equity as other comprehensive income. Realized gains or losses and any
other than temporary declines in value are reported in other income (expense). For Russian investments that do not meet these criteria, the Company continues to classify these securities as long-term investments and carry such investments at cost
with adjustments made for other than temporary impairment.





The Company retains an approximately 8% limited
partnership interest in the Prospect Poland Fund. Polish venture capital investments within the Prospect Poland Fund are recorded at fair value as determined by the




16




---

management of the Prospect Poland Fund. Unrealized and realized gains or losses are recorded in the Consolidated Statement of Operations. The Company analyzes the assumptions supporting changes
in the fair value of these investments for appropriateness on a quarterly basis.





On August 7, 2000, Harbor Global
entered into an administration and liquidation agreement with Calypso Management pursuant to which Calypso Management will manage the liquidation of Harbor Global and operate Harbor Globals assets pending their liquidation. As compensation for
its provision of services to Harbor Global, Calypso Management receives a portion of the net proceeds distributed from the liquidation of Harbor Globals assets, based upon a predetermined schedule, which varies depending upon the source of the
distribution and the cumulative amount of distributions since the Spin-off. Harbor Global accrues such management fees at the earlier of (1) the formal declaration by the Board of Directors of a distribution and (2) the time when a distributable
amount is estimable following the sale or liquidation of an asset.





The Company recognizes deferred tax assets and
liabilities based on the difference between the financial statement carrying amounts and the tax bases of assets and liabilities. The Company regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance based on
historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences.





Liquidity and Capital Resources





Liquid assets held directly by Harbor Global consisting of
cash and cash equivalents and marketable securities maintained for general corporate purposes, which were approximately $25.0 million as of September 30, 2002, of which $6.9 million was restricted. This represents a $5.0 million increase over the
2001 fiscal year end and is attributable principally to $5.5 million of proceeds from the sale of the Companys Russian timber operations and the receipt of $2.5 million from Ashanti, less funding for operations during the first half of 2002.
Management believes that the cash available for general corporate purposes is sufficient to fund operations over the next two years.





The assets of the Companys majority-owned Russian subsidiary, PIOGLOBAL Investment Fund, consist of cash and cash equivalents, equity securities (both liquid and illiquid), marketable securities, real estate holdings,
and other miscellaneous assets.





On May 23, 2002, the shareholders of PIOGLOBAL Investment Fund approved a
dividend of approximately $3.1 million. The dividend will be paid over a period of one year beginning on September 1, 2002 to shareholders of record on April 4, 2002. Harbor Global expects to receive its proportionate share of such dividend in the
amount of approximately $1.3 million after tax during the fourth quarter of 2002.





On October 22, 2002, the Board
of Directors of the Company declared a dividend of approximately $5.7 million or $1.00 per share on Harbor Globals common shares. Pursuant to the administration and liquidation agreement, Harbor Global will receive a payment equal to 10% of
such dividend or $0.10 per share. The balance of $5.1 million or $0.90 per share will be payable on November 22, 2002 to shareholders of record as of November 8, 2002.





Future Operating Results





From time to time, management may
make forward-looking statements in this Quarterly Report on Form 10-Q, in other documents that the Company files with the Securities and Exchange Commission (including exhibits and those documents incorporated by reference into the Form 10-Q),
in press releases or in other public discussions. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for these statements. For this purpose, a forward-looking statement is any statement that is not a statement of
historical fact. Forward-looking statements include, but are not limited to, those about asset realization plans and strategies, anticipated expenses, liquidity and capital resources and expectations about market conditions. Forward-looking
statements can be identified by the words may, believes, anticipates, plans, expects, estimates and similar




17




---

expressions. Forward-looking statements are based on currently available information and managements expectations of future results but involve certain assumptions. Management cautions
readers that assumptions involve substantial risks and uncertainties. Consequently, any forward-looking statement could turn out to be wrong. Many factors could cause actual results to differ materially from expectations. Management assumes no
obligation to update any such forward-looking statements. Described below are some of the important factors that could affect revenues or results of operations.





There can be no assurance that shareholders will be able to sell their Harbor Global common shares.





Harbor Global common shares are not listed on any securities exchange or on The Nasdaq Stock Market ® .





Furthermore, Harbor Global does not intend to:





| |  |  | engage the services of any market maker;
| | - |  | ----------------------------------------




| |  |  | facilitate the development of an active public trading market in Harbor Global common shares, or encourage others to do so;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------




| |  |  | place any advertisements in the media promoting an investment in Harbor Global; or
| | - |  | ----------------------------------------------------------------------------------




| |  |  | except as required by the Securities Exchange Act of 1934, collect or publish information about prices at which Harbor Global common shares may be traded.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------




Harbor Global cannot provide assurances as to the prices at which Harbor Global common shares
may trade or provide assurances that shareholders will be able to sell their Harbor Global common shares.





The
potential values to be realized upon the sale or liquidation of most of Harbor Globals assets, if any, are speculative.





The potential values to be realized upon the sale of Harbor Globals Russian real estate management and investment management operations, if any, are speculative.





A significant portion of Harbor Globals Russian real estate management and investment management operations consists of its approximately 52% interest in PIOGLOBAL
Investment Fund, a company that invests in Russian real estate and, to a lesser extent, securities of Russian companies. Generally, the Russian real estate and securities markets are significantly smaller and less liquid than the markets in the
United States, and as a result, a portion of the assets held by PIOGLOBAL Investment Fund are illiquid. There is also limited liquidity in some of the publicly traded securities of PIOGLOBAL Investment Fund. Consequently, Harbor Global may have
difficulty selling some of its investment in PIOGLOBAL Investment Fund or causing PIOGLOBAL Investment Fund to liquidate some of its underlying assets, and may only be able to do so at prices, which may not reflect the long-term value of its
investments.





Harbor Globals businesses, particularly those conducted in emerging markets, are
susceptible to numerous risks and uncertainties associated with international operations.





Harbor Global
conducts business in countries outside of the United States, primarily in Russia. Harbor Global will continue to operate its international businesses until those businesses are liquidated and will continue to be subject to the risks of doing
business internationally, including:





| |  |  | unexpected changes in regulatory requirements and underdeveloped legal systems in some countries;
| | - |  | -------------------------------------------------------------------------------------------------




| |  |  | tariffs and other trade barriers;
| | - |  | ---------------------------------




| |  |  | difficulties in staffing and managing foreign operations;
| | - |  | ---------------------------------------------------------




| |  |  | political and economic instability;
| | - |  | -----------------------------------



18




---




| |  |  | fluctuations in currency exchange rates;
| | - |  | ----------------------------------------




| |  |  | restrictions on currency exchange and repatriation;
| | - |  | ---------------------------------------------------




| |  |  | restrictions on foreign investment in its businesses; and
| | - |  | ---------------------------------------------------------




| |  |  | potentially adverse tax consequences.
| | - |  | -------------------------------------




For example, in recent years Russia has undergone substantial political, economic and social change. As is typical of an emerging market, Russia does not possess a well-developed business, legal and
regulatory infrastructure that would generally exist in the United States or in a more mature free market economy. Accordingly, Harbor Globals Russian real estate management and investment management operations involve significant risks, such
as those listed above, which are not typically associated with developed markets. The liquidation of these businesses, as well as the successful operation of these businesses pending their liquidation, will depend on the stability of, and economic
conditions in, these emerging markets.





The loss of key officers and managers could impair the ability of
Harbor Global to successfully operate and manage its assets prior to their liquidation.





Mr. Kasnet is the
President and Chief Executive Officer, and Mr. Hunter is the Chief Operating Officer and Chief Financial Officer of Harbor Global. Mr. Kasnet previously served as the President, and Mr. Hunter previously served as the Chief Operating Officer and
Senior Vice President of Pioneer Global Investments, a division of Pioneer. As executive officers of Pioneer Global Investments, Mr. Kasnet and Mr. Hunter operated substantially all the businesses that Harbor Global now owns. In addition, Harbor
Global has entered into an administration and liquidation agreement with Calypso Management, an entity owned and operated by Mr. Kasnet and Mr. Hunter, under which Calypso Management will manage the liquidation of Harbor Global and operate its
assets as going concern businesses until they are liquidated.





Because Harbor Globals assets are a diverse
range of businesses and are generally located in countries in which successfully conducting and selling businesses requires significant experience, Harbor Global believes that its success in liquidating its assets and operating its assets pending
their liquidation will depend to a significant extent upon the continued efforts of Mr. Kasnet and Mr. Hunter. The loss of the services of either Mr. Kasnet or Mr. Hunter could have a material adverse effect upon Harbor Globals results of
operations and financial condition. The services of Mr. Kasnet and Mr. Hunter may also be critical to Harbor Globals ability to liquidate its assets at prices that will enable Harbor Global to make meaningful distributions to its
shareholders.





Mr. Kasnet and Mr. Hunter have both entered into employment agreements with Calypso
Management. Mr. Kasnets employment agreement provides for an initial term of two years and may be terminated by Mr. Kasnet upon 120 days prior written notice following the second anniversary of the distribution date. On October 22,
2002, Mr. Kasnets employment was extended for an additional period of 18 months, commencing on October 24, 2002, in accordance with the administration and liquidation agreement and his employment agreement. Mr. Hunters employment
agreement provides that Mr. Hunters employment with Calypso Management is at will, subject to termination by either Calypso Management or Mr. Hunter upon 60 days prior written notice. If either Mr. Kasnets or Mr. Hunters
employment with Calypso Management is terminated, he will cease to be an officer of Harbor Global. In addition, Harbor Global has obtained key officer life insurance policies with benefits payable to Harbor Global for Mr. Kasnet and Mr. Hunter.





Harbor Global will indemnify pioneer for some liabilities accruing after the spin-off.





Under the Distribution Agreement, Harbor Global agreed to indemnify Pioneer for liabilities, other than tax liabilities,
incurred by Pioneer relating to the businesses or operations of the Harbor Global assets. For example, in connection with the sale of its gold mining operations in Ghana to Ashanti, Pioneer has agreed to indemnify Ashanti for claims arising under
the purchase agreement before June 19, 2005 relating to its Ghanaian gold mining operations. Under the Distribution Agreement, Pioneer transferred Pioglobal Goldfields II, the Pioneer




19




---

subsidiary through which Pioneers gold mining operations in Ghana were conducted, to Harbor Global. As a result of the transfer, Harbor Global is obligated to reimburse Pioneer in the event
that Ashanti seeks indemnification for any claim. Harbor Globals indemnification obligations to Pioneer in connection with the Ashanti purchase agreement are capped at the amount of the total purchase price paid by Ashanti to Pioglobal
Goldfields II under the purchase agreement.





Additionally, under a tax separation agreement between Harbor Global
and Pioneer, generally, Harbor Global has agreed to indemnify Pioneer for tax liabilities relating to the Harbor Global businesses. Currently, there are no suits pending that would require payment by Harbor Global to Pioneer under the
indemnification provisions of the Distribution Agreement or tax separation agreement. However, Harbor Global cannot provide assurances that no legal proceeding or other claim will occur that would require Harbor Global to indemnify Pioneer.
Furthermore, Harbor Global and its subsidiaries may be subject to legal proceedings or other claims arising in the ordinary course of business, including employment related claims, environmental claims and regulatory fees or fines associated with
its international operations.





As a result of holding Harbor Global common shares, Harbor Globals
shareholders may recognize taxable income and be required to pay tax without a corresponding distribution of cash from Harbor Global to its shareholders.





For United States federal income tax purposes, Harbor Global is treated as a partnership. For United States federal income tax purposes, Harbor Globals shareholders will be treated as partners in
a Bermuda partnership and their Harbor Global common shares will represent partnership interests. Because of its classification as a partnership for United States federal income tax purposes, Harbor Global is not itself subject to United States
federal income tax. Instead, items of income, gain, loss, deduction and expense will flow through to Harbor Globals shareholders, and they will be required to include their allocable share of these items in computing their own United States
federal income tax for each taxable year of Harbor Global. Cash distributions made by Harbor Global to its shareholders generally will not be taxable, except to the extent that those distributions exceed a shareholders adjusted tax basis in
the Harbor Global common shares.





Harbor Global believes that one or more of the majority or minority owned
foreign subsidiaries of Harbor Global may be classified as a foreign personal holding company or passive foreign investment company for United States federal income tax purposes. If any such subsidiary is classified as a foreign personal holding
company or passive foreign investment company, Harbor Globals shareholders may be required to recognize taxable income and pay tax with respect to a portion of the subsidiarys income, even in the absence of the receipt of any payment of
cash or other property from the subsidiary. The tax rules regarding foreign partnerships, foreign personal holding companies and passive foreign investment companies are complicated. Harbor Globals shareholders should consult their tax
advisors to determine the tax consequences to them of holding Harbor Global common shares.





Harbor Global will
be subject to significant restrictions if it becomes an investment company.





Harbor Global intends to conduct
its businesses and operations so as to avoid being required to register as an investment company. If, nevertheless, Harbor Global were to be required to register as an investment company, because Harbor Global is a foreign company, the Investment
Company Act would prohibit Harbor Global and any person deemed to be an underwriter of Harbor Globals securities from offering for sale, selling or delivering after sale, in connection with a public offering, any security issued by Harbor
Global in the United States.





Item 3.Quantitative and Qualitative Disclosures About Market Risk.





Harbor Global monitors its exposure to adverse changes in interest rates, foreign currency
exchange rates and market fluctuations.




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The Companys interest rate risk involves the short-term investment of
excess cash. This risk impacts fair values, earnings and cash flows. Excess cash is primarily invested in foreign government bonds, United States treasury bills and in overnight repurchase agreements backed by United States government securities.
These short-term investments are reported either as cash and cash equivalents or marketable securities. The balance of such securities at September 30, 2002 was approximately $8.8 million of cash and cash equivalents and approximately $29.0 million
as marketable securities. Earnings from excess cash invested were approximately $0.6 million and $1.5 million for the three and nine months ended September 30, 2002, respectively. Based on excess cash invested at September 30, 2002, a one percent
increase or decrease in current market interest rates would have the effect of causing an approximately $0.4 million additional pre-tax credit or charge to the statement of operations for the year.





The United States dollar (the Companys reporting currency) has been designated as the Companys functional currency.
Translation gains and losses that result from remeasuring into the United States dollar are included in the statements of operations. To mitigate against currency translation risk the Company primarily transacts in United States dollars by
contracting for most of its costs and revenues in United States dollars. This acts as a natural hedge to protect against currency fluctuations from the Companys operations.





The Russian ruble is not a fully convertible currency outside of the territory of the Russian Federation. The translation of ruble denominated assets and liabilities into
United States dollars for the purpose of these financial statements does not indicate that the Company could realize or settle in United States dollars the reported values of these assets and liabilities. The Company reports all of its non monetary
assets and liabilities held in the Russian Federation at historical exchange rates, and any fluctuation in foreign exchange rates would not have any impact on reported non monetary assets and liabilities.





The table below sets forth in the Companys reporting currency a summary of the monetary assets and liabilities held in rubles at
September 30, 2002.





(In Thousands)Monetary AssetsCash and Cash Equivalents

$
5,523Marketable Securities Held for Sale


35,331Accounts Receivable


1,496$
42,350Monetary LiabilitiesAccounts Payable

$
8,243Net Position

$
34,107





The Company indirectly invests in equity instruments of
privately-held companies through its approximately 52% interest in the PIOGLOBAL Investment Fund and its approximately 8% interest in the Prospect Poland Fund. Investments in privately held companies by the PIOGLOBAL Investment Fund are recorded at
cost in long-term investments. With respect to the Companys limited partnership interest in the Prospect Poland Fund, such interests are recorded in Polish Venture Capital Investment using the equity method of accounting. The Company is
exposed to market risk as it relates to the market value of its indirect investments in privately held companies. The carrying value of the Companys interest in the Prospect Poland Fund was written-down by $325,000 during the first nine months
of 2002.





The PIOGLOBAL Investment Fund is also invested in equity instruments of public companies, which are
classified as available-for-sale pursuant to SFAS 115. Those publicly traded equity investments that have evidenced a sufficient breadth and scope of market activity are valued based at the quoted price for such securities according to the Russian
Trading System and are recorded in long-term marketable securities.




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Otherwise, the investment is recorded in long-term investments at a fair value equivalent to its original cost basis. These available-for-sale equity investments, primarily in oil and gas, energy
companies and the telecommunications industry, are subject to significant fluctuations in fair value due to the volatility of the stock market and the industries in which these companies participate. At September 30, 2002 and December 31, 2001, the
fair value of equity investments contained in long-term marketable securities aggregated $19.7 million and $18.8 million, respectively. As a result, during the first nine months of 2002, the Company recorded net unrealized gains after deferred taxes
and minority interest of $0.3 million as a separate component of stockholders equity. Although the breadth of industries represented on the Russian Trading System is severely limited, the Company attempts to manage its exposure to stock market
fluctuations and minimize the impact of stock market declines to the Companys earnings and cash flow by increased diversification of the portfolio.





Item 4.Controls and Procedures.





(a)  Evaluation of Disclosure Controls and Procedures.    The Companys Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Companys disclosure
controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended) as of a date within 90 days prior to the filing date of this Quarterly Report on Form 10-Q (the Evaluation
Date). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Companys disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the
Company (including its consolidated subsidiaries) required to be included in the Companys reports filed or submitted under the Exchange Act.





(b)  Changes in Internal Controls.    Since the Evaluation Date, there have not been any significant changes in the Companys internal controls or in other
factors that could significantly affect such controls.




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PART IIOTHER INFORMATION





Item 1.Legal Proceedings





As
previously mentioned in the most recent Quarterly Report on Form 10-Q, in written and oral communications, IFC, a minority shareholder of Pioglobal First Russia, has raised questions about the appropriateness of certain services that were charged to
Pioglobal First Russia and its subsidiaries by Harbor Global, its predecessor, Pioneer, and certain of their affiliates and about the settlement of a 1999 insurance claim relating to the operation of Pioneer Bank. Harbor Global believes that these
services were properly charged to Pioglobal First Russia and its subsidiaries and that the 1999 insurance settlement was appropriate.





Noah Gotbaum filed a complaint against PIOGlobal Corporation, an indirect wholly-owned subsidiary of the Company (PIOGlobal Corporation), Pioneer and Pioneer Investment Management USA, Inc., in the Massachusetts
Superior Court, Suffolk County. An amended complaint was served on PIOGlobal Corporation on October 25, 2002. The amended complaint alleges that Mr. Gotbaum was terminated as President and Chief Investment Officer of an investment fund managed by
Pioneer. Mr. Gotbaum brings claims for breach of contract, violation of the Massachusetts Wage Act and Quantum Meruit and seeks unspecified monetary damages. The Company believes Mr. Gotbaums claims against it are without merit.





Item 6.Exhibits and Reports on Form 8-K





(a)  Exhibits:The Exhibit Index immediately precedes the Exhibits filed herein and is incorporated by reference.





(b)  Reports on Form 8-K:None




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SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.





Dated: November 12, 2002





HARBOR GLOBAL COMPANY LTD./s/    DONALD H.
HUNTERDonald H. Hunter Chief
Operating Officer Chief Financial Officer (Duly authorized
officer and principal financial and accounting officer)




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CERTIFICATIONS





I, Stephen G. Kasnet, Chief Executive Officer of the Company, certify that:





1.  I have reviewed this quarterly report on Form 10-Q of Harbor Global Company Ltd.;





2.  Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;





3.  Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;





4.  The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:





a)  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;





b)  evaluated the
effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and





c)  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;





5.  The registrants other certifying officers and I
have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of 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 officers and I have indicated
in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.





Date: November 12, 2002





/s/    STEPHEN G.
KASNETStephen G. Kasnet Chief
Executive Officer




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CERTIFICATIONS





I, Donald H. Hunter, Chief Financial Officer of the Company, certify that:





1.  I have reviewed this quarterly report on Form 10-Q of Harbor Global Company Ltd.;





2.  Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;





3.  Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;





4.  The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:





a)  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;





b)  evaluated the
effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and





c)  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;





5.  The registrants other certifying officers and I
have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of 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 officers and I have indicated
in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.





Date: November 12, 2002





/s/    DONALD H.
HUNTERDonald H. Hunter Chief
Financial Officer




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INDEX TO EXHIBITS





Exhibit Number

Description2.1***

Form of Distribution Agreement by and among The Pioneer Group, Inc., Harbor Global Company Ltd. and Harbor Global II
Ltd.3.1+

Memorandum of Association of Harbor Global Company Ltd.3.2+

Bye-Laws of Harbor Global Company Ltd.4.1**

Specimen Common Share Certificate10.1*

Letter dated October 22, 2002 from the Board of Directors of Harbor Global Company Ltd. to Calypso Management
LLC99.1*

Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 200299.2*

Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002


---

|* |  | Filed herewith.
|- |  | ---------------

|** |  | Incorporated by reference to Harbor Global Company Ltd.s Quarterly Report on Form 10-Q (file number 0-30889) filed on November 13, 2000.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------

|*** |  | Incorporated by reference to Amendment No. 1 to Harbor Global Company Ltd.s Registration Statement on Form 10/A (file number 0-30889) filed on August 8,
2000.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|+ |  | Incorporated by reference to Harbor Global Company Ltd.s Registration Statement on Form 10 (file number 0-30889) filed on June 26, 2000.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------



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