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 September 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 November 13, 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 September 30, 2000
and December 31, 1999.............................................. 3
Condensed Consolidated Statements of Income for the three and
nine months ended September 30, 2000 and 1999...................... 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 and 1999........................... 5
Consolidated Statements of Changes in Shareholders' Equity for
the nine months ended September 30, 2000 and 1999.................. 6
Consolidated Statements of Comprehensive Income for the three
and nine months ended September 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 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>
September 30, December 31,
2000 1999
------------ -----------
ASSETS (Unaudited)
<S> <C> <C>
Cash and cash equivalents....................................................... $ 48,545 $ 49,703
Cash held in escrow ............................................................ - 3,110
Investments, principally of life insurance subsidiaries:
Fixed maturities:
Available-for-sale, at fair value (amortized cost: September 30, 2000,
$1,245,370; December 31, 1999, $1,037,085) .............................. 1,178,188 989,065
Held-to-maturity, at amortized cost (fair value: September 30, 2000,
$140,599; December 31, 1999, $221,167) .................................. 140,737 222,110
Equity securities:
Trading account, at fair value (cost: September 30, 2000, $94,006;
December 31, 1999, $34,680) ............................................. 751,003 399,844
Available-for-sale, at fair value (cost: September 30, 2000, $220,757;
December 31, 1999, $186,403) ............................................ 212,079 182,926
Policy loans ............................................................... 10,298 10,385
---------- ----------
Total investments .............................................................. 2,292,305 1,804,330
Deferred policy acquisition costs .............................................. 169,215 144,518
Assets held in separate accounts ............................................... 198,452 125,528
Receivables .................................................................... 38,413 29,287
Due from brokers ............................................................... 53,951 27,048
Other assets ................................................................... 13,020 19,264
---------- ----------
Total assets ................................................................... $2,813,901 $2,202,788
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Life insurance policy liabilities .............................................. $1,619,866 $1,416,423
Liabilities related to separate accounts ....................................... 198,301 126,703
Short-term bank loan ........................................................... 20,066 -
Accounts payable and accrued liabilities ....................................... 14,446 34,912
Income taxes payable and other liabilities ..................................... 5,757 5,748
Deferred income taxes .......................................................... 110,630 66,527
---------- ----------
Total liabilities .............................................................. 1,969,066 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 ..................................................... 65,624 62,307
Retained earnings .............................................................. 861,073 559,344
Employee benefit trusts, at cost (shares: September 30, 2000, 12,843,381;
December 31, 1999, 15,331,656) ............................................. (58,105) (54,033)
Accumulated other comprehensive income (loss) .................................. (26,979) (18,365)
---------- ----------
Total shareholders' equity ..................................................... 844,835 552,475
---------- ----------
Total liabilities and shareholders' equity ..................................... $2,813,901 $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 Nine Months Ended
September 30, September 30,
-------------------- -------------------
2000 1999 2000 1999
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Revenues:
Investment income............................................... $ 29,799 $ 24,581 $ 83,131 $ 71,710
Insurance policy charges........................................ 1,822 1,922 5,660 5,162
Financial advisory services, asset management and other
fee income .................................................. 7,329 6,596 24,325 19,612
Realized investment gains (losses).............................. 87,982 968 88,170 (4,861)
Unrealized investment gains (losses) on trading securities ..... (62,359) 97,981 291,834 171,738
-------- -------- -------- --------
64,573 132,048 493,120 263,361
Expenses:
Interest credited on insurance policyholder accounts............ 24,610 18,738 67,385 53,787
Amortization of deferred policy acquisition costs............... 4,769 5,102 16,011 12,858
Operating expenses.............................................. 13,894 10,961 43,154 40,202
Goodwill amortization........................................... 58 59 173 177
Interest expense................................................ 128 15 142 37
-------- -------- -------- --------
43,459 34,875 126,865 107,061
-------- -------- -------- --------
Income before income tax expense................................ 21,114 97,173 366,255 156,300
Income tax expense (benefit).................................... (7,947) 7,622 52,901 25,951
-------- -------- -------- --------
Net income...................................................... $ 29,061 $ 89,551 $313,354 $130,349
-------- -------- -------- --------
-------- -------- -------- --------
Interim dividend declared
(2000 and 1999: 11.0 cents per share gross; 8.8 cents per ADR). $ - $ - $ 4,608 $ 4,408
-------- -------- -------- --------
-------- -------- -------- --------
Earnings per share and ADR, basic............................... $ 0.56 $ 1.81 $ 6.21 $ 2.64
Earnings per share and ADR, diluted............................. $ 0.47 $ 1.62 $ 5.16 $ 2.42
</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>
Nine Months Ended
September 30,
-------------------------
2000 1999
--------- ---------
<S> <C> <C>
Net cash provided by operating activities....................................... $ 233,824 $ 70,764
Cash flows from investing activities:
Purchases of held-to-maturity fixed maturity securities ........................ (2,328) (4,080)
Purchases of available-for-sale fixed maturity securities ...................... (239,332) (252,975)
Purchases of available-for-sale equity securities .............................. (90,142) (37,515)
Proceeds from redemption of held-to-maturity fixed maturity securities ......... 37,098 33,414
Proceeds from sale of available-for-sale fixed maturity securities ............. 52,416 132,342
Proceeds from sale of available-for-sale equity securities ..................... 2,243 13,224
Capital expenditures ........................................................... (1,411) (971)
Other cash flows from investing activities ..................................... (1,374) (1,751)
--------- ---------
Net cash used in investing activities .......................................... (242,830) (118,312)
--------- ---------
Cash flows from financing activities:
Issue of ordinary shares ....................................................... - 1
Dividends paid ................................................................. (11,625) (11,450)
Short-term bank loan ........................................................... 20,066 -
Payment of bank overdraft ...................................................... (593) (606)
--------- ---------
Net cash provided by (used in) financing activities ............................ 7,848 (12,055)
--------- ---------
Net decrease in cash and cash equivalents ...................................... (1,158) (59,603)
Cash and cash equivalents at beginning of year ................................. 49,703 111,414
--------- ---------
Cash and cash equivalents at end of period ..................................... $ 48,545 $ 51,811
--------- ---------
--------- ---------
</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>
Accumulated
Other
Ordinary Additional Employee Compre- Total
Shares at Paid-in Retained Benefit hensive Shareholders'
Par Value Capital Earnings Trusts Income (Loss) 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 - - - - 1
Net unrealized gains (losses) on
available-for-sale securities... - - - - (12,754) (12,754)
Purchase of shares by the
employee benefit trusts......... - - - (3,345) - (3,345)
Exercise of employee share
options......................... - 54 - 1,843 - 1,897
Net realized gains on disposal
of shares held by the
employee benefit trusts......... - 40 - - - 40
Cash dividends declared............ - - (11,450) - - (11,450)
Net income......................... - - 130,349 - - 130,349
-------- --------- ---------- --------- -------- ---------
Balance, September 30, 1999........ $ 3,222 $ 62,293 $ 437,684 $ (53,784) $(16,196) $ 433,219
-------- --------- ---------- --------- -------- ---------
-------- --------- ---------- --------- -------- ---------
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Ordinary Additional Employee Compre- Total
Shares at Paid-in Retained Benefit hensive Shareholders'
Par Value Capital Earnings Trusts Income (Loss) Equity
---------- ---------- ---------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 2000........... $ 3,222 $ 62,307 $ 559,344 $ (54,033) $(18,365) $ 552,475
Net unrealized gains (losses) on
available-for-sale securities... - - - - (8,630) (8,630)
Foreign currency translation
adjustment...................... - - - - 16 16
Purchase of shares by the
employee benefit trusts......... - - - (12,712) - (12,712)
Exercise of employee share
options, including income
tax effect...................... - 2,508 - 8,640 - 11,148
Extension of employee
share options................... - 1,150 - - - 1,150
Net realized gains (losses) on
disposal of shares held by the
employee benefit trusts......... - (341) - - - (341)
Cash dividends declared............ - - (11,625) - - (11,625)
Net income ........................ - - 313,354 - - 313,354
-------- --------- ---------- --------- -------- ---------
Balance, September 30, 2000........ $ 3,222 $ 65,624 $ 861,073 $ (58,105) $(26,979) $ 844,835
-------- --------- ---------- --------- -------- ---------
-------- --------- ---------- --------- -------- ---------
</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 Nine Months Ended
September 30, September 30,
-------------------- -------------------
2000 1999 2000 1999
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Net income ..................................................... $ 29,061 $ 89,551 $313,354 $130,349
Other comprehensive income (loss) net of income taxes:
Foreign currency translation adjustments ....................... 16 - 16 -
Unrealized gains (losses) on available-for-sale securities
arising during the period, net of income taxes and
deferred policy acquisition cost amortization adjustments
of $(11,355), $11,316, $15,502 and $24,392, respectively..... 3,666 (5,829) (8,630) (12,754)
-------- -------- -------- --------
Other comprehensive income (loss) .............................. 3,682 (5,829) (8,614) (12,754)
-------- -------- -------- --------
Comprehensive income ........................................... $ 32,743 $ 83,722 $304,740 $117,595
-------- -------- -------- --------
-------- -------- -------- --------
</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 (collectively, "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 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 nine month periods ended September 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, changes in unrealized gains or losses on available-for-sale
securities, and foreign currency translation adjustments arising on the
translation of the Group's Jersey, Channel Islands insurance subsidiary.
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 and the Agent
Loyalty Opportunity Trust which are regarded as treasury stock for the purposes
of this calculation.
The Group has issued employee share options, which are considered
potential common stock under SFAS 128. 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 Nine Months Ended
September 30, September 30,
-------------------- -------------------
2000 1999 2000 1999
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Net income .................................................... $ 29,061 $ 89,551 $ 313,354 $ 130,349
Basic:
Weighted average number of ordinary shares outstanding,
excluding shares held by the employee benefit trusts........ 51,625,224 49,476,240 50,457,786 49,361,903
---------- ---------- ---------- ----------
Earnings per share and ADR, basic ............................. $0.56 $1.81 $6.21 $2.64
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted:
Weighted average number of ordinary shares outstanding,
excluding shares held by the employee benefit trusts........ 51,625,224 49,476,240 50,457,786 49,361,903
Effect of dilutive securities (employee share options) ........ 9,737,286 5,971,712 10,322,344 4,491,193
---------- ---------- ---------- ----------
Weighted average ordinary shares used in diluted earnings
per share calculations ...................................... 61,362,510 55,447,952 60,780,130 53,853,096
---------- ---------- ---------- ----------
Earnings per share and ADR, diluted............................ $0.47 $1.62 $5.16 $2.42
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</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 September 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 $2.8 million and $2.1 million, respectively. During the nine month
periods ended September 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 $7.7 million and $7.4 million,
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 Nine Months Ended
September 30, September 30,
-------------------- -------------------
2000 1999 2000 1999
--------- --------- --------- --------
REVENUES (In thousands)
<S> <C> <C> <C> <C>
Operating segments:
Life insurance and annuities (1), (2).......................... $ 52,911 $ 43,951 $429,959 $145,332
Asset management (1)........................................... 2,153 1,831 5,912 5,000
Financial advisory services ................................... 5,692 4,847 17,456 14,810
Venture capital management (2) ................................ 3,605 80,772 38,650 95,794
-------- -------- -------- --------
64,361 131,401 491,977 260,936
Reconciliation of segment amounts to consolidated amounts:
Interest income ............................................... 212 647 1,143 2,425
-------- -------- -------- --------
Consolidated revenues and investment gains .................... $ 64,573 $132,048 $493,120 $263,361
-------- --------- -------- --------
-------- --------- -------- --------
INCOME BEFORE INCOME TAX EXPENSE
Operating segments:
Life insurance and annuities (1), (2).......................... $ 21,480 $ 17,808 $339,850 $ 69,344
Asset management (1) .......................................... 803 462 1,569 796
Financial advisory services ................................... (1,323) 59 (3,129) 412
Venture capital management (2) ................................ 2,244 79,395 31,816 86,656
-------- -------- -------- --------
23,204 97,724 370,106 157,208
Reconciliation of segment amounts to consolidated amounts:
Interest income ............................................... 212 647 1,143 2,425
Corporate expenses ............................................ (2,116) (1,124) (4,679) (3,119)
Goodwill amortization ......................................... (58) (59) (173) (177)
Interest expense .............................................. (128) (15) (142) (37)
-------- -------- -------- --------
Consolidated income before income tax expense ................. $ 21,114 $ 97,173 $366,255 $156,300
-------- -------- -------- --------
-------- -------- -------- --------
-------------------------------------
(1) Intersegmental revenue in asset management segment
from life insurance and annuities segment................ $ 953 $ 434 $ 2,150 $ 1,126
-------- -------- -------- --------
-------- -------- -------- --------
(2) Intersegmental revenue in venture capital management
segment from life insurance and annuities segment........ $ 1,848 $ 1,625 $ 5,594 $ 6,311
-------- -------- -------- --------
-------- -------- -------- --------
</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 nine months of
2000 were in the venture capital management segment, where assets increased by
$24.2 million to $302.1 million as of September 30, 2000, and in the life
insurance and annuities segment, where assets increased by $597.3 million to
$2.5 billion as of September 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
("SEC").
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 nine month periods ended
September 30, 2000 and 1999, an analysis of the life insurance and annuities
segment's results of operations.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
2000 1999 2000 1999
--------- --------- --------- --------
(In thousands)
<S> <C> <C> <C> <C>
Revenues:
Investment income.............................................. $ 26,785 $ 21,731 $ 73,971 $ 61,099
Insurance policy charges ...................................... 1,822 1,922 5,660 5,162
Realized investment gains ..................................... 76,291 638 67,839 1,216
Unrealized investment gains (losses) on trading securities .... (52,424) 19,308 281,306 76,927
Other fee income .............................................. 437 352 1,183 928
-------- -------- -------- --------
Total revenues and investment gains .......................... 52,911 43,951 429,959 145,332
Expenses:
Interest credited on insurance policyholder accounts .......... 24,610 18,738 67,385 53,787
Amortization of deferred policy acquisition costs ............. 4,769 5,102 16,011 12,858
Mortality expenses ............................................ 66 35 (335) (302)
General and administrative expenses ........................... 1,986 2,268 7,048 9,645
-------- -------- -------- --------
31,431 26,143 90,109 75,988
-------- -------- -------- --------
Income before income tax expense .............................. $ 21,480 $ 17,808 $339,850 $ 69,344
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
<PAGE>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Third quarter of 2000 compared to third 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 $21.5 million to the Group's overall income before taxes
in the third quarter of 2000, an increase of $3.7 million over the same period
in 1999. The sum of net realized and net unrealized investment gains for the
third quarter increased by $3.9 million, general and administrative expenses
decreased by $0.3 million, amortization of deferred policy acquisition costs
decreased by $0.3 million, and the spread between investment income and interest
credited to policyholder accounts dropped by $0.8 million. Policy charges
decreased by $0.1 million and other fee income increased by $0.1 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 seven
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 $150.3
million for the third quarter of 2000, an increase of 48% over the premiums
received in the third quarter of 1999. LPAL accounted for $16.1 million of the
total premium volume during the third quarter. The increase in LPLA's premiums
reflects the continuing strong performance of the multi-year guaranteed rate
annuity product series, Regal Accumulator, which added approximately $81.4
million in sales during the third quarter.
Interest and dividend income on securities was $26.8 million in the third
quarter of 2000 as compared with $21.7 million in 1999. This $5.1 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 September 30, 2000 was $157.6 million,
compared with $149.3 million as of December 31, 1999 and $47.3 million as of
September 30, 1999.
Net investment gains during the third quarter of 2000 were $23.9 million,
including a $52.4 million net decline in the value of the listed equity
securities held in the trading account. The market value of the trading account
portfolio decreased from $551.6 million as of June 30, 2000 to $514.5 million as
of September 30, 2000, including portfolio additions of $18.3 million resulting
from the initial public offering of one of LPLA's private preferred stock
holdings. LPAL sold a portion of one of its listed equity holdings during the
quarter, which resulted in a $76.8 million realized gain based on an original
cost of $3.0 million. As of September 30, 2000, LPLA's and LPAL's investment
portfolios included eight former private preferred stocks that have been
converted to listed common equities and two convertible bond holdings in
publicly traded companies. Also as of September 30, 2000, two additional
investment holdings were in the process of being acquired by publicly traded
companies in exchange for their stock.
<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
$2.3 billion as of September 30, 2000, compared with $1.7 billion as of December
31, 1999 and $1.5 billion as of September 30, 1999. On total average invested
assets for the third quarter of 2000, the average annualized net return,
including both realized and unrealized investment gains and losses, was 8.88%,
as compared with 11.32% for the same period in 1999.
Policy surrender and other policy charge income decreased by $0.1 million
in the third quarter of 2000 to $1.8 million, as compared with $1.9 million for
the same period in 1999. Full policy surrenders totaled $37.9 million in the
third quarter of 2000, a $11.3 million increase over the same period in 1999.
These increased surrenders occurred in older blocks of business that were in the
later stages of their surrender penalty periods. Internal policy conversions
accounted for $12.0 million of the full surrenders in the third quarter of 2000,
compared with $8.1 million in same period in 1999.
Interest credited on policyholder accounts increased by $5.9 million in
the third quarter of 2000 to $24.6 million, as compared with $18.7 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 5.89% in the third quarter of 2000, as compared with 5.50% for
the same period in 1999.
Amortization of deferred policy acquisition costs was $4.8 million in the
third quarter of 2000, a decrease of $0.3 million from the same period in 1999.
This decrease was primarily due to the timing of actuarial true-up adjustments
in 1999, offset by the impact of increased surrender activity in 2000.
General and administrative expenses were $2.0 million in the third
quarter of 2000, compared with $2.3 million in the same period in 1999. This
$0.3 million decrease was due to lower professional fees and the receipt of
guaranty assessment refunds in the third quarter of 2000, offset by higher
employee compensation costs. The annualized expense ratio for the third quarter
of 2000, which is defined as general and administrative expenses divided by the
average book value of total cash and investments, was 0.31% as compared with
0.35% for the same period in 1999.
First nine months of 2000 compared to first nine months of 1999
For the first nine months of 2000, the life insurance and annuities
segment contributed $339.9 million to the Group's overall income before taxes,
an increase of $270.5 million over the same period in 1999. The sum of net
realized and net unrealized investment gains for the first nine months of 2000
increased by $271.0 million, general and administrative expenses decreased by
$2.6 million, and amortization of deferred policy acquisition costs increased by
$3.2 million. Policy charges and other fee income increased by $0.8 million,
while the spread between investment income and interest credited to policyholder
accounts decreased by $0.7 million to $6.6 million.
Premiums for all life, annuity and guaranteed bond products were $412.2
million for the first nine months of 2000, an increase of 85% over the premiums
received in the same period in 1999. LPAL accounted for $28.8 million of the
total premium volume during the first nine months of 2000. The increase in
LPLA's premiums reflects the continuing strong performance of the multi-year
guaranteed rate annuity product series, Regal Accumulator, which added
approximately $223.1 million in sales during the first nine months of 2000, as
compared with $96.9 million in sales for the same period in 1999.
<PAGE>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Interest and dividend income on investments was $74.0 million for the
first nine months of 2000 as compared with $61.1 million in 1999. This $12.9
million increase was primarily due to asset growth from new business.
Net investment gains were $349.1 million, including a $281.3 million
movement in net unrealized gains on the listed equity securities held in the
trading account. The market value of the trading account portfolio increased
from $186.5 million as of December 31, 1999 to $514.5 million as of September
30, 2000, including portfolio additions of $55.4 million resulting from the
initial public offerings or acquisitions by publicly traded companies of five of
LPLA's and LPAL's private preferred stock holdings. LPLA and LPAL sold portions
of their positions in two listed equity holdings during the first nine months of
2000, which resulted in $109.0 million of realized gains based on an original
cost of $8.7 million. These gains were partially offset by permanent impairment
writedowns on four private placement debt investments.
Total invested assets increased to $2.3 billion as of September 30, 2000,
compared with $1.7 billion as of December 31, 1999. On total average invested
assets for the nine months ended September 30, 2000, the average annualized net
return, including both realized and unrealized capital gains and losses, was
28.55%, as compared with 13.2% for the same period in 1999.
Policy surrender and other policy charge income increased by $0.5 million
for first nine months of 2000 to $5.7 million, as compared with $5.2 million for
the same period in 1999. Full policy surrenders totaled $110.1 million for the
first nine months of 2000, a $46.7 million increase over the same period in
1999. These increased surrenders occurred in older blocks of business that were
in the later stages of their surrender penalty periods. Internal policy
conversions accounted for $34.8 million of the full surrenders for the first
nine months of 2000, compared with $9.6 million in same period in 1999.
Interest credited on policyholder accounts increased by $13.6 million for
the first nine months of 2000 to $67.4 million, as compared with $53.8 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 5.76% for the first nine months of 2000, as
compared with 5.55% for the same period in 1999.
Amortization of deferred policy acquisition costs was $16.0 million for
the first nine months of 2000, an increase of $3.2 million from the same period
in 1999. This increase was primarily due to new business growth, particularly in
the multi-year annuity products discussed above, and a higher level of policy
surrenders.
General and administrative expenses were $7.0 million in the first nine
months of 2000, compared with $9.6 million in the same period in 1999. This
decrease was due to non-recurring legal expenses incurred during 1999, offset by
higher employee compensation costs. The annualized expense ratio for the nine
months ended September 30, 2000, which is defined as general and administrative
expenses divided by the average book value of total cash and investments, was
0.44% as compared with 0.82% for the same period in 1999.
<PAGE>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
LPAL, 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. LPAL had 513 policyholders as of September 30, 2000, and
premiums totaling $28.8 million had been generated through that date. Sales have
been made through 49 financial intermediaries in the Channel Islands, the U.K.
and the Isle of Man, with over 55% of the premiums received from Jersey, Channel
Islands investors.
Asset Management
The following table sets out, for the three and nine month periods ended
September 30, 2000 and 1999, an analysis of the asset management segment's
results of operations.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
2000 1999 2000 1999
--------- --------- --------- --------
(In thousands)
<S> <C> <C> <C> <C>
Revenues ...................................................... $ 2,153 $ 1,831 $ 5,912 $ 5,000
Operating expenses ............................................ 1,350 1,369 4,343 4,204
-------- -------- -------- --------
Income before income tax expense .............................. $ 803 $ 462 $ 1,569 $ 796
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
Third quarter of 2000 compared to third 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 third quarter of 2000, as compared with the same period in 1999, by 9% to
$1.3 million. Expenses remained level at $1.3 million. Profitability has been
impacted by lower than expected growth in the wrap fee account business, with
sales for the first nine months of 2000 more than offset by redemptions.
Redemptions occurred primarily in the Value Equity product area, while sales
were greater for the Growth Equity product, a trend consistent with the
industry. Total average wrap assets under management for the third quarter of
2000 were approximately $915 million, compared with approximately $936 million
for the third quarter of 1999.
Included in the revenues of the asset management segment for the third
quarter of 2000 are portfolio management fees from the insurance business
segment of $1.0 million, compared with $0.4 million for the same period in 1999.
These increased fees were primarily attributable to the larger portfolio of
listed equity securities held by the life insurance operation which is managed
by the Group's asset management subsidiary in Jersey.
<PAGE>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
First nine months of 2000 compared to first nine months of 1999
For the first nine months of 2000, revenues of BCM remained level at $4.1
million as compared with the same period in 1999. Expenses increased by 5% to
$4.3 million primarily due to an exceptional charge related to an employee
benefit plan. Profitability has been impacted by lower than planned growth in
the wrap fee account business, with sales for the first nine months of 2000 more
than offset by redemptions. Redemptions occurred primarily in the Value Equity
product area, while sales were greater for the Growth Equity product, a trend
consistent with the industry. Total wrap assets under management as of September
30, 2000 were approximately $940 million; these were up from $916 million as of
September 30, 1999, but down from $972 million as of December 31, 1999.
Included in the revenues of the asset management segment for the first
nine months of 2000 are portfolio management fees from the insurance business
segment of $2.2 million, compared with $1.1 million for the same period in 1999.
These increased fees were primarily attributable to the larger portfolio of
listed equity securities held by the life insurance operation which is managed
by the Group's asset management subsidiary in Jersey.
At the beginning of 2001, BCM plans to add a new wrap product which
blends its growth and value styles into a single equity 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 nine month periods ended
September 30, 2000 and 1999, an analysis of the financial advisory services
segment's results of operations.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
2000 1999 2000 1999
--------- --------- --------- --------
(In thousands)
<S> <C> <C> <C> <C>
Revenues:
Financial advisory services fees............................... $ 5,692 $ 4,847 $ 17,456 $ 14,810
Expenses:
Commissions.................................................... 4,174 3,276 12,579 9,818
Operating expenses............................................. 2,841 1,512 8,006 4,580
-------- -------- -------- --------
7,015 4,788 20,585 14,398
-------- -------- -------- --------
Income (loss) before income taxes ............................. $ (1,323) $ 59 $ (3,129) $ 412
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
<PAGE>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Third quarter of 2000 compared to third quarter of 1999
Financial advisory services income decreased from $0.06 million in the
third quarter of 1999 to a pre-tax loss of $1.3 million in the third quarter of
2000.
Revenues of London Pacific Advisors ("LPA") (formerly SAI Financial
Advisors) increased by $0.8 million to $5.7 million in the third quarter of
2000. Asset management and consulting fees 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 $1.9
billion at the end of the third quarter of 2000 from $1.3 billion at the end of
the third quarter of 1999, after excluding $250 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 $0.9 million to $4.2
million.
LPA's gross revenues less commissions for the third quarter of 2000 were
$1.5 million, compared with $1.6 million for the third 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. The contract was renewed during the third quarter of
1999 on less favorable terms. 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 39% to $2.1 million in the third quarter of 2000
compared with the third quarter of 1999. Staff costs increased by 37% primarily
due to staffing additions made throughout 1999 and 2000, as the company
positioned itself for expected growth and the launch of its new Internet based
initiative, in 2000. Excluding staff costs, operating expenses increased by 43%
in the third quarter of 2000 compared with the third quarter of 1999, primarily
due to the cost of new data processing systems.
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 third quarter of 2000 were $0.7
million, and it is expected that further development costs will be incurred in
the fourth quarter of 2000 as the new initiative is completed and rolled out.
First nine months of 2000 compared to first nine months of 1999
Financial advisory services income decreased from $0.4 million in the
first nine months of 1999 to a pre-tax loss of $3.1 million in the first nine
months 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 $2.6 million to $17.5 million in the first
nine months 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 $1.9 billion as of September 30, 2000 from
$1.3 billion as of September 30, 1999, after excluding $250 million in assets
administered by Select Benefit Consultants, Inc., which was sold on December 31,
1999. There was a corresponding $2.8 million increase in commission expense to
$12.6 million.
LPA's gross revenues less commissions for the first nine months of 2000
were $4.9 million, compared to $5.0 million for 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
third quarter of 2000.
Operating expenses, excluding costs of the Group's Internet based
initiative, increased by 28% to $5.8 million in the first nine months of 2000 as
compared with the same period in 1999. Staff costs increased by 20% primarily
due to staffing additions made throughout 1999 and 2000, as the company
positioned itself for expected growth and the launch of its new Internet based
initiative, in 2000. Excluding staff costs, operating expenses increased by 43%
in the first nine months of 2000 compared with the same period in 1999,
primarily due to increases in advertising costs and new operating systems.
The costs of the Group's Internet based initiative included in the income
statement for the first nine months of 2000 were $2.2 million.
Venture Capital Management
The following table sets out, for the three and nine month periods ended
September 30, 2000 and 1999, an analysis of the venture capital management
segment's results of operations.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
2000 1999 2000 1999
--------- --------- --------- --------
(In thousands)
<S> <C> <C> <C> <C>
Revenues:
Management fees................................................ $ 1,848 $ 1,625 $ 7,518 $ 6,311
Investment income.............................................. 1 144 273 749
Realized investment gains (losses)............................. 11,691 330 20,331 (6,077)
Unrealized investment gains (losses)........................... (9,935) 78,673 10,528 94,811
-------- -------- -------- --------
Total revenues and investment gains ........................... 3,605 80,772 38,650 95,794
Operating expenses............................................. 1,361 1,377 6,834 9,138
-------- -------- -------- --------
Income before income tax expense............................... $ 2,244 $ 79,395 $ 31,816 $ 86,656
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
<PAGE>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Third quarter of 2000 compared to third quarter of 1999
Income before taxes from the venture capital management segment decreased
from $79.4 million in the third quarter of 1999 to $2.2 million in the third
quarter of 2000. Contributing to income in the third quarter of 1999 was $78.7
million of unrealized gains on the listed equity securities held in the trading
account which was not repeated in the third quarter of 2000. The positions in
listed equity securities resulted from private equity transactions in technology
companies. There was a downward trend in the market for technology stocks
towards the end of the third quarter.
The movement in net unrealized investment gains in the listed equity
trading portfolio during the third quarter of 2000 was a loss of $9.9 million.
The market value of the trading account portfolio decreased from $251.9 million
as of June 30, 2000 to $236.5 million as of September 30, 2000. There were
partial sales of four listed equity holdings during the period, which resulted
in realized gains of $11.7 million based on an original cost of $2.9 million.
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 six months of 2000.
First nine months of 2000 compared to first nine months of 1999
Income before taxes from the venture capital management segment decreased
from $86.7 million in the first nine months of 1999 to $31.8 million in the
first nine months of 2000. Contributing to income in the first nine months of
1999 was $94.8 million of unrealized gains on the listed equity securities held
in the trading account which was not repeated at the same level in the first
nine months of 2000.
The movement in net unrealized investment gains in the listed equity
trading portfolio during the first nine months of 2000 was $10.5 million. The
market value of the trading account portfolio increased from $213.3 million as
of December 31, 1999 to $236.5 million as of September 30, 2000, including
portfolio additions of $15.6 million resulting from the initial public offerings
or acquisitions by publicly traded companies of five private preferred stock
holdings. There were partial sales of four listed equity holdings during the
period, which resulted in realized gains of $11.7 million based on an original
cost of $2.9 million. Additional gains of $8.6 million resulted from adjustments
related to private placement debt investments which offset writedowns taken by
the life insurance segment on such investments.
Corporate and Other
Third quarter of 2000 compared to third quarter of 1999
Corporate expenses increased by $1.0 million to $2.1 million in the third
quarter of 2000 as compared with the third quarter of 1999, primarily due to the
extension of employee share option grants which were due to expire. Under U.S.
GAAP, the difference between the exercise price and the fair market value on the
date of extension is considered compensation expense in the current period, as
no compensation expense was recorded at the original grant dates when the
options were granted with an exercise price equal to the fair market value of
the underlying shares.
<PAGE>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Interest income earned by the Group (excluding the life insurance and
annuity business) decreased by $0.4 million to $0.2 million in the third quarter
of 2000 as compared with the third quarter of 1999, primarily due to the
decrease in cash and cash equivalents held by the Group. Group cash was used
during the period between September 30, 1999 and September 30, 2000 primarily to
pay dividends and for investment purchases.
First nine months of 2000 compared to first nine months of 1999
Corporate expenses increased by $1.6 million to $4.7 million in the first
nine months of 2000, as compared with the same period in 1999, primarily due to
the employee share option extensions discussed in the previous section, 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 $1.3 million to $1.1 million in the first nine
months of 2000 as compared with the same period in 1999, primarily due to the
decrease in cash and cash equivalents held by the Group. Group cash was used
during the period between September 30, 1999 and September 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.
Third quarter of 2000 compared to third quarter of 1999
The effective tax rate, as a percentage of income before income taxes for
the third quarter of 1999, was 8%. This low effective tax rate reflects the fact
that only 18% of income in that period was contributed by the U.S. life
insurance and annuity company, which is subject to federal tax at approximately
35%. Most of the remaining income in that period represented net capital gains
from the Jersey and Guernsey operations where capital gains are not taxed.
On income before income taxes of $21.1 million for the third quarter of
2000, there was a net tax benefit of $7.9 million. A $25.6 million loss for the
quarter in the U.S. life insurance and annuity company generated a $9.0 million
tax benefit, while most of the offsetting income for the period represented net
capital gains from the Jersey and Guernsey operations where capital gains are
not taxed.
First nine months of 2000 compared to first nine months of 1999
The effective tax rate, as a percentage of income before income taxes for
the first nine months of 1999, was 17%. This low effective tax rate reflects the
fact that only 44% of income in that period was contributed by the U.S. life
insurance and annuity company, which is subject to federal tax at approximately
<PAGE>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
35%. Most of the remaining income in that period represented net capital gains
from the Jersey and Guernsey operations where capital gains are not taxed. The
effective tax rate, as a percentage of income before income taxes for the first
nine months of 2000, was 14%. This lower effective tax rate was attributable to
the lower percentage (40%) of income for the first nine months of 2000
contributed by the U.S. life and annuity company, with most of the remaining
income in that period representing net capital gains from the Jersey and
Guernsey operations.
Liquidity and Capital Resources
On a consolidated basis as of September 30, 2000, cash and cash
equivalents of the Group, excluding the life insurance business segment,
amounted to $11.9 million. The Group, excluding the life insurance business
segment, also held $129.6 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 $17.0 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 nine months of 2000 by
$292.4 million to $844.8 million, primarily due to net income for the period of
$313.4 million. $58.1 million of loans to the Company's employee share option
trusts have been netted against shareholders' equity as of September 30, 2000.
These loans will be repaid as employees exercise their share options.
As of September 30, 2000, the Group had $20.1 million of short-term bank
borrowings, and had no bond issues or convertible securities outstanding. There
were no such bank borrowings, bond issues or convertible securities outstanding
as of December 31, 1999. As of September 30, 2000 and December 31, 1999, $13.0
million and $11.8 million, respectively, of the Group's $50.0 million bank
facility had also 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.
<PAGE>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(continued)
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 were only $28.6 million as
of September 30, 2000, 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 September 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 was
approximately $1.6 billion, would have decreased by $75.4 million, compared with
a decrease of $61.6 million for the calculated market value of liabilities,
which were approximately $1.5 billion. Conversely, a sudden decrease of 100
basis points would have increased the investment portfolio's fair value by $79.4
million, compared with an increase in the calculated market value of liabilities
of $43.8 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 predicted 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
September 30, 2000 and December 31, 1999, which totaled $754.1 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
$377.1 million and $204.1 million, respectively.
<PAGE>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Part II - OTHER INFORMATION
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
--------------- -------
10.1.1 Multicurrency Term Facility Agreement dated May 2, 2000
between London Pacific Group Limited and the Governor and
Company of the Bank of Scotland. This replaces the Term Loan
Agreement dated October 25, 1996, filed previously as Exhibit
3.11; the First, Second, Third, Fourth and Fifth Amendment
Agreements dated May 28, 1997, November 25, 1997, November 12,
1998, April 20, 1999, and June 21, 1999, respectively, filed
previously as Exhibits 3.11.1, 3.11.2, 3.11.3, 3.11.4 and
3.11.6, respectively; and the Accession Agreement dated April
29, 1999, filed previously as Exhibit 3.11.5.
10.2.1 Executed Instrument dated May 31, 2000 among (1) Richard John
Pirouet, (2) Clive Aubrey Charles Chaplin, (3) Ronald William
Green and (4) Victor Aloysius Hebert, relating to The London
Pacific Group 1990 Employee Share Option Trust. This is
supplemental to the Settlement dated February 16, 1990 and the
Executed Instruments dated March 18, 1994, September 27, 1994,
March 3, 1995, August 22, 1996 and August 29, 1998 filed
previously as Exhibits 3.2, 3.2.1, 3.2.2, 3.2.3, 3.2.4 and
3.2.5, respectively.
10.2.2 Executed Instrument dated May 31, 2000 among (1) Richard John
Pirouet, (2) Clive Aubrey Charles Chaplin, (3) Ronald William
Green, (4) Victor Aloysius Hebert and (5) Christopher Byrne,
relating to The London Pacific Group 1990 Employee Share
Option Trust. This is supplemental to the Settlement dated
February 16, 1990 and the Executed Instruments dated March 18,
1994, September 27, 1994, March 3, 1995, August 22, 1996,
August 29, 1998 and May 31, 2000 filed previously as Exhibits
3.2, 3.2.1, 3.2.2, 3.2.3, 3.2.4, 3.2.5 and 10.2.1,
respectively.
27 Financial Data Schedule for the nine months ended
September 30, 2000.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the third quarter
of 2000.
<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: November 13, 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
--------------- -------
10.1.1 Multicurrency Term Facility Agreement dated May 2, 2000
between London Pacific Group Limited and the Governor and
Company of the Bank of Scotland. This replaces the Term Loan
Agreement dated October 25, 1996, filed previously as Exhibit
3.11; the First, Second, Third, Fourth and Fifth Amendment
Agreements dated May 28, 1997, November 25, 1997, November 12,
1998, April 20, 1999, and June 21, 1999, respectively, filed
previously as Exhibits 3.11.1, 3.11.2, 3.11.3, 3.11.4 and
3.11.6, respectively; and the Accession Agreement dated April
29, 1999, filed previously as Exhibit 3.11.5.
10.2.1 Executed Instrument dated May 31, 2000 among (1) Richard John
Pirouet, (2) Clive Aubrey Charles Chaplin, (3) Ronald William
Green and (4) Victor Aloysius Hebert, relating to The London
Pacific Group 1990 Employee Share Option Trust. This is
supplemental to the Settlement dated February 16, 1990 and the
Executed Instruments dated March 18, 1994, September 27, 1994,
March 3, 1995, August 22, 1996 and August 29, 1998 filed
previously as Exhibits 3.2, 3.2.1, 3.2.2, 3.2.3, 3.2.4 and
3.2.5, respectively.
10.2.2 Executed Instrument dated May 31, 2000 among (1) Richard John
Pirouet, (2) Clive Aubrey Charles Chaplin, (3) Ronald William
Green, (4) Victor Aloysius Hebert and (5) Christopher Byrne,
relating to The London Pacific Group 1990 Employee Share
Option Trust. This is supplemental to the Settlement dated
February 16, 1990 and the Executed Instruments dated March 18,
1994, September 27, 1994, March 3, 1995, August 22, 1996,
August 29, 1998 and May 31, 2000 filed previously as Exhibits
3.2, 3.2.1, 3.2.2, 3.2.3, 3.2.4, 3.2.5 and 10.2.1,
respectively.
27 Financial Data Schedule for the nine months ended
September 30, 2000.
