UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 0-21874
London Pacific Group Limited
(Exact name of registrant as specified in its charter)
-----------------------
Jersey, Channel Islands Not applicable
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
Minden House, 6 Minden Place
St. Helier, Jersey JE2 4WQ
Channel Islands
(Address of principal executive offices)
(Zip Code)
011 44 (1534) 607700
(Registrant's telephone number, including area code)
(Former name, address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the registrant's Ordinary Shares, 5
cents par value per share, as of August 14, 2000 was 64,433,313.
<PAGE>
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements: Page
<S> <C>
Condensed Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999...................................... 3
Condensed Consolidated Statements of Income for the
three and six months ended June 30, 2000 and 1999.......... 4
Condensed Consolidated Statements of Cash Flows for
the six months ended June 30, 2000 and 1999................ 5
Consolidated Statements of Changes in Shareholders' Equity
for the six months ended June 30, 2000 and 1999............ 6
Consolidated Statements of Comprehensive Income for
the three and six months ended June 30, 2000 and 1999...... 7
Notes to Interim Consolidated Financial Statements............. 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 22
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 23
Item 4. Submission of Matters to a Vote of Security Holders............ 23
Item 6. Exhibits and Reports on Form 8-K............................... 24
Signature ............................................................... 25
Exhibit Index .......................................................... 26
</TABLE>
<PAGE>
Part I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
Cash and cash equivalents..................................................... $ 27,841 $ 49,703
Cash held in escrow........................................................... 2,933 3,110
Investments, principally of life insurance subsidiaries:
Fixed maturities:
Available-for-sale, at fair value (amortized cost: June 30, 2000,
$1,192,977; December 31, 1999, $1,037,085)............................. 1,111,593 989,065
Held-to-maturity, at amortized cost (fair value: June 30, 2000,
$164,986; December 31, 1999, $221,167)................................. 166,126 222,110
Equity securities:
Trading account, at fair value (cost: June 30, 2000, $84,176;
December 31, 1999, $34,680) ........................................... 803,533 399,844
Available-for-sale, at fair value (cost: June 30, 2000, $179,589;
December 31, 1999, $186,403) .......................................... 171,397 182,926
Loans to life insurance policyholders .................................... 10,374 10,385
------------ -----------
Total investments ............................................................ 2,263,023 1,804,330
Assets held in separate accounts ............................................. 171,417 125,528
Deferred policy acquisition costs ............................................ 173,641 144,518
Receivables .................................................................. 36,147 56,335
Other assets ................................................................. 13,412 19,264
------------ -----------
Total assets ................................................................. $ 2,688,414 $ 2,202,788
------------ -----------
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Liabilities:
Life insurance policy liabilities ............................................ $ 1,538,871 $ 1,416,423
Liabilities related to separate accounts ..................................... 172,881 126,703
Accounts payable and accrued liabilities ..................................... 28,832 34,912
Income taxes payable and other liabilities ................................... 5,802 5,748
Deferred income taxes......................................................... 118,814 66,527
------------ -----------
Total liabilities ............................................................ 1,865,200 1,650,313
------------ -----------
Shareholders' equity:
Ordinary shares, $.05 par value per share: authorized 86,400,000 shares;
issued and outstanding 64,433,313 shares ................................. 3,222 3,222
Additional paid-in capital ................................................... 63,510 62,307
Retained earnings ............................................................ 836,544 559,344
Employee benefit trusts, at cost (shares: June 30, 2000, 12,724,006;
December 31, 1999, 15,331,656) ........................................... (49,401) (54,033)
Accumulated other comprehensive income (loss) from
net unrealized gains (losses) on available-for-sale securities ........... (30,661) (18,365)
------------ -----------
Total shareholders' equity ................................................... 823,214 552,475
------------ -----------
Total liabilities and shareholders' equity ................................... $ 2,688,414 $ 2,202,788
------------ -----------
------------ -----------
</TABLE>
[FN]
See accompanying notes to Interim Consolidated Financial Statements.
</FN>
<PAGE>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Investment income............................................... $ 27,547 $ 23,883 $ 53,332 $ 47,129
Insurance policy charges........................................ 2,011 1,718 3,838 3,240
Financial advisory services, asset management and other
fee income................................................. 7,231 6,638 16,996 13,016
Realized investment gains (losses).............................. (8,596) (5,586) 188 (5,829)
Unrealized investment gains on trading securities .............. 426,338 39,842 354,193 73,757
--------- --------- --------- ---------
454,531 66,495 428,547 131,313
Expenses:
Interest credited on insurance policyholder accounts............ 22,330 17,751 42,775 35,049
Amortization of deferred policy acquisition costs............... 5,947 3,690 11,242 7,756
Operating expenses.............................................. 16,039 17,653 29,260 29,241
Goodwill amortization........................................... 57 59 115 118
Interest expense................................................ 2 17 14 22
--------- --------- --------- ---------
44,375 39,170 83,406 72,186
--------- --------- --------- ---------
Income before income tax expense................................ 410,156 27,325 345,141 59,127
Income tax expense.............................................. 70,325 6,880 60,848 18,329
--------- --------- --------- ---------
Net income...................................................... $ 339,831 $ 20,445 $ 284,293 $ 40,798
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<TABLE>
<S> <C> <C>
Interim dividend declared
(2000 and 1999: 11.0 cents per share gross; 8.8 cents per ADR)........................... $ 4,608 $ 4,408
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Earnings per share and ADR, basic............................... $ 6.57 $ 0.41 $ 5.59 $ 0.82
Earnings per share and ADR, diluted............................. $ 5.62 $ 0.36 $ 4.72 $ 0.75
</TABLE>
[FN]
See accompanying notes to Interim Consolidated Financial Statements.
</FN>
<PAGE>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
2000 1999
---------- ---------
<S> <C> <C>
Net cash provided by operating activities..................................... $ 135,210 $ 33,983
Cash flows from investing activities:
Purchases of held-to-maturity and available-for-sale securities .............. (228,381) (200,209)
Proceeds from sale of held-to-maturity and available-for-sale securities ..... 75,880 125,018
Capital expenditures ......................................................... (1,099) (551)
Other cash flows from investing activities ................................... 4,214 244
---------- ---------
Net cash used in investing activities ........................................ (149,386) (75,498)
---------- ---------
Cash flows from financing activities:
Issue of ordinary shares ..................................................... - 5
Dividends paid ............................................................... (7,093) (7,096)
Payment of bank overdraft .................................................... (593) (748)
---------- ---------
Net cash used in financing activities ........................................ (7,686) (7,839)
---------- ---------
Net decrease in cash and cash equivalents .................................... (21,862) (49,354)
Cash and cash equivalents at beginning of year ............................... 49,703 111,414
---------- ---------
Cash and cash equivalents at end of period ................................... $ 27,841 $ 62,060
---------- ---------
---------- ---------
</TABLE>
[FN]
See accompanying notes to Interim Consolidated Financial Statements.
</FN>
<PAGE>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Net Unrealized
Gains (Losses) on
Ordinary Additional Employee Available-for- Total
Shares at Paid-in Retained Benefit Sale Shareholders'
Par Value Capital Earnings Trusts Securities Equity
----------- ---------- ---------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 .......... $ 3,221 $ 62,199 $ 318,785 $ (52,282) $ (3,442) $ 328,481
Issue of ordinary shares........... 1 4 - - - 5
Unrealized gains (losses) on
available-for-sale securities... - - - - (6,925) (6,925)
Purchase of shares by the
employee benefit trusts......... - - - (1,171) - (1,171)
Exercise of employee share
options, including income
tax effect...................... - 50 - 1,650 - 1,700
Realized gains (losses) on
disposal of shares held by the
employee benefit trusts......... - 38 - - - 38
Cash dividends declared............ - - (7,096) - - (7,096)
Net income......................... - - 40,799 - - 40,799
-------- --------- ---------- --------- -------- ---------
Balance, June 30, 1999............. $ 3,222 $ 62,291 $ 352,488 $ (51,803) $(10,367) $ 355,831
-------- --------- ---------- --------- -------- ---------
-------- --------- ---------- --------- -------- ---------
</TABLE>
<TABLE>
<CAPTION>
Net Unrealized
Gains (Losses) on
Ordinary Additional Employee Available-for- Total
Shares at Paid-in Retained Benefit Sale Shareholders'
Par Value Capital Earnings Trusts Securities Equity
----------- ---------- ---------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 2000........... $ 3,222 $ 62,307 $ 559,344 $ (54,033) $(18,365) $ 552,475
Unrealized gains (losses) on
available-for-sale securities... - - - - (12,296) (12,296)
Purchase of shares by the
employee benefit trusts......... - - - (2,660) - (2,660)
Exercise of employee share
options, including income
tax effect...................... - 1,548 - 7,292 - 8,840
Realized gains (losses) on
disposal of shares held by the
employee benefit trusts......... - (345) - - - (345)
Cash dividends declared............ - - (7,093) - - (7,093)
Net income ........................ - - 284,293 - - 284,293
-------- --------- ---------- --------- -------- ---------
Balance, June 30, 2000............. $ 3,222 $ 63,510 $ 836,544 $ (49,401) $(30,661) $ 823,214
-------- --------- ---------- --------- -------- ---------
-------- --------- ---------- --------- -------- ---------
</TABLE>
[FN]
See accompanying notes to Interim Consolidated Financial Statements.
</FN>
<PAGE>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Net income ..................................................... $ 339,831 $ 20,445 $ 284,293 $ 40,798
Other comprehensive income (loss) net of income taxes:
Unrealized gains (losses) on available-for-sale securities
arising during the period, net of income taxes and
deferred policy acquisition cost amortization adjustments
of $19,273, $10,216, $26,857 and $13,078, respectively ...... (8,613) (4,726) (12,296) (6,925)
--------- -------- --------- --------
Other comprehensive income (loss)............................... (8,613) (4,726) (12,296) (6,925)
--------- -------- --------- --------
Comprehensive income ........................................... $ 331,218 $ 15,719 $ 271,997 $ 33,873
--------- -------- --------- --------
--------- -------- --------- --------
</TABLE>
[FN]
See accompanying notes to Interim Consolidated Financial Statements.
</FN>
<PAGE>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Item 1. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Basis of Presentation
The accompanying interim consolidated financial statements are unaudited
and have been prepared by London Pacific Group Limited ("the Company") in
accordance with United States generally accepted accounting principles ("U.S.
GAAP"). These financial statements include the accounts of the Company, its
subsidiaries, the Employee Share Option Trust and the Agent Loyalty Opportunity
Trust ("the Group"). Certain information and note disclosures normally included
in the Group's annual consolidated financial statements have been condensed or
omitted. The interim consolidated financial statements, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
accruals) which are necessary for a fair statement of the results for the
interim periods presented.
While the Group believes that the disclosures presented are adequate to
make the information not misleading, these interim consolidated financial
statements should be read in conjunction with the audited financial statements
and related notes for the year ended December 31, 1999 which are contained in
the Company's Annual Report on Form 20-F, filed with the U.S. Securities and
Exchange Commission on March 31, 2000. These audited financial statements were
prepared in conformity with accounting principles generally accepted in the
United Kingdom ("U.K. GAAP"). The significant impact of converting to U.S. GAAP
is the reduction of shareholders' equity due to the reclassification of the cost
of the shares held by the employee benefit trusts, which had been recorded as an
asset in the consolidated balance sheet under U.K. GAAP, and due to the
recognition of unrealized losses on available-for-sale securities, net of income
taxes and deferred policy acquisition cost amortization adjustments.
The results for the three and six month periods ended June 30, 2000 are
not necessarily indicative of the results to be expected for the full fiscal
year.
Note 2. Comprehensive Income
Comprehensive income is defined as the aggregate change in shareholders'
equity, excluding changes in ownership interests. For the Group, it is the sum
of net income and changes in unrealized gains or losses on available-for-sale
securities.
Note 3. Earnings Per Share and Per ADR
The Group calculates earnings per share in accordance with 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 by the
weighted average number of ordinary shares outstanding during the applicable
period, excluding shares held by the employee share option trust which do not
rank for dividend.
The Group has issued employee share options, which are considered to be
potentially dilutive. Diluted earnings per share is calculated by dividing net
income by the weighted average number of ordinary shares outstanding during the
applicable period adjusted for these potentially dilutive options, which are
determined based on the "Treasury Stock Method."
<PAGE>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Item 1. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
Note 3. Earnings Per Share and Per ADR (continued)
The following table sets forth the reconciliation of the numerators and
denominators for the earnings per share calculations in accordance with SFAS
128.
CALCULATION OF EARNINGS PER SHARE AND PER ADR
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2000 1999 2000 1999
----------- --------- --------- --------
<S> <C> <C> <C> <C>
Net income .................................................... $ 339,831 $ 20,445 $ 284,293 $ 40,798
Basic:
Weighted average number of ordinary shares outstanding,
excluding shares held by the employee share option trust ... 51,704,724 50,001,907 50,894,327 49,949,545
---------- ---------- ---------- ----------
Earnings per share and ADR, basic ............................. $ 6.57 $ 0.41 $ 5.59 $ 0.82
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted:
Weighted average number of ordinary shares outstanding,
excluding shares held by the employee share option trust ... 51,704,724 50,001,907 50,894,327 49,949,545
Effect of dilutive securities (employee share options) ........ 8,735,872 6,097,398 9,399,571 4,585,292
---------- ---------- ---------- ----------
Weighted average ordinary shares used in dilutive earnings
per share calculations ...................................... 60,440,596 56,099,305 60,293,898 54,534,837
---------- ---------- ---------- ----------
Earnings per share and ADR, diluted............................ $ 5.62 $ 0.36 $ 4.72 $ 0.75
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Earnings per ADR are equivalent to earnings per ordinary share, following the 4
for 1 split of ADRs which was effective from the close of business on March 23,
2000.
Note 4. Segment Information
The Group's reportable operating segments are classified according to its
principal businesses, which are: life insurance and annuities, asset management,
financial advisory services 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 three month periods ended June 30, 2000 and
1999, there were included in the venture capital management and asset management
operating segments, management fees from the insurance business operating
segment of $2,526 and $1,956, respectively. During the six month periods ended
June 30, 2000 and 1999, there were included in the venture capital management
and asset management operating segments, management fees from the insurance
business operating segment of $4,943 and $5,378, respectively. These management
fees have been approved by the insurance regulatory body in the life insurance
company's U.S. state of domicile.
<PAGE>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Item 1. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
Note 4. Segment Information (continued)
Revenues and income before income tax expense for the Group's reportable
operating segments, based on management's internal reporting structure, are
shown below:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ---------
REVENUES (In thousands)
<S> <C> <C> <C> <C>
Operating segments:
Life insurance and annuities (1), (2).......................... $ 378,752 $ 47,529 $ 377,048 $ 101,381
Asset management (1)........................................... 1,857 1,729 3,759 3,169
Financial advisory services ................................... 5,720 4,982 11,764 9,963
Venture capital management (2) ................................ 67,830 11,504 35,045 15,022
--------- --------- --------- ---------
454,159 65,744 427,616 129,535
Reconciliation of segment amounts to consolidated amounts:
Interest income ............................................... 372 751 931 1,778
--------- --------- --------- ---------
Consolidated revenues and investment gains .................... $ 454,531 $ 66,495 $ 428,547 $ 131,313
--------- --------- --------- ---------
--------- --------- --------- ---------
INCOME BEFORE INCOME TAX EXPENSE
Operating segments:
Life insurance and annuities (1), (2).......................... $ 347,811 $ 20,865 $ 318,370 $ 51,536
Asset management (1) .......................................... 119 266 766 334
Financial advisory services ................................... (1,167) 168 (1,806) 353
Venture capital management (2) ................................ 64,214 6,107 29,572 7,261
--------- --------- --------- ---------
410,977 27,406 346,902 59,484
Reconciliation of segment amounts to consolidated amounts:
Interest income ............................................... 372 751 931 1,778
Corporate expenses ............................................ (1,134) (756) (2,563) (1,995)
Goodwill amortization ......................................... (57) (59) (115) (118)
Interest expense .............................................. (2) (17) (14) (22)
--------- --------- --------- ---------
Consolidated income before income tax expense ................. $ 410,156 $ 27,325 $ 345,141 $ 59,127
--------- --------- --------- ---------
--------- --------- --------- ---------
-------------------------
(1) Intersegmental revenue in asset management segment
from life insurance and annuities segment................ $ 662 $ 415 $ 1,197 $ 692
--------- --------- --------- ---------
--------- --------- --------- ---------
(2) Intersegmental revenue in venture capital management
segment from life insurance and annuities segment........ $ 1,864 $ 1,541 $ 3,746 $ 4,686
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<PAGE>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Item 1. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
Note 4. Segment Information (continued)
The material changes in segmental assets during the first half of 2000
were in the venture capital management segment, where assets increased by $28.0
million to $305.8 million as of June 30, 2000, and in the life insurance and
annuities segment, where assets increased by $463.8 million to $2.4 billion as
of June 30, 2000. Both movements were caused primarily by the change in net
unrealized gains on listed equity securities in the trading account.
Note 5. Investments
Investments are classified into three separate categories and accounted
for as follows:
i) trading securities, which are reported at fair value with the change
in unrealized gains and losses included in earnings;
ii) available-for-sale securities, which are reported at fair value, with
unrealized gains and losses excluded from earnings, but reported net of
applicable taxes and deferred policy acquisition cost amortization adjustments
as a separate component of shareholders' equity; and
iii) held-to-maturity securities, which are reported at amortized cost.
Item 2. 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 unaudited interim
consolidated financial statements, and the notes thereto, presented elsewhere in
this report. The interim consolidated financial statements are prepared in
accordance with generally accepted accounting principles 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 in
the Group's other filings with the U.S. Securities and Exchange Commission.
Forward-Looking Statements and Factors That May Affect Future Results
The matters discussed in this report contain forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, that involve risks and uncertainties. All statements other than
statements of historical information provided herein are forward-looking
statements and may contain information about financial results, economic
conditions, trends and known uncertainties.
Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis, judgement,
belief or expectation only as of the date hereof. The Group undertakes no
obligation to publicly revise these forward-looking statements to reflect events
or circumstances that arise after the date hereof.
<PAGE>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The Group's actual results could differ materially from those discussed
herein. Factors that could cause or contribute to such differences include, but
are not limited to, those discussed in this section and elsewhere in this
report, and the risks discussed in the Group's other filings with the U.S.
Securities and Exchange Commission. These risks and uncertainties could cause
actual results to differ materially from those reflected in the forward-looking
statements. The types of risks and uncertainties include, but are not limited
to, (i) the risks described in this report in Part I, Item 3 "Quantitative and
Qualitative Disclosures About Market Risk," (ii) variations in demand for the
Group's products and services, (iii) significant changes in net cash flows in or
out of the Group's businesses, (iv) significant fluctuations in the performance
of debt and equity markets worldwide, (v) the enactment of adverse state,
federal or foreign regulation or changes in government policy or regulation
(including accounting standards) affecting the Group's operations, (vi) the
effect of economic conditions and interest rates in the U.S., the U.K. or
internationally, (vii) the ability of the Group's companies to compete in their
respective businesses, and (viii) the ability of the Company to attract and
retain key personnel.
Life Insurance and Annuities
The following table sets out, for the three and six month periods ended
June 30, 2000 and 1999, an analysis of the life insurance and annuities
segment's results of operations.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Revenues:
Investment income.............................................. $ 24,522 $ 20,944 $ 47,186 $ 39,368
Insurance policy charges ...................................... 2,011 1,718 3,838 3,240
Realized investment gains (losses) ............................ (17,152) 821 (8,452) 578
Unrealized investment gains (losses) on trading securities .... 369,055 23,704 333,730 57,619
Other fee income .............................................. 316 342 746 576
--------- --------- --------- ---------
Total revenues and investment gains (losses) ................. 378,752 47,529 377,048 101,381
Expenses:
Interest credited on insurance policyholder accounts .......... 22,330 17,751 42,775 35,049
Amortization of deferred policy acquisition costs ............. 5,947 3,690 11,242 7,756
Mortality expenses ............................................ (434) (115) (401) (337)
Commissions ................................................... 70 75 139 151
General and administrative expenses ........................... 3,028 5,263 4,923 7,226
--------- --------- --------- ---------
30,941 26,664 58,678 49,845
--------- --------- --------- ---------
Income before income tax expense .............................. $ 347,811 $ 20,865 $ 318,370 $ 51,536
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<PAGE>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Second quarter of 2000 compared to second quarter of 1999
The life insurance and annuities segment, which consists of London Pacific
Life & Annuity Company ("LPLA") and London Pacific Assurance Limited ("LPAL"),
contributed $347.8 million to the Group's overall income before taxes in the
second quarter of 2000, an increase of $326.9 million over the same period in
1999. The sum of net realized and net unrealized investment gains for the second
quarter increased by $327.4 million and general and administrative expenses
decreased by $2.2 million, while amortization of deferred policy acquisition
costs increased by $2.3 million and the spread between investment income and
interest credited to policyholder accounts dropped by $1.0 million. Policy
charges and other income increased by $0.3 million, and mortality expenses
decreased by $0.3 million over 1999.
In accordance with U.S. GAAP, premiums collected on annuity and universal
life contracts are not reported as revenues, but as deposits to insurance
liabilities. Revenues for these products are recognized over time in the form of
investment income and surrender or other charges. LPLA offers both fixed
annuities, which typically have an interest rate guaranteed for one to five
years, after which the company has the discretionary ability to change the
crediting rate to any rate not below a guaranteed rate, and variable annuities,
which allow the contract holders the ability to direct premiums into specific
investment portfolios with rates of return being based on the performance of the
portfolio. LPAL began selling guaranteed bond contracts, which are similar to
LPLA's fixed annuity products, in the Channel Islands and U.K. markets during
the second quarter of 2000.
Premiums for all life, annuity and guaranteed bond products were $156.6
million for the second quarter of 2000, an increase of 98% over the premiums
received in the second quarter of 1999. LPAL accounted for $12.7 million of the
total premium volume during the second quarter. The increase in LPLA's premiums
reflects the continuing strong performance of the five-year guaranteed rate
annuity product, Regal Accumulator 5, which added approximately $86.8 million in
sales during the second quarter. A new six-year guaranteed rate annuity product
was introduced by LPLA on August 1, 2000.
Interest and dividend income on investments was $24.5 million in the
second quarter of 2000 as compared with $20.9 million in 1999. This $3.6 million
increase was primarily due to asset growth from new business, offset by
acquisitions of capital appreciation (zero yield) securities. The carrying value
of the private equity portfolio as of June 30, 2000 was $152.7 million, compared
with $149.3 million as of December 31, 1999 and $66.1 million as of June 30,
1999.
Net investment gains were $351.9 million, including the $369.0 million
movement in net unrealized gains on the listed equity securities held in the
trading account. The value of the trading account portfolio increased from
$130.0 million as of March 31, 2000 to $499.0 million as of June 30, 2000. LPLA
sold a portion of one of its listed equity holdings during the second quarter of
2000 which resulted in a $23.4 million realized gain. This gain was offset by
permanent impairment writedowns on four private placement issues. As of June 30,
2000, LPLA's and LPAL's investment portfolios included seven former private
preferred stocks that have been converted to listed common equities and two
convertible bond holdings in publicly traded companies. During the second
quarter of 2000, two private preferred issues completed their initial public
offerings and two holdings were acquired for stock of publicly traded companies.
Subsequent to June 30, 2000, another company completed its initial public
offering.
<PAGE>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Total invested assets (defined as total assets excluding deferred policy
acquisition costs, other assets and income tax related accounts) increased to
$2.2 billion as of June 30, 2000, compared with $1.7 billion as of December 31,
1999 and $1.5 billion as of June 30, 1999. On total average invested assets for
the second quarter of 2000, the average annualized net return, including both
realized and unrealized investment gains and losses, was 51.81%, as compared
with 12.95% for the same period in 1999.
Policy surrender and mortality charge income increased by $0.3 million in
the second quarter of 2000 to $2.0 million, as compared with $1.7 million for
the same period in 1999. Full policy surrenders totaled $40.6 million in the
second quarter of 2000, a $20.3 million increase over the same period in 1999.
Internal policy conversions accounted for $13.5 million of the full surrenders
in the second quarter of 2000, compared with $1.3 million in same period in
1999.
Mortality expenses were $0.3 million lower in the second quarter of 2000
as compared with the same period in 1999. This increase was primarily due to
favorable experience on annuity death claims.
Interest credited on policyholder accounts increased by $4.5 million in
the second quarter of 2000 to $22.3 million, as compared with $17.8 million for
the same period in 1999. This increase was primarily due to new business growth
and an increase in overall policy crediting rates. The average rate credited to
policyholders was 5.60% in the second quarter of 2000, as compared with 5.41%
for the same period in 1999.
Amortization of deferred policy acquisition costs was $5.9 million in the
second quarter of 2000, an increase of $2.3 million from the same period in
1999. This increase was primarily due to new business growth, particularly in
the five-year product discussed above, and a higher level of policy surrenders.
General and administrative expenses were $3.0 million in the second
quarter of 2000, compared with $5.3 million in the same period in 1999. This
decrease was due to non-recurring legal expenses incurred during 1999. The
annualized expense ratio for the second quarter of 2000, which is defined as
general and administrative expenses divided by the average book value of total
cash and investments, was 0.64% as compared with 0.81% for the same period in
1999.
First six months of 2000 compared to first six months of 1999
For the six months ended June 30, 2000, the life insurance and annuities
segment contributed $318.4 million to the Group's overall income before taxes,
an increase of $266.9 million over the same period in 1999. The sum of net
realized and net unrealized investment gains for the six months ended June 30,
2000 increased by $267.1 million and general and administrative expenses
decreased by $2.3 million, partially offset by a $3.5 million increase in
amortization of deferred policy acquisition costs. Policy charges and other
income increased by $0.8 million, while the spread between investment income and
interest credited to policyholder accounts increased by $0.1 million to $4.4
million.
<PAGE>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Premiums for all life, annuity and guaranteed bond products were $261.9
million for the six months ended June 30, 2000, an increase of 115% over the
premiums received in the same period in 1999. LPAL accounted for $12.7 million
of the total premium volume during the six months ended June 30, 2000. The
increase in LPLA's premiums reflects the continuing strong performance of the
five-year guaranteed rate annuity product, Regal Accumulator 5, which added
approximately $143.7 million in sales during the six months ended June 30, 2000,
as compared with $40.1 million in sales for the same period in 1999 following
the product's introduction on May 1, 1999.
Interest and dividend income on investments was $47.2 million for the six
months ended June 30, 2000 as compared with $39.4 million in 1999. This $7.8
million increase was primarily due to asset growth from new business.
Net investment gains were $325.3 million, including the $333.7 million
movement in net unrealized gains on the listed equity securities held in the
trading account. The value of the trading account portfolio increased from
$165.3 million as of December 31, 1999 to $499.0 million as of June 30, 2000.
LPLA sold its remaining position in one of its listed equity holdings during the
six months ended June 30, 2000, which resulted in a $32.2 million realized gain.
This gain was offset by permanent impairment writedowns on four private
placement issues.
Total invested assets increased to $2.2 billion as of June 30, 2000,
compared with $1.7 billion as of December 31, 1999. On total average invested
assets for the six months ended June 30, 2000, the average annualized net
return, including both realized and unrealized investment gains and losses, was
26.87%, as compared with 14.11% for the same period in 1999.
Policy surrender and mortality charge income increased by $0.6 million
for the six months ended June 30, 2000 to $3.8 million, as compared with $3.2
million for the same period in 1999. Full policy surrenders totaled $72.2
million for the six months ended June 30, 2000, a $35.4 million increase over
the same period in 1999. Internal policy conversions accounted for $22.3 million
of the full surrenders for the six months ended June 30, 2000, compared with
$1.4 million in same period in 1999.
Mortality expenses were $0.1 million lower for the six months ended June
30, 2000 as compared with the same period in 1999.
Interest credited on policyholder accounts increased by $7.8 million for
the six months ended June 30, 2000 to $42.8 million, as compared with $35.0
million for the same period in 1999. This increase was primarily due to new
business growth and an increase in overall policy crediting rates. The average
rate credited to policyholders was 5.47% for the six months ended June 30, 2000,
as compared with 5.36% for the same period in 1999.
Amortization of deferred policy acquisition costs was $11.2 million for
the six months ended June 30, 2000, an increase of $3.5 million from the same
period in 1999. This increase was primarily due to new business growth,
particularly in the five-year product discussed above, and a higher level of
policy surrenders.
<PAGE>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
General and administrative expenses were $4.9 million for the six months
ended June 30, 2000, compared with $7.2 million in the same period in 1999. This
decrease was due to non-recurring legal expenses incurred during 1999. The
annualized expense ratio for the six months ended June 30, 2000, which is
defined as general and administrative expenses divided by the average book value
of cash and investments, was 0.56% as compared with 0.78% for the same period in
1999.
London Pacific Assurance Limited, which began its operations in the first
quarter of 2000, sells a single premium term life insurance bond designed to
offer a yield higher than bank deposits. The single premium investment, the
Guaranteed Return Bond, offers a guaranteed yield and a guaranteed return of
capital at maturity for either three or five years. The yield can be taken as
either a regular payment or as capital appreciation. Through June 30, 2000,
premiums totaling $12.7 million had been received, of which approximately 75%
represented sales of the three-year bond. Sales have been made in the Channel
Islands, the U.K. and the Isle of Man, with over 60% of the premiums from
Jersey, Channel Islands investors.
The emphasis in the second half of 2000 will be to continue to promote
the Guaranteed Return Bond in the Channel Islands, the Isle of Man and the U.K.
by way of targeted trade advertising and presentations.
Asset Management
The following table sets out, for the three and six month periods ended
June 30, 2000 and 1999, an analysis of the asset management segment's results of
operations.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2000 1999 2000 1999
--------- --------- --------- --------
(In thousands)
<S> <C> <C> <C> <C>
Revenues ...................................................... $ 1,857 $ 1,729 $ 3,759 $ 3,169
Operating expenses ............................................ 1,738 1,463 2,993 2,835
--------- --------- --------- --------
Income before income tax expense .............................. $ 119 $ 266 $ 766 $ 334
--------- --------- --------- --------
--------- --------- --------- --------
</TABLE>
Second quarter of 2000 compared to second quarter of 1999
The asset management segment primarily includes the U.S. fund management
operations of Berkeley Capital Management ("BCM"). Revenues of BCM declined in
the second quarter of 2000, as compared with the same period in 1999, by 6% to
$1.3 million. Expenses increased by 22% to $1.7 million, primarily due to an
exceptional charge related to an employee benefit plan. Profitability has been
significantly impacted by lower than planned growth in the wrap fee account
business, with sales for the second quarter of 2000 largely offset by
redemptions. Redemptions occurred primarily in the Value Equity product area, as
the flow of investment capital into entrepreneurial growth companies enhanced
the performance of growth equity funds and diminished the returns of value style
portfolios. Total wrap assets under management as of June 30, 2000 were
approximately $890 million, compared with approximately $863 million as of March
31, 2000.
<PAGE>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Included in the revenues of the asset management segment for the second
quarter of 2000 are fees from the insurance business segment of $0.7 million,
compared with $0.4 million for the same period in 1999.
First six months of 2000 compared to first six months of 1999
For the six months ended June 30, 2000, revenues of BCM increased by 6%
to $2.7 million. Expenses increased by 7% to $2.9 million, primarily due to an
exceptional charge related to an employee benefit plan. Profitability has been
significantly impacted by lower than planned growth in the wrap fee account
business, with sales for the first half of 2000 more than offset by redemptions.
Redemptions occurred primarily in the Value Equity product area, as the flow of
investment capital into entrepreneurial growth companies enhanced the
performance of growth equity funds and diminished the returns of value style
portfolios. Total wrap assets under management as of June 30, 2000 were
approximately $890 million, down from $972 million as of December 31, 1999.
Included in the revenues of the asset management segment for the first
six months of 2000 are fees from the insurance business segment of $1.2 million,
compared with $0.7 million for the same period in 1999.
During the second half of 2000, BCM plans to add a new wrap product which
blends its growth and value styles into a single product. The goal of adding
this product is to boost BCM's assets under management and profitability in
future years.
Financial Advisory Services
The following table sets out, for the three and six month periods ended
June 30, 2000 and 1999, an analysis of the financial advisory services segment's
results of operations.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2000 1999 2000 1999
--------- --------- --------- --------
(In thousands)
<S> <C> <C> <C> <C>
Revenues:
Financial advisory services fees............................... $ 5,720 $ 4,982 $ 11,764 $ 9,963
Expenses:
Commissions.................................................... 4,032 3,269 8,405 6,542
Operating expenses............................................. 2,855 1,545 5,165 3,068
--------- -------- --------- --------
6,887 4,814 13,570 9,610
--------- -------- --------- --------
Income (loss) before income tax expense........................ $ (1,167) $ 168 $ (1,806) $ 353
--------- -------- --------- --------
--------- -------- --------- --------
</TABLE>
<PAGE>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Second quarter of 2000 compared to second quarter of 1999
Financial advisory services income decreased from $0.2 million in the
second quarter of 1999 to a loss of $1.2 million in the second quarter of 2000.
Revenues of London Pacific Advisors ("LPA") (formerly SAI Financial
Advisors) increased by $0.7 million to $5.7 million in the second quarter of
2000. Asset management and consulting fees and broker-dealer revenues increased
due to the company's continued expansion of its network of financial advisors
and assets under management, consulting, servicing or administration. These
assets grew to $1.8 billion at the end of the second quarter of 2000 from $1.4
billion at the end of the second quarter of 1999, after excluding $263 million
in assets administered by Select Benefit Consultants, Inc., which was sold on
December 31, 1999. There was a corresponding increase in commission expense of
$0.8 million to $4.0 million.
LPA's gross revenues less commissions for the second quarter of 2000 were
$1.7 million, which was level with the second quarter of 1999. The rate of
growth in revenues less commissions did not correspond with the rate of growth
in gross revenues primarily because of the contractual decline in the percentage
of fees received by LPA for administering managed portfolios on behalf of
another company. During the second quarter of 1999, LPA received 65% of the
revenue stream on that contract and during the second quarter of 2000, LPA
received 25% of the revenue stream. These percentage decreases were
contractually set in 1996 and the contract was set to expire on September 30,
1999. During the second quarter of 1999, management negotiated a new three-year
contract at a rate of 25% of the revenue stream, effective from October 1, 1999.
There was no corresponding decline in LPA's operating costs related to these
portfolio administration services.
Operating expenses, excluding costs of the Group's Internet based
initiative, increased by 21% to $1.9 million in the second quarter of 2000
compared with the second quarter of 1999. Staff costs increased by 11% primarily
due to staffing additions made throughout 1999, as the company positioned itself
for expected future growth in 2000 and beyond. Excluding staff costs, operating
expenses increased by 44% in the second quarter of 2000 compared with the second
quarter of 1999, primarily due to increases in advertising costs.
The contractual adjustment to the servicing fees discussed above will cut
into profitability for the full year 2000. However, the company is focusing more
of its marketing efforts on large institutional clients with the goal of adding
sizeable revenue blocks at higher margins.
In late 1999, the Group decided to make the LPA business the foundation
for an Internet based initiative that can then be migrated to several other
vertical markets in which the Group has expertise. The costs for this initiative
included in the income statement for the second quarter of 2000 were $1.0
million, and it is expected that further development costs will increase total
expenses in the financial advisory services segment throughout 2000.
First six months of 2000 compared to first six months of 1999
Financial advisory services income decreased from $0.4 million in the
first half of 1999 to a loss of $1.8 million in the first half of 2000.
<PAGE>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Revenues of LPA increased by $1.8 million to $11.8 million in the six
months ended June 30, 2000. Asset management and consulting fees and
broker-dealer revenues increased due to the company's continued expansion of its
network of financial advisors and assets under management, consulting, servicing
or administration. These assets grew to $1.8 billion as of June 30, 2000 from
$1.4 billion as of June 30, 1999, after excluding $263 million in assets
administered by Select Benefit Consultants, Inc., which was sold on December 31,
1999. There was a corresponding increase in commission expense of $1.9 million
to $8.4 million.
LPA's gross revenues less commissions for the six months ended June 30,
2000 were $3.4 million, which was level with the same period in 1999. The rate
of growth in revenues less commissions did not correspond with the rate of
growth in gross revenues primarily because of the contractual decline in the
percentage of fees received by LPA for administering managed portfolios on
behalf of another company, as described in the previous section relating to the
second quarter of 2000.
Operating expenses, excluding costs of the Group's Internet based
initiative, increased by 21% to $3.7 million in the six months ended June 30,
2000 as compared with the same period in 1999. Staff costs increased by 13%
primarily due to staffing additions made throughout 1999, as the company
positioned itself for expected future growth in 2000 and beyond. Excluding staff
costs, operating expenses increased by 38% in the six months ended June 30, 2000
compared with the same period in 1999, primarily due to increases in advertising
costs.
The costs of the Group's Internet based initiative included in the income
statement for the six months ended June 30, 2000 were $1.5 million.
Venture Capital Management
The following table sets out, for the three and six month periods ended
June 30, 2000 and 1999, an analysis of the venture capital management segment's
results of operations.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2000 1999 2000 1999
--------- --------- --------- --------
(In thousands)
<S> <C> <C> <C> <C>
Revenues:
Management fees................................................ $ 1,864 $ 1,541 $ 5,670 $ 4,686
Investment income.............................................. 127 232 272 605
Realized investment gains (losses)............................. 8,556 (6,407) 8,640 (6,407)
Unrealized investment gains (losses)........................... 57,283 16,138 20,463 16,138
--------- --------- -------- --------
Total revenues and investment gains (losses)................... 67,830 11,504 35,045 15,022
Operating expenses............................................. 3,616 5,397 5,473 7,761
--------- --------- -------- --------
Income before income tax expense............................... $ 64,214 $ 6,107 $ 29,572 $ 7,261
--------- --------- -------- --------
--------- --------- -------- --------
</TABLE>
<PAGE>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Second quarter of 2000 compared to second quarter of 1999
Income before taxes from the venture capital management segment increased
from $6.1 million in the second quarter of 1999 to $64.2 million in the second
quarter of 2000. This increase was attributable to the movement in net
unrealized investment gains for the quarter on the listed equity securities held
in the trading account. These positions in listed equity securities are a result
of private equity transactions in technology companies.
The movement in net unrealized investment gains in the listed equity
portfolio from March 31, 2000 to June 30, 2000 was $57.3 million. Total
unrealized investment gains in this portfolio as of March 31, 2000 were $163.0
million. These unrealized investment gains increased to $220.3 million as of
June 30, 2000. Declines in market values totaling $50.1 million on the four
investments held as of March 31, 2000 were more than offset by unrealized gains
of $107.4 million on three investments that went public, or were acquired,
during the second quarter of 2000.
Significant fluctuations in net unrealized gains in the listed equity
trading account are likely in future quarters, reflecting equity market
volatility, especially in the technology sector. The potential impact of losses
relating to the old private debt portfolio has declined over the past twelve
months due to the increase in the Group's net assets, as well as due to
writedowns taken against this portfolio at the end of 1999 and in the second
quarter of 2000, and sales or redemptions in the latter part of 1999 and the
first half of 2000.
First six months of 2000 compared to first six months of 1999
Income before taxes from the venture capital management segment increased
from $7.3 million in the six months ended June 30, 1999 to $29.6 million in the
six months ended June 30, 2000. This increase was attributable to the movement
in net unrealized investment gains for the first six months of 2000 on the
listed equity securities held in the trading account.
The movement in net unrealized investment gains in the listed equity
portfolio from December 31, 1999 to June 30, 2000 was $20.5 million. Total
unrealized investment gains in this portfolio as of December 31, 1999 were
$199.8 million. These unrealized investment gains increased to $220.3 million as
of June 30, 2000. Declines in market values totaling $124.5 million on the three
investments held as of December 31, 1999 were more than offset by unrealized
gains of $145.0 million on four investments that went public, or were acquired,
during the first six months of 2000.
Corporate and Other
Second quarter of 2000 compared to second quarter of 1999
Corporate expenses increased by $0.4 million to $1.1 million for the
second quarter of 2000, primarily due to the costs of raising the public profile
of the Group, including the hiring of a public relations firm, the costs of SEC
reporting, and increased registrar fees.
Interest income earned by the Group (excluding the life insurance and
annuity business) decreased by $0.4 million to $0.4 million in the second
quarter of 2000 as compared with the second quarter of 1999,
<PAGE>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
primarily due to the decrease in cash and cash equivalents held by the Group.
Group cash was used during the period between June 30, 1999 and June 30, 2000
primarily to pay dividends and for investment purchases.
First six months of 2000 compared to first six months of 1999
Corporate expenses increased by $0.6 million to $2.6 million for the
first six months of 2000, primarily due to the costs of raising the public
profile of the Group, including the hiring of a public relations firm, the costs
of SEC reporting, and increased registrar fees.
Interest income earned by the Group (excluding the life insurance and
annuity business) decreased by $0.8 million to $0.9 million in the first six
months of 2000 as compared with the first six months of 1999, primarily due to
the decrease in cash and cash equivalents held by the Group. Group cash was used
during the period between June 30, 1999 and June 30, 2000 primarily to pay
dividends and for investment purchases.
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. The Group is
liable for income tax in Jersey at a rate of 20%. In the United States, the
Group is liable for both federal and California taxes at 34-35% and 8.84%,
respectively. Capital gains on certain investments are exempt from Jersey and
Guernsey taxation.
Second quarter of 2000 compared to second quarter of 1999
The effective tax rate, as a percentage of income before income taxes for
the second quarter of 1999, was 25%. The high tax rate in this period was
attributable to the high percentage (76%) of income contributed by the U.S. life
insurance and annuity company, which is subject to federal tax at approximately
35%. The effective tax rate, as a percentage of income before income taxes for
the second quarter of 2000, was 17%. This lower effective tax rate reflects the
fact that only 49% of income for the second quarter of 2000 was contributed by
the U.S. life and annuity company, and that 51% of income for that period
represented net capital gains from the Jersey and Guernsey operations (where
capital gains are not taxed).
First six months of 2000 compared to first six months of 1999
The effective tax rate, as a percentage of income before income taxes for
the first six months of 1999, was 31%. The high tax rate in this period was
attributable to the high percentage (87%) of income contributed by the U.S. life
insurance and annuity company, which is subject to federal tax at approximately
35%. The effective tax rate, as a percentage of income before income taxes for
the first six months of 2000, was 18%. This lower effective tax rate reflects
the fact that only 50% of income for the first six months of 2000 was
contributed by the U.S. life and annuity company, and that 50% of income for
that period represented net capital gains from the Jersey and Guernsey
operations (where capital gains are not taxed).
<PAGE>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources
On a consolidated basis as of June 30, 2000, cash and cash equivalents of
the Group, excluding the life insurance business segment, amounted to $18.0
million. The Group, excluding the life insurance business segment, also held
$134.8 million of listed equity securities which could be sold within a short
period of time. The Group's management believes that the balances of cash and
liquid resources, together with its $37.1 million availability on a $50.0
million bank facility, should be sufficient to satisfy the Group's anticipated
financing requirements during the next twelve months.
Shareholders' equity increased during the first six months of 2000 by
$270.7 million to $823.2 million, primarily due to net income for the period of
$284.3 million ($4.72 per ordinary share and ADR on a diluted basis). $49.4
million of loans to the Company's employee share option trusts have been netted
against shareholders' equity as of June 30, 2000. These loans will be repaid as
employees exercise their share options.
As of June 30, 2000 and December 31, 1999, the Group had no bank
borrowings, bond issues or convertible securities outstanding. However, as of
these dates, $12.9 million and $11.8 million, respectively, of the Group's $50.0
million bank facility had been utilized in the form of letters of credit and
guarantees in connection with certain portfolio companies.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The nature of the Group's businesses exposes the Group to market risk.
Market risk is the risk of loss that may occur when interest rate and equity
price movements adversely change the value of invested assets.
Interest Rate Risk
The Group's life insurance and annuity business is subject to risk from
interest rate fluctuations when there is a difference between the amount of
interest earning assets and the amount of interest bearing liabilities that are
prepaid, mature or are repriced in specific periods. London Pacific Life &
Annuity Company ("LPLA") and London Pacific Assurance Limited ("LPAL") attempt
to minimize their exposure to interest rate fluctuations by managing the
characteristics of their assets and liabilities so that the effects of changes
are reasonably likely to be offset. LPLA's and LPAL's principal asset/liability
management goals are to achieve sufficient cash flows from invested assets to
fund contractual obligations, while maximizing investment returns. LPLA and LPAL
have not used derivative financial instruments to achieve their asset/liability
management goals.
Exposure to interest rate risk is estimated by performing sensitivity
tests based on duration analysis of LPLA's investment and product portfolios.
Duration is an option adjusted measure of the percentage change in the market
value of the assets or liabilities in response to a given change in interest
rates. For LPAL, given that policyholder liabilities are less than $13 million,
interest rate risk is considered to be minimal. To demonstrate the sensitivity
of LPLA's assets and liabilities, tests performed on LPLA's assets and
liabilities indicated that, as of June 30, 2000, if market interest rates had
suddenly increased by 100 basis points, the fair value of the investment
portfolio that is subject to interest rate risk, which is approximately $1.5
billion, would have decreased by $71.5 million, compared with a decrease of
$59.6 million for the calculated market
<PAGE>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(continued)
value of liabilities, which are approximately $1.4 billion. Conversely, a sudden
decrease of 100 basis points would have increased the investment portfolio's
fair value by $76.5 million, compared with an increase in the calculated market
value of liabilities of $59.0 million. These results depend upon certain key
assumptions regarding the behavior of interest sensitive cash flows. Although
LPLA has attempted to ensure the assumptions used are based on the best
available data, cash flows cannot be forecasted with certainty, and can deviate
materially from the assumed results.
Equity Price Risk
The Group, including LPLA and LPAL, is exposed to equity price risk on
the listed equity securities held almost entirely in its 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 the Company's
net income, because the Group's 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.
If the market price of the Group's listed equity portfolio as of June 30,
2000 and December 31, 1999, which totaled $807.2 million and $408.2 million,
respectively, had abruptly increased or decreased by 50%, the market value of
the listed equity portfolio would have increased or decreased by $403.6 million
and $204.1 million, respectively.
Part II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
There are no legal proceedings pending against the Group which are likely
to have a material adverse effect on the financial position or results of
operations of the Company and its subsidiaries.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 18, 2000, the annual meeting of the shareholders of London
Pacific Group Limited was held and the matters submitted to a vote were as
follows:
(1) To declare a final 1999 dividend of 18.0 cents per share gross on the
ordinary shares; votes received for: 37,123,554, against: 0, withheld: 0.
(2) For the re-election of three directors; Mr. G. L. Wilcox, votes received
for: 37,123,554, against: 0, withheld: 0; Mr. J. Clennett, votes received
for: 37,123,554, against: 0, withheld: 0; The Viscount Trenchard, votes
received for: 37,120,679, against: 2,875, withheld: 0. Directors whose term
of office continued, and who were not up for re-election at this annual
meeting, include Mr. A. I. Trueger, Mr. V. A. Hebert, Marquess of Tavistock
and Mr. H. E. Hughes, Jr.
<PAGE>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(continued)
(3) To reappoint PricewaterhouseCoopers as auditors of the Company and to
authorize the directors to fix their remuneration; votes received for:
37,123,554, against: 0, withheld: 0.
(4) To sanction the purchase of shares of the Company; votes received for:
37,123,554, against: 0, withheld: 0.
(5) To sanction the change in the Company's Articles of Association; votes
received for: 37,123,554, against: 0, withheld: 0.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed herewith or incorporated by reference
pursuant to Rule 12b-32 under the Securities Act of 1934:
Exhibit No. Title
----------- -----
3.(I) Memorandum and Articles of Association of London Pacific Group Limited
as amended and restated on April 18, 2000.
27 Financial Data Schedule for the six months ended June 30, 2000.
(b) REPORTS ON FORM 8-K
The Company filed a Form 8-K on May 8, 2000, describing an amendment to
the Company's Articles of Association. The purpose of the amendment was to allow
the Company's Ordinary Shares to be traded and issued in uncertificated form. No
financial statements were filed with this report.
<PAGE>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LONDON PACIFIC GROUP LIMITED
(Registrant)
Date: August 14, 2000 By: /s/ Ian K. Whitehead
----------------------
Ian K. Whitehead
Chief Financial Officer
(Principal Financial and
Accounting Officer and
Duly Authorized Officer
of the Registrant)
<PAGE>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit No. Title
----------- -----
3.(I) Memorandum and Articles of Association of London Pacific Group Limited
as amended and restated on April 18, 2000.
27 Financial Data Schedule for the six months ended June 30, 2000.
