UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- - - --------------------------------------------------------------------------------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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.
X
Yes ------- No -------
The number of shares outstanding of the registrant's Ordinary Shares, 5
cents par value per share, as of May 3, 2000 was 64,433,313.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements: Page
Condensed Consolidated Balance Sheets as of March 31, 2000
and December 31, 1999......................................... 3
Condensed Consolidated Statements of Income for the
three months ended March 31, 2000 and 1999.................... 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2000 and 1999.................... 5
Consolidated Statements of Changes in Shareholders' Equity
for the three months ended March 31, 2000 and 1999............ 6
Consolidated Statements of Comprehensive Income for the three
months ended March 31, 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...... 18
PART II
OTHER INFORMATION
Item 1. Legal Proceedings............................................... 19
Item 2. Changes in Securities and Use of Proceeds....................... 19
Item 6. Exhibits and Reports on Form 8-K................................ 19
Signature................................................................... 20
Exhibit Index............................................................... 21
Part I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
March 31, December 31,
2000 1999
------------ ------------
(Unaudited)
ASSETS
Cash and cash equivalents ....................................................... $ 53,592 $ 49,703
Cash held in escrow ............................................................. 3,144 3,110
Investments, principally of life insurance subsidiaries:
Fixed maturities:
Available-for-sale, at fair value (amortized cost: March 31, 2000,
$1,093,762; December 31, 1999, $1,037,085) ................................. 1,038,831 989,065
Held-to-maturity, at amortized cost (fair value: March 31, 2000, $200,662;
December 31, 1999, $221,167) ............................................... 201,684 222,110
Equity securities:
Trading account, at fair value (cost: March 31, 2000, $41,826;
December 31, 1999, $34,680) ................................................ 334,845 399,844
Available-for-sale, at fair value (cost: March 31, 2000, $216,804;
December 31, 1999, $186,403) ............................................... 209,529 182,926
Loans to life insurance policyholders ........................................ 10,292 10,385
----------- -----------
Total investments ............................................................... 1,795,181 1,804,330
Assets held in separate accounts ................................................ 147,340 125,528
Deferred policy acquisition costs ............................................... 154,486 144,518
Accounts receivable ............................................................. 19,062 35,430
Other assets .................................................................... 41,492 40,169
----------- -----------
Total assets .................................................................... $ 2,214,297 $ 2,202,788
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Life insurance policy liabilities ............................................... $ 1,462,343 $ 1,416,423
Liabilities related to separate accounts ........................................ 148,821 126,703
Accounts payable and accrued liabilities ........................................ 47,125 35,982
Income taxes payable and other liabilities ...................................... 60,539 71,205
----------- -----------
Total liabilities ............................................................... 1,718,828 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 ...................................................... 63,569 62,307
Retained earnings ............................................................... 503,806 559,344
Employee benefit trusts, at cost (shares: March 31, 2000, 14,683,381;
December 31,1999, 15,331,656) ................................................ (53,080) (54,033)
Accumulated other comprehensive income (loss) from
net unrealized gains (losses) on available-for-sale securities ............... (22,048) (18,365)
----------- -----------
Total shareholders' equity ...................................................... 495,469 552,475
----------- -----------
Total liabilities and shareholders' equity ...................................... $ 2,214,297 $ 2,202,788
----------- -----------
----------- -----------
[FN]
See accompanying notes to Interim Consolidated Financial Statements.
</FN>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended
March 31,
-------------------------
2000 1999
---------- ----------
Revenues:
Investment income ............................................................... $ 25,785 $ 23,246
Insurance policy charges ........................................................ 1,827 1,522
Financial advisory services, asset management and other fee income .............. 9,765 6,378
Realized investment gains (losses) .............................................. 8,784 (243)
Unrealized investment gains (losses) on trading securities ...................... (72,145) 33,915
----------- -----------
(25,984) 64,818
Expenses:
Interest credited on insurance policyholder accounts ............................ 20,445 17,298
Amortization of deferred policy acquisition costs ............................... 5,295 4,066
Operating expenses .............................................................. 13,221 11,588
Goodwill amortization ........................................................... 58 59
Interest expense ................................................................ 12 5
----------- -----------
39,031 33,016
----------- -----------
Income (loss) before income tax expense ......................................... (65,015) 31,802
Income tax expense (credit) ..................................................... (9,477) 11,449
----------- -----------
Net income (loss) ............................................................... $ (55,538) $ 20,353
----------- -----------
----------- -----------
Earnings (loss) per share and ADR, basic ........................................ $ (1.11) $ 0.41
Earnings (loss) per share and ADR, diluted ...................................... $ (1.11) $ 0.40
[FN]
See accompanying notes to Interim Consolidated Financial Statements.
</FN>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
March 31,
------------------------
2000 1999
---------- ----------
Net cash provided by operating activities ....................................... $ 47,953 $ 11,034
Cash flows from investing activities:
Purchases of held-to-maturity and available-for-sale securities ................. (100,221) (86,683)
Proceeds from sale of held-to-maturity and available-for-sale securities ........ 55,713 44,703
Capital expenditures ............................................................ (458) (126)
Other cash flows from investing activities ...................................... 706 (19)
--------- ---------
Net cash used in investing activities ........................................... (44,260) (42,125)
--------- ---------
Cash flows from financing activities:
Increase in (payment of) bank overdraft ......................................... 196 (1,100)
--------- ---------
Net cash provided by (used in) financing activities ............................. 196 (1,100)
--------- ---------
Net increase (decrease) in cash and cash equivalents ............................ 3,889 (32,191)
Cash and cash equivalents at beginning of year .................................. 49,703 111,414
--------- ---------
Cash and cash equivalents at end of period ...................................... $ 53,592 $ 79,223
--------- ---------
--------- ---------
[FN]
See accompanying notes to Interim Consolidated Financial Statements.
</FN>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands)
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
----------- ----------- ----------- ------------ ----------- --------------
Balance, January 1, 1999.............. $ 3,221 $ 62,199 $ 318,785 $ (52,282) $ (3,442) $ 328,481
Unrealized gains (losses) on
available-for-sale securities...... - - - - (2,199) (2,199)
Net income............................ - - 20,353 - - 20,353
----------- ----------- ----------- ------------ ----------- --------------
Balance, March 31, 1999............... $ 3,221 $ 62,199 $ 339,138 $ (52,282) $ (5,641) $ 346,635
----------- ----------- ----------- ------------ ----------- --------------
----------- ----------- ----------- ------------ ----------- --------------
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
----------- ----------- ----------- ------------ ------------ -------------
Balance, January 1, 2000............... $ 3,222 $ 62,307 $ 559,344 $ (54,033) $ (18,365) $ 552,475
Unrealized gains (losses) on
available-for-sale securities....... - - - - (3,683) (3,683)
Purchase of shares by the
employee benefit trusts............. - - - (1,831) - (1,831)
Exercise of employee share
options, including income
tax effect.......................... - 1,475 - 2,784 - 4,259
Realized gains (losses) on disposal
of shares held by the employee
benefit trusts - (213) - - - (213)
Net income (loss)...................... - - (55,538) - - (55,538)
------------ ----------- ----------- ------------ ------------ -------------
Balance, March 31, 2000................ $ 3,222 $ 63,569 $ 503,806 $ (53,080) $ (22,048) $ 495,469
------------ ----------- ----------- ------------ ------------ -------------
------------ ----------- ----------- ------------ ------------ -------------
[FN]
See accompanying notes to Interim Consolidated Financial Statements.
</FN>
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
Three Months Ended
March 31,
-------------------------
2000 1999
------------ ----------
Net income (loss)................................................................ $ (55,538) $ 20,353
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 $7,584 in 2000 and $2,861 in 1999.............................. (3,683) (2,199)
------------ ------------
Other comprehensive income (loss)................................................ (3,683) (2,199)
------------ ------------
Comprehensive income (loss)...................................................... $ (59,221) $ 18,154
------------ ------------
------------ ------------
[FN]
See accompanying notes to Interim Consolidated Financial Statements.
</FN>
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.
The results for the three month period ended March 31, 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 or loss 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." As the Company recorded a net
loss for the three months ended March 31, 2000, the calculation of diluted
earnings per share for this period does not include these potentially dilutive
options as they are anti-dilutive and would result in a reduction of net loss
per share. If the Company had reported net income for the three months ended
March 31, 2000, there would have been an additional 11,563,292 shares included
in the calculation of diluted earnings per share.
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)
Three Months Ended
March 31,
------------------------------
2000 1999
----------- -----------
Net income (loss) ............................................................... $ (55,538) $ 20,353
Basic:
Weighted average number of ordinary shares outstanding, excluding shares
held by the employee share option trust ...................................... 50,083,932 49,897,182
------------- -----------
Earnings (loss) per share and ADR, basic ........................................ $ (1.11) $0.41
------------- -----------
------------- -----------
Diluted:
Weighted average number of ordinary shares outstanding, excluding shares
held by the employee share option trust ...................................... 50,083,932 49,897,182
Effect of dilutive securities (employee share options) .......................... - 1,443,864
------------- -----------
Weighted average ordinary shares used in dilutive earnings
per share calculations ....................................................... 50,083,932 51,341,046
------------- -----------
Earnings (loss) per share and ADR, diluted ...................................... $ (1.11) $0.40
------------- -----------
------------- -----------
Earnings per ADR are equivalent to earnings per ordinary share, following the 4
for 1 split of ADRs during the first quarter of 2000. For further information
see Part II, Item 2 on page 19.
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. The only material
change in segmental assets during the first quarter of 2000 was in the venture
capital management segment, where assets decreased by $43.6 million from $277.8
million as of December 31, 1999, primarily caused by the change in net
unrealized gains on listed equity securities in the trading account.
Intercompany transfers between reportable operating segments are accounted
for at prices which are designed to be representative of unaffiliated third
party transactions. During the three month periods ended March 31, 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 $2,417 and $3,422, respectively. These management fees have been
approved by the insurance regulatory body in the U.S. state of domicile.
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:
Three Months Ended
March 31,
-------------------
REVENUES 2000 1999
-------- --------
(In thousands)
Operating segments:
Life insurance and annuities (1), (2)............................................ $ (1,704) $ 53,852
Asset management (1)............................................................. 1,902 1,440
Financial advisory services ..................................................... 6,044 4,981
Venture capital management (2) .................................................. (32,785) 3,518
------- -------
(26,543) 63,791
Reconciliation of segment amounts to consolidated amounts:
Interest income ................................................................. 559 1,027
------- --------
Consolidated revenues and investment gains (losses) ............................. $(25,984) $ 64,818
------- --------
------- --------
INCOME BEFORE INCOME TAX EXPENSE
Operating segments:
Life insurance and annuities (1), (2)............................................ $ (29,441) $ 30,671
Asset management (1)............................................................. 647 68
Financial advisory services ..................................................... (639) 185
Venture capital management (2)................................................... (34,642) 1,154
-------- -------
(64,075) 32,078
Reconciliation of segment amounts to consolidated amounts:
Interest income ................................................................. 559 1,027
Corporate expenses .............................................................. (1,429) (1,239)
Goodwill amortization ........................................................... (58) (59)
Interest expense ................................................................ (12) (5)
-------- -------
Consolidated income (loss) before income tax expense ............................ $ (65,015) $ 31,802
-------- -------
-------- -------
- - - -------------------------
(1) Intersegmental revenue in asset management segment from life insurance
and annuities segment ....................................................... $ 535 $ 277
-------- -------
-------- -------
(2) Intersegmental revenue in venture capital management segment from life
insurance and annuities segment ............................................. $ 1,882 $ 3,145
-------- -------
-------- -------
Item 1. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
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.
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 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.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(continued)
Life Insurance and Annuities
The following table sets out, for the three months ended March 31, 2000 and
1999, an analysis of the life insurance and annuities segment's results of
operations.
Three Months Ended
March 31,
--------------------
2000 1999
--------- --------
(In thousands)
Revenues:
Investment income .............................................$ 22,664 $ 18,424
Insurance policy charges ...................................... 1,827 1,522
Realized investment gains (losses) ............................ 8,700 (243)
Unrealized investment gains (losses) on trading securities .... (35,325) 33,915
Other fee income .............................................. 430 234
-------- -------
Total revenues and investment gains (losses) .................. (1,704) 53,852
Expenses:
Interest credited on insurance policyholder accounts .......... 20,445 17,298
Amortization of deferred policy acquisition costs ............. 5,295 4,066
Mortality expenses ............................................ 33 (222)
Commissions ................................................... 69 76
General and administrative expenses ........................... 1,895 1,963
-------- -------
27,737 23,181
-------- -------
Income (loss) before income tax expense ......................$ (29,441) $ 30,671
-------- -------
-------- -------
London Pacific Life & Annuity Company ("LPLA") contributed a loss before
income taxes of $29.4 million to the Group's overall results for the first
quarter of 2000, a decrease of $60.1 million over the same period in 1999. Net
realized and unrealized investment gains for 2000 decreased by $60.3 million and
amortization of deferred policy acquisition costs increased by $1.2 million over
1999, partially offset by an increase of $1.1 million in the spread between
investment income and interest credited to policyholder accounts.
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.
Premiums for all life and annuity products were $105.3 million for the
first quarter of 2000, an increase of 148% over the premiums received
in the first quarter of 1999. This increase in premiums reflects the
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(continued)
continuing strong performance of the five-year guaranteed rate annuity product,
Regal Accumulator 5, which added approximately $54.9 million in sales during the
first quarter of 2000. LPLA introduced this product during the second quarter of
1999. A seven-year guaranteed rate version of this product and a new six-year
guaranteed rate product will be introduced during the second quarter of 2000.
Interest and dividend income on investments was $22.7 million in the first
quarter of 2000 as compared with $18.4 million in 1999. This $4.3 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 March 31, 2000 was $135.8 million compared
with $91.0 million as of December 31, 1999.
Net investment losses were $26.6 million, including the $35.3 million change
in net unrealized gains on the listed equity securities held in the trading
account from $165.3 million as of December 31, 1999 to $130.0 million as of
March 31, 2000. LPLA sold a portion of one of its holdings during the first
quarter of 2000, which resulted in a $8.8 million realized gain. As of March 31,
2000, LPLA's investment portfolio included three former private preferred stocks
that have been converted to listed common equities and two convertible bond
holdings in publicly traded companies. Subsequent to March 31, 2000, one of
LPLA's private portfolio companies completed its initial public offering.
Another portfolio company is currently in registration.
Total cash and securities remained level at $1.5 billion as of March 31,
2000 compared with December 31, 1999. On total average cash and securities for
the first quarter of 2000, the average annualized net return, including realized
and unrealized capital gains and losses was -1.01% in the first quarter of 2000,
as compared with 15.52% for the same period in 1999.
Policy surrender and mortality charge income increased by $0.3 million in
the first quarter of 2000 to $1.8 million, as compared with $1.5 million for the
same period in 1999. Full policy surrenders totaled $31.6 million in the first
quarter of 2000, a $15.1 million increase compared with the same period in 2000.
Although there was a large increase in full policy surrenders, the surrenders
primarily occurred in older blocks of policies where the surrender charge
periods are in their later stages, resulting in a lower average surrender
charge.
Mortality expenses were $0.3 million higher in the first quarter of 2000
compared to the same period in 1999. The increase was primarily due to death
claims on universal life policies.
Interest credited on policyholder accounts increased by $3.1 million in the
first quarter of 2000 to $20.4 million, as compared with $17.3 million for the
same period in 1999. The increase was primarily due to new business growth and a
slight increase in overall policy crediting rates. The average rate credited to
policyholders was 5.44% in the first quarter of 2000, as compared with 5.39 %
for the same period in 1999.
Amortization of deferred policy acquisition costs was $5.3 million in the
first quarter of 2000, an increase of $1.2 million from the same period in 1999.
The increase was primarily due to new business growth and a higher level of
policy surrenders.
General and administrative expenses were $1.9 million in the first quarter
of 2000, compared with $2.0 million in the first quarter of 1999. The annualized
expense ratio for the first quarter of 2000, which is defined as general and
administrative expenses divided by the average book value of cash and
investments, was 0.5% as compared with 0.6% for the same period in 1999.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(continued)
On December 24, 1999, the Group formed a new insurance company in Jersey,
Channel Islands. London Pacific Assurance Limited is now selling a similar
product to LPLA's Regal Accumulator, which is called a "guaranteed bond" in the
U.K. Initially, sales were restricted to the Jersey, Channel Islands market and
sales for the first quarter of 2000 were minimal. Subsequent to March 31, 2000,
sales have increased steadily with an increasing number of potential clients
currently in the pipeline. Sales have now been extended into the U.K. which
should have an impact on sales volume for the remainder of the year.
Asset Management
The following table sets out, for the three months ended March 31, 2000 and
1999, an analysis of the asset management segment's results of operations.
Three Months Ended
March 31,
---------------------
2000 1999
---------- ----------
(In thousands)
Revenues ........................................ $ 1,902 $ 1,440
Operating expenses............................... 1,255 1,372
---------- ----------
Income before income tax expense ................ $ 647 $ 68
---------- ----------
---------- ----------
Income from the asset management segment increased by $0.6 million to $0.6
million in the first quarter of 2000. This increase was primarily attributable
to improved first quarter 2000 results at Berkeley Capital Management ("BCM"),
the Group's U.S. fund manager.
BCM's management fees on wrap accounts increased by $0.2 million to $1.1
million, consistent with the increase in the average total asset value of the
wrap accounts for the first quarter 2000 to $0.9 billion. Total revenues were
$1.4 million in the first quarter of 2000 compared with $1.2 million in the
first quarter of 1999. BCM's expenses decreased by $0.1 million to $1.2 million
primarily due to a decrease in staff costs which resulted from lower commissions
to the company's wrap account wholesalers. Wrap account sales during the first
quarter of 2000 were $98.5 million compared with $157.0 million during the first
quarter of 1999.
Included in the revenues of the asset management and venture capital
management segments are fees from the insurance business segment of $2.4 million
(compared with $3.4 million in the first quarter of 1999) which are approved by
LPLA's insurance regulatory body in its U.S. state of domicile. In the first
quarter of 2000, $0.5 million of these fees was allocated to the asset
management business segment (including $0.4 million to the Jersey fund
management operation) and $1.9 million was allocated to the venture capital
management business segment.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(continued)
Financial Advisory Services
The following table sets out, for the three months ended March 31, 2000 and
1999, an analysis of the financial advisory services segment's results of
operations.
Three Months Ended
March 31,
-------------------
2000 1999
-------- --------
(In thousands)
Revenues:
Financial advisory services fees .............. $ 6,044 $ 4,981
Expenses:
Commissions ................................... 4,373 3,273
Operating expenses ............................ 2,310 1,523
-------- --------
6,683 4,796
-------- --------
Income (loss) before income tax expense ....... $ (639) $ 185
-------- --------
-------- --------
Financial advisory services income decreased from a $0.2 million gain in the
first quarter of 1999 to a $0.6 million loss in the first quarter of 2000.
Revenues of SAI Financial Advisors ("SAI") increased by $1.1 million to $6.0
million in the first 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 $1.6 billion at the end of the first
quarter of 2000 from $1.3 billion at the end of the first quarter of 1999, after
excluding $263 million in assets administered by Select Benefit Consultants,
Inc., which was sold on December 31, 1999. The total number of financial
advisors increased from 163 at the end of the first quarter of 1999 to 228 at
the end of the first quarter of 2000. There was a corresponding increase in
commission expense of $1.1 million to $4.4 million.
SAI's gross revenues less commissions decreased by 2% in the first quarter
of 2000. The rate of growth in revenues less commissions did not correspond with
the rate of growth in gross revenues primarily as a result of the contractual
decline in the percentage of fees received for the administration of managed
portfolios on behalf of another company. During the first quarter of 1999, SAI
received 65% of the revenue stream on that contract and during the first quarter
of 2000 SAI 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 SAI's operating costs related to these
portfolio administration services.
Operating expenses, excluding costs of the Group's Internet based
initiative, increased by 20% to $1.8 million in the first quarter of 2000
compared with the first quarter of 1999. Staff costs increased by 17% 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 26% in the first quarter of 2000 compared with the first
quarter of 1999, primarily due to increases in advertising costs.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(continued)
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 where it should be
possible to add sizeable revenue blocks at higher margins.
In late 1999, the Group decided to make the SAI 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 development costs for this
initiative in the first quarter of 2000 were $0.5 million, and it is expected
that further development costs will increase total expenses in the financial
advisory services segment throughout 2000.
Venture Capital Management
The following table sets out, for the three months ended March 31, 2000 and
1999, an analysis of the venture capital management segment's results of
operations.
Three Months Ended
March 31,
---------------------
2000 1999
---------- ----------
(In thousands)
Revenues:
Management fees ................................ $ 3,806 $ 3,145
Investment income .............................. 145 373
Realized investment gains ...................... 84 -
Unrealized investment gains (losses) ........... (36,820) -
---------- ----------
Total revenues and investment gains (losses) ... (32,785) 3,518
Operating expenses ............................. 1,857 2,364
---------- ----------
Income (loss) before income tax expense ........ $ (34,642) $ 1,154
---------- ----------
---------- ----------
Venture capital management income declined from $1.2 million in the first
quarter of 1999 to a loss of $34.6 million in the first quarter of 2000. This
loss was attributable to the change in net unrealized gains for the quarter on
the listed equity securities held in the trading account. These positions in
listed equity securities resulted from private equity transactions in technology
companies. There was a significant decline in the market for technology stocks
towards the end of the first quarter.
The change in the net unrealized gains in the listed equity portfolio from
the end of 1999 to March 31, 2000 was a decline of $36.8 million. Total
unrealized gains in this portfolio as of December 31, 1999 were $199.8 million.
These unrealized gains dropped to $163.0 million as of March 31, 2000. A decline
in value of $94.1 million on one investment was partially offset by an
unrealized gain of $56.0 million on another investment that went public during
the first 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 sales or
redemptions in the latter part of 1999 and the first quarter of 2000.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(continued)
Corporate and Other
Corporate expenses increased by 15% to $1.4 million for the first quarter of
2000, primarily due to the costs of raising the public profile of the Group,
including the hiring of a public relations firm.
Interest income earned by the Group (excluding the life insurance and
annuity business) decreased by $0.5 million to $0.6 million in the first quarter
of 2000 as compared with the first 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 the first quarter of 1999 and the first quarter of
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 securities are exempt from Jersey and
Guernsey taxation.
The effective tax rate, as a percentage of income before income taxes for
the first quarter of 1999, was 36%. The high tax rate in this period was
attributable to the high percentage (96%) of income contributed by the U.S. life
insurance and annuity company which is subject to federal tax at approximately
35%. The effective tax credit rate, as a percentage of the loss before income
taxes for the first quarter of 2000, was 15%. This lower effective tax rate
reflects the fact that only 45% of the first quarter loss was contributed by the
U.S. life and annuity company, and that 57% of the first quarter loss
represented net capital losses from the Jersey and Guernsey operations (where
capital gains are not taxed).
Liquidity and Capital Resources
On a consolidated basis as of March 31, 2000, cash and cash equivalents of
the Group, excluding the life insurance business segment, amounted to $35.5
million. The Group, excluding the life insurance business segment, also held
$120.8 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 $37.6 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 decreased in the first three months of 2000 by $57.0
million to $495.5 million, primarily due to the net loss for the period of $55.5
million ($1.11 per ordinary share and ADR). $53.1 million of loans to the
Company's employee share option trusts have been netted against shareholders'
equity. These loans will be repaid as employees exercise their share options.
As of March 31, 2000 and December 31, 1999, the Group had no bank
borrowings, bond issues or convertible securities outstanding. However, as of
these dates, $12.4 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 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(continued)
Year 2000 Computer Issues
To date, the Group has not encountered any material problems with internal
systems, software, equipment and facilities relating to the inability to
recognize appropriate dates related to the year 2000. In addition, the Group is
not aware of any material year 2000 problems with customers, suppliers or
vendors. Accordingly, the Group does not anticipate incurring material expenses
or experiencing any material operational disruptions as a result of any year
2000 issues.
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") attempts to minimize its exposure to interest rate
fluctuations by managing the characteristics of its assets and liabilities so
that the effects of changes are reasonably likely to be offset. LPLA's principal
asset/liability management goal is to achieve sufficient cash flows from
invested assets to fund contractual obligations, while maximizing investment
returns. Historically, LPLA has not used derivative financial instruments to
achieve its 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. To
demonstrate the sensitivity of LPLA's assets and liabilities, tests performed on
LPLA's assets and liabilities indicated that, as of March 31, 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 $1.4 billion, would have decreased by $66.1 million, compared with
a decrease of $56.1 million for the calculated market value of liabilities,
which are approximately $1.3 billion. Conversely, a sudden decrease of 100 basis
points would have increased the investment portfolio's fair value by $70.5
million, compared with an increase in the calculated market value of liabilities
of $49.9 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, 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 and instruments that derive their value from a particular stock, a
group of stocks or a stock index. 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (continued)
If the market price of the Group's listed equity portfolio as of March 31,
2000 and 1999, which totaled $339.4 million and $72.6 million, respectively, had
abruptly increased or decreased by 20%, the market value of the listed equity
portfolio would have increased or decreased by $67.9 million and $14.5 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the first quarter of 2000, the Company completed a 4 for 1 split of
its American Depositary Receipts ("ADRs"). Effective from the close of business
on March 23, 2000, each American Depositary Share ("ADS") represents one
Ordinary Share. On March 24, 2000, ADS holders received three additional ADSs
for every one ADS they held on the record date of March 23, 2000. This ADR split
did not affect the Company`s Ordinary Shares that are listed on the London Stock
Exchange.
A registration statement relating to the above ADR split was filed on Form
F-6 with the U.S. Securities and Exchange Commission on March 14, 2000 and is
incorporated herein by reference.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are filed herewith or incorporated by reference
pursuant to Rule 12b-32 under the Securities Act of 1934:
EXHIBIT NO. TITLE
3.7 Form of Deposit Agreement dated as of September 25, 1992, as
amended and restated as of November 24, 1993, as further
amended and restated as of March 14, 2000 among London Pacific
Group Limited, The Bank of New York as Depositary, and all
Owners and Holders from time to time of American Depositary
Receipts issued thereunder.*
27 Financial Data Schedule for the three months ended
March 31, 2000.
--------------------------
* Incorporated by reference to Exhibit A filed with the
Company's 1933 Act Registration Statement on Form F-6 on March
14, 2000 (Registration No. 333-11658).
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: May 3, 2000 By: /s/ Ian K. Whitehead
------------------------
Ian K. Whitehead
Chief Financial Officer
(Principal Financial and
Accounting Officer and Duly
Authorized Officer of the
Registrant)
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Number Title
- - - -------------- -----
27 Financial Data Schedule for the three months ended
March 31, 2000.