UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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 of (I.R.S. Employer Identification No.)
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)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
American Depositary Shares, each representing New York Stock Exchange, Inc.
one Ordinary Share of $0.05 par value per share
Ordinary Shares of $0.05 par value per share New York Stock Exchange, Inc.*
*Not for trading, but only in connection with the registration of American
Depositary Shares, pursuant to the requirements of the Securities and Exchange
Commission.
Securities registered pursuant to Section 12(g) of the Act: None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ |X| ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the closing sale price of the Ordinary Shares on March
5, 2001 as reported on the London Stock Exchange (using an exchange rate of
GBP1.00 = $1.47) was $256,296,731. Ordinary Shares held by each current
executive officer and director and by each person who is known by the registrant
to own 5% or more of the outstanding Ordinary Shares have been excluded from
this computation in that such persons may be deemed to be affiliates of the
registrant. This determination of affiliate status is not a conclusive
determination for other purposes.
As of March 5, 2001, the registrant had outstanding 64,433,313 Ordinary
Shares, $0.05 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive proxy statement for its Annual General Meeting
of Shareholders to be held on May 31, 2001, is incorporated by reference in Part
III of this Form 10-K.
TABLE OF CONTENTS
PART I Page
Item 1. Business ......................................................... 1
Item 2. Properties........................................................ 11
Item 3. Legal Proceedings................................................. 12
Item 4. Submission of Matters to a Vote of Security Holders............... 12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................... 12
Item 6. Selected Financial Data........................................... 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 16
Item 7A. Quantitative and Qualitative Disclosures about Market Risk........ 27
Item 8. Financial Statements and Supplementary Data....................... 29
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................... 63
PART III
Item 10. Directors and Executive Officers of the Registrant................ 63
Item 11. Executive Compensation............................................ 63
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 63
Item 13. Certain Relationships and Related Transactions.................... 63
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 64
Financial Statement Schedules................................................ 67
Signatures ...................................................................73
Exhibit Index ............................................................. 74
As used herein, the terms "registrant" and "Company" refer to London
Pacific Group Limited. Except as the context otherwise requires, the term
"Group" refers collectively to the registrant and its subsidiaries.
Forward-Looking Statements and Factors That May Affect Future Results
The statements contained in this Annual Report on Form 10-K ("Report")
that are not historical facts, including, but not limited to, statements found
in Item 1 "Business," Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Item 7A "Quantitative and Qualitative
Disclosures About Market Risk," are forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Such forward-looking statements are based on current
expectations, estimates, forecasts and projections about the industries in which
the Group operates, management's current beliefs and assumptions made by
management. Words such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates," "goals," variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions that are difficult to predict. Future outcomes and
results may differ materially from what is expressed or forecast in such
forward-looking statements. The Group undertakes no obligation to update any
forward-looking statements, whether as a result of new information, future
developments or otherwise.
PART I
Item 1. BUSINESS
OVERVIEW
London Pacific Group Limited, based in Jersey, Channel Islands, is a
diversified international financial services company. The Company's operating
subsidiaries gather assets through their distribution networks in the U.S. and
U.K. Assets under the Group's management or administration as of December 31,
2000 totaled approximately $4.9 billion.
The Company evolved from a financial consulting business, The Berkeley
Consulting Group, formed in 1977. That business focused on financial consulting
services and venture capital finance for U.S. high technology companies from
non-U.S. institutional financing sources. The Company (originally named Berkeley
Technology Limited) was incorporated in 1985 in Jersey, Channel Islands. It
obtained a listing on the London Stock Exchange in that same year and is
currently trading under the symbol LPG. Since 1985, the Group has grown with the
establishment of life insurance and annuity businesses in both the U.S. and
Jersey, and through acquisitions in the financial advisory services and asset
management areas.
American Depositary Receipts ("ADRs") representing the Ordinary Shares of
the Company began trading in the U.S. market in 1992. The Company obtained a
listing on The Nasdaq Stock MarketSM in 1993 and in November 1999 migrated to
the New York Stock Exchange where its ADRs are now traded under the symbol LDP.
During the first quarter of 2000, the Company completed a four-for-one split of
its ADRs. Effective from the close of business on March 23, 2000, each American
Depositary Share ("ADS"), represented by an ADR, equals one Ordinary Share.
In September 1996, the Group completed the acquisition of London Pacific
Advisory Services, Inc. ("LPAS") (formerly Select Advisors, Inc.), a registered
investment adviser, London Pacific Securities, Inc. ("LPS") (formerly Select
Capital Corporation), a registered broker/dealer, and Advisors Insurance
Services of Texas, an insurance agency. LPAS and LPS are collectively known as
London Pacific Advisors ("LPA"). On December 31, 1998, the Group exited the
trust services business by completing the sale of North American Trust Company.
On December 24, 1999, the Group established its Jersey, Channel Islands
insurance subsidiary.
London Pacific Group Limited currently has offices in Jersey (Channel
Islands), California and North Carolina.
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BUSINESS SEGMENTS
The Group operates in four business segments: life insurance and
annuities, financial advisory services, asset management and venture capital
management. The Group's principal operating subsidiaries by business segment and
location, are set forth below:
Principal Subsidiaries Business Segment Location
- ------------------------------------------ ------------------------- -------------------------
London Pacific Life & Annuity Company Life insurance and annuities Raleigh and Sacramento
London Pacific Assurance Limited Life insurance and annuities Jersey, Channel Islands
London Pacific Advisors Financial advisory services Sacramento
Berkeley Capital Management Asset management San Francisco
Berkeley International Limited Asset management Jersey, Channel Islands
Berkeley International Capital Corporation Venture capital management San Francisco
Berkeley International Capital Limited Venture capital management Guernsey, Channel Islands
See Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Results of Operations by Business Segment" and Note
17 to the Consolidated Financial Statements in Item 8 of this Form 10-K for a
summary of the Group's financial information by business segment and
geographical location.
Life Insurance and Annuities
The Group's two insurance subsidiaries, London Pacific Life & Annuity
Company ("LPLA") and London Pacific Assurance Limited ("LPAL"), are primarily
engaged in the development, marketing and servicing of investment oriented
insurance products. Accumulation products, such as annuities and guaranteed
return bonds, comprise the principal products offered by the insurance
subsidiaries. In exchange for an up-front deposit, such products generally
provide policyholders a tax deferred rate of investment return and certain of
these products guarantee such a return for a stated period of time.
The business of each insurance subsidiary is based upon its network of
agents and financial advisors, a focused and competitive product range,
efficient administration systems and utilization of the Group's investment
management capabilities. The insurance subsidiaries' accumulation products are
marketed primarily as investment vehicles. Single premium deferred annuities and
guaranteed return bonds provide policyholders with a rate of return that is
either subject to periodic adjustments or fixed for the entire contract period
depending on the customer's preference. The insurance subsidiaries seek to
benefit from changing demographic trends, an expected growth in demand for
retirement savings products and anticipated higher consumer savings. Among the
products expected to benefit from these trends are accumulation products such as
those offered by the insurance subsidiaries.
London Pacific Life & Annuity Company
LPLA is licensed in 41 U.S. states and the District of Columbia and
distributes its products through approximately 3,000 contracted agents. This
network of independent contractors consists of life insurance agents, financial
planners, estate planners and brokers, as well as banks and other financial
institutions. LPLA has recently expanded its distribution network to include
select national marketing organizations. Variable annuity contracts issued by
LPLA are distributed through independent broker-dealers, stockbrokers and other
financial institutions.
Products
LPLA's accumulation products include fixed rate annuities, variable
annuities, and annuities with market value adjustment provisions, all sold
through independent agents and financial advisors.
LPLA primarily sells flexible premium and single premium deferred annuity
contracts. Under one type of contract, LPLA guarantees the policyholder's
principal and credits the accumulated deposit with a rate of
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interest that is guaranteed for the initial policy year. After the initial
policy year, LPLA has the discretionary ability to change the crediting rate to
any crediting rate not below a guaranteed minimum rate (currently 3%). During
the years ended December 31, 2000, 1999 and 1998, sales of these products
accounted for $174.1 million, $136.2 million and $113.8 million, respectively,
or 36%, 42% and 56%, respectively, of total premiums collected. LPLA also sells
market value adjusted annuity contracts which guarantee the crediting rate for
the full term of the contract. During 2000, 1999 and 1998, sales of these
products accounted for $286.0 million, $149.1 million and $48.2 million,
respectively, or 58%, 46% and 24%, respectively, of total premiums collected.
These multi-year guaranteed rate contracts range in terms from three to seven
years.
Crediting rates are initially based on: (i) the rate of return the
insurance subsidiaries can earn on invested assets acquired with the contract
deposits; (ii) the costs related to marketing and administering the products;
and (iii) the crediting rates offered on similar products by other companies.
Subsequent adjustments to crediting rates are based on multiple factors,
including the yield on the investment portfolio, contract surrender assumptions
and the crediting rate history of particular groups of annuity contracts. For
2000, 1999 and 1998, the average rate credited on outstanding annuity contracts
was 5.89%, 5.48% and 5.59%, respectively.
Typically, the policyholder is permitted to withdraw all or part of the
premium paid plus the accumulated interest credited to the contract (the
"Accumulation Value"), subject to the assessment of surrender charges for
withdrawals in excess of specified limits. Most of LPLA's accumulation products
provide for penalty free withdrawals of up to 10% of the Accumulation Value each
year, subject to limitations. Withdrawals in excess of allowable penalty free
amounts are assessed a surrender charge during a penalty period which generally
ranges from three to ten years after the date a policy is issued. In addition to
the surrender charge, the multi-year guaranteed rate contracts may also be
subject to a market value adjustment charge for withdrawals in excess of
specified limits. The initial surrender charge generally is 12% to 9% of the
Accumulation Value and generally decreases by one percentage point annually
during the penalty period. Surrender charges and market value adjustment
provisions, where applicable, are designed to protect LPLA from loss on early
terminations and to reduce the likelihood of policyholders terminating their
contracts during periods of increasing interest rates. These practices lengthen
the effective duration of policy liabilities and enable LPLA to maintain
profitability on such policies.
Single premium immediate annuities accounted for $19.1 million, $20.8
million and $11.7 million, or 4%, 6% and 6%, respectively, of total premiums
collected in 2000, 1999 and 1998, respectively. These products are designed to
provide a series of periodic payments for a fixed period of time or for life,
according to the policyholder's choice at the time of issue. Once the payments
begin, the amount, frequency and length of time for which they are payable are
fixed. The implicit interest rate on outstanding single premium immediate
annuity contracts averaged 4.65%, 4.71% and 4.83% for 2000, 1999 and 1998,
respectively.
Variable annuities accounted for $8.0 million, $13.1 million and $26.9
million, or 2%, 4% and 13%, respectively, of total premiums collected in 2000,
1999 and 1998, respectively. Variable annuities differ from fixed annuities in
that the principal value may fluctuate depending on the performance of assets
allocated pursuant to various investment options chosen by the policyholder.
Variable annuities offer policyholders a fixed or variable rate of return based
upon the specific investment option into which the premiums are directed.
LPLA discontinued writing any new universal life business in 1999,
although it continues to receive renewal premiums on the policies in force.
Universal life insurance products accounted for $1.5 million, $2.4 million and
$2.9 million, or 0.3%, 0.7% and 1.4%, respectively, of total premiums collected
in 2000, 1999 and 1998, respectively. Universal life insurance products provide
whole life insurance with adjustable rates of return based on current interest
rates.
Administration
With over 42,000 policyholders, customer service is a key focus of LPLA.
LPLA has implemented technologically advanced administrative processes which
have helped LPLA maintain its competitive position. In conjunction with IBM in
early 1991, LPLA led the industry in adopting remote imaging for more accurate,
cost effective processing. Image processing allows a constant flow of
communication between the home office in Raleigh, North Carolina and the
administrative office in Sacramento, California. Offices on both coasts of the
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U.S. make it possible for LPLA to service policyholders nationwide over an 11
hour workday. These operating efficiencies play an important role in LPLA's
ability to provide a high quality of customer service and to compete effectively
in the markets in which it operates.
London Pacific Assurance Limited
LPAL, the Group's insurance subsidiary in Jersey, Channel Islands, was
formed in 1999. LPAL began selling guaranteed return bonds in Jersey through
financial intermediaries and also directly to the public. The sterling bonds,
which have a growth or regular payment option, are suitable for individual
investors, corporate entities or trusts. Sales were extended first to the U.K.
in April 2000, followed by Guernsey and the Isle of Man. The bonds have three-
or five-year maturities, and are attractive to investors because of their stable
investment return. In the first ten months of its operations, LPAL's premium
income exceeded $50 million. As of December 31, 2000, LPAL had over 800 clients.
LPAL's early priorities have been to establish a high quality back office
and to develop distribution channels. Policy applications are received in Jersey
and then scanned and transmitted to LPLA's administration center in Raleigh,
North Carolina. Policies are then issued the following day in Jersey. The
administrative synergy between the Group's two insurance companies has enhanced
the customer service in Jersey and minimized the set-up costs.
During 2000, nearly 200 financial intermediaries signed agreements to
sell LPAL's products, which gives LPAL access to approximately 6,000 independent
financial advisors ("IFAs") in the U.K. and Jersey. LPAL is actively seeking to
enter into similar agreements with financial intermediary networks and advisory
divisions of retail banks and building societies.
Products
LPAL offers three guaranteed bonds: sterling bonds, U.S. dollars bonds
and Euro denominated bonds. All of LPAL's guaranteed bonds are single premium
assurance policies designed to meet the needs of the security conscious investor
looking for a competitive guaranteed return for the duration of the investment.
The sterling bond offers an investment period of either three or five
years. Yields can either be taken as periodic payments or as a guaranteed lump
sum at maturity. The former may be taken monthly, quarterly or annually.
As LPAL is based in Jersey, it is well positioned to target, where
permissable, expatriates with savings and investments held by Channel Islands
financial institutions but who may be working abroad. To attract investments
from this potentially lucrative market, LPAL launched a new five-year guaranteed
bond denominated in U.S. dollars in October 2000. A three-year U.S. dollar bond
was introduced early in 2001, along with the new Euro denominated product. LPAL
now has a unique guaranteed product range.
The U.S. dollar and Euro denominated bonds have investment periods of
either three or five years, each of which returns their original capital in full
plus guaranteed growth at the end of the investment period.
From LPAL's inception through the end of 2000, premium revenue for the
sterling guaranteed bond was $49.3 million and for the U.S. dollar guaranteed
bond was $3.5 million. 95% of the bonds were sold through financial
intermediaries. LPAL is now transacting business through over 100 financial
intermediaries in the Channel Islands, U.K. and Isle of Man. During 2000, over
50% of premiums generated were through financial institutions and IFAs in
Jersey.
Investment Portfolios
The insurance subsidiaries' $2.1 billion portfolio of securities (at fair
value) as of December 31, 2000 continued to be balanced, consisting primarily of
investment grade corporate bonds and collateralized mortgage obligations, with
no direct exposure to commercial mortgage loans. Private placement debt and
preferred stock in later stage high technology companies arranged by Berkeley
International Capital
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Corporation represented approximately 11% of total assets of the insurance
subsidiaries as of December 31, 2000. The fair value of the insurance
subsidiaries' listed equity securities increased to $248.7 million as of
December 31, 2000, from $186.5 million as of December 31, 1999. The overall
portfolio strategy of the insurance subsidiaries is to hold equity securities
for further gain after the underlying companies have completed an initial public
offering, and to sell in the shorter term other listed equity securities that
have been acquired via an acquisition.
Investment activities are an integral part of the insurance subsidiaries'
business. Profitability of the insurance products is significantly affected by
spreads between the returns on invested assets and the rates credited to
policyholders. Changes in crediting rates may not be sufficient to maintain
targeted investment spreads in all economic and market environments. In
addition, competition and other factors may limit the insurance subsidiaries'
ability to adjust or maintain crediting rates at levels necessary to avoid
compression of spreads under certain market conditions. For 2000, 1999 and 1998,
the total return on average invested assets was 12.32%, 16.79% and 8.42%,
respectively, and the average interest rate credited to policyholders was 5.89%,
5.62% and 5.71%, respectively.
See Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Life Insurance and Annuities" for additional
information on the insurance subsidiaries' investment portfolios.
Competition
LPLA and LPAL operate in a highly competitive environment. The insurance
industry consists of a large number of companies, many of which have greater
financial resources, more diversified product lines and larger staffs than those
of LPLA and LPAL. An expanding number of other financial services companies also
market insurance products or offer competing products. Competition is based on a
number of factors, including product pricing, service provided to distributors
and policyholders, and ratings.
LPLA currently has an A.M. Best Company ("Best") rating of B++ (Very
Good). Best ratings for the industry currently range from A++ (Superior) to F
(In Liquidation). Publications by Best indicate that the B++ rating is assigned
to companies that, in Best's opinion, have, on balance, very good balance sheet
strength and operating performance. Those companies, in Best's opinion, have a
good ability to meet their ongoing obligations to policyholders. LPAL is
currently unrated.
The Group believes its insurance subsidiaries are able to compete
effectively because of: (i) their ability to quickly develop and bring to the
market innovative products in response to changing customer needs, (ii) superior
customer service supported by customized administrative systems, (iii) their
ability to offer competitive crediting rates as a result of specialized
investment management skills within the Group, and (iv) access to new
distribution sources as a result of product integrity and experience in
establishing and growing new relationships with independent producers.
Financial Advisory Services
London Pacific Advisors
London Pacific Advisors ("LPA") is located in Sacramento, California. The
total value of assets under LPA management, administration or consulting as of
December 31, 2000 was $1.5 billion.
LPA experienced significant change and innovation in 2000. The LPA
business (which was acquired by the Group in 1996) had previously been focused
on providing back office services to independent financial advisors (and small
groups of advisors). In 2000, this focus was expanded considerably to include
large institutional clients and to encompass a full range of web based front
office and back office services, which LPA has branded myOfficeOnlineSM. LPA's
business model is particularly well suited to an Internet delivery platform.
These efforts have positioned the company to aggressively pursue the
institutional market and to better serve independent advisors.
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As part of this change in strategy, several noteworthy actions were
undertaken in 2000: (i) the company's name was changed from Select Advisors to
London Pacific Advisors, and its web based technology activities were moved to
London Pacific Technologies, Inc., a newly formed Group company; (ii) LPA
upgraded its back office systems and staffing, and reengineered its business
practices in order to meet the requirements of its institutional clients and its
"real time" web front-end processing; (iii) LPA's many service offerings were
web enabled; and (iv) a new marketing and sales strategy was developed and
implemented.
While the process of innovation will be a continuing one, the reaction
from clients, prospects and employees to these changes at LPA has been very
positive. Early indications from institutional clients and prospects suggest
that myOfficeOnlineSM is a unique product offering that fills a void in the
marketplace.
Products, Services and Revenues
LPA provides a comprehensive menu of services to financial advisors and
institutions, with an emphasis on web based technologies, fee based investment
products and consulting. These services range from providing investment advice
to managing complex web based consulting platforms for institutional clients.
LPA earns revenues from four principal sources: (i) asset management and
consulting fees are generated under LPA contracts providing for fees calculated
as a percentage of assets under management or consulting by its financial
advisors and institutional clients; (ii) portfolio servicing fees are also
generated under contracts providing for fees based on a percentage of assets;
(iii) commissions are received from the sale by advisors of insurance products,
including annuities and life insurance; and (iv) brokerage fees are received on
trading activity handled through LPA's trading desk or via business placed
directly with investment companies. The latter two sources of revenues are
generated by LPA's broker-dealer subsidiary, London Pacific Securities, Inc.
Commissions paid to affiliated advisors vary broadly based on the product
and the contractual relationship with the advisor. No commissions are ordinarily
paid on portfolio servicing revenue.
Asset management and consulting fees contributed 44%, 28% and 20% to net
revenues (i.e., gross revenues less commissions) for the years ended December
31, 2000, 1999 and 1998, respectively. Portfolio servicing fees declined over
the same period, contributing 21%, 36% and 50% to net revenues for 2000, 1999
and 1998, respectively. A substantial portion of the portfolio servicing revenue
in 2000 was related to a contract with one client which is currently due to
expire on September 30, 2002.
Commissions received from the sale by advisors of insurance products
contributed approximately 5%, 5% and 4% to net revenues for 2000, 1999 and 1998,
respectively, while brokerage fees contributed 22%, 21% and 18% to net revenues
for 2000, 1999 and 1998, respectively.
When financial advisors affiliate with LPA, they generally transfer their
clients' assets to LPA's registered investment adviser and broker-dealer. By
themselves, such asset transfers may be a significant source of growth for the
company. In addition, once the financial advisor joins LPA, new assets from the
sale of fee based services and commission products can be invested in LPA
services or processed by LPA companies. Also, LPA achieves growth from existing
clients in the form of new contributions, market appreciation and reinvested
income.
A new source of growth for LPA is its focus on adding large financial
institutions to its client base. In the typical scenario, LPA offers its web
based consulting, administration and reporting services to the institution and
to its financial advisor employees. LPA's fees for these services are tied to
the assets under management in the institution's program, and LPA's fees grow
along with the growth of those program assets.
Intellectual Property
LPA currently has one trademark registered with the U.S. Patent and
Trademark Office. This trademark is for LPA's flagship asset management product,
Global LeadersTM, and was registered on August 3, 1999. The
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registration has an initial ten year "in force" period, unless terminated
earlier as provided by law. In August 2000, LPA applied for a trademark for
myOfficeOnlineSM, the name given to LPA's web based services package.
Competition
The Group's financial advisory services business continues to operate in
a highly competitive industry. Competitors include other investment management
firms, broker-dealers, commercial banks, trust companies, insurance companies,
financial advisory firms, application software and service providers in the
financial services sector, and mutual funds. Many of LPA's competitors operate
across all of LPA's markets, offer a full range of products or financial
services, and have greater financial capacity and other resources. The Group
believes that the considerable experience and past success of its investment
personnel, a focused and individualized approach to client servicing, successful
investment performance, and its proprietary systems enable it to compete within
the markets in which it operates.
Asset Management
Berkeley Capital Management ("BCM") and Berkeley International Limited
("BIL") are the Group's asset management companies. While BCM offers its
services to third parties and Group affiliates, BIL manages only Group assets.
Berkeley Capital Management
BCM is a San Francisco based investment manager with over 28 years of
experience and is the Group's primary asset management subsidiary. The company
managed assets totaling approximately $2.6 billion as of the end of 2000,
including approximately $1.5 billion in corporate bonds for the Group's
insurance subsidiaries. BCM manages equity, balanced and bond accounts for
institutional clients and for the wrap fee programs of major brokerage houses.
Its investment approach involves strong fundamental research and is led by its
senior portfolio managers, who have worked together since 1975. BCM derives
revenue from the management of public equity and fixed income securities. The
level of the bond and stock markets affects BCM's revenues, as BCM is generally
compensated for its services with fees calculated as percentages of assets under
management.
BCM has two equity products and a fixed income product. The Growth Equity
style focuses on selecting companies with strong earnings growth potential. The
median market capitalization of the portfolio is greater than that of the S&P
500. The Income Equity style focuses on companies from the S&P 500 universe with
high relative yields and is designed to produce superior returns with below
average volatility. Both investment styles utilize bottom-up approaches and
disciplined buy and sell processes. BCM's fixed income style seeks out the most
attractive relative values in the marketplace. Risk levels are set in
conjunction with client objectives and value is added around the benchmark by
trading into those areas that BCM believes have the best relative values.
BCM also provides investment management services to institutional
clients, which include pension plans, employee benefit plans, trusts,
foundations and corporations, as well as to individual clients. BCM markets
these services primarily through financial consultants, plan sponsors and
brokerage firms. Most new business over the past three years has come from
managed account programs.
The bond portfolios of the Group's insurance subsidiaries are managed by
BCM's professional fixed income managers who have experience with a wide range
of fixed income investments, such as U.S. government bonds, mortgage-backed
securities, high-grade, high-yield corporate bonds, and municipal bonds.
BCM's principal source of revenue is the management of equity assets for
individuals and institutions on a nationwide basis. Revenues in this area are
derived exclusively from management fees which are calculated based upon the
dollar value of assets managed. Additional fees, representing less than 15% of
BCM's total fees during 2000, were received from the Group's insurance
subsidiaries, again based on a percentage of assets under management.
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BCM has managed account marketing agreements with over 20 firms, and
assets managed under these agreements represented the majority of BCM's assets
under management for unaffiliated parties. Some of these agreements have been in
place for more than ten years. Either party may terminate these agreements at
will, though none of these contracts has ever been terminated by the other party
at any time during the past ten years. BCM's largest customers are Morgan
Stanley Dean Witter and PaineWebber. During 2000, fees from each of these two
customers represented more than 10% of BCM's revenues. An agreement negotiated
with an affiliate, London Pacific Life & Annuity Company, also provided more
than 10% of BCM's revenues during 2000.
In 2000, BCM joined the core wrap program of Prudential Securities, one
of the big five U.S. retail brokerage firms. BCM is currently discussing
distribution agreements with other firms and also is actively seeking to broaden
its product array with firms with which it has existing relationships. This
brokerage firm "shelf-space" is becoming increasingly valuable, as the
advantages of separately managed accounts for individuals with at least $100,000
of investable assets become more broadly known.
Berkeley International Limited
Berkeley International Limited is located in Jersey, Channel Islands.
Previously, BIL managed investment portfolios for third parties and Group
companies. Non-affiliated assets under management have been decreasing during
recent years as managed portfolios reached the end of their scheduled lives or
were closed early. Currently, BIL primarily manages the listed equity securities
held by the Group's insurance subsidiaries in their investment portfolios.
Competition
There are numerous competitors offering asset management services. Within
each brokerage firm managed account program, there are dozens of competitors and
many more potential competitors. BCM competes based upon performance, service
and marketing. Price is set by market conditions and is generally the same for
all investment managers with managed account agreements with each brokerage
firm. There are no dominant competitors in the managed account marketplace
because brokerage firms seek to limit the total client assets with any manager
and because performance records tend to vary over time. In relation to direct
institutional and individual client relationships, BCM competes based on the
same principal factors and price may be a secondary factor. In addition to the
above, there is competition within the securities industry in obtaining and
retaining the services of investment executives.
Venture Capital Management
Berkeley International Capital Corporation ("BICC") and Berkeley
International Capital Limited ("BICL") comprise the Group's venture capital
management business. In recent years, the Group's venture capital subsidiaries
have focused primarily on U.S. high technology companies, with investments
generally ranging from $5 million to $25 million.
Berkeley International Capital Corporation
BICC, based in San Francisco, arranges private equity placements into
rapidly growing technology companies, mainly on behalf of the Group's operating
companies. Placements are typically arranged in later stage technology
companies, which are near beta test of their product and need to scale up their
engineering, marketing and sales infrastructure. The venture capital management
business earns fees and may take some principal positions within BICL.
Over the past 21 years, BICC has arranged over $1.8 billion of placements
in the private capital markets on behalf of Group companies and clients. These
have included investments in America Online, Oracle Corporation, Cadence Design
Systems, Inc., LSI Logic Corporation, Broderbund Software, 3COM Corporation,
Integrated Device Technology, Inc., Cypress Semiconductor, Inc. and New Focus,
Inc.
8
During 2000, the Group's operating companies continued to follow the
discipline of retaining the publicly listed securities arising out of initial
public offerings, where those securities have the potential to yield substantial
future gains.
Proximity, focus, relationships, experience and responsiveness are
factors in BICC's success. Many of the portfolio companies are headquartered in
close proximity to BICC's offices. Most of these companies specialize in
"business-to-business" Internet technologies, telecommunications (both central
office and consumer premises), data communications, software, semiconductors and
knowledge learning.
The private equity technology investments arranged by BICC and currently
held by the Group's operating subsidiaries are: AccessLan Communications, Inc.;
Agility Communications, Inc.; Alacritech, Inc.; BeamReach Networks, Inc.; BRECIS
Communications Corporation; Catena Networks, Inc.; Ceon Corporation; Fast-Chip,
Inc.; I-Cube, Inc.; KnowledgeNet, Inc.; LightChip, Inc.; LongBoard, Inc.; Mahi
Networks, Inc.; Mainstreet Networks, Inc.; Mayan Networks, Inc.; RedCreek
Communications, Inc.; Shomiti Systems, Inc.; Telera, Inc.; Triscend Corporation;
Westwave Communications, Inc.; and Xtera Communications, Inc.
Berkeley International Capital Limited
BICL, based in Guernsey, Channel Islands, is able to take principal
positions in connection with private equity transactions arranged by its sister
company, BICC. These private equity positions may evolve into listed equity
securities pursuant to initial public offerings or in connection with the
acquisition of the private issuing company by a listed company. As of December
31, 2000, BICL held $105.4 million of such positions in listed equity
securities.
Competition
The Group's venture capital management business faces competition
primarily from commercial banks, investment banks, venture capital firms and
insurance companies, many of which have substantially greater financial
resources than the Group. The marketplace for venture capital is highly
competitive, and demand for financing is also influenced by current economic and
stock market conditions. The pool of capital that is seeking opportunities to
invest in later stage venture capital companies has grown rapidly in recent
years. BICC has, however, continued to maintain a good flow of quality deals,
and management believes that the recent shakeout in the Internet sector has
improved BICC's competitive position.
REGULATION
Life Insurance and Annuities
London Pacific Life & Annuity Company ("LPLA") is subject to regulation
and supervision by the insurance regulatory agencies of the U.S. states in which
it transacts business. State laws generally establish supervisory agencies with
broad regulatory authority, including the power to: (i) grant and revoke
business licenses, (ii) regulate and supervise trade practices and market
conduct, (iii) establish guaranty associations, (iv) license agents, (v) approve
policy forms, (vi) establish reserve requirements, (vii) prescribe the form and
content of required financial statements and reports, (viii) determine the
reasonableness and adequacy of statutory capital and surplus, (ix) regulate the
type and amount of permitted investments, and (x) limit the amount of dividends
that may be paid without obtaining regulatory approval.
On the basis of statutory statements filed with state regulators
annually, the National Association of Insurance Commissioners ("NAIC")
calculates certain financial ratios to assist state regulators in monitoring the
financial condition of insurance companies. A "usual range" of results for each
ratio is used as a benchmark. Departure from the usual ranges on four or more
ratios generally lead to enquiries from individual state insurance departments.
In the past, variances in certain ratios resulted in enquiries from certain
insurance departments to which LPLA responded. Such enquiries did not lead to
any restrictions affecting LPLA's operations.
9
The NAIC has developed risk based capital ("RBC") standards which
establish capital requirements for insurance companies based on the ratio of the
company's total adjusted capital (defined as the total of its statutory capital,
surplus, asset valuation reserve and certain other adjustments) to its RBC. The
standards are designed to help identify companies which are under-capitalized
and require specific regulatory actions in the event an insurer's RBC ratio
falls below specified levels. As of December 31, 2000, the total adjusted
capital of LPLA was in excess of the minimum level of RBC that would require a
regulatory response.
The U.S. federal government does not directly regulate the insurance
industry. However, federal legislation and administrative policies in several
areas, including pension regulation, age and sex discrimination, financial
services regulation, securities regulation and federal taxation, do affect the
insurance industry. From time to time, legislation is introduced in Congress
that would allow the federal government to assume some role in the regulation of
the insurance industry.
LPLA prepares financial statements on the basis of statutory accounting
practices prescribed or permitted by the insurance department in North Carolina,
its state of domicile. Prescribed statutory accounting practices include a
variety of publications promulgated by the NAIC as well as U.S. state laws,
regulations and administrative rules. In 1998, the NAIC adopted codified
statutory accounting principles. The purpose of codification is to create
uniformity in statutory financial reporting across U.S. states. The North
Carolina Insurance Department has adopted the new statutory accounting
principles, effective January 1, 2001. The Group expects the implementation of
the new statutory accounting principles will not have a material adverse impact
on LPLA's statutory surplus.
LPLA is subject to guaranty fund assessment laws which exist in all U.S.
states in which LPLA transacts business. As a result of operating in a state
which has guaranty fund assessment laws, a solvent insurance company may be
assessed for certain obligations arising from the insolvencies of other
insurance companies which operated in that U.S. state. As of December 31, 2000,
LPLA has accrued $1.0 million for estimated expected future assessments in its
financial statements.
London Pacific Assurance Limited ("LPAL") is regulated by the Jersey
Financial Services Commission ("JFSC") and under Article 6 of the Insurance
Business (Jersey) Law 1996 is permitted to conduct long-term insurance business.
The JFSC sets out the conditions with which LPAL must comply and determines the
reporting requirements and the frequency of reporting. These conditions include:
(i) LPAL must hold, at all times, approved assets at least equal to the
long-term insurance fund plus the required minimum solvency margin, (ii) the
margin of solvency must be the greater of GBP 50,000 or 2.5% of the value of the
long-term business fund, (iii) at least 25% of total assets must be represented
by approved assets, (iv) a maximum of 20% of the approved assets necessary to
cover the long-term insurance fund and the required minimum solvency margin may
be held in private equity investments, and (v) assets equal to not less than 90%
of liabilities must be placed with approved independent custodians and kept
unavailable from access by other creditors of LPAL. As of December 31, 2000,
LPAL met all of these conditions.
LPAL is required to submit annual audited financial statements and an
audited annual filing to the JFSC in the format consistent with that required by
the Insurance Directorate of HM Treasury in the United Kingdom. The annual
filing submitted by LPAL must be accompanied by a Certificate from the Appointed
Actuary that based on sufficiently prudent assumptions, assets are sufficient to
cover all liabilities and that the annual filing contains a report from the
Appointed Actuary on the matching of investments to liabilities. All sales,
marketing and advertising literature used by LPAL must also be provided to the
JFSC. Such literature must state that LPAL is a regulated insurer based in
Jersey.
Other Business Segments
In the U.S., the Group's investment adviser subsidiaries, London Pacific
Advisory Services, Inc. and Berkeley Capital Management, are registered as
investment advisers under the Investment Advisers Act of 1940, as amended (the
"Advisers Act"). Because these subsidiaries have more than $25 million of assets
under management, they are required to register with the U.S. Securities and
Exchange Commission ("SEC"). The Advisers Act imposes detailed regulatory
requirements on the activities of SEC registered investment advisers, including,
but not limited to: contents of advisory contracts, recordkeeping,
fee structures, performance
10
advertising, fiduciary duty to clients, and custody of client assets.
Additionally, SEC registered investment advisers are subject to state statutes
regulating fraudulent activity in all U.S. states in which they conduct
business.
The Group's investment adviser subsidiaries provide investment management
services to U.S. retirement plan accounts. Consequently, they are required to
follow the provisions of the Employee Retirement Income Security Act of 1974
("ERISA"), in addition to the provisions of the Advisers Act. ERISA sets forth
specific rules governing the conduct of ERISA plan fiduciaries, including but
not limited to: use of soft dollars, proxy voting, bonding requirements, tax
considerations, performance fees, agency and principal transactions, and
solicitation fees. ERISA falls under the governing authority of the SEC, the
U.S. Department of Labor and the U.S. Internal Revenue Service.
The Group's broker-dealer subsidiary, London Pacific Securities, Inc.
("LPS") (formerly Select Capital Corporation), negotiates security transactions
on behalf of its clients through registered affiliates in all 50 U.S. states and
clears all transactions on a fully disclosed basis through another clearing
broker-dealer, which maintains the customer accounts. LPS is registered under
the Exchange Act and is subject to regulation by the SEC. The Exchange Act and
related rules generally regulate the conduct of business and the financial
condition of registered broker-dealers. LPS is a member of the National
Association of Securities Dealers, Inc. ("NASD"), a self-regulatory organization
that oversees the activities of registered broker-dealers. The NASD requires
compliance with its membership, registration, conduct, and marketplace rules,
which govern, among other things, the registration of personnel, finance and
operations, recommendations to customers, sales practices, underwriting of
securities and supervisory responsibilities.
Berkeley International Limited is registered with and subject to
regulation by the Jersey Financial Services Commission under the Investment
Business (Jersey) Law 1998. BIL is authorized to manage private closed-end
investment funds, as defined by law.
Group
The Group employs compliance officers responsible for managing the
Group's compliance with applicable regulatory requirements. Although the scope
of regulation and form of supervision to which the Group is subject, as
described above, may vary from jurisdiction to jurisdiction, the applicable laws
and regulations often are complex and generally grant broad discretion to
supervisory authorities in adopting regulations and supervising regulated
activities. The Group's continuing ability to engage in the life insurance and
annuities, financial advisory services, asset management and venture capital
management businesses in the jurisdictions in which it currently operates is
dependent upon its compliance with the rules and regulations promulgated from
time to time by the appropriate authorities in each of these jurisdictions. The
burden of such regulation weighs equally upon all companies carrying on
activities similar to those of the Group, and the Group does not consider such
regulation to adversely affect its competitive position.
EMPLOYEES
As of December 31, 2000, the Group had 237 employees. The breakdown by
business segment was as follows: life insurance and annuities, 87; financial
advisory services, 97; asset management, 24; venture capital management, 20; and
corporate, 9. None of the Group's employees are covered by a collective
bargaining agreement and the Group has not experienced any work stoppages.
Item 2. PROPERTIES
The Group operates from four offices located in Jersey (Channel Islands),
San Francisco, Sacramento and Raleigh, currently consisting of approximately
57,000 square feet of space in the aggregate. All offices are leased.
Approximately 26,000 square feet is leased in Jersey, Raleigh and Sacramento,
under leases expiring from 2002 to 2010, pertaining to the Group's life
insurance and annuities business. Approximately 15,000 square feet is leased in
Sacramento, under a lease expiring in 2002, pertaining to the Group's financial
advisory services segment. Under a lease expiring in 2004, approximately 12,000
square feet is leased in San
11
Francisco of which 50% pertains to the Group's asset management segment and 50%
to the Group's venture capital management segment. Approximately 4,000 square
feet is leased for corporate activities in Jersey and San Francisco, under
leases expiring in 2004 and 2010. See Note 11 to the Consolidated Financial
Statements in Item 8 below for further information regarding the Group's leases.
Item 3. LEGAL PROCEEDINGS
There are no legal proceedings pending against the Group which are likely
to have a material adverse effect on the Group's financial position or results
of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's shareholders during the
quarter ended December 31, 2000.
Part II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The principal trading market for the Company's Ordinary Shares is the
London Stock Exchange, on which such shares have been listed since February
1985. American Depositary Shares ("ADSs"), each representing one Ordinary Share,
are represented by American Depositary Receipts ("ADRs") for which The Bank of
New York in New York is the Depositary. ADSs have been traded in the United
States from September 1992 through August 1993 on the OTC Bulletin Board, from
September 1993 through November 1999 on The Nasdaq Stock MarketSM under the
symbol "LPGL," and since November 1999 on the New York Stock Exchange under the
symbol "LDP." As of December 31, 2000, there were 64,433,313 Ordinary Shares
outstanding. Also as of that date, there were 18,008,971 ADSs outstanding,
representing 18,008,971 Ordinary Shares or 27.9% of the Company's outstanding
shares. ADS holders may exercise their voting rights through the ADR Depositary.
The Company completed a four-for-one split of its ADSs, effective from
the close of business on March 23, 2000. 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 ADS split did not affect the Company's Ordinary Shares that are
listed on the London Stock Exchange.
The following table shows, for the quarters indicated, the reported
highest and lowest middle market quotations (which represent an average of bid
and asked prices) for the Company's Ordinary Shares on the London Stock
Exchange, based on its Daily Official List, and the high and low trade price
information of the ADSs as obtained from Nasdaq and the New York Stock Exchange
(as restated to reflect the four-for-one split in March 2000):
12
Pounds Per U.S. Dollars
Ordinary Share Per ADS
-------------------- --------------------
High Low High Low
-------- --------- --------- ---------
1999:
First quarter .............................................. GBP 2.28 GBP 1.85 $ 3.84 $ 3.08
Second quarter.............................................. 5.08 2.20 9.72 3.31
Third quarter............................................... 4.35 3.18 7.26 5.31
Fourth quarter.............................................. 6.18 2.65 11.61 4.37
2000:
First quarter............................................... 19.38 5.15 32.50 8.00
Second quarter.............................................. 13.90 6.08 24.06 8.75
Third quarter............................................... 18.33 8.00 26.37 12.00
Fourth quarter.............................................. 13.93 5.53 21.00 7.37
2001:
First quarter (through March 5, 2001)....................... 8.05 5.18 12.00 7.06
Holders
As of March 5, 2001, the Company had approximately 1,954 shareholders of
record and 54 ADS holders of record. Because many shares and ADSs are held by
brokers and various institutions on behalf of other holders, the Company is
unable to estimate the total number of beneficial holders represented by these
holders of record.
Dividends
The Company has paid dividends on its Ordinary Shares for each year in
which it has been listed on the London Stock Exchange, from 1985 to date.
Dividends on its Ordinary Shares are paid twice a year. An interim gross
dividend on the Company's Ordinary Shares of $0.11 per share was declared by the
Board of Directors in August 2000 and was paid on September 25, 2000. In
February 2001, the directors recommended a final gross dividend for 2000 of
$0.18 per Ordinary Share which, together with the interim dividend, made a total
gross dividend for 2000 of $0.29 ($0.232 net of 20% Jersey tax) per Ordinary
Share. The final dividend is subject to formal approval by shareholders at the
Company's Annual General Meeting on May 31, 2001, and, if approved, will be paid
on June 1, 2001.
Holders of ADSs are entitled to receive dividends paid on the Company's
Ordinary Shares through the ADR Depositary. Subject to formal approval of the
dividend by shareholders, ADS holders will receive a final dividend for 2000 of
$0.144 (net of 20% Jersey tax) on June 11, 2001.
The table below shows the amounts of interim, final and total dividends
together with the net dividends (after 20% Jersey tax) paid on each Ordinary
Share for the last two years. Dividends per ADS also are shown, restated to
reflect the four-for-one split in March 2000.
U.S. Dollars Per Ordinary Share U.S. Dollars Per ADS
-------------------------------------------------------------- ----------------------------
Gross Net
----------------------------- -----------------------------
Interim Final Total Interim Final Total Interim Final Total
----------------------------- ----------------------------- ----------------------------
1999............ $0.11 $0.18 $0.29 $0.088 $0.144 $0.232 $0.088 $0.144 $0.232
2000............ $0.11 $0.18* $0.29* $0.088 $0.144* $0.232* $0.088 $0.144* $0.232*
- ----------------------------
* The final dividend is subject to formal approval by shareholders at the Annual
General Meeting on May 31, 2001.
13
Under current practice, holders of ADSs who are residents of the United
States for tax purposes receive the net dividend (the gross dividend less the
associated Jersey income tax). See "Taxation - Taxation of Dividends" below.
There are currently no exchange control restrictions in Jersey on the
payment of dividends on the Ordinary Shares or on the conduct of the Group's
operations. See Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 7 to the Consolidated Financial
Statements in Item 8 of this Form 10-K for details regarding regulatory
restrictions on dividends.
TAXATION
The following summary of certain Jersey and U.S. tax consequences
regarding share ownership is based on law and published practice as of March 5,
2001, and is subject to any changes in Jersey and U.S. law or published practice
or in the establishment of any double taxation convention between Jersey and the
U.S. occurring after that date. The summary is not a complete analysis or
listing of all the possible tax consequences and does not address the tax
implications for special classes of holders, such as banks, insurance companies
and dealers in securities. The summary also does not address U.S. state income
tax consequences. Owners of Ordinary Shares and ADSs should consult their own
tax advisors as to the tax consequences of such ownership.
There is no double tax treaty or similar convention between the U.S. and
Jersey. For the purposes of the U.S. Internal Revenue Code of 1986, as amended,
it is assumed that beneficial owners of ADSs, in accordance with the terms of
the Deposit Agreement, will be treated as the owners of the underlying Ordinary
Shares represented by the ADSs.
Taxation of Dividends
Dividends are declared gross in U.S. dollars. Dividends paid by the
Company are treated as having suffered Jersey income tax at the standard rate
(currently 20%) on the gross amount thereof.
Charities, superannuation funds and certain assurance companies in the
U.K., together with individual investors who are Commonwealth citizens or
citizens of a member state of the European Community, may be entitled to a full
or partial repayment of the Jersey income tax credit suffered on distributions,
on submission of a claim to the Jersey Comptroller of Income Tax. Shareholders
who are unsure of their tax position should consult their tax advisor.
Generally, the net dividend paid to a holder or owner who is a U.S.
citizen, a U.S. resident, a U.S. domestic corporation or a trust or estate whose
income is subject to U.S. federal income taxation regardless of source (a "U.S.
holder") will be included in gross income and treated as foreign source dividend
income for U.S. federal income tax purposes to the extent payment is made out of
the Company's current or accumulated earnings and profits as determined under
U.S. federal income tax principles. Such dividends generally will not be
eligible for the "dividends received" deduction permitted to be taken by U.S.
corporations.
However, special rules apply for purposes of determining the dividend
income and potential foreign tax credits available to a U.S. corporation that
controls 10% or more of the Company's voting stock. Any such shareholder should
consult its tax advisor with respect to the U.S. tax treatment of its interest
in the Company.
Taxation of Capital Gains
Currently, there are no Jersey taxes levied on capital gains. A U.S.
holder that sells or exchanges an ADR or Ordinary Share will recognize a gain or
loss for U.S. federal income tax purposes, in an amount equal to the difference
between the amount realized and the holder's tax basis in either the ADS
represented by the ADR or the Ordinary Share. Such a gain or loss will be a
capital gain or loss if the ADR or the Ordinary Share was a capital asset in the
hands of the U.S. holder and will be a long-term capital gain or loss if the ADR
or Ordinary Share was held for more than one year (including, in the case of an
ADR, the period during which the
14
Ordinary Shares surrendered in exchange therefore were held). In general, the
long-term capital gain of a non-corporate U.S. holder is subject to a maximum
tax rate of 20%.
Deposits and withdrawals by U.S. holders of Ordinary Shares in exchange
for ADSs are not currently subject to U.S. federal income tax.
Backup Withholding Tax
A U.S. holder may be subject to U.S. backup withholding tax at a rate of
31% with respect to dividends received or gross proceeds from the sale of ADRs
or Ordinary Shares unless the holder provides a taxpayer identification number
and certain certifications or otherwise establishes an exemption from backup
withholding. Certain classes of persons, such as corporations, are exempt from
backup withholding. Backup withholding is not an additional tax; the amount
withheld may be credited against the holder's U.S. federal income tax liability,
and a refund of any excess may be obtained from the U.S. Internal Revenue
Service.
Estate and Gift Tax
No death, estate, gift, inheritance or capital transfer taxes are levied
in Jersey.
Stamp Duty and Stamp Duty Reserve Tax
No U.K. stamp duty should be payable on any transfer of an Ordinary
Share, or of an ADS, provided it is executed and retained outside the U.K.
Therefore, a transfer of an ADS in the United States would not ordinarily give
rise to a U.K. stamp duty charge.
An instrument transferring Ordinary Shares, or an ADS, could attract U.K.
stamp duty if its execution relates to anything done or to be done in the U.K.,
for example if it is executed in the U.K. or to be brought into the U.K. after
execution. If the transfer is on a sale then the rate of stamp duty will be 0.5%
of the consideration given. This charge is rounded up to the nearest GBP 5.
Gifts and other transfers which are neither sales nor made in contemplation of a
sale do not attract this charge. Instead they will either be exempt or attract a
fixed duty of GBP 5 per transfer.
A transfer from the Depositary to an ADS holder of the underlying
Ordinary Shares may be subject to a fixed stamp duty of GBP 5 if the instrument
of transfer relates to anything done or to be done in the U.K., for example if
it is executed in the U.K. or is to be brought into the U.K. after execution. A
transfer of Ordinary Shares from the Depositary directly to a purchaser on
behalf of an ADS holder may attract stamp duty at a rate of 0.5% of the
consideration (rounded up to the nearest GBP 5) if execution of the instrument
of transfer relates to anything done or to be done in the U.K., for example if
it is executed in the U.K. or is to be brought into the U.K. after execution.
U.K. stamp duty reserve tax will not be payable on an agreement to
transfer the Ordinary Shares or ADSs.
15
Item 6. SELECTED FINANCIAL DATA
The following is a summary of selected financial data for the Company
and its subsidiaries. This data should be read in conjunction with the audited
consolidated financial statements of the Company which are included in Item 8
"Financial Statements and Supplementary Data" of this Form 10-K. ADS amounts
have been restated to reflect the four-for-one split in March 2000.
Years Ended/As of December 31,
------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(In thousands, except per share and ADS data)
Operating Results
Revenues from continuing operations, including net realized
and change in net unrealized investment gains............. $ 189,521 $ 472,566 $ 150,497 $ 140,712 $ 137,608
Income from continuing operations before income tax
expense................................................... 15,010 305,662 28,882 26,877 32,295
Income (loss) from discontinued operations.................. - - 4,089 921 (65)
Income tax expense (benefit)................................ (17,447) 53,786 6,515 2,920 7,945
Net income ................................................. 32,457 251,876 26,456 24,878 24,285
Earnings per share and ADS:
Basic................................................... 0.64 5.05 0.51 0.45 0.44
Diluted................................................. 0.53 4.54 0.49 0.43 0.42
Financial Position
Cash and investments........................................ 2,127,414 1,857,143 1,482,757 1,439,034 1,473,965
Total assets................................................ 2,562,988 2,194,157 1,635,024 1,606,049 1,667,752
Long-term debt.............................................. 35,556 - - - -
Shareholders' equity........................................ 567,742 552,475 328,481 345,346 326,939
Book value per share and ADS................................ 8.81 8.57 5.10 5.05 4.79
Ordinary Share and ADS Data
Ordinary Shares outstanding as of December 31............... 64,433 64,433 64,424 68,328 68,326
Weighted average shares used in:
Basic earnings per share calculation.................... 50,795 49,892 52,206 55,490 54,980
Diluted earnings per share calculation.................. 60,728 55,445 53,552 57,295 57,807
Cash dividends declared per share (gross)................... $ 0.29 $ 0.29 $ 0.29 $ 0.29 $ 0.29
Cash dividends declared per ADS............................. $ 0.232 $ 0.232 $ 0.232 $ 0.232 $ 0.232
Market price per share on December 31....................... GBP 5.53 GBP 5.59 GBP 1.87 GBP 1.77 GBP 2.10
Market price per ADS on December 31......................... $ 7.56 $ 9.00 $ 3.14 $ 3.00 $ 3.50
Market capitalization as of December 31..................... $ 530,431 $ 583,495 $ 199,449 $ 198,341 $ 244,774
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the audited
consolidated financial statements, and the notes thereto, presented in Item 8
"Financial Statements and Supplementary Data" of this Form 10-K. The
consolidated financial statements are prepared in accordance with 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" which are set forth below and in the Company's other
filings with the SEC.
Forward-Looking Statements and Factors That May Affect Future Results
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this Report contain forward-looking
statements within the meaning of Section 21E of the Exchange Act. Such
forward-looking statements are based on current expectations, estimates,
forecasts and projections
16
about the industries in which the Group operates, management's current beliefs
and assumptions made by management. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates," "goals," variations of
such words and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions that are difficult to
predict. Future outcomes and results may differ materially from what is
expressed or forecast in such forward-looking statements. The Group undertakes
no obligation to update any forward-looking statements, whether as a result of
new information, future developments or otherwise.
Factors that could cause or contribute to deviations from the
forward-looking statements include those discussed in this section, elsewhere in
this Report and in the Company's other filings with the SEC. The factors
include, but are not limited to, (i) the risks described in Item 7A
"Quantitative and Qualitative Disclosures About Market Risk," (ii) variations in
demand for the Group's products and services, (iii) the success of new products
and services provided by the Group, (iv) the credit ratings of the Group's
insurance subsidiaries, (v) significant changes in net cash flows in or out of
the Group's businesses, (vi) fluctuations in the performance of debt and equity
markets worldwide, (vii) the enactment of adverse state, federal or foreign
regulation or changes in government policy or regulation (including accounting
standards) affecting the Group's operations, (viii) the effect of economic
conditions and interest rates in the U.S., the U.K. or internationally, (ix) the
ability of the Group's subsidiaries to compete in their respective businesses,
and (x) the ability of the Group to attract and retain key personnel.
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
Income before tax expense for the Group's reportable operating
segments, based on management's internal reporting structure, is as follows:
Years Ended December 31,
-------------------------------------------
2000 1999 1998
------------- ------------- -------------
(In thousands)
Income by operating segment:
Life insurance and annuities (1) (2) ........................................ $ 132,671 $ 147,753 $ 23,833
Financial advisory services ................................................. (2,261) 166 369
Asset management (1) ........................................................ 1,778 1,036 838
Venture capital management (2) .............................................. (110,444) 158,627 3,520
------------- ------------- -------------
21,744 307,582 28,560
Reconciliation of segment amounts to consolidated amounts:
Interest income ............................................................. 1,574 2,836 4,526
Corporate expenses .......................................................... (7,388) (4,366) (3,950)
Goodwill amortization ....................................................... (248) (348) (236)
Interest expense ............................................................ (672) (42) (18)
------------- ------------- -------------
Consolidated income from continuing operations before
income tax expense ........................................................ $ 15,010 $ 305,662 $ 28,882
------------- ------------- -------------
------------- ------------- -------------
(1) Intersegmental revenue in asset management segment
from life insurance and annuities segment............................... $ 2,775 $ 1,597 $ 2,880
------------- ------------- -------------
------------- ------------- -------------
(2) Intersegmental revenue in venture capital management
segment from life insurance and annuities segment....................... $ 7,474 $ 7,943 $ 2,945
------------- ------------- -------------
------------- ------------- -------------
Business segment data contained in Note 17 to the Consolidated
Financial Statements should be read in conjunction with this discussion. A
detailed discussion of the results for each reportable segment follows.
17
Life Insurance and Annuities
Certain information regarding the life insurance and annuities segment's
results of operations is as follows:
Years Ended December 31,
-------------------------------------------
2000 1999 1998
------------- ------------- -------------
(In thousands)
Revenues:
Investment income............................................................ $ 103,909 $ 85,768 $ 83,800
Insurance policy charges .................................................... 7,400 6,671 7,111
Net realized investment gains, including related amortization (1) ........... 123,661 3,986 4,944
Change in net unrealized investment gains on trading securities,
including related amortization (1)......................................... 8,269 144,861 11,184
Other fee income ............................................................ 1,684 1,421 1,065
------------- ------------- -------------
Total revenues and investment gains, including related
amortization (1)........................................................... 244,923 242,707 108,104
Expenses:
Interest credited on insurance policyholder accounts 94,065 73,753 68,067
Amortization of deferred policy acquisition costs related to operations (1) 9,420 8,324 8,171
Mortality expenses (gains)................................................... (340) (167) (153)
General and administrative expenses ......................................... 9,107 13,044 8,186
------------- ------------- -------------
Total expenses related to operations (1)..................................... 112,252 94,954 84,271
------------- ------------- -------------
Income before income tax expense ............................................ $ 132,671 $ 147,753 $ 23,833
------------- ------------- -------------
------------- ------------- -------------
(1) As a result of net realized investment gains on available-for-sale
securities, and the change in net unrealized investment gains on trading
securities, which back the life insurance and annuities segment's
investment-type products, amortization of deferred policy acquisition costs was
increased by $11,735, $8,473 and $8,000 in 2000, 1999 and 1998, respectively.
For purposes of the above business segment presentation, this additional
amortization is not shown in operating expenses in accordance with the Group's
accounting policy used to prepare the consolidated income statement, but is
netted against realized investment gains ($7,544, $4,276 and $2,926 in 2000,
1999 and 1998, respectively) and the change in net unrealized investment gains
($4,191, $4,197 and $5,074 in 2000, 1999 and 1998, respectively).
2000 compared to 1999
In 2000, the life insurance and annuities segment, which consists of
London Pacific Life & Annuity Company ("LPLA") and London Pacific Assurance
Limited ("LPAL"), contributed $132.7 million to the Group's overall income
before taxes, a decrease of $15.1 million from 1999. Net realized investment
gains, including related amortization of deferred policy acquisition costs
("DPAC"), increased by $119.7 million, while the change in net unrealized
investment gains, including related DPAC amortization, decreased by $136.6
million. Amortization of DPAC, excluding amortization related to investment
gains and losses, increased by $1.1 million, the spread between investment
income and interest credited to insurance policyholder accounts decreased by
$2.2 million, and general and administrative expenses decreased by $3.9 million.
Insurance policy charges increased by $0.7 million, other fee income increased
by $0.3 million over 1999, and mortality gains increased by $0.2 million over
1999.
In accordance with U.S. GAAP, premiums collected on annuity and universal
life contracts are not reported as revenues, but rather 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
18
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
the U.K. markets during the first quarter of 2000.
Premiums received for all life, annuity and guaranteed bond products were
$541.5 million during 2000, an increase of $219.9 million, or 68%, over the
premiums received during 1999. LPAL generated $52.8 million of the total premium
volume received during 2000. The increase in LPLA's premiums reflected the
continuing strong performance of its multi-year guaranteed rate annuity product
series, Regal Accumulator, which added approximately $286.0 million in sales in
2000, compared to $149.1 million in 1999. Further, sales of LPLA's traditional
one-year guaranteed rate annuity products were $174.1 million in 2000, compared
to $136.2 million in 1999. LPAL's sales met first year expectations and the
company was successful in attracting independent financial advisors to
distribute its products, despite being a start-up company in a very competitive
U.K. market.
Interest and dividend income on investments was $103.9 million in 2000,
compared with $85.8 million in 1999. This $18.1 million increase was primarily
due to asset growth from new business and higher reinvestment rates, offset by
acquisitions of capital appreciation (zero yield) securities. The carrying value
of the private equity portfolio as of December 31, 2000 was $234.2 million,
compared with $145.5 million as of December 31, 1999.
Net investment gains, including related DPAC amortization, were $131.9
million in 2000, compared to $148.8 million in 1999. Net investment gains in
2000 were comprised of realized investment gains of $131.2 million, a $12.4
million change in net unrealized gains on the listed equity securities held in
the trading portfolio, and related DPAC amortization of $11.7 million. The
market value of the trading portfolio increased from $186.5 million as of
December 31, 1999 to $248.7 million as of December 31, 2000. Additions to the
trading portfolio during 2000 of $69.8 million resulted from three investee
companies that completed initial public offerings and four private equity
investments that were acquired for stock by public companies. LPLA and LPAL sold
certain trading positions in 2000 that resulted in net realized gains of $170.6
million based on their aggregate original cost of $20.1 million. These gains
were partially offset by permanent impairment writedowns of $39.4 million on
five private placement debt securities and one private equity security. As of
December 31, 2000, LPLA's and LPAL's investment portfolios included ten former
private preferred stocks that have been converted to listed common equities and
one convertible bond holding in a publicly traded company. Also, as of December
31, 2000, one additional private equity investment was in the process of being
acquired by a publicly traded company in exchange for its stock.
Total invested assets (defined as total assets excluding DPAC, other
assets and income tax related accounts) increased to $2.2 billion as of December
31, 2000, compared with $1.7 billion as of December 31, 1999. On total average
invested assets for 2000, the average annualized net return, including both
realized and unrealized investment gains and losses, was 12.3%, compared with
16.8% for 1999. This decrease in annualized net return resulted primarily from
the decrease in net investment gains discussed above.
Policy surrender and mortality charge income increased by $0.7 million in
2000 to $7.4 million, compared with $6.7 million in 1999. Full policy surrenders
totaled $146.7 million in 2000, a $57.3 million increase over 1999. These
increased surrenders occurred in older blocks of business that were in the later
stages of their surrender penalty periods. Annuity surrenders may increase as
the portion of the business that can be withdrawn by policyholders without
incurring a surrender charge penalty grows. Internal policy conversions
accounted for $47.5 million of the full surrenders in 2000, compared with $16.1
million in 1999.
Interest credited on policyholder accounts increased by $20.3 million in
2000 to $94.1 million, compared with $73.8 million in 1999. The increase was
primarily due to new business growth in the multi-year annuity products which
generally have higher crediting rates than traditional annuity products but
lower acquisition costs, and an increase in overall policy crediting rates. The
average rate credited to policyholders was 5.9% in 2000, compared with 5.6% in
1999.
Amortization of DPAC, excluding amortization related to investment gains
and losses, was $9.4 million in 2000, an increase of $1.1 million over 1999.
This increase was primarily due to new business growth,
19
particularly with the multi-year annuity products that have shorter product
lives than traditional annuity products, and the higher level of policy
surrenders discussed above. Realized and unrealized investment gains were
included in the gross profits used to calculate the amortization of DPAC. This
inclusion of investment gains resulted in additional amortization of $11.7
million in 2000, compared with $8.5 million in 1999.
General and administrative expenses were $9.1 million in 2000, compared
with $13.0 million in 1999. This $3.9 million decrease was primarily due to
non-recurring legal expenses in 1999 and the receipt of several insurance
guaranty fund refunds during 2000. The annualized expense ratio in 2000, which
is defined as general and administrative expenses divided by the average book
value of total cash and investments, was 0.44%, compared with 0.88% in 1999.
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. Yields can be either taken as periodic payments or as a
guaranteed lump sum at maturity. LPAL had over 800 policyholders as of December
31, 2000, and premiums totaling $52.8 million had been generated through that
date. Sales have been made through 109 financial intermediaries in the Channel
Islands, the U.K. and the Isle of Man, with over 52% of the premiums received
from investors in, or through financial intermediaries in Jersey, Channel
Islands.
1999 compared to 1998
In 1999, the life insurance and annuities segment contributed $147.8
million to the Group's overall income before taxes, an increase of $123.9
million over the same period in 1998. Net realized investment gains, including
related amortization of DPAC, decreased by $1.0 million, while the change in net
unrealized investment gains, including related DPAC amortization, increased by
$133.7 million. Amortization of DPAC, excluding amortization related to
investment gains and losses, increased by $0.2 million, the spread between
investment income and interest credited to insurance policyholder accounts
decreased by $3.7 million, and general and administrative expenses increased by
$4.9 million. Insurance policy charges decreased by $0.4 million, other fee
income increased by $0.4 million, and mortality gains remained level.
Premiums received for all life, annuity and guaranteed bond products were
$321.6 million during 1999, an increase of $118.1 million, or 58%, over the
premiums received during 1998. The increase in LPLA's premiums reflected the
success of the new five-year guaranteed rate annuity product, Regal Accumulator
5, which added $149.1 million in sales during 1999, and the 50% increase in
licensed agents to approximately 3,000 at the end of 1999.
Interest and dividend income on investments was $85.8 million in 1999,
compared with $83.8 million in 1998. This $2.0 million increase was primarily
due to asset growth from new business, offset by an increase in capital
appreciation (zero yield) securities and the higher management fees paid to an
affiliate on these particular securities. The carrying value of the private
equity portfolio as of December 31, 1999 was $145.5 million, compared with $81.5
million as of December 31, 1998.
Net investment gains, including related DPAC amortization were $148.8
million in 1999, compared to net investment gains of $16.1 million in 1998. Net
investment gains were comprised of realized investment gains of $8.2 million, a
$149.1 million change in net unrealized gains on the listed equity securities
held in the trading portfolio, and related DPAC amortization of $8.5 million.
The market value of the trading portfolio increased from $27.8 million as of
December 31, 1998 to $186.5 million as of December 31, 1999. Additions to the
trading portfolio during 1999 of $16.0 million resulted from two investee
companies that completed initial public offerings and three other equity
investments that were acquired for stock by public companies. LPLA sold certain
trading positions in 1999 that resulted in realized gains of $28.0 million based
on their aggregate original cost of $6.4 million. An additional gain of $6.3
million was realized on a private equity investment that was purchased for cash.
Realized losses totaled $26.1 million, primarily due to permanent impairment
writedowns on private debt and equity securities. As of December 31, 1999,
LPLA's investment portfolio included four former private preferred stocks that
had been converted to listed common equities and two convertible bond holdings
in publicly traded companies.
20
Total invested assets increased to $1.7 billion as of December 31, 1999,
compared with $1.3 billion as of December 31, 1998. On total average invested
assets for 1999, the average annualized net return, including both realized and
unrealized investment gains and losses, was 16.8%, compared with 8.4% for 1998.
This increase in annualized net return resulted primarily from the increase in
net investment gains discussed above.
Policy surrender and other policy charge income decreased by $0.4 million
in 1999 to $6.7 million, compared with $7.1 million in 1998. Full policy
surrenders totaled $89.4 million in 1999, a $2.3 million increase over 1998.
Internal policy conversions accounted for $16.1 million of the full surrenders
in 1999, compared with $2.5 million in 1998.
Interest credited on policyholder accounts increased by $5.7 million in
1999 to $73.8 million, compared with $68.1 million in 1998. This increase was
primarily due to new business growth and an increase in overall policy crediting
rates. The average rate credited to policyholders was 5.6% in 1999, compared
with 5.7% in 1998.
Amortization of DPAC, excluding amortization related to investment gains
and losses, was $8.3 million in 1999, an increase of $0.1 million over 1998.
This increase was primarily due to new business growth, particularly with the
five-year product discussed above, and a higher level of policy surrenders.
Realized and unrealized investment gains were included in the gross profits used
to calculate the amortization of DPAC. This inclusion of investment gains
resulted in additional amortization of $8.5 million in 1999, compared with $8.0
million in 1998.
General and administrative expenses were $13.0 million in 1999, compared
with $8.2 million in 1998. The increase was primarily due to higher legal costs
and employee compensation and benefit costs. The annualized expense ratio in
1999, which is defined as general and administrative expenses divided by the
average book value of total cash and investments, was 0.88%, compared with 0.62%
in 1998.
Financial Advisory Services
Certain information regarding the financial advisory services segment's
results of operations is as follows:
Years Ended December 31,
-------------------------------------------
2000 1999 1998
------------- ------------- -------------
(In thousands)
Revenues:
Financial advisory services fees............................................. $ 22,952 $ 19,913 $ 14,502
Expenses:
Commissions.................................................................. 16,441 13,314 8,994
Operating expenses........................................................... 8,772 6,433 5,139
------------- ------------- -------------
25,213 19,747 14,133
------------- ------------- -------------
Income (loss) before income tax expense ..................................... $ (2,261) $ 166 $ 369
------------- ------------- -------------
------------- ------------- -------------
2000 compared to 1999
Financial advisory services income decreased from $0.2 million in 1999 to
a loss of $2.3 million in 2000, primarily due to the contractual adjustment to
certain servicing fee revenues as discussed below, as well as due to the costs
of the Internet based initiative also discussed below.
Revenues of London Pacific Advisors ("LPA") (formerly SAI Financial
Advisors) increased by $3.0 million to $23.0 million in 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
21
administration. Although in total these assets remained fairly constant at
approximately $1.5 billion, the components shifted favorably toward the higher
yielding management assets as opposed to administered assets. Market movement
also had an unfavorable impact on total assets under management. There was a
corresponding increase in commission expense of $3.1 million to $16.4 million.
LPA's gross revenues less commissions for 2000 were $6.5 million, which
was level with 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 27% to $8.1 million in 2000 compared with $6.4 million
in 1999. Staff costs increased by 22% primarily due to staffing additions, as
the company positioned itself for expected growth in its management and
administration divisions. Excluding staff costs, operating expenses increased by
34% in 2000 compared with 1999, primarily due to increases in advertising costs
and new operating systems.
The contractual adjustment to the servicing fees discussed above cut into
profitability for 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 could 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 2000 were $0.7 million, and it is expected
that further development costs will increase total expenses in the financial
advisory services segment throughout 2001.
1999 compared to 1998
Financial advisory services income decreased from $0.4 million in 1998 to
$0.2 million in 1999.
Revenues of LPA increased by $5.4 million to $19.9 million in 1999. 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 as of December 31, 1999 from $1.2 billion as of December 31, 1998,
after excluding $269.4 million in assets administered by Select Benefit
Consultants, Inc. ("SBC"), a subsidiary which was sold on December 31, 1999.
There was a corresponding increase in commission expense of $4.3 million from
$9.0 million in 1998 to $13.3 million in 1999.
LPA's gross revenues less commissions increased by 20% from $5.5 million
in 1998 to $6.6 million 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. 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 increased by 25% to $6.4 million in 1999 compared with
1998. Staff costs increased by 42% 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 2% in
1999 compared with 1998. Included in 1999 revenues is the gain on sale of SBC of
$0.1 million.
22
Asset Management
Certain information regarding the asset management segment's results of
operations is as follows:
Years Ended December 31,
-------------------------------------------
2000 1999 1998
------------- ------------- -------------
(In thousands)
Revenues .................................................................... $ 7,799 $ 6,826 $ 6,607
Operating expenses .......................................................... 6,021 5,790 5,769
------------- ------------- -------------
Income before income tax expense ............................................ $ 1,778 $ 1,036 $ 838
------------- ------------- -------------
------------- ------------- -------------
2000 compared to 1999
Included in the revenues of the asset management segment for 2000 were
portfolio management fees from the life insurance and annuities segment of $2.8
million, compared with $1.6 million for 1999. These increased fees primarily
account for the overall increase in income in the asset management segment. The
higher fees resulted from the larger portfolio of listed equity securities held
by the life insurance operation which is managed by Berkeley International
Limited, the Group's asset management subsidiary in Jersey.
Revenues at Berkeley Capital Management ("BCM"), the Group's U.S. asset
manager, remained level in 2000 at $5.5 million, including $0.7 million of
management fees from the life insurance and annuities segment. Expenses
increased by $0.3 million to $5.9 million, primarily due to higher staff costs.
Increased profitability at BCM was hindered by lower than planned growth
in the wrap fee account business, with sales for 2000 largely offset by
redemptions. Total wrap assets under management as of December 31, 2000 were
approximately $955 million, up from approximately $890 million as of June 30,
2000, but down from approximately $972 million as of December 31, 1999. BCM
again benefited during 2000 from having two complementary equity investment
styles. The strong long-term performance record of the Growth Equity product
allowed BCM to attract net new wrap assets each quarter throughout the year. The
growth style benefited early on in 2000 from the market's strong focus on
technology carrying over from 1999 into the first quarter of 2000. BCM's Value
Equity product, which had underperformed the broad market averages during the
period when technology was favored so exclusively, experienced net redemptions
in wrap programs early in 2000. As the market changed at the end of March, the
value holdings began to rise once again and redemptions began to fall off
sharply. By the end of 2000, BCM's value portfolios had provided investors with
returns of over 10% for the full year and both investment styles again had
positive net sales.
During 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.
1999 compared to 1998
Income from the asset management segment increased by $0.2 million from
$0.8 million in 1998 to $1.0 million in 1999. This increase was primarily
attributable to improved 1999 results at BCM.
Revenues of BCM increased in 1999 by 40% to $5.5 million, primarily due
to higher management fees on wrap fee accounts. Total wrap assets under
management as of December 31, 1999 were approximately $972 million, compared to
approximately $690 million as of December 31, 1998. BCM's expenses increased by
$0.7 million to $5.6 million due to increased staff costs, including sales
commissions to the company's wrap account wholesalers.
23
Included in the revenues of the asset management segment for 1999 were
portfolio management fees from the life insurance and annuities segment of $1.6
million, compared to $2.9 million in 1998.
Venture Capital Management
Certain information regarding the venture capital management segment's
results of operations is as follows:
Years Ended December 31,
-------------------------------------------
2000 1999 1998
------------- ------------- -------------
(In thousands)
Revenues:
Management fees............................................................ $ 9,398 $ 7,943 $ 5,805
Investment income.......................................................... 273 863 815
Net realized investment gains (losses)..................................... 14,341 (16,843) 2,138
Change in net unrealized investment gains (losses)......................... (123,474) 199,848 -
------------- ------------- -------------
Total revenues and net investment gains (losses)........................... (99,462) 191,811 8,758
Operating expenses......................................................... 10,982 33,184 5,238
------------- ------------- -------------
Income (loss) before income tax expense.................................... $ (110,444) $ 158,627 $ 3,520
------------- ------------- -------------
------------- ------------- -------------
2000 compared to 1999
Income before taxes from the venture capital management segment decreased
from $158.6 million in 1999 to a loss of $110.4 million in 2000. This loss was
attributable to the change in net unrealized gains for the year on the listed
equity securities held in the trading portfolio. These positions in listed
equity securities were the result of private equity transactions in technology
companies. The losses reflected the downward trend in the market for technology
stocks during the latter part of 2000.
The change in net unrealized gains in the listed equity trading portfolio
during 2000 was a decrease of $123.5 million. The market value of the trading
portfolio decreased from $213.3 million as of December 31, 1999 to $105.2
million as of December 31, 2000. Additions to the trading portfolio during 2000
of $25.5 million resulted from the initial public offerings or acquisitions by
publicly traded companies of seven private preferred stock holdings. Disposals
of certain trading positions in 2000 resulted in realized gains of $15.9 million
based on their aggregate original cost of $10.1 million. Other realized gains
and losses netted to a loss of $1.6 million, primarily resulting from writedowns
on private placement debt securities.
Significant fluctuations in net unrealized gains in the listed equity
trading portfolio 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 eighteen
months due to the increase in the Group's net assets, as well as due to
liquidity events and writedowns taken against this portfolio in the latter part
of 1999 and during 2000.
Included in the revenues of the venture capital management segment for
2000 are portfolio management fees from the life insurance and annuities segment
of $7.5 million, compared to $7.9 million in 1999. Berkeley International
Capital Corporation ("BICC") sources and monitors private investments for LPLA,
for which LPLA pays BICC management fees. Total financings completed by BICC for
the insurance subsidiaries and for Berkeley International Capital Limited
("BICL") during 2000 were $131.1 million, compared to $104.8 million during
1999. Other non-recurring fees of $1.9 million were received in 2000.
Interest income on private debt securities decreased to $0.3 million in
2000 from $0.9 million in 1999. Operating expenses in 2000 decreased by $22.2
million to $11.0 million, primarily due to lower employee compensation,
consistent with the lower income in this segment in 2000.
24
1999 compared to 1998
Income before taxes from the venture capital management segment increased
from $3.5 million in 1998 to $158.6 million in 1999. This increase was
attributable to the change in net unrealized gains on the listed equity
securities held in the trading portfolio. These positions in listed equity
securities were the result of private equity transactions in technology
companies.
Net investment gains were $183.0 million in 1999, of which $199.8 million
represented the change in net unrealized gains on the listed equity securities
held in the trading portfolio during the year. The gains were largely
attributable to one holding in BICL's portfolio. Realized gains of $6.8 million
on listed equity securities and private preferred stocks were more than offset
by $23.6 million of losses and writedowns on private debt and equity securities.
Revenues (excluding net investment gains) for this segment increased by
$2.2 million, to $8.8 million in 1999. Consulting and arrangement fees of $2.9
million were received from investee companies during the first half of 1998, but
the Group has not received such fees since that time. This loss of revenue has
been offset by an increase of more than $5.0 million to $7.9 million of fees
received for management services provided by BICC to LPLA with respect to its
private placement portfolio. This was consistent with the increased value of
that portfolio, as well as the increased fees agreed upon relating to LPLA's
private equity securities. Total financings completed by BICC during 1999 were
$104.8 million, up from the $49.5 million completed during 1998.
Interest income on private debt securities contributed $0.9 million in
1999, a $0.1 million increase over 1998. Operating expenses in 1999 increased by
$27.9 million to $33.2 million primarily due to higher employee compensation,
which was in line with the higher level of venture capital management income in
1999.
Corporate and Other
2000 compared to 1999
Corporate expenses increased by $3.0 million to $7.4 million in 2000,
compared to $4.4 million for 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.
Additionally, in 2000, there were increased costs related to raising the
public profile of the Group, higher registrar fees, and costs for additional SEC
reporting requirements. It is expected that these costs will continue into 2001
and future years.
Interest income earned by the Group (excluding the life insurance and
annuity segment) decreased by $1.2 million to $1.6 million in 2000 as compared
with 1999, primarily due to the decrease in cash and cash equivalents held by
the Group. Interest expense incurred by the Group (excluding the life insurance
and annuity segment) increased by $0.6 million to $0.7 million in 2000,
primarily due to bank borrowings during the latter part of 2000. A discussion of
the Group's use of cash is discussed in "Liquidity and Capital Resources" below.
1999 compared to 1998
Corporate expenses increased by $0.4 million to $4.4 million in 1999,
compared to $4.0 million for 1998, primarily due to initial New York Stock
Exchange listing fees and an increase in professional fees.
Interest income earned by the Group (excluding the life insurance and
annuity segment) decreased by $1.7 million to $2.8 million in 1999 as compared
with 1998, primarily due to the decrease in cash and cash
25
equivalents held by the Group. Group cash was used during the year primarily to
pay dividends and for investment purchases.
Consolidated Income from Continuing Operations Before Income Tax Expense
Consolidated income from continuing operations before income tax expense
increased by $276.8 million, from $28.9 million in 1998 to $305.7 million in
1999, and then decreased by $290.7 million to $15.0 million in 2000. These large
movements were primarily attributable to the high level of net realized and
unrealized investment gains in 1999 which was not repeated in 2000.
Consolidated income before income tax expense for 2001 and future years
may be volatile due to the Group's holdings of listed equity securities
primarily in the technology sector, which are marked to market with changes in
their market value recognized in the income statement for each period. For more
information on the possible effects of volatility in the prices of equity
securities, see Item 7A "Quantitative and Qualitative Disclosures About Market
Risk" below.
Income Taxes
The Group is subject to taxation on its income in all countries in which
it operates based upon the taxable income arising in each country. However,
realized gains on certain investments are exempt from Jersey and Guernsey
taxation. The Group is subject to income tax in Jersey at a rate of 20%. In the
United States, the Group is subject to both federal and California taxes at
34-35% and 8.84%, respectively.
2000 compared to 1999
Though income before tax expense was $15.0 million in 2000, an income tax
benefit of $17.4 million resulted for the year. This was primarily attributable
to the $51.2 million loss from the U.S. life and annuity company which generated
a federal tax benefit of approximately 35%. Income of $70.4 million was
contributed by the Jersey and Guernsey operations during 2000, which primarily
consisted of untaxed investment gains. The effective tax rate, as a percentage
of income before income taxes for 1999, was 18%.
1999 compared to 1998
The effective tax rate, as a percentage of income before income taxes for
1999, was 18%. This effective tax rate reflects the fact that 48% of the income
for 1999 was contributed by the U.S. life and annuity company, and that more
than 50% of the income for the year represented income from the Jersey and
Guernsey operations, which largely consisted of untaxed investment gains. The
effective tax rate, as a percentage of income from continuing operations before
income taxes for 1998, was 19%.
LIQUIDITY AND CAPITAL RESOURCES
Until the latter part of 2000, the Group financed its operations and
capital expenditures with internally generated funds and existing liquid
resources. As of December 31, 1999 and December 31, 1998, the Group had no bank
borrowings bond issues or convertible securities outstanding. However, as of
these dates, $11.8 million and $2.5 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. As of December 31,
2000, the Group had utilized $14.1 million of the bank facility in the form of
letters of credit and guarantees in connection with these portfolio companies,
and had drawn down $35.6 million in loans which are scheduled for repayment in
April 2002. These loans were used for general corporate purposes.
On a consolidated basis as of December 31, 2000, cash and cash
equivalents of the Group, excluding the life insurance segment, amounted to
$53.3 million. As of December 31, 2000, the Group, excluding the life insurance
and annuity segment, also held $102.7 million of listed equity securities which
could be sold within a short period of time. Management believes that the
balances of cash, liquid resources and borrowings, should be sufficient to
satisfy the Group's anticipated financing requirements during the next twelve
months. Shareholders' equity increased during 2000 by $15.3 million to $567.7
million, primarily due to net income for
26
the period of $32.5 million, less dividends paid of $11.6 million. As of
December 31, 2000, $58.0 million of the Company's Ordinary Shares, at cost, held
by the employee benefit trusts have been netted against shareholders' equity.
Upon exercise of employee share options, shareholders' equity will be increased
by the cost of the shares transferred to the employees and the proceeds received
will increase Group cash.
At the end of 1999, the Group had cash held in escrow of $3.1 million
related to the sale of North American Trust Company at the end of 1998. During
2000, this escrow account was released to the Group, after deduction of $0.3
million for claims by the buyer.
The total assets of the Group have grown substantially over the last
eleven years from $210.1 million at the end of 1989 to $2.6 billion at the end
of 2000. A major factor behind the growth in total assets was the creation in
1989 and subsequent expansion of LPLA.
As of December 31, 2000, the Group held $281.2 million in private
corporate debt and equity securities. Of this total, $277.0 million was held in
the investment portfolios of the insurance subsidiaries (LPLA and LPAL). Liquid
markets exist for $19.2 million of these private securities. No public price
information is available for the remainder of these securities, and therefore
debt is valued at amortized cost and equity is valued at the original cost,
unless these securities become other than temporarily impaired. Debt securities
largely represent subordinated loans to an array of companies that are
diversified by industry, geography and financial structure. All of these debt
securities contain covenant restrictions that management believes should provide
a degree of financial protection to the debt holders, including LPLA. The
private equity securities are primarily preferred stock holdings in later stage
technology companies. Financial information on the issuers of these debt and
equity securities is received and reviewed periodically. Contact with company
management is maintained through ongoing dialogue to examine future plans and
prospects.
LPLA invests in collateralized mortgage obligations ("CMOs") as part of
its ongoing efforts to maintain a broadly diversified portfolio. As of December
31, 2000, LPLA's portfolio held $188.9 million in investment grade, liquid CMOs.
The market value of these securities was $190.4 million. Of the total CMO
securities as of December 31, 2000, $0.1 million could be considered highly
volatile with respect to interest rate changes. Management review of the
collateral and cash flow characteristics of each security is completed prior to
acquisition. Ongoing review of security holdings is an integral part of LPLA's
portfolio management practices.
As of December 31, 2000, the insurance subsidiaries' fixed maturity
security portfolios had $22.0 million in unrealized gains and $80.4 million in
unrealized losses. LPLA and LPAL believe that changes in interest rates should
not materially alter the average maturity of their security portfolios, nor
alter their ability to hold fixed maturity securities until their scheduled
maturities.
There are statutory restrictions on LPLA's ability to make dividend
payments. Dividend payments that exceed the lower of 10 percent of its statutory
surplus as of December 31 of the preceding year or net gain from operations for
the preceding year must be approved by certain regulatory authorities. As of
December 31, 2000, LPLA's equity amounted to $179.1 million, none of which could
be transferred in the form of dividends, loans or advances to the parent company
at that date without regulatory approval.
The Group had no material commitments for capital expenditures
outstanding at December 31, 2000.
Item 7A. 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 segment 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. LPLA and LPAL attempt to
minimize their exposure
27
to interest rate fluctuations by managing the characteristics of their assets
and liabilities so that the effects of changes are reasonably likely to be
offset. LPLA's and LPAL's principal asset/liability management goals are to
achieve sufficient cash flows from invested assets to fund contractual
obligations, while maximizing investment returns. LPLA and LPAL have not used
derivative financial instruments to achieve their asset/liability management
goals. Exposure to interest rate risk is estimated by performing sensitivity
tests based on duration analysis of LPLA's investment and product portfolios.
Duration is an option adjusted measure of the percentage change in the
market value of the assets or liabilities in response to a given change in
interest rates. For LPAL, given that policyholder liabilities are less than
$55.0 million, interest rate risk is considered to be minimal. To demonstrate
the sensitivity of LPLA's assets and liabilities, tests performed on LPLA's
assets and liabilities indicated that, as of December 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 was
approximately $1.7 billion, would have decreased by $77.3 million, compared with
a decrease of $44.6 million for the calculated market value of liabilities,
which was approximately $1.6 billion. Conversely, a sudden decrease of 100 basis
points would have increased the investment portfolio's fair value by $79.1
million, compared with an increase in the calculated market value of liabilities
of $46.7 million. These results depend upon certain key assumptions regarding
the behavior of interest sensitive cash flows. Although LPLA has attempted to
ensure that the assumptions used are based on the best available data, cash
flows cannot be forecasted with certainty, and can deviate materially from the
assumed results.
Equity Price Risk
The Group, including LPLA and LPAL, is exposed to equity price risk on
the listed equity securities held almost entirely in its trading portfolio.
Changes in the level or volatility of equity prices affect the value of the
listed equity securities. These changes in turn directly affect the Group'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. These listed equity securities are
primarily in companies in the high technology industry sector, many of which are
small capitalization stocks.
If the market price of the Group's listed equity portfolio as of December
31, 2000 and December 31, 1999, which totaled $356.5 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 $178.3 million
and $204.1 million, respectively. $264.6 million of the value of the listed
equity portfolio as of December 31, 2000 represented unrealized market
appreciation. Of the listed equity securities held as of December 31, 2000,
$160.4 million and $62.5 million consisted of holdings in New Focus, Inc. and
Siebel Systems, Inc., respectively, with unrealized gains of $145.4 million and
$48.0 million, respectively.
For additional information relating to the Group's financial risk
profile, see Note 12 to the Consolidated Financial Statements in Item 8
"Financial Statements and Supplementary Data" of this Form 10-K.
28
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Auditors........................................... 29
Consolidated Balance Sheets as of December 31, 2000 and 1999............. 30
Consolidated Statements of Income for the
Years Ended December 31, 2000, 1999 and 1998........................ 31
Consolidated Statements of Cash Flows for the
Years Ended December 31, 2000, 1999 and 1998........................ 32
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 2000, 1999 and 1998........................ 34
Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 2000, 1999 and 1998........................ 36
Notes to Consolidated Financial Statements............................... 37
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
London Pacific Group Limited
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of London Pacific Group Limited and its subsidiaries at December 31,
1999 and 2000, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedules listed in the
accompanying index appearing under Item 14 on page 64, present fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedules are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers
Chartered Accountants
Jersey, Channel Islands
March 8, 2001
29
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
2000 1999
------------- -------------
(In thousands, except share amounts)
ASSETS
Cash and cash equivalents..................................................... $ 114,285 $ 49,703
Cash held in escrow........................................................... - 3,110
Investments, principally of life insurance subsidiaries:
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $1,352,313 and
$1,037,085 as of December 31, 2000 and 1999, respectively)............. 1,292,015 989,065
Held-to-maturity, at amortized cost (fair value: $129,400 and $221,167
as of December 31, 2000 and 1999, respectively)....................... 127,514 222,110
Equity securities:
Trading, at fair value (cost: $99,747 and $34,680 as of December 31,
2000 and 1999, respectively) .......................................... 353,896 399,844
Available-for-sale, at fair value (cost: $238,942 and $186,403 as of
December 31, 2000 and 1999, respectively) ............................. 229,403 182,926
Policy loans .............................................................. 10,301 10,385
------------- -------------
Total investments ............................................................ 2,013,129 1,804,330
Accrued investment income .................................................... 28,629 22,168
Deferred policy acquisition costs ............................................ 168,102 144,518
Assets held in separate accounts ............................................. 206,325 125,528
Receivables .................................................................. 17,222 34,167
Other assets ................................................................. 15,296 10,633
------------- -------------
Total assets ................................................................. $ 2,562,988 $ 2,194,157
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Life insurance policy liabilities ............................................ $ 1,691,601 $ 1,416,423
Liabilities related to separate accounts ..................................... 203,806 126,703
Notes payable ................................................................ 35,556 -
Deferred income tax liabilities .............................................. 41,587 57,896
Accounts payable, accruals and other liabilities ............................. 22,696 40,660
------------- -------------
Total liabilities ............................................................ 1,995,246 1,641,682
------------- -------------
Commitments and contingencies
Shareholders' equity:
Ordinary shares, $0.05 par value per share: authorized 86,400,000 shares;
issued and outstanding 64,433,313 shares .................................. 3,222 3,222
Additional paid-in capital ................................................... 67,591 62,307
Retained earnings ............................................................ 580,176 559,344
Employee benefit trusts, at cost (shares: 12,811,381 and 15,331,656 as of
December 31, 2000 and 1999, respectively) ................................. (58,003) (54,033)
Accumulated other comprehensive income (loss) ................................ (25,244) (18,365)
------------- -------------
Total shareholders' equity ................................................... 567,742 552,475
------------- -------------
Total liabilities and shareholders' equity ................................... $ 2,562,988 $ 2,194,157
------------- -------------
------------- -------------
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
30
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
-------------------------------------------
2000 1999 1998
------------- ------------- -------------
(In thousands, except per share
and ADS amounts)
Revenues:
Investment income.......................................................... $ 116,005 $ 99,007 $ 94,966
Insurance policy charges................................................... 7,400 6,671 7,111
Financial advisory services, asset management and other fee income........ 31,584 26,563 22,154
Net realized investment gains (losses)..................................... 145,546 (8,581) 10,008
Change in net unrealized investment gains (losses) on trading securities .. (111,014) 348,906 16,258
------------- ------------- -------------
189,521 472,566 150,497
Expenses:
Interest credited on insurance policyholder accounts....................... 94,065 73,753 68,067
Amortization of deferred policy acquisition costs.......................... 21,155 16,797 16,171
Operating expenses......................................................... 58,371 75,964 37,123
Goodwill amortization...................................................... 248 348 236
Interest expense........................................................... 672 42 18
------------- ------------- -------------
174,511 166,904 121,615
------------- ------------- -------------
Income from continuing operations before income tax expense................ 15,010 305,662 28,882
Income tax expense (benefit) on continuing operations...................... (17,447) 53,786 5,419
------------- ------------- -------------
Income from continuing operations.......................................... 32,457 251,876 23,463
Loss from discontinued operations, net of income tax benefit of $861....... - - (2,003)
Gain on sale of discontinued operations, net of income tax expense
of $1,957............................................................... - - 4,996
------------- ------------- -------------
Net income................................................................. $ 32,457 $ 251,876 $ 26,456
------------- ------------- -------------
------------- ------------- -------------
Basic earnings per share and ADS(1):
Continuing operations...................................................... $ 0.64 $ 5.05 $ 0.45
Discontinued operations.................................................... - - 0.06
------------- ------------- -------------
$ 0.64 $ 5.05 $ 0.51
------------- ------------- -------------
------------- ------------- -------------
Diluted earnings per share and ADS(1):
Continuing operations...................................................... $ 0.53 $ 4.54 $ 0.44
Discontinued operations.................................................... - - 0.05
------------- ------------- -------------
$ 0.53 $ 4.54 $ 0.49
------------- ------------- -------------
------------- ------------- -------------
(1)ADS amounts have been restated to reflect the four-for-one split in March
2000.
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
31
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-------------------------------------------
2000 1999 1998
------------- ------------- -------------
(In thousands)
Cash flows from operating activities:
Net income................................................................... $ 32,457 $ 251,876 $ 26,456
Adjustments to reconcile net income to net
cash provided by operating activities:
Net gain on sale of discontinued operations.................................. - - (6,953)
Change in life insurance policy liabilities, net............................. 7,976 8,208 42,266
Depreciation and amortization ............................................... 1,175 1,055 2,151
Amortization of deferred policy acquisition costs ........................... 21,155 16,797 16,171
Deferred income tax expense (benefit) ....................................... (12,502) 54,265 8,332
Net realized investment (gains) losses ...................................... 40,970 42,984 (10,008)
Net amortization of investment premiums and discounts........................ (1,966) (3,309) (982)
Changes in assets and liabilities:
Trading equity securities (including change in net unrealized (gains)
losses of $111,014 in 2000, $(348,906) in 1999 and $(16,258)
in 1998) ................................................................ 45,948 (372,002) (27,842)
Accrued investment income ................................................... (6,461) (3,093) (1,227)
Deferred policy acquisition costs ........................................... (39,026) (25,840) (19,167)
Receivables.................................................................. 1,647 (611) 4,102
Other assets ................................................................ 372 (624) 160
Accounts payable, accruals and other liabilities ............................ (17,310) 23,990 (698)
Income taxes payable ........................................................ (3,598) (628) (8,832)
Other operating cash flows .................................................. (2,240) (4,901) (4,601)
------------- ------------- -------------
Net cash provided by (used in) operating activities ......................... 68,597 (11,833) 19,328
------------- ------------- -------------
Cash flows from investing activities:
Purchases of held-to-maturity fixed maturity securities ..................... (4,201) (10,126) (25,582)
Purchases of available-for-sale fixed maturity securities ................... (357,950) (345,004) (558,064)
Purchases of available-for-sale equity securities............................ (140,959) (109,900) (77,736)
Proceeds from redemption of held-to-maturity fixed maturity securities....... 51,141 38,560 106,421
Proceeds from sale of available-for-sale fixed maturity securities .......... 63,093 206,729 510,070
Proceeds from sale of available-for-sale equity securities .................. 100,101 49,710 40,347
Capital expenditures......................................................... (3,659) (1,184) (1,173)
Proceeds from sale of subsidiary............................................. - - 8,500
Other cash flows from investing activities .................................. 3,123 3,166 (1,656)
------------- ------------- -------------
Net cash provided by (used in) investing activities ......................... (289,311) (168,049) 1,127
------------- ------------- -------------
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
32
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31,
-------------------------------------------
2000 1999 1998
------------- ------------- -------------
(In thousands)
Cash flows from financing activities:
Insurance policyholder contract deposits .................................... 493,998 305,514 201,112
Insurance policyholder benefits paid ........................................ (226,796) (173,414) (178,371)
Issue of Ordinary Shares .................................................... - 5 35
Purchase of Ordinary Shares ................................................. - - (12,651)
Dividends paid .............................................................. (11,625) (11,446) (12,749)
Purchases of Ordinary Shares by the employee benefit trusts.................. (12,712) (4,043) (12,462)
Proceeds from disposal of shares by the employee benefit trusts.............. 8,407 2,344 5,208
Notes payable................................................................ 35,000 - -
Bank overdrafts.............................................................. (593) (789) 1,139
------------- ------------- -------------
Net cash provided by (used in) financing activities ......................... 285,679 118,171 (8,739)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents ........................ 64,965 (61,711) 11,716
Cash and cash equivalents at beginning of year .............................. 49,703 111,414 99,698
Foreign currency translation adjustment ..................................... (383) - -
------------- ------------- -------------
Cash and cash equivalents at end of year .................................... $ 114,285 $ 49,703 $ 111,414
------------- ------------- -------------
------------- ------------- -------------
Supplemental disclosure of cash flow information:
Cash paid (received) during the year for:
Interest .................................................................... $ 50 $ 42 $ 85
Income taxes (net of amounts recovered) ..................................... (1,347) (270) 6,774
Supplemental disclosure of non-cash investing activities:
Exchange of available-for-sale equity securities for trading equity
securities................................................................ $ 97,857 $ 31,372 $ 11,585
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
33
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(In thousands, except per share and ADS amounts)
Accumulated
Other
Ordinary Additional Employee Compre- Total
Shares at Paid-in Retained Benefit hensive Shareholders'
Par Value Capital Earnings Trusts Income(Loss) Equity
---------- ---------- ---------- ---------- ---------- ----------
Balance as of January 1, 1998 ..... $ 3,416 $ 73,870 $305,078 $(44,306) $ 6,219 $344,277
Net income......................... - - 26,456 - - 26,456
Change in net unrealized gains
(losses) on available-for-sale
securities...................... - - - - (9,661) (9,661)
Exercise of employee share
options, including income
tax effect...................... - 28 - 4,486 - 4,514
Net realized gains on disposal
of shares held by the employee
benefit trusts.................. - 722 - - - 722
Cash dividends (23.2 cents net
per share and ADS(1))........... - - (12,749) - - (12,749)
Issue of Ordinary Shares........... 3 32 - - - 35
Purchase of Ordinary Shares
for cancellation................ (198) (12,453) - - - (12,651)
Purchase of shares by the
employee benefit trusts......... - - - (12,462) - (12,462)
-------- -------- -------- -------- -------- --------
Balance as of December 31, 1998.... $ 3,221 $ 62,199 $318,785 $(52,282) $ (3,442) $328,481
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Net income......................... $ - $ - $251,876 $ - $ - $251,876
Change in net unrealized gains
(losses) on available-for-sale
securities...................... - - - - (14,923) (14,923)
Exercise of employee share
options, including income
tax effect...................... - 52 - 2,292 - 2,344
Net realized gains on disposal
of shares held by the employee
benefit trusts.................. - 52 - - - 52
Cash dividends (23.2 cents net
per share and ADS(1))........... - - (11,446) - - (11,446)
Issue of Ordinary Shares........... 1 4 - - - 5
Purchase of shares by the
employee benefit trusts......... - - - (4,043) - (4,043)
Other.............................. - - 129 - - 129
-------- -------- -------- -------- -------- --------
Balance as of December 31, 1999.... $ 3,222 $ 62,307 $559,344 $(54,033) $(18,365) $552,475
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
(1) ADS amounts have been restated to reflect the four-for-one split in March
2000.
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
34
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(In thousands, except per share and ADS amounts)
Accumulated
Other
Ordinary Additional Employee Compre- Total
Shares at Paid-in Retained Benefit hensive Shareholders'
Par Value Capital Earnings Trusts Income(Loss) Equity
---------- ---------- ---------- ---------- ---------- ----------
Balance as of January 1, 2000 ..... $ 3,222 $ 62,307 $559,344 $(54,033) $(18,365) $552,475
Net income ........................ - - 32,457 - - 32,457
Change in net unrealized gains
(losses) on available-for-sale
securities..................... - - - - (6,837) (6,837)
Foreign currency translation
adjustment...................... - - - - (42) (42)
Exercise of employee share
options, including income
tax effect...................... - 2,676 - 8,742 - 11,418
Extension of employee
share options................... - 2,943 - - - 2,943
Net realized gains (losses) on
disposal of shares held by the
employee benefit trusts......... - (335) - - - (335)
Cash dividends (23.2 cents net
per share and ADS(1))........... - - (11,625) - - (11,625)
Purchase of shares by the
employee benefit trusts......... - - - (12,712) - (12,712)
-------- -------- -------- -------- -------- --------
Balance as of December 31, 2000.... $ 3,222 $ 67,591 $580,176 $(58,003) $(25,244) $567,742
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
(1) ADS amounts have been restated to reflect the four-for-one split in March
2000.
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
35
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31,
-------------------------------------------
2000 1999 1998
------------- ------------- -------------
(In thousands)
Net income................................................................... $ 32,457 $ 251,876 $ 26,456
Other comprehensive income (loss), net of deferred income taxes:
Foreign currency translation adjustments, net of income taxes of $0.......... (42) - -
Change in net unrealized gains (losses) on available-for-sale securities
arising during the year, net of income taxes and deferred policy
acquisition cost amortization adjustments of $9,423, $27,819, and
$12,706, respectively ................................................... (6,837) (14,923) (9,661)
------------- ------------- -------------
Other comprehensive income (loss) ........................................... (6,879) (14,923) (9,661)
------------- ------------- -------------
Comprehensive income ........................................................ $ 25,578 $ 236,953 $ 16,795
------------- ------------- -------------
------------- ------------- -------------
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
36
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared by
London Pacific Group Limited (the "Company") in conformity with United States
generally accepted accounting principles ("U.S. GAAP"). These consolidated
financial statements include the accounts of the Company, its subsidiaries, the
Employee Share Option Trust and the Agent Loyalty Opportunity Trust
(collectively, the "Group"). All intercompany transactions have been eliminated
in consolidation. During the first quarter of 2000, the Company completed a
four-for-one split of its American Depositary Shares ("ADSs"). Effective from
the close of business on March 23, 2000, each ADS represents one Ordinary Share.
All dividend and earnings per ADS amounts disclosed in these financial
statements have been restated to reflect this split.
The consolidated balance sheet is presented in an unclassified format as
the Group is primarily engaged in the life insurance and annuity business.
The Company is incorporated under the laws of Jersey, Channel Islands.
Its Ordinary Shares are traded on the London Stock Exchange and on the New York
Stock Exchange in the form of ADSs, which are represented by American Depositary
Receipts ("ADRs"). Pursuant to the regulations of the U.S. Securities and
Exchange Commission ("SEC"), the Company is considered a U.S. domestic
registrant and must file financial statements prepared under U.S. GAAP. In prior
years, the Company filed as a "foreign private issuer" (as defined by the SEC)
and prepared its financial statements under United Kingdom generally accepted
accounting principles ("U.K. GAAP") with a reconciliation to U.S. GAAP for net
income and shareholders' equity.
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 previously as an asset
in the consolidated balance sheet under U.K. GAAP. The effect of the change to
U.S. GAAP on net income, as previously reported for 1999, is a decrease from
$252.8 million to $251.9 million, and on diluted earnings per share and ADS, a
decrease from $4.61 to $4.54.
Cash and Cash Equivalents
The Group considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Investments
The Group's investments consist of fixed maturity and equity securities.
Fixed maturity securities are classified as either available-for-sale or
held-to-maturity, and equity securities are classified as either trading or
available-for-sale. The investments are accounted for as follows:
i) available-for-sale securities are recorded at fair value, with changes
in unrealized gains and losses excluded from net income, but reported net of
applicable taxes and adjustments to deferred policy acquisition cost
amortization as a separate component of comprehensive income;
ii) held-to-maturity securities are recorded at amortized cost; and
iii) trading securities are recorded at fair value with changes in
unrealized gains and losses included in net income.
Amortization of premiums and accretion of discounts on fixed maturity
securities are reflected in earnings over the contractual terms of the
investments in a manner that produces a constant effective yield. Realized gains
and losses on securities are included in net income using the specific
identification method.
37
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Where declines in the value of investments are considered other than temporary,
a charge is reflected in net income for the difference between cost or amortized
cost and estimated net realizable value.
Private corporate debt and equity securities are valued at cost, and are
adjusted for declines in value that are considered other than temporary.
Policy loans are carried at aggregate unpaid principal balances. Interest
income on such loans is accrued as earned.
Included in available-for-sale and held-to-maturity fixed maturity
securities are collateralized mortgage obligations ("CMOs"). Premiums and
discounts arising from the purchase of CMOs are treated as yield adjustments
over their estimated lives. For single class and defined multi-class
mortgage-backed and asset-backed securities, anticipated prepayments are
considered when determining the amortization of discount or premium. Prepayment
assumptions are obtained from dealer surveys and are based on the current
interest rate and economic development. The retrospective adjustment method is
used to value all such securities except for interest-only securities, which are
valued using the prospective method.
Deferred Policy Acquisition Costs
Policy acquisition costs are the costs of producing life insurance and
annuity business: principally commissions, underwriting costs and certain
marketing expenses which vary with, and are primarily related to, the
acquisition of new business. Policy acquisition costs are deferred and amortized
over the estimated lives of the policies in relation to their estimated future
gross profits. Amortization is adjusted in the current year when estimates of
total profits to be realized from a group of products are revised.
Deferred policy acquisition costs are adjusted for the change in
amortization that would have been recorded if fixed maturity securities
classified as available-for-sale had been sold at their stated aggregate fair
value and the proceeds reinvested at current yields. The impact of this
adjustment is included in accumulated other comprehensive income within
shareholders' equity.
Other Assets
Other assets consist primarily of the following:
a) Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost less
accumulated depreciation. Depreciation is calculated on a straight-line basis at
rates sufficient to write-off such assets over their estimated useful lives on
the following basis:
Furniture and equipment - five years
Computer equipment, including software - three to five years
Motor vehicles - five years
Leasehold improvements - life of lease
The Group adopted Statement of Position No. 98-1 ("SOP 98-1"),
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," as of January 1, 2000. With the adoption of SOP 98-1, the Group
began capitalizing certain internal and external costs incurred to obtain or
create internal use software. These capitalized costs are amortized over five
years with the amortization period beginning when the software is ready for its
intended use.
38
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Assets held under capital leases are included in property, equipment and
leasehold improvements and are depreciated over their estimated useful lives.
The future obligations under these leases are included in accounts payable,
accruals and other liabilities. Interest paid on capital leases is charged to
the income statement over the periods of the leases.
b) Intangible Assets
Intangible assets consist of the cost of acquiring U.S. state life
insurance licenses, which are being amortized over a period of 20 years, and
goodwill recorded at acquisition of subsidiaries. Goodwill at acquisition arises
where the consideration given exceeds the fair value attributed to the separable
net assets. All goodwill on acquisitions is capitalized and amortized on a
straight-line basis over its estimated useful economic life, generally 25 years.
Separate Accounts
Separate account assets and liabilities represent funds segregated for
the benefit of certain policyholders. For non-guaranteed policies, the
policyholder bears the investment risk, and policyholder account deposits and
withdrawals, investment income and realized gains and losses are excluded from
the amounts reported in the income statement. Fees charged on policyholder
deposits are included in other fee income. For guaranteed policies issued in
certain states, the U.S. life company bears a portion of the investment risk.
Policy charges, interest credited, investment income and realized gains and
losses on investments backing the guaranteed policies are included in the
amounts reported in the income statement.
Life Insurance Policy Liabilities, Revenues and Expenses
Life insurance policy liabilities, premium revenues and related expenses
are accounted for in accordance with Statement of Financial Accounting Standards
No. 97, "Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sale of
Investments," as follows:
i) Life insurance policy liabilities for deferred annuities and universal
life products are accounted for as investment-type insurance products and
universal life-type products, respectively, and are recorded at accumulated
value (premiums received, plus accrued interest to the balance sheet date, less
withdrawals and assessed fees). Life insurance policy liabilities for certain
immediate annuities are accounted for as limited payment-type policies, and as
such are recorded at the present value of future benefits including assumptions
as to investment yields, mortality, withdrawals, maintenance expenses and other
assumptions based on generally accepted actuarial methods and on the Group's
experience.
ii) Revenues for investment-type insurance products and universal
life-type products consist of charges assessed against policy account values for
the cost of insurance, policy administration and surrenders. Revenues for
limited payment-type products are recognized when due.
iii) Benefits for investment-type insurance products and for universal
life-type products are charged to expense when incurred and reflect the claim
amounts in excess of the policy account balance. Expenses for investment-type
and universal life-type products include the interest credited to the policy
account balance. Benefits and expenses, other than deferred policy acquisition
costs, for limited payment-type products are charged to expense in the period
incurred.
39
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenue Recognition
Fee income for financial advisory and asset management services are
recorded on an accrual basis when the services are performed for the client.
Interest income is accounted for on an accrual basis. Dividends are
accounted for when declared.
Listed equity securities received as a result of an acquisition of one of
the Group's investee companies by a publicly traded company that are held in
escrow by an escrow agent, are recognized in the financial statements when the
transaction is completed. Reductions are made to the number of shares of listed
equity securities held in escrow that are carried in the financial statements as
claims are made by the acquiring company against the escrow, or if evidence
exists that a claim is probable.
Stock Based Compensation
The Group accounts for stock based compensation issued to employees in
accordance with Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees," which recognizes compensation cost
based upon the intrinsic value at the date of grant of the option awarded. The
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock Based Compensation," which
encourages, but does not require, companies to recognize compensation expense
for grants of stock options based on their fair value. The Group has elected, as
permitted by SFAS 123, to adopt the disclosure requirement of SFAS 123 and to
continue to account for stock based compensation under APB 25.
Income Taxes
The Group accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." Under SFAS 109, the Group recognizes taxes payable or refundable for the
current year, and deferred tax assets and liabilities due to temporary
differences in the basis of assets and liabilities between amounts recorded for
financial statement and tax purposes.
The Group provides a valuation allowance for deferred income tax assets
if it is more likely than not that some portion of the deferred income tax asset
will not be realized. The Group includes in income any increase or decrease in a
valuation allowance that results from a change in circumstances that causes a
change in judgement about the realization of the related deferred income tax
asset.
The Group includes in additional paid-in capital the tax benefit on share
options exercised during the period to the extent that such exercises result in
a permanent difference between financial statement and tax basis compensation
expense.
Earnings Per Share and ADS
The Group calculates earnings per share in accordance with Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share." This
statement requires the presentation of basic and diluted earnings per share.
Basic earnings per share is calculated by dividing net income or loss by the
weighted average number of Ordinary Shares outstanding during the applicable
period, excluding shares held by the 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 as adjusted for these
potentially dilutive options which are determined based on the "Treasury Stock
Method."
40
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Foreign Currencies
The Group uses the U.S. dollar as its functional currency. Assets and
liabilities denominated in foreign currencies are translated into U.S. dollars
at the prevailing exchange rates at the balance sheet date. Individual income
statement items are translated to U.S. dollars at prevailing exchange rates on
the transaction date. The resulting net difference on balance sheet translation
is shown as a separate component of shareholders' equity. Foreign currency
transaction gains and losses are recorded in the income statement.
Comprehensive Income
Comprehensive income consists of net income; changes in unrealized gains
or losses on available-for-sale securities, net of income taxes and deferred
policy acquisition cost amortization adjustments; and foreign currency
translation gains or losses arising on the translation of the Group's Jersey,
Channel Islands insurance subsidiary.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." This statement requires that
derivatives be recognized as assets and liabilities, and be measured at fair
value, with changes in the fair value being accounted for within net income,
unless qualifying for hedge accounting. In June 1999, the FASB issued Statement
of Financial Accounting Standard No. 137 ("SFAS 137") which deferred the
effective date of SFAS 133 to all fiscal quarters of all fiscal years beginning
after June 15, 2000. In June 2000, the FASB issued Statement of Financial
Accounting Standard No. 138 ("SFAS 138") which amended the accounting and
reporting standards of SFAS 133 for certain derivative instruments and certain
hedging activities. The Group will adopt SFAS 133, as amended by SFAS 137 and
SFAS 138, on January 1, 2001. The adoption of this financial standard will not
have a material impact upon the presentation of the Group's results of
operations and financial position.
Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions affecting the reported amounts of assets and
liabilities and the disclosures of contingent assets and liabilities as of the
date of the financial statements, and the reported amounts of revenue and
expenses for the reporting period. Estimates are inherently subject to change
and actual results could differ from the estimates. Certain significant
estimates, including those used to determine life insurance policy liabilities
and deferred policy acquisition costs, are disclosed throughout these notes to
the financial statements.
Reclassifications
Certain reclassifications were made to prior years' balances to conform
with the current year's presentation. These reclassifications have no effect on
prior years' net income or shareholders' equity.
41
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2. Investments
Summary Cost and Fair Value Information
Fixed Maturity Securities
An analysis of fixed maturity securities is as follows:
December 31,
--------------------------------------------------------------------------------------------------
2000 1999
----------------------------------------------- ------------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
---------- --------- --------- ---------- ---------- --------- ---------- ----------
(In thousands)
Available-for-sale:
U.S. treasury securities. $ 982 $ - $ (13) $ 969 $ 979 $ - $ (9) $ 970
Non-U.S. government
debt securities........ 21,750 1,037 - 22,787 10,969 529 (38) 11,460
Non-U.S. corporate
debt securities........ 178,167 3,558 (6,616) 175,109 111,188 304 (5,993) 105,499
Corporate debt securities 923,179 12,992 (63,885) 872,286 692,551 944 (44,775) 648,720
Mortgage-backed securities 99,334 1,584 (179) 100,739 106,222 164 (3,900) 102,486
Private corporate debt
securities............ 33,708 29 (1,488) 32,249 33,151 11,858 - 45,009
Other debt securities... 95,193 676 (7,993) 87,876 82,025 94 (7,198) 74,921
---------- --------- --------- ---------- ---------- --------- --------- ----------
$1,352,313 $ 19,876 $ (80,174) $1,292,015 $1,037,085 $ 13,893 $ (61,913) $ 989,065
---------- --------- --------- ---------- ---------- --------- ---------- ----------
Held-to-maturity:
U.S. treasury securities. $ 2,240 $ 15 $ (22) $ 2,233 $ 2,242 $ 29 $ (14) $ 2,257
U.S. municipal securities 2,044 41 - 2,085 2,158 36 (3) 2,191
Non-U.S. government
debt securities ...... 195 - - 195 182 - (2) 180
Non-U.S. corporate
debt securities ...... 1,301 28 - 1,329 6,816 90 (2) 6,904
Corporate debt securities 11,410 186 (64) 11,532 12,312 147 (228) 12,231
Mortgage-backed securities 88,151 1,626 (153) 89,624 99,816 480 (1,735) 98,561
Private corporate debt
securities............ 22,173 229 - 22,402 98,483 259 - 98,742
Other debt securities... - - - - 101 - - 101
---------- --------- --------- ---------- ---------- --------- ---------- ----------
$ 127,514 $ 2,125 $ (239) $ 129,400 $ 222,110 $ 1,041 $ (1,984) $ 221,167
---------- --------- --------- ---------- ---------- --------- ---------- ----------
Total fixed maturity
securities $1,479,827 $ 22,001 $ (80,413) $1,421,415 $1,259,195 $ 14,934 $ (63,897) $1,210,232
---------- --------- --------- ---------- ---------- --------- ---------- ----------
---------- --------- --------- ---------- ---------- --------- ---------- ----------
There were no sales of fixed maturity securities classified as
held-to-maturity during 2000. During 1999, one fixed maturity security
classified as held-to-maturity was sold for $8,342,000, resulting in no gain or
loss. This security was sold due to credit concerns.
Non-income producing fixed maturity securities during 2000 totaled
$11,527,000 at amortized cost as of December 31, 2000.
42
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Contractual Maturities
The amortized cost and estimated fair value of fixed maturity securities
as of December 31, 2000 by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities as certain issuers have the
right to call and certain borrowers have the right to prepay obligations without
penalty.
Available-for-Sale Held-to-Maturity
----------------------- -----------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ---------- ---------- ----------
(In thousands) (In thousands)
Due in one year or less ........................... $ 6,676 $ 6,681 $ 7,508 $ 7,542
Due after one year through five years ............. 306,593 301,518 19,184 19,293
Due after five years through ten years ............ 563,387 540,623 796 801
Due after ten years ............................... 376,323 342,454 11,875 12,140
---------- ---------- ---------- ----------
1,252,979 1,191,276 39,363 39,776
Mortgage-backed securities ........................ 99,334 100,739 88,151 89,624
---------- ---------- ---------- ----------
$1,352,313 $1,292,015 $ 127,514 $ 129,400
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Equity Securities
Equity securities are comprised of available-for-sale and trading
securities. An analysis of equity securities is as follows:
December 31,
--------------------------------------------------------------------------------------------------
2000 1999
----------------------------------------------- ------------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Unrealized Unrealized Fair Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
---------- --------- --------- ---------- ---------- --------- ---------- ----------
(In thousands)
Private corporate equity
securities............. $ 226,799 $ - $ - $ 226,799 $ 174,592 $ - $ - $ 174,592
Listed equity securities. 12,143 124 (9,663) 2,604 11,811 94 (3,571) 8,334
---------- --------- --------- ---------- ---------- --------- ---------- ----------
Total available-for-sale
equity securities...... 238,942 124 (9,663) 229,403 186,403 94 (3,571) 182,926
Trading securities....... 99,747 264,433 (10,284) 353,896 34,680 367,295 (2,131) 399,844
---------- --------- --------- ---------- ---------- --------- ---------- ----------
Total equity securities.. $ 338,689 $ 264,557 $ (19,947) $ 583,299 $ 221,083 $ 367,389 $ (5,702) $ 582,770
---------- --------- --------- ---------- ---------- --------- ---------- ----------
---------- --------- --------- ---------- ---------- --------- ---------- ----------
Trading securities are carried at fair value with changes in net
unrealized gains (losses) of $(111,014,000), $348,906,000 and $16,258,000
included in earnings during 2000, 1999 and 1998, respectively.
Investment Concentration and Risk
As of December 31, 2000, investments in fixed maturity and equity
securities included two corporate issuers representing more than ten percent of
shareholders' equity. Trading securities included investments in
43
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
New Focus, Inc. and Siebel Systems recorded at market values of $160,385,000 and
$62,487,000, respectively, as of December 31, 2000. These investments were not
held as of December 31, 1999. Fixed maturity securities considered less than
investment grade approximated 13.1% and 19.3% of total fixed maturity securities
as of December 31, 2000 and 1999, respectively.
Changes in Net Unrealized Gains (Losses) on Available-for-Sale Securities
The net unrealized losses after deferred policy acquisition cost
adjustments on fixed maturity securities classified as available-for-sale as of
December 31, 2000 totaled $29,118,000 before tax and $18,993,000 after tax, and
as of December 31, 1999 totaled $24,662,000 before tax and $16,030,000 after
tax.
Changes in net unrealized gains (losses) on available-for-sale securities
included in other comprehensive income for the years ended December 31, 1998,
1999 and 2000 were as follows:
Net Unrealized Gains (Losses)
-------------------------------------------
Debt Equity
Securities Securities Total
------------- ------------- -------------
(In thousands)
Net unrealized gains (losses) on available-for-sale securities as of
December 31, 1997 ......................................................... $ 2,903 $ 3,316 $ 6,219
Changes during the year ended December 31, 1998:
Decrease in stated amount of securities...................................... (19,772) (2,595) (22,367)
Decrease in amortization of deferred policy acquisition costs................ 8,303 - 8,303
Decrease in deferred income tax liabilities.................................. 4,014 389 4,403
------------- ------------- -------------
Net unrealized gains (losses) on available-for-sale securities as of
December 31, 1998.......................................................... (4,552) 1,110 (3,442)
Changes during the year ended December 31, 1999:
Decrease in stated amount of securities...................................... (38,452) (4,290) (42,742)
Decrease in amortization of deferred policy acquisition costs................ 20,793 - 20,793
Decrease in deferred income tax liabilities.................................. 6,181 845 7,026
------------- ------------- -------------
Net unrealized gains (losses) on available-for-sale securities as of
December 31, 1999.......................................................... (16,030) (2,335) (18,365)
Changes during the year ended December 31, 2000:
Decrease in stated amount of securities...................................... (10,198) (6,062) (16,260)
Decrease in amortization of deferred policy acquisition costs................ 5,741 - 5,741
Decrease in deferred income tax liabilities.................................. 1,494 2,188 3,682
------------- ------------- -------------
Net unrealized gains (losses) on available-for-sale securities as of
December 31, 2000.......................................................... $ (18,993) $ (6,209) $ (25,202)
------------- ------------- -------------
------------- ------------- -------------
Net Investment Income
The details of investment income, net of investment expenses, are as
follows:
44
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31,
-------------------------------------------
2000 1999 1998
------------- ------------- -------------
(In thousands)
Interest on fixed maturity securities..................................... $ 112,039 $ 94,546 $ 89,811
Dividends on equity securities............................................ 431 213 69
Interest on policy loans.................................................. 640 606 539
Interest on cash and cash equivalents..................................... 3,389 3,780 5,296
------------- ------------- -------------
Gross investment income................................................... 116,499 99,145 95,715
Investment expenses....................................................... (494) (138) (749)
------------- ------------- -------------
116,005 99,007 94,966
Interest credited on insurance policyholder accounts...................... (94,065) (73,753) (68,067)
------------- ------------- -------------
Net investment income..................................................... $ 21,940 $ 25,254 $ 26,899
------------- ------------- -------------
------------- ------------- -------------
Investment expenses included professional fees, salaries and other
allocated costs of investment management and administration.
Realized Gains and Losses and Impairments
Information about net and gross realized gains and losses on securities
transactions is as follows:
Years Ended December 31,
-------------------------------------------
2000 1999 1998
------------- ------------- -------------
(In thousands)
Net realized gains (losses) on securities transactions:
Fixed maturities, available-for-sale....................................... $ 13 $ (6,735) $ 9,196
Fixed maturities, held-to-maturity......................................... (28,274) (36,862) (2,734)
Trading securities......................................................... 186,516 34,403 -
Equity securities, available-for-sale...................................... (12,709) 613 3,546
------------- ------------- -------------
$ 145,546 $ (8,581) $ 10,008
------------- ------------- -------------
------------- ------------- -------------
Gross realized gains (losses) on securities transactions:
Fixed maturities, available-for-sale:
Gross gains............................................................ $ 244 $ 2,179 $ 10,002
Gross losses........................................................... (231) (8,914) (806)
Fixed maturities, held-to-maturity:
Gross losses........................................................... (28,274) (36,862) (2,734)
Trading securities:
Gross gains............................................................ 187,717 34,403 -
Gross losses........................................................... (1,201) - -
Equity securities, available-for-sale:
Gross gains............................................................ 179 7,822 4,388
Gross losses........................................................... (12,888) (7,209) (842)
------------- ------------- -------------
Net realized investment gains (losses) on securities transactions.......... $ 145,546 $ (8,581) $ 10,008
------------- ------------- -------------
------------- ------------- -------------
45
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During 2000, securities with an aggregate carrying value of $27,674,000
classified as held-to-maturity and $12,869,000 classified as available-for-sale
were considered other than temporarily impaired by management. These realized
losses totaling $40,543,000 were recorded in the consolidated income statement.
Fixed maturity securities with an aggregate carrying value of $23,397,000 and
$20,122,000 in 2000 and 1999, respectively, classified as held-to-maturity were
exchanged into preferred stock and classified as available-for-sale. The
exchanges resulted from refinancings by the investee companies and there were no
gains or losses recorded in the consolidated income statement.
Listed Equity Securities Held in Escrow
As a result of the acquisitions of four companies in which the Group held
private equity investments during 2000, the Group received publicly traded stock
in the acquiring companies. In these transactions, a portion, generally 10-15%,
of the shares to be received were withheld and deposited into escrow with an
escrow agent, to serve as security for any damages caused to the acquiror as a
result of any inaccuracy or breach of representations and warranties made by the
acquired company, or any action, suit or proceeding pending against the acquired
company.
The aggregate market value of the Group's listed equity securities held
in escrow as of December 31, 2000 was $22,956,000. During February 2001, one of
the escrow accounts was released in full and the Group received shares valued at
$12,687,000 as of December 31, 2000. The remaining escrow shares are all
scheduled to be released during 2001, subject to claims made by the acquiring
companies. The shares have been fully reflected in the consolidated financial
statements as of December 31, 2000. The Group is not aware of any actual or
potential claims, after making enquiries, other than a pending claim estimated
at $100,000 which has been reflected in the carrying value stated above.
Note 3. Deferred Policy Acquisition Costs
Deferred policy acquisition cost activity was as follows:
Years Ended December 31,
-------------------------------------------
2000 1999 1998
------------- ------------- -------------
(In thousands)
Balance as of January 1..................................................... $ 144,518 $ 114,681 $ 103,382
Deferral of costs relating to:
Commissions ................................................................ 32,634 21,996 15,955
Other ...................................................................... 6,392 3,844 3,212
------------- ------------- -------------
39,026 25,840 19,167
Amortization relating to:
Operations ................................................................. 9,420 8,324 8,171
Investment gains ........................................................... 11,735 8,473 8,000
------------- ------------- -------------
21,155 16,797 16,171
------------- ------------- -------------
Net deferral ............................................................... 17,871 9,043 2,996
Adjustment for unrealized losses on available-for-sale fixed
maturity securities...................................................... 5,740 20,794 8,303
Decrease due to foreign exchange............................................ (27) - -
------------- ------------- -------------
Balance as of December 31 .................................................. $ 168,102 $ 144,518 $ 114,681
------------- ------------- -------------
------------- ------------- -------------
46
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4. Receivables
An analysis of receivables is as follows:
December 31,
----------------------------
2000 1999
------------- -------------
(In thousands)
Fee income receivable ...................................................... $ 1,666 $ 1,404
Allowance for doubtful accounts ............................................ (5) (16)
Due from brokers ........................................................... 8,799 27,048
Income tax refund receivable ............................................... 5,520 2,640
Other receivables .......................................................... 1,242 3,091
------------- -------------
Total receivables .......................................................... $ 17,222 $ 34,167
------------- -------------
------------- -------------
Note 5. Intangible Assets
Intangible assets consist primarily of goodwill and the cost of acquiring
U.S. state life insurance licenses. Intangible asset activity was as follows:
Years Ended
December 31,
----------------------------
2000 1999
------------- -------------
(In thousands)
Cost:
Balance as of January 1 .................................................... $ 8,155 $ 8,362
Disposals .................................................................. (39) (207)
------------- -------------
Balance as of December 31 .................................................. 8,116 8,155
Accumulated amortization:
Accumulated amortization as of January 1 ................................... 3,480 3,046
Amortization recorded....................................................... 462 451
Accumulated amortization on disposals ...................................... (39) (17)
------------- -------------
Accumulated amortization as of December 31 ................................. 3,903 3,480
------------- -------------
Net book value as of December 31 ........................................... $ 4,213 $ 4,675
------------- -------------
------------- -------------
Note 6. Life Insurance Policy Liabilities
An analysis of life insurance policy liabilities is as follows:
December 31,
----------------------------
2000 1999
------------- -------------
(In thousands)
Future policy benefits:
Immediate annuities...................................................... $ 169,357 $ 167,822
Policyholder contract deposits:
Deferred annuities ...................................................... 1,468,070 1,194,872
Universal life products ................................................. 49,574 51,697
Other policy claims and benefits ........................................... 4,600 2,032
------------- -------------
$ 1,691,601 $ 1,416,423
------------- -------------
------------- -------------
47
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The liability for future policy benefits and policyholder contract
deposits was determined based on the following assumptions:
Interest Rate Assumptions
Credited interest rates for universal life-type products ranged from 5.5%
to 6.25% in 2000 and in 1999. Guarantees ranged from 4.0% to 5.5% in 2000 and in
1999. For annuity products, credited interest rates generally ranged from 5.0%
to 8.75% in 2000, and from 5.0% to 7.75% in 1999. The interest rates credited on
immediate annuities ranged from 1% to 11% in 2000 and 1999.
Mortality Assumptions
Assumed mortality rates were generally based on experience multiples
applied to Select and Ultimate Tables commonly used in the industry. For
immediate annuities, mortality assumptions were based on blends of the 1983a and
1979-81 U.S. Life Tables.
Withdrawal Assumptions
Withdrawal charges on deferred annuities generally ranged from 9% to 12%,
grading to zero over a period of up to 12 years. Withdrawal assumptions for
individual life insurance policies were based on historical company experience
and varied by issue, age, type of coverage and policy duration.
Note 7. Statutory Financial Information and Restrictions
The Group's U.S. life insurance subsidiary, London Pacific Life & Annuity
Company ("LPLA"), prepares financial statements on the basis of statutory
accounting practices ("SAP") prescribed or permitted by the insurance department
in North Carolina, its state of domicile. Prescribed SAP include a variety of
publications promulgated by the National Association of Insurance Commissioners
("NAIC") as well as U.S. state laws, regulations and administrative rules. In
1998, the NAIC adopted codified statutory accounting principles. The purpose of
codification is to create uniformity in statutory financial reporting across
U.S. states. The North Carolina Insurance Department has adopted codification,
effective January 1, 2001. The Group expects the implementation of the new SAP
will not have a material adverse impact on LPLA's statutory surplus.
Prior to January 1, 2001, the principal differences between SAP and U.S.
GAAP ("GAAP") were: (i) policy acquisition costs were expensed as incurred under
SAP, but were deferred and amortized under GAAP, (ii) amounts collected from
holders of universal life-type and annuity products were recognized as premiums
when collected under SAP, but were initially recorded as contract deposits under
GAAP, with cost of insurance recognized as revenue when assessed and other
contract charges recognized as revenue over the periods for which services were
provided, (iii) the classification and carrying amount of investments in certain
securities were different under SAP than under GAAP, (iv) the criteria for
providing asset valuation allowances, and the methodologies used to determine
the amounts thereof, were different under SAP than GAAP, (v) the timing of
establishing certain reserves, and the methodologies used to determine the
amounts thereof, were different under SAP than under GAAP, (vi) no provision was
made for deferred income taxes under SAP, and (vii) certain assets were not
admitted for purposes of determining surplus under SAP.
48
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A comparison of net income and statutory capital and surplus of LPLA
determined on the basis of SAP to net income and shareholders' equity of LPLA on
the basis of GAAP is as follows:
2000 1999 1998
------------- ------------- -------------
(In thousands)
Statutory Accounting Practices:
Net income (loss) for the years ended December 31.......................... $ (13,246) $ 993 $ 133
Statutory capital and surplus as of December 31 ........................... 152,955 166,701 80,316
Generally Accepted Accounting Principles:
Net income (loss) for the years ended December 31.......................... (33,538) 95,593 15,470
Shareholders' equity as of December 31 .................................... $ 179,097 $ 215,134 $ 162,814
Risk based capital ("RBC") requirements promulgated by the NAIC require
life insurers to maintain minimum capitalization levels that are determined
based on formulas incorporating credit risk, insurance risk, interest rate risk
and general business risk. As of December 31, 2000, LPLA's adjusted capital and
surplus exceeded their authorized control level of RBC. Included within the
statutory capital and surplus as of December 31, 2000 shown above were
$20,000,000 of notes issued by LPLA to a sister company.
The insurance statutes of the state of domicile limit the amount of
dividends that LPLA can pay annually without first obtaining regulatory
approval. Generally, the limitations are based on a combination of statutory net
gain from operations for the preceding year, 10% of statutory surplus at the end
of the preceding year, and dividends and distributions made during the preceding
twelve months. No dividends can be paid by LPLA during 2001 without regulatory
approval.
Note 8. Notes Payable
On May 2, 2000, the Group's credit facility with a bank was extended
until April 2002, under which the Group may borrow up to $50,000,000 for general
corporate purposes. As of December 31, 2000 and 1999, $35,556,000 and $0,
respectively, was outstanding under this credit facility, and $14,074,000 and
$11,842,000, respectively, was utilized in the form of letters of credit and
guarantees in connection with certain portfolio companies which are highly
leveraged. The credit facility bears interest at variable rates based on LIBOR.
The annual interest rate on borrowings as of December 31, 2000 was 7.375% and
commitment fees were charged at 0.375% per annum on the unutilized balance
during 2000. The facility may be extended annually by mutual consent of the
Group and the lender after April 2002.
Note 9. Income Taxes
The Group is subject to taxation on its income in all countries in which
it operates based upon the taxable income arising in each country. However,
realized gains on certain investments are exempt from Jersey and Guernsey
taxation. This and other tax benefits which may not recur have reduced the tax
charge in 2000, 1999 and 1998.
The Group is subject to income tax in Jersey at a rate of 20%. In the
United States, the Group is subject to both federal and California taxes charged
at 34-35% and 8.84%, respectively.
The provision for income taxes differs from the amount computed by
applying the Jersey, Channel Islands statutory income tax rate of 20% to income
before taxes from continuing operations. The sources and tax effects of the
difference are as follows:
49
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31,
-------------------------------------------
2000 1999 1998
------------- ------------- -------------
(In thousands)
Income taxes computed at Jersey statutory income tax rate of 20%............. $ 3,002 $ 61,132 $ 5,776
Realized and unrealized investment gains not subject to taxation in
Jersey (losses not deductible)............................................ (37,344) 112 (755)
Other losses not deductible in Jersey........................................ 1,676 796 792
Income in Guernsey not subject to taxation (losses not deductible)........... 23,171 (32,414) (18)
Taxes on income at higher than 20% statutory Jersey rate:
Realized and unrealized investment gains and losses in the U.S............ (6,273) 22,793 3,619
Other income and losses in the U.S. ...................................... (626) 1,375 (412)
Adjustment of prior years' provisions ....................................... (1,053) - (3,577)
Other ....................................................................... - (8) (6)
------------- ------------- -------------
Actual tax expense (benefit) ................................................ $ (17,447) $ 53,786 $ 5,419
------------- ------------- -------------
------------- ------------- -------------
The Group recognizes assets and liabilities for the deferred tax
consequences of temporary differences between the tax basis of assets and
liabilities and their reported amounts in the financial statements. These
temporary differences will result in taxable or deductible amounts in future
years when the reported amounts of assets and liabilities are recovered or
settled. The deferred income tax assets are reviewed periodically for
recoverability and valuation allowances are provided as necessary. Deferred
income tax assets and liabilities are disclosed net in the consolidated
financial statements when they arise within the same tax jurisdiction and tax
return.
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets and deferred income tax liabilities
are presented below. Net deferred income tax liabilities existed as of December
31, 2000 and 1999 in the U.S. life insurance subsidiary which files a separate
U.S. federal tax return. Net deferred income tax assets existed as of December
31, 2000 and 1999 in the U.S. non-life subsidiaries which file consolidated
federal tax returns for two separate non-life groups.
December 31,
----------------------------
2000 1999
------------- -------------
(In thousands)
Deferred income tax assets:
Net operating loss carry forwards ........................................... $ 6,822 $ -
Unrealized losses on investments............................................. 27,967 21,152
Insurance policyholder liabilities .......................................... 27,013 27,199
Other assets................................................................. 26 956
------------- -------------
61,828 49,307
------------- -------------
Deferred income tax liabilities:
Unrealized gains on investments ............................................. (46,687) (57,860)
Accretion recognized on a cash basis for income tax purposes ................ (3,830) (3,098)
Cost of policies produced ................................................... (52,757) (46,020)
Other liabilities ........................................................... (141) (225)
------------- -------------
(103,415) (107,203)
------------- -------------
Net deferred income tax liabilities.......................................... $ (41,587) $ (57,896)
------------- -------------
------------- -------------
50
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
----------------------------
2000 1999
------------- -------------
(In thousands)
Deferred income tax assets:
Net operating loss carry forwards .......................................... $ 6,553 $ 2,904
Revenues and expenses recognized on a cash basis for income tax purposes ... 1,713 1,303
Intangible assets .......................................................... - 42
Unrealized losses on investments ........................................... - 739
Other assets ............................................................... 2,490 1,176
Valuation allowance ........................................................ (6,121) (4,154)
------------- -------------
Deferred income tax assets, net of valuation allowance ..................... 4,635 2,010
Deferred income tax liabilities:
Depreciation, amortization and other......................................... (358) (285)
------------- -------------
Net deferred income tax assets............................................... $ 4,277 $ 1,725
------------- -------------
------------- -------------
Income taxes in the following amounts would have arisen if the
distributable earnings of subsidiaries were remitted to the parent. No provision
for deferred income taxes has been made for these potential liabilities, as
there is currently no intention to distribute such earnings.
December 31,
-------------------------------------------
2000 1999 1998
------------- ------------- -------------
(In thousands)
Potential tax liability on distributable earnings of subsidiaries ......... $ 24,507 $ 30,985 $ 34,553
------------- ------------- -------------
------------- ------------- -------------
Note 10. Shareholders' Equity
The Company has authorized 86,400,000 Ordinary Shares with a par value of
$0.05 per share. As of December 31, 2000 and 1999, there were 64,433,313
Ordinary Shares issued and outstanding.
Changes in the number of Ordinary Shares were as follows:
Years Ended December 31,
-------------------------------------------
2000 1999 1998
------------- ------------- -------------
(In thousands)
Shares issued as of January 1.............................................. 64,433 64,424 68,328
New share capital issued................................................... - 9 64
Purchase of shares by the Company.......................................... - - (3,968)
------------- ------------- -------------
Shares issued as of December 31 ........................................... 64,433 64,433 64,424
------------- ------------- -------------
------------- ------------- -------------
Total dividends declared were $0.29 gross per Ordinary Share ($0.232 net
of 20% Jersey tax) and $0.232 per ADS (net of 20% Jersey tax) during each of the
years ended December 31, 2000, 1999 and 1998, or $11,625,000, $11,446,000 and
$12,749,000, respectively, in total.
51
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Group has two share incentive plans as described in Note 14 to the
Consolidated Financial Statements. Under the terms of these plans, shares of the
Company may be purchased in the open market and held in trust. These shares are
owned by the employee benefit trusts, which are subsidiaries of the Company for
financial reporting purposes.
Changes in the number of shares held by The London Pacific Group 1990
Employee Share Option Trust ("ESOT") and the Agent Loyalty Opportunity Trust
("ALOT") were as follows:
Years Ended December 31,
------------------------------------------------------------------------
2000 1999 1998
---------------------- ---------------------- ----------------------
ESOT ALOT ESOT ALOT ESOT ALOT
---------- ---------- ---------- ---------- ---------- ----------
(In thousands)
Shares held as of January 1 .......... 14,682 650 14,527 650 12,886 325
Purchased ............................ 694 - 865 - 3,398 325
Exercised ............................ (3,214) - (710) - (1,757) -
Transfer between trusts .............. 212 (212) - - - -
---------- ---------- ---------- ---------- ---------- ----------
Shares held as of December 31......... 12,374* 438 14,682 650 14,527 650
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
* 604,000 held in ADR form.
Note 11. Commitments and Contingencies
Lease Commitments
The Group leases furniture, fixtures and equipment under capital and
operating leases with terms in excess of one year. The Group also leases office
space under operating leases. Total rent expense on operating leases was
$1,237,000, $1,442,000 and $1,790,000 for the years ended December 31, 2000,
1999 and 1998, respectively.
Future minimum lease payments required under capital and non-cancellable
operating leases with terms of one year or more, as of December 31, 2000 were as
follows:
Capital Operating
Leases Leases
------- --------
(In thousands)
2001 ....................................................................... $ 261 $ 1,334
2002 ....................................................................... 244 864
2003 ....................................................................... 134 708
2004 ....................................................................... 38 481
2005 ....................................................................... 7 201
2006 and thereafter ........................................................ - 388
------- --------
Total ...................................................................... 684 $ 3,976
------- --------
--------
Less amounts representing interest ......................................... (97)
-------
Present value of net minimum lease payments ................................ $ 587
-------
-------
52
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Letters of Credit and Guarantees
For disclosure of letters of credit and guarantees, see Note 8 to the
Consolidated Financial Statements.
Note 12. Fair Value of Financial Instruments
Substantially all financial instruments used in the Group's trading and
investing activities are carried at fair value or amounts that approximate fair
value. Fair value is based generally on listed market prices or broker-dealer
price quotations. To the extent that prices are not readily available, or if
liquidating the Group's position is reasonably expected to affect market prices,
estimated fair value is based on internal valuation models and estimates made by
management.
With the exception of the fixed maturity securities classified as
held-to-maturity, which are held at amortized cost, the carrying values of the
Group's financial assets are equal to estimated fair value.
It is not practicable for the Group to estimate with sufficient
reliability a meaningful fair value range for its portfolio of private corporate
securities because of the many qualitative rather than quantitative factors that
would require consideration in making such an estimate.
Considerable judgement is required in interpreting market data used to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that could be realized in a
current market exchange. The use of different market assumptions or estimation
methodologies may have a material effect on the estimated fair value amounts.
The carrying values and estimated fair values of the Group's financial
instruments were as follows:
December 31,
------------------------------------------------------
2000 1999
------------------------ ------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
---------- ---------- ---------- ----------
(In thousands)
Financial assets:
Cash and cash equivalents ....................... $ 114,285 $ 114,285 $ 49,703 $ 49,703
Cash held in escrow ............................. - - 3,110 3,110
Investments:
Fixed maturities:
Available-for-sale........................ 1,292,015 1,292,015 989,065 989,065
Held-to-maturity.......................... 127,514 129,400 222,110 221,167
Equity securities:
Trading................................... 353,896 353,896 399,844 399,844
Available-for-sale........................ 229,403 229,403 182,926 182,926
Policy loans.................................. 10,301 10,301 10,385 10,385
Assets held in separate accounts................. 206,325 206,325 125,528 125,528
Financial liabilities:
Life insurance policy liabilities ............... 1,691,601 1,597,951 1,416,423 1,346,923
Liabilities related to separate accounts......... 203,806 188,683 126,703 118,599
Notes payable.................................... 35,556 35,556 - -
53
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following methods and assumptions were used by the Group in
estimating the fair value of the financial instruments presented:
Cash and Cash Equivalents: The carrying amounts reported in the consolidated
balance sheet for these instruments approximated fair value.
Fixed Maturity Securities: Fair values for fixed maturity securities classified
as available-for-sale and held-to-maturity were generally based upon quoted
market prices and appropriate valuation methodologies.
Equity Securities:
a) Trading Securities: Fair value for equity securities classified as trading
were based on quoted market prices.
b) Available-for-Sale Securities: Fair values for equity securities classified
as available-for-sale were generally based upon quoted market prices and
appropriate valuation methodologies.
Policy Loans: The carrying amounts reported in the consolidated balance sheet
for these instruments approximated fair value.
Assets Held in Separate Accounts: Fair values for assets held in separate
accounts were based on quoted market prices.
Life Insurance Policy Liabilities: The balance sheet caption "Life insurance
policy liabilities" includes investment-type insurance contracts (i.e., deferred
annuities and universal life contracts) and immediate annuity contracts. The
estimated fair values of deferred annuity and universal life policies were based
on the account values after deduction of surrender charges. The estimated fair
values of immediate annuity contracts were based on the present value of
expected benefits using a discount rate equal to the five-year U.S. Treasury
rate.
Liabilities Related to Separate Accounts: The estimated fair values of deferred
annuity and variable annuity policies were based on the account values after
deduction of surrender charges.
Notes Payable: The carrying amounts reported in the consolidated balance sheet
for these instruments approximated fair value as the bank borrowings bear
interest at a variable rate.
Note 13. Employee Benefit Plan
1993 Deferred Compensation Plan
The Group sponsors a deferred compensation plan for certain U.S.
employees. It is designed to allow these employees the opportunity to
participate in the potential gains to be realized by the Group from selected
private company investments made by the Group. Plan participants may elect to
defer payment of all or a portion of their compensation and then to invest in,
on a "phantom" basis, securities which mirror the performance of private
investments made by the Group. The participants do not actually own the
underlying securities and do not risk their original principal amount deemed to
be invested in the underlying securities. Under the terms of the plan, as
amended, participants may elect to receive in cash, or to rollover into the
plan, "redemption" amounts (e.g., amounts realized in cash by the Group on the
underlying investments, return of principal amounts upon reaching specified
expiration dates, or amounts related to an annual election to redeem out of
certain publicly traded underlying securities). The Group does not fund this
plan and the rights of the participants to receive payments from the plan are
unsecured claims against the Group. As of December 31,
54
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2000 and 1999, the Group's liability to participants under this plan was
$5,402,000 and $3,864,000, respectively. In addition, as of those dates,
unrealized appreciation on the underlying securities of $2,089,000 and
$1,936,000, respectively, had been accrued but was not yet payable to
participants.
The Group recognized expense related to this deferred compensation plan
of $1,412,000, $2,476,000 and $173,000 for the years ended December 31, 2000,
1999 and 1998, respectively.
Note 14. Share Incentive Plans
The Group has two share incentive plans for employees, agents and
directors of London Pacific Group Limited and its subsidiaries that provide for
the issuance of share options and stock appreciation rights.
Employee Share Option Trust
The London Pacific Group 1990 Share Option Trust ("ESOT") provides for
the granting of share options to employees and directors. The objectives of this
plan include retaining the best personnel and providing for additional
performance incentives. Options are granted with an exercise price equal to the
fair market value at the date of grant. Such grants to employees are generally
exercisable in four equal annual installments beginning one year from the date
of grant, subject to employment continuation, and expire seven or ten years from
the date of grant. Such grants to directors are fully vested on the date of
grant and expire seven or ten years from the date of the grant.
The ESOT may purchase shares of the Company in the open market, funded
each year by a loan from the Company or its subsidiaries up to an annual maximum
of 5% of the consolidated net assets of the Group. The loan is unsecured and
interest free and is eliminated in the consolidated financial statements. The
ESOT has waived its entitlement to dividends on any shares held. See Note 10 to
the Consolidated Financial Statements for a summary of the share activity within
the ESOT.
Share option activity for the years ended December 31, 2000, 1999 and
1998 was as follows:
2000 1999 1998
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
(Options in thousands) Options Price Options Price Options Price
------- -------- ------- -------- ------- --------
Outstanding as of January 1...................... 15,256 $ 3.61 14,215 $ 3.47 12,356 $ 3.42
Granted.......................................... 431 19.55 1,852 4.50 3,842 3.38
Exercised........................................ (3,214) 2.62 (710) 3.30 (1,757) 2.96
Forfeited........................................ (160) 12.59 (101) 3.32 (226) 3.34
Expired.......................................... (100) 2.50 - - - -
------- ------- ------- ------- ------- -------
Outstanding as of December 31.................... 12,213 $ 4.32 15,256 $ 3.61 14,215 $ 3.47
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Options exercisable as of December 31............ 9,632 $ 4.05 11,444 $ 3.54 9,242 $ 3.55
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
The Group accounts for stock based compensation using the intrinsic value
method prescribed by Accounting Principles Board Opinion No.25 ("APB 25"),
"Accounting for Stock Issued to Employees." Under APB 25, no compensation cost
is recognized for stock option awards granted at or above fair market value.
55
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All grants made by the Group were at market value, and thus, no compensation
expense was recorded for options granted. However, the Group extended the
expiration date on 310,000 outstanding options during 2000 and, in accordance
with APB 25, recorded compensation expense of $2,943,000. This expense
represents the difference between the exercise price of the options and the
market value of the underlying shares at date of extension. Of the options
modified, 250,000 were extended for an additional three years from date of
expiration, and 60,000 were extended for an additional ten years from date of
modification.
Had compensation expense for the Group's ESOT activity been determined
based upon the fair value method in accordance with Statement of Financial
Accounting Standard No. 123 ("SFAS 123"), "Accounting for Stock Based
Compensation," the Group's net income and earnings per share and ADS would have
been reduced to the pro forma amounts as follows:
Years Ended December 31,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
(In thousands, except per share
and ADS amounts)
Net income:
As reported.............................................................. $ 32,457 $ 251,876 $ 26,456
Pro forma................................................................ 30,896 250,971 25,989
Basic earnings per share and ADS (1):
As reported.............................................................. 0.64 5.05 0.51
Pro forma................................................................ 0.61 5.03 0.50
Diluted earnings per share and ADS (1):
As reported.............................................................. 0.53 4.54 0.49
Pro forma................................................................ 0.51 4.53 0.49
Weighted average fair value of each option granted during the year....... $ 9.24 $ 0.76 $ 0.36
(1) ADS amounts have been restated to reflect the four-for-one split in March
2000.
The pro forma disclosures shown above were calculated for all options
granted after December 31, 1994 using a Black-Scholes option pricing model with
the following assumptions:
2000 1999 1998
----------- ----------- -----------
Expected dividend yield (2) ............................................. - - -
Expected stock price volatility ......................................... 67% 31% 26%
Risk-free interest rate ................................................. 6.07% 5.49% 5.75%
Weighted average expected life (in years)................................ 5 5 5
(2) As the Company has paid a constant dividend amount for these years, a
deduction to the share price was made in the amount of the net present value of
the dividend and the dividend yield in the option pricing model was set to zero.
56
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Summary information about the Group's share options outstanding as of
December 31, 2000 is as follows:
Options Outstanding Options Exercisable
-------------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
----------- ----------- ------------ ------------- -------------- -----------
(In thousands) (Years) (In thousands)
$ 1 - $ 5 9,364 3.03 $ 3.27 7,338 $ 3.24
6 - 10 2,486 3.71 6.19 2,194 5.98
11 - 15 65 6.42 12.75 - -
16 - 20 198 9.65 19.18 - -
21 - 25 100 9.68 21.00 100 21.00
----------- --------- ---------- ----------- ------------ ---------
$ 1 -$ 25 12,213 3.35 $ 4.32 9,632 $ 4.05
----------- --------- ---------- ----------- ------------ ---------
----------- --------- ---------- ----------- ------------ ---------
Agent Loyalty Opportunity Trust
The Agent Loyalty Opportunity Trust ("ALOT") provides for the granting of
stock appreciation rights ("SARs") on the Company's Ordinary Shares to agents of
the U.S. life insurance business. Each award unit entitles the holder to cash
compensation equal to the difference between the Company's prevailing share
price and the exercise price. The award units are exercisable in four equal
annual installments commencing on the first anniversary of the date of grant and
are forfeited upon termination of the agency contract. Vesting of the award in
any given year is also contingent on the holder of the award surpassing a
predetermined benchmark tied to sales and persistency. The SARs expire seven
years from the date of grant.
The ALOT may purchase Ordinary Shares in the open market, funded by a
loan from a Group subsidiary. The loan is secured by the shares held in the
trust and bears interest based upon the trust's net income before interest for
each financial period. The trust receives dividends on all Ordinary Shares held.
The loan, interest income, and dividend income are eliminated in the
consolidated financial statements. See Note 10 to the Consolidated Financial
Statements for a summary of the share activity within the ALOT.
SAR activity for the years ended December 31, 2000, 1999 and 1998 was as
follows:
2000 1999 1998
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Award Exercise of Award Exercise of Award Exercise
(Award units in thousands) Units Price Units Price Units Price
--------- --------- --------- --------- --------- ---------
Outstanding as of January 1........... 576 $3.65 613 $3.35 228 $3.35
Granted............................... - - 94 5.19 396 3.35
Exercised............................. (109) 3.50 (84) 3.35 - -
Forfeited............................. (29) 3.35 (47) 3.35 (11) 3.35
------- ------- ------- ------- ------- -------
Outstanding as of December 31......... 438 $3.71 576 $3.65 613 $3.35
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Award units exercisable as of
December 31......................... 68 $3.62 62 $3.35 44 $3.35
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
57
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Summary information about the Group's SARs outstanding as of December 31,
2000 is as follows:
Award Units Outstanding Award Units Exercisable
--------------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------------- ------------ ------------ ------------- -------------- -----------
(In thousands) (Years) (In thousands)
$ 3.35 353 4.00 $3.35 58 $3.35
5.19 85 5.28 5.19 10 5.19
------------- --------- ---------- ----------- ------------ ---------
$3.35 - $5.19 438 4.25 $3.71 68 $3.62
------------- --------- ---------- ----------- ------------ ---------
------------- --------- ---------- ----------- ------------ ---------
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation, an Interpretation of APB Opinion No. 25," which was
effective for all awards granted after July 1, 2000.
Compensation expense relating to award grants in the ALOT was accounted for
under APB 25, prior to the issuance of FIN 44. Thus, no expense was recognized
at the grant dates because all awards were made with an exercise price equal to
the prevailing market value. However, compensation expense of $1,943,000 and
$300,000 for the years ended December 31, 2000 and 1999, respectively, on
exercise of the awards was recognized. This compensation expense was capitalized
in the consolidated balance sheet as deferred policy acquisition costs, in
accordance with the Group's accounting policy as stated in Note 1 to the
Consolidated Financial Statements.
Note 15. Earnings Per Share and ADS
A reconciliation of the numerators and denominators for the basic and
diluted earnings per share calculations in accordance with Statement of
Financial Accounting Standard No. 128 ("SFAS 128"), "Earnings per Share," is as
follows:
Years Ended December 31,
-------------------------------------------
2000 1999 1998
------------- ------------- -------------
(In thousands, except share, per share
and ADS amounts)
Net income............................................................. $ 32,457 $ 251,876 $ 26,456
Basic earnings per share and ADS:
Weighted average number of Ordinary Shares outstanding,
excluding shares held by the employee benefit trusts................. 50,794,731 49,891,778 52,205,641
------------- ------------- -------------
------------- ------------- -------------
Continuing operations ................................................. $ 0.64 $ 5.05 $ 0.45
Discontinued operations ............................................... - - 0.06
------------- ------------- -------------
Basic earnings per share and ADS ...................................... $ 0.64 $ 5.05 $ 0.51
------------- ------------- -------------
------------- ------------- -------------
58
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31,
-------------------------------------------
2000 1999 1998
------------- ------------- -------------
(In thousands, except share, per share
and ADS amounts)
Diluted earnings per share and ADS:
Weighted average number of Ordinary Shares outstanding,
excluding shares held by the employee benefit trusts................. 50,794,731 49,891,778 52,205,641
Effect of dilutive securities (employee share options) ................ 9,932,897 5,553,591 1,346,637
------------- ------------- -------------
Weighted average Ordinary Shares used in diluted earnings per
share calculations................................................... 60,727,628 55,445,369 53,552,278
------------- ------------- -------------
------------- ------------- -------------
Continuing operations ................................................. $ 0.53 $ 4.54 $ 0.44
Discontinued operations ............................................... - - 0.05
------------- ------------- -------------
Diluted earnings per share and ADS .................................... $ 0.53 $ 4.54 $ 0.49
------------- ------------- -------------
------------- ------------- -------------
Earnings per ADS are equivalent to earnings per Ordinary Share, following
the four-for-one split of ADSs which was effective from the close of business on
March 23, 2000. All ADS amounts have been restated to reflect this split.
Note 16. Transactions with Related Parties
The Group paid legal fees of approximately $418,000, $560,000, and
$38,000 during 2000, 1999 and 1998, respectively, to a law firm of which one of
its directors, Victor A. Hebert, is a member.
As of December 31, 1999, an executive officer of the Company had a
housing loan from a Group company amounting to $728,000 which was subsequently
repaid during 2000. The facility had been provided at an interest rate of 7.25%.
Note 17. Business Segment and Geographical Information
The Group's reportable operating segments are classified according to its
principal businesses, which are: life insurance and annuities, financial
advisory services, asset management and venture capital management.
Intercompany transfers between reportable operating segments are
accounted for at prices which are designed to be representative of unaffiliated
third party transactions. During the years ended December 31, 2000, 1999 and
1998, there were included in the asset management and venture capital management
segments, portfolio management fees from the life insurance and annuities
segment of $10,249,000, $9,540,000 and $5,825,000, respectively. These
management fees have been approved by the insurance regulatory body in the life
insurance company's U.S. state of domicile.
59
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Summary revenue and investment gain (loss) information by geographic
segment, based on the domicile of the Group company generating those revenues,
is as follows:
Years Ended December 31,
-------------------------------------------
2000 1999 1998
------------- ------------- -------------
(In thousands)
Jersey................................................................... $ 181,516 $ (4,956) $ 2,757
Guernsey................................................................. (99,098) 195,107 5,666
United States............................................................ 107,103 282,415 142,074
------------- ------------- -------------
Consolidated revenues and net investment gains (losses).................. $ 189,521 $ 472,566 $ 150,497
------------- ------------- -------------
------------- ------------- -------------
Total assets by geographic segment were as follows:
December 31,
----------------------------
2000 1999
------------- -------------
(In thousands)
Jersey.................................................................... $ 251,255 $ 79,869
Guernsey.................................................................. 176,173 223,099
United States............................................................. 2,135,560 1,891,189
------------- -------------
Consolidated total assets ................................................ $ 2,562,988 $ 2,194,157
------------- -------------
------------- -------------
Revenues and income before tax expense for the Group's reportable
operating segments, based on management's internal reporting structure, were as
follows:
Years Ended December 31,
-------------------------------------------
2000 1999 1998
------------- ------------- -------------
(In thousands)
Revenues:
Life insurance and annuities (1)(2)...................................... $ 256,658 $ 251,180 $ 116,104
Financial advisory services.............................................. 22,952 19,913 14,502
Asset management (1) .................................................... 7,799 6,826 6,607
Venture capital management (2) .......................................... (99,462) 191,811 8,758
------------- ------------- -------------
187,947 469,730 145,971
Reconciliation of segment amounts to consolidated amounts:
Interest income ......................................................... 1,574 2,836 4,526
------------- ------------- -------------
Consolidated revenues and net investment gains (losses).................. $ 189,521 $ 472,566 $ 150,497
------------- ------------- -------------
------------- ------------- -------------
- -------------------------------------
(1) Intersegmental revenue in asset management segment
from life insurance and annuities segment............................ $ 2,775 $ 1,597 $ 2,880
(2) Intersegmental revenue in venture capital management
segment from life insurance and annuities segment.................... $ 7,474 $ 7,943 $ 2,945
60
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31,
-------------------------------------------
2000 1999 1998
------------- ------------- -------------
(In thousands)
Income before income tax expense:
Life insurance and annuities (1)(2)...................................... $ 132,671 $ 147,753 $ 23,833
Financial advisory services ............................................. (2,261) 166 369
Asset management (1) .................................................... 1,778 1,036 838
Venture capital management (2) .......................................... (110,444) 158,627 3,520
------------- ------------- -------------
21,744 307,582 28,560
Reconciliation of segment amounts to consolidated amounts:
Interest income ......................................................... 1,574 2,836 4,526
Corporate expenses ...................................................... (7,388) (4,366) (3,950)
Goodwill amortization ................................................... (248) (348) (236)
Interest expense ........................................................ (672) (42) (18)
------------- ------------- -------------
Consolidated income before income tax expense ........................... $ 15,010 $ 305,662 $ 28,882
------------- ------------- -------------
------------- ------------- -------------
- -------------------------------------
(1) Intersegmental revenue in asset management segment
from life insurance and annuities segment............................ $ 2,775 $ 1,597 $ 2,880
(2) Intersegmental revenue in venture capital management
segment from life insurance and annuities segment.................... $ 7,474 $ 7,943 $ 2,945
Assets attributable to each of the Group's reportable operating segments,
based on management's reporting structure, were as follows:
December 31,
----------------------------
2000 1999
------------- -------------
(In thousands)
Assets:
Life insurance and annuities............................................. $ 2,360,806 $ 1,879,504
Financial advisory services.............................................. 9,966 6,446
Asset management......................................................... 8,749 11,414
Venture capital management............................................... 109,604 277,886
Corporate and other...................................................... 73,863 18,907
------------- -------------
Consolidated total assets ............................................... $ 2,562,988 $ 2,194,157
------------- -------------
------------- -------------
Note 18. Discontinued Operations
On December 31, 1998, the Group completed the sale of its subsidiary,
North American Trust Company ("NATC"). At the time, NATC was part of the
Financial Advisory Services segment of the Group. Proceeds from the sale were
$11,500,000 in cash, of which $3,000,000 was held in escrow pending claims by
the buyer. In August 2000, the Group received $2,727,000 plus interest from the
escrow account. The net gain on sale of $4,996,000, including income tax expense
of $1,957,000, and the net operating loss of $2,030,000 for 1998, including an
income tax benefit of $861,000, have been reflected as income from discontinued
operations in the consolidated financial statements.
61
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Summarized financial information for discontinued operations is as
follows:
Year Ended
December 31,
1998
-------------
(In thousands)
Net revenues............................................................. $ 8,706
Operating expenses....................................................... 11,570
-------------
Operating gain (loss).................................................... (2,864)
Gain on sale of discontinued operations.................................. 6,953
-------------
Income before income taxes............................................... 4,089
Income tax expense....................................................... 1,096
-------------
Net income from discontinued operations.................................. $ 2,993
-------------
-------------
Note 19. Selected Quarterly Financial Information (Unaudited)
Unaudited quarterly financial information (in thousands, except per
share and ADS amounts) is as follows:
2000
------------------------------------------------------
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
---------- --------- --------- --------- ---------
Revenues including net investment gains (losses)........ $ (25,984) $ 454,531 $ 64,573 $(303,599) $ 189,521
Income (loss) before income tax expense (benefit) ...... (65,015) 410,156 21,114 (351,245) 15,010
Net income (loss)....................................... (55,538) 339,831 29,061 (280,897) 32,457
Basic earnings (loss) per share and ADS ................ (1.11) 6.57 0.56 (5.42) 0.64
Diluted earnings (loss) per share and ADS .............. $ (1.11) $ 5.62 $ 0.47 $ (5.42) $ 0.53
1999
------------------------------------------------------
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
---------- --------- --------- --------- ---------
Revenues including net investment gains ................ $ 64,818 $ 66,495 $ 132,048 $ 209,205 $ 472,566
Income before income tax expense ....................... 31,802 27,325 97,173 149,362 305,662
Net income.............................................. 20,353 20,445 89,551 121,527 251,876
Basic earnings per share and ADS ....................... 0.41 0.41 1.81 2.48 5.05
Diluted earnings per share and ADS ..................... $ 0.40 $ 0.36 $ 1.62 $ 2.17 $ 4.54
Due to the method required by SFAS 128 to calculate per share and ADS
amounts, the quarterly per share and ADS amounts do not total to the full year
per share and ADS amounts. ADS amounts have been restated to reflect the
four-for-one split in March 2000.
62
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Certain information required by Part III is omitted from this Report on
Form 10-K since the Company will file a definitive Proxy Statement for its
Annual Meeting of Shareholders to be held on May 31, 2001, pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended (the "Proxy
Statement"), not later than 120 days after the end of the fiscal year covered by
this Report, and certain information included in the Proxy Statement is
incorporated by reference.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
Arthur I. Trueger, Executive Chairman: Mr. Trueger, age 52, is the
founder of London Pacific Group Limited and a principal shareholder. He has
worked for the Company for more than 24 years and holds A.B., M.A. and J.D.
degrees from the University of California.
Ian K. Whitehead, Chief Financial Officer: Mr. Whitehead, age 46, has
held the position of Chief Financial Officer of London Pacific Group Limited
since he joined the Company in 1990. In addition, he was the Chief Executive
Officer of London Pacific Life & Annuity Company between 1994 and 1999. He is a
Chartered Accountant.
Information regarding the Company's directors is incorporated by
reference to the sections entitled "Proposal 3 - Election of Director" and
"Board of Directors and Committees" in the Proxy Statement.
Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934 is incorporated by reference to the section entitled "Other
Information About Directors and Executive Officers" in the Proxy Statement.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
sections entitled "Executive Compensation" and "Directors' Compensation" in the
Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
section entitled "Information Regarding Beneficial Ownership of Principal
Shareholders, Directors and Executive Officers" in the Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
section entitled "Other Information About Directors and Executive Officers" in
the Proxy Statement.
63
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. Financial Statements: Page
----
The following consolidated financial statements of London Pacific Group
Limited and subsidiaries are included in Item 8:
Report of Independent Auditors........................................ 29
Consolidated Balance Sheets as of December 31, 2000 and 1999.......... 30
Consolidated Statements of Income for the
Years Ended December 31, 2000, 1999 and 1998................. 31
Consolidated Statements of Cash Flows for the
Years Ended December 31, 2000, 1999 and 1998................. 32
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 2000, 1999 and 1998................. 34
Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 2000, 1999 and 1998................. 36
Notes to the Consolidated Financial Statements........................ 37
2. Financial Statement Schedules:
The following financial statement schedules of London Pacific Group
Limited and subsidiaries are included in this Form 10-K immediately
following Item 14 and should be read in conjunction with the consolidated
financial statements and notes thereto included in Item 8:
Schedule I - Summary of Investments - Other Than Investments
in Related Parties .......................................... 67
Schedule II - Condensed Financial Information of Registrant
Condensed Balance Sheets as of December 31, 2000 and 1999.... 68
Condensed Statements of Income for the
Years Ended December 31, 2000, 1999 and 1998.............. 69
Condensed Statements of Cash Flows for the
Years Ended December 31, 2000, 1999 and 1998.............. 70
Note to Condensed Financial Statements....................... 71
Schedule III - Supplementary Insurance Information.................... 72
All other financial statement schedules required by Regulation S-X have
been omitted because they are not applicable or the required information
is included in the applicable consolidated financial statements or notes
thereto in Item 8 "Financial Statements and Supplementary Data" of this
Form 10-K.
64
3. Exhibits:
The following exhibits of London Pacific Group Limited and subsidiaries are
filed herewith or incorporated by reference as indicated below:
Exhibit
Number Description
- ------- -----------
3.(i) Memorandum and Articles of Association of London Pacific Group
Limited, as amended and restated on April 18, 2000 (filed previously
as Exhibit 3.(I) to the Company's Form 10-Q for the quarter ended
June 30, 2000).
4.1 Specimen Ordinary Share certificate.
4.2 Form of Deposit Agreement dated September 25, 1992, as amended and
restated as of November 24, 1993, as further amended and restated as
of March 14, 2000, among 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 (filed previously
as Exhibit A to the Company's Registration Statement on Form F-6
(Registration No. 333-11658) dated March 14, 2000).
4.3 Letter Agreement dated August 25, 1992 between The Bank of New York
and the Company covering the Basic Administration Charge relating to
the Deposit Agreement (shown above as Exhibit 4.2) (filed previously
as Exhibit 3.8 to the Company's Post-Effective Amendment No. 2 to
Registration Statement on Form 20-F/A dated August 31, 1993).
10.1 Multicurrency Term Facility Agreement dated May 2, 2000 between
London Pacific Group Limited and the Governor and Company of the
Bank of Scotland (filed previously as Exhibit 10.1.1 to the
Company's Form 10-Q for the quarter ended September 30, 2000).
10.2.1 Settlement dated February 16, 1990 among (1) the Company, (2) John
Gerald Patrick Wheeler and (3) Ian Walter Strang, constituting The
Govett & Company 1990 Employee Share Option Trust (filed previously
as Exhibit 3.2 to the Company's Post-Effective Amendment No. 2 to
Registration Statement on Form 20-F/A dated August 31, 1993).
10.2.2 Executed Instrument dated March 18, 1994 among (1) John Gerald
Patrick Wheeler, (2) Ian Walter Strang and (3) Richard John Pirouet,
relating to The Govett & Company 1990 Employee Share Option Trust
(filed previously as Exhibit 3.2.1 to the Company's Annual Report on
Form 20-F filed on June 10, 1994).
10.2.3 Executed Instrument dated September 27, 1994 among (1) Ian Walter
Strang, (2) Richard John Pirouet and (3) Clive Aubrey Charles
Chaplin, relating to The Govett & Company 1990 Employee Share Option
Trust (filed previously as Exhibit 3.2.2 to the Company's Annual
Report on Form 20-F filed on June 29, 1995).
10.2.4 Executed Instrument dated March 3, 1995 among (1) Ian Walter Strang,
(2) Richard John Pirouet and (3) Clive Aubrey Charles Chaplin,
relating to The Govett & Company 1990 Employee Share Option Trust
(filed previously as Exhibit 3.2.3 to the Company's Annual Report on
Form 20-F filed on June 29, 1995).
10.2.5 Executed Instrument dated August 22, 1996 among (1) Richard John
Pirouet, (2) Clive Aubrey Charles Chaplin and (3) Ronald William
Green, relating to The London Pacific Group 1990 Employee Share
Option Trust (filed previously as Exhibit 3.2.4 to the Company's
Annual Report on Form 20-F filed on June 30, 1997).
65
10.2.6 Executed Instrument dated August 29, 1998 among (1) Richard John
Pirouet, (2) Clive Aubrey Charles Chaplin, (3) Ronald William Green
and (4) Victor Aloysius Hebert, relating to The London Pacific Group
1990 Employee Share Option Trust (filed previously as Exhibit 3.2.5
to the Company's Annual Report on Form 20-F filed on June 30, 1999).
10.2.7 Executed Instrument dated May 31, 2000 among (1) Richard John
Pirouet, (2) Clive Aubrey Charles Chaplin, (3) Ronald William Green
and (4) Victor Aloysius Hebert, relating to The London Pacific Group
1990 Employee Share Option Trust (filed previously as Exhibit 10.2.1
to the Company's Form 10-Q for the quarter ended September 30,
2000).
10.2.8 Executed Instrument dated May 31, 2000 among (1) Richard John
Pirouet, (2) Clive Aubrey Charles Chaplin, (3) Ronald William Green,
(4) Victor Aloysius Hebert and (5) Christopher Byrne, relating to
The London Pacific Group 1990 Employee Share Option Trust (filed
previously as Exhibit 10.2.2 to the Company's Form 10-Q for the
quarter ended September 30, 2000).
10.3.1 (1) Agreement dated July 1, 1990 between the Company and Ian Kenneth
Whitehead.
10.3.2 (1) Berkeley (USA) Holdings Limited Amended and Restated 1993 Deferred
Compensation Plan dated December 16, 1999.
21 Subsidiaries of the Company as of March 5, 2001.
- ------------
(1) Management contract or compensatory arrangement filed in response to Item
14(a)(3) of the instructions to Form 10-K.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 2000.
(c) The exhibits of London Pacific Group Limited and subsidiaries are listed
in Item 14(a)(3) above.
(d) The financial statement schedules for London Pacific Group Limited and
subsidiaries follow on pages 67 through 72.
66
SCHEDULE I - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
As of December 31, 2000
Column A Column B Column C Column D
Amount at
Which Shown
in Consolidated
Fair Balance
Type of Investments Cost (1) Value Sheet (2)
- ---------------------------------------------------------------- ------------ ------------ -------------
(In thousands)
Fixed maturity securities:
Bonds:
United States government and government
agencies and authorities................................... $ 3,258 $ 3,238 $ 3,244
States, municipalities and political subdivisions............ 2,044 2,086 2,044
Foreign governments.......................................... 21,945 22,981 22,981
Public utilities............................................. 44,003 43,937 43,926
Convertibles and bonds with warrants attached................ 28,708 27,220 27,220
All other corporate bonds.................................... 1,333,028 1,276,033 1,274,194
Redeemable preferred stock...................................... 46,841 45,920 45,920
------------ ------------ ------------
Total fixed maturity securities................................. 1,479,827 1,421,415 1,419,529
------------ ------------ ------------
------------
Equity securities:
Common stocks:
Industrial, miscellaneous and all other...................... 111,940 356,550 356,550
Non-redeemable preferred stocks................................. 226,749 226,749 226,749
------------ ------------ ------------
Total equity securities......................................... 338,689 583,299 583,299
------------ ------------ ------------
------------
Policy loans.................................................... 10,301 10,301
------------ ------------
Total investments............................................... $ 1,828,817 $ 2,013,129
------------ ------------
------------ ------------
- --------------
(1) Cost of fixed maturity securities is original cost, reduced by repayments
and adjusted for amortization of premiums and accretion of discounts. Cost
of equity securities is original cost.
(2) Differences between amounts reflected in Column B or Column C and amounts
at which shown in the consolidated balance sheet reflected in Column D
result from the application of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Fixed maturity securities are classified as either
available-for-sale or held-to-maturity. Available-for-sale securities are
recorded at fair value, with changes in unrealized gains and losses
excluded from net income, but reported net of applicable taxes and
adjustments to deferred policy acquisition cost amortization as a separate
component of comprehensive income. Held-to-maturity securities are recorded
at amortized cost.
67
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
LONDON PACIFIC GROUP LIMITED
CONDENSED BALANCE SHEETS
December 31,
----------------------------
2000 1999
------------- -------------
(In thousands, except share amounts)
ASSETS
Cash and cash equivalents .................................................... $ 31,933 $ 24,950
Investment in subsidiaries ................................................... 462,028 437,049
Intercompany balances ........................................................ 77,143 93,041
Other assets ................................................................. 503 319
------------- -------------
Total assets ................................................................. $ 571,607 $ 555,359
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, accruals and other liabilities.............................. $ 2,938 $ 2,411
Intercompany balances ........................................................ 927 473
------------- -------------
Total liabilities ............................................................ 3,865 2,884
------------- -------------
Commitments and contingencies
Shareholders' equity:
Ordinary shares, $0.05 par value per share: authorized 86,400,000 shares;
issued and outstanding 64,433,313 shares .................................. 3,222 3,222
Additional paid-in capital ................................................... 67,591 62,307
Retained earnings ............................................................ 580,176 559,344
Employee benefit trusts, at cost (shares: 12,811,381 and 15,331,656 as of
December 31, 2000 and 1999, respectively) ................................. (58,003) (54,033)
Accumulated other comprehensive income (loss) ................................ (25,244) (18,365)
------------- -------------
Total shareholders' equity ................................................... 567,742 552,475
------------- -------------
Total liabilities and shareholders' equity ................................... $ 571,607 $ 555,359
------------- -------------
------------- -------------
<FN>
See accompanying Note to Condensed Financial Statements.
</FN>
68
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
LONDON PACIFIC GROUP LIMITED
CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
-------------------------------------------
2000 1999 1998
------------- ------------- -------------
(In thousands)
Revenues:
Investment income.......................................................... $ 1,092 $ 499 $ 566
Interest and fees from subsidiaries, net (1)............................... 15,994 14,119 9,960
Financial advisory services, asset management and other fee income......... 2,092 302 1,495
Gain on redemption of preferred shares by subsidiary (1) .................. - 84,040 -
Distribution from subsidiary (1)........................................... - 29,238 -
------------- ------------- -------------
19,178 128,198 12,021
Expenses:
Staff costs ............................................................... 5,944 3,718 2,277
Escrow release ............................................................ (1,000) - (600)
Other operating expenses................................................... 3,488 3,160 1,475
------------- ------------- -------------
8,432 6,878 3,152
------------- ------------- -------------
Income before income tax expense and equity in
undistributed net income of subsidiaries................................. 10,746 121,320 8,869
Income tax expense......................................................... 1,550 1,602 1,155
------------- ------------- -------------
Income before equity in undistributed net income of
subsidiaries............................................................. 9,196 119,718 7,714
Equity in undistributed net income of subsidiaries (1)..................... 23,261 132,158 18,742
------------- ------------- -------------
Net income................................................................. $ 32,457 $ 251,876 $ 26,456
------------- ------------- -------------
------------- ------------- -------------
(1) Eliminated on consolidation.
<FN>
See accompanying Note to Condensed Financial Statements.
</FN>
69
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
LONDON PACIFIC GROUP LIMITED
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-------------------------------------------
2000 1999 1998
------------- ------------- -------------
(In thousands)
Cash flows from operating activities:
Net income................................................................... $ 32,457 $ 251,876 $ 26,456
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income of subsidiaries........................... (23,261) (132,158) (18,742)
Gain on redemption of preferred shares of subsidiary......................... - (84,040) -
Gain on liquidation of subsidiary............................................ - (29,238) -
Other operating cash flows .................................................. 923 22,290 (1,685)
------------- ------------- -------------
Net cash provided by operating activities ................................... 10,119 28,730 6,029
------------- ------------- -------------
Cash flows from investing activities:
Investment in subsidiaries .................................................. (7,668) - -
Distributions from subsidiary ............................................... - 29,248 -
Cash proceeds from redemption of preferred shares of subsidiary ............. - 8,230 -
Advances to subsidiaries .................................................... - (40,508) -
Other cash flows from investing activities .................................. (42) 3,930 (321)
------------- ------------- -------------
Net cash provided by (used in) investing activities ......................... (7,710) 900 (321)
------------- ------------- -------------
Cash flows from financing activities:
Dividends paid .............................................................. (11,777) (11,599) (12,852)
Issue of Ordinary Shares .................................................... - 5 35
Purchase of Ordinary Shares ................................................. - - (12,651)
Repayments from subsidiaries ................................................ 16,351 - 21,038
------------- ------------- -------------
Net cash provided by (used in) financing activities ......................... 4,574 (11,594) (4,430)
------------- ------------- -------------
Net increase in cash and cash equivalents ................................... 6,983 18,036 1,278
Cash and cash equivalents at beginning of year .............................. 24,950 6,914 5,636
------------- ------------- -------------
Cash and cash equivalents at end of year .................................... $ 31,933 $ 24,950 $ 6,914
------------- ------------- -------------
------------- ------------- -------------
<FN>
See accompanying Note to Condensed Financial Statements.
</FN>
70
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
LONDON PACIFIC GROUP LIMITED
NOTE TO CONDENSED FINANCIAL STATEMENTS
Note 1. Basis of Presentation and Significant Accounting Policies
The accompanying financial statements comprise a condensed presentation of
financial position, results of operations and cash flows of London Pacific Group
Limited (the "Company") on a separate company basis. These condensed financial
statements do not include the accounts of the Company's subsidiaries, but
instead include the Company's investment in those subsidiaries, stated at
amounts which are equal to the Company's equity in the subsidiaries' net assets.
The consolidated financial statements of the Company and its subsidiaries are
included in Item 8 of Form 10-K for the year ended December 31, 2000.
Additional information about the significant accounting policies applied
by the Company and its subsidiaries is included in Note 1 to the Consolidated
Financial Statements in Item 8 of Form 10-K for the year ended December 31,
2000.
71
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Life Insurance and Annuities Segment
Years Ended/As of December 31,
-------------------------------------------
2000 1999 1998
------------- ------------- -------------
(In thousands)
Deferred policy acquisition costs.......................................... $ 168,102 $ 144,518 $ 114,681
Future policy benefits, losses, claims and loss expenses (1) .............. 1,687,001 1,414,391 1,274,974
Unearned premiums.......................................................... N/A N/A N/A
Other policy claims and benefits payable (1)............................... 4,600 2,032 1,141
Premium revenue (2) ....................................................... 7,400 6,671 7,111
Net investment income (3) ................................................. 103,909 85,768 83,800
Benefits, claims, losses and settlement expenses........................... N/A N/A N/A
Amortization of deferred policy acquisition costs.......................... 21,155 16,797 16,171
Other operating expenses................................................... 9,107 13,044 8,186
Premiums written........................................................... N/A N/A N/A
- -----------------
(1) For additional disclosure regarding life insurance policyholder
liabilities, see Note 6 to the consolidated financial statements of London
Pacific Group Limited and subsidiaries which are included in Item 8 of Form
10-K for the year ended December 31, 2000.
(2) Insurance policy charges.
(3) Expenses related to the management and administration of investments have
been netted with investment income in the determination of net investment
income.
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LONDON PACIFIC GROUP LIMITED
(Registrant)
By /s/ Arthur I. Trueger
------------------------
Date: March 30, 2001 Arthur I. Trueger
Executive Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Arthur I. Trueger
-------------------------------
Date: March 30, 2001 Arthur I. Trueger
Executive Chairman
(Principal Executive Officer)
/s/ Ian K. Whitehead
-------------------------------
Date: March 30, 2001 Ian K. Whitehead
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Victor A. Hebert
-------------------------------
Date: March 30, 2001 Victor A. Hebert
Deputy Chairman and Non-Executive Director
/s/ John Clennett
-------------------------------
Date: March 30, 2001 John Clennett
Non-Executive Director
/s/ Harold E. Hughes, Jr.
-------------------------------
Date: March 30, 2001 Harold E. Hughes, Jr.
Non-Executive Director
/s/ The Viscount Trenchard
--------------------------------
Date: March 30, 2001 The Viscount Trenchard
Non-Executive Director
/s/ Gary L. Wilcox
---------------------------------
Date: March 30, 2001 Gary L. Wilcox
Non-Executive Director
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LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
EXHIBIT INDEX FOR THE ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2000
Exhibit
Number Description
- ------- -----------
3.(i) Memorandum and Articles of Association of London Pacific Group
Limited, as amended and restated on April 18, 2000 (filed previously
as Exhibit 3.(I) to the Company's Form 10-Q for the quarter ended
June 30, 2000).
4.1 Specimen Ordinary Share certificate.
4.2 Form of Deposit Agreement dated September 25, 1992, as amended and
restated as of November 24, 1993, as further amended and restated as
of March 14, 2000, among 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 (filed previously
as Exhibit A to the Company's Registration Statement on Form F-6
(Registration No. 333-11658) dated March 14, 2000).
4.3 Letter Agreement dated August 25, 1992 between The Bank of New York
and the Company covering the Basic Administration Charge relating to
the Deposit Agreement (shown above as Exhibit 4.2) (filed previously
as Exhibit 3.8 to the Company's Post-Effective Amendment No. 2 to
Registration Statement on Form 20-F/A dated August 31, 1993).
10.1 Multicurrency Term Facility Agreement dated May 2, 2000 between
London Pacific Group Limited and the Governor and Company of the
Bank of Scotland (filed previously as Exhibit 10.1.1 to the
Company's Form 10-Q for the quarter ended September 30, 2000).
10.2.1 Settlement dated February 16, 1990 among (1) the Company, (2) John
Gerald Patrick Wheeler and (3) Ian Walter Strang, trustees,
constituting the Govett & Company 1990 Employee Share Option Trust
(filed previously as Exhibit 3.2 to the Company's Post-Effective
Amendment No. 2 to Registration Statement on Form 20-F/A dated
August 31, 1993).
10.2.2 Executed Instrument dated March 18, 1994 among (1) John Gerald
Patrick Wheeler, (2) Ian Walter Strang and (3) Richard John Pirouet,
relating to the Govett & Company 1990 Employee Share Option Trust
(filed previously as Exhibit 3.2.1 to the Company's Annual Report on
Form 20-F filed on June 10, 1994).
10.2.3 Executed Instrument dated September 27, 1994 among (1) Ian Walter
Strang, (2) Richard John Pirouet and (3) Clive Aubrey Charles
Chaplin, relating to the Govett & Company 1990 Employee Share Option
Trust (filed previously as Exhibit 3.2.2 to the Company's Annual
Report on Form 20-F filed on June 29, 1995).
10.2.4 Executed Instrument dated March 3, 1995 among (1) Ian Walter Strang,
(2) Richard John Pirouet and (3) Clive Aubrey Charles Chaplin,
relating to the Govett & Company 1990 Employee Share Option Trust
(filed previously as Exhibit 3.2.3 to the Company's Annual Report on
Form 20-F filed on June 29, 1995).
10.2.5 Executed Instrument dated August 22, 1996 among (1) Richard John
Pirouet, (2) Clive Aubrey Charles Chaplin and (3) Ronald William
Green, relating to The London Pacific Group 1990 Employee Share
Option Trust (filed previously as Exhibit 3.2.4 to the Company's
Annual Report on Form 20-F filed on June 30, 1997).
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10.2.6 Executed Instrument dated August 29, 1998 among (1) Richard John
Pirouet, (2) Clive Aubrey Charles Chaplin, (3) Ronald William Green
and (4) Victor Aloysius Hebert, relating to The London Pacific Group
1990 Employee Share Option Trust (filed previously as Exhibit 3.2.5
to the Company's Annual Report on Form 20-F filed on June 30, 1999).
10.2.7 Executed Instrument dated May 31, 2000 among (1) Richard John
Pirouet, (2) Clive Aubrey Charles Chaplin, (3) Ronald William Green
and (4) Victor Aloysius Hebert, relating to The London Pacific Group
1990 Employee Share Option Trust (filed previously as Exhibit 10.2.1
to the Company's Form 10-Q for the quarter ended September 30,
2000).
10.2.8 Executed Instrument dated May 31, 2000 among (1) Richard John
Pirouet, (2) Clive Aubrey Charles Chaplin, (3) Ronald William Green,
(4) Victor Aloysius Hebert and (5) Christopher Byrne, relating to
The London Pacific Group 1990 Employee Share Option Trust (filed
previously as Exhibit 10.2.2 to the Company's Form 10-Q for the
quarter ended September 30, 2000).
10.3.1(1) Agreement dated July 1, 1990 between the Company and Ian Kenneth
Whitehead.
10.3.2(1) Berkeley (USA) Holdings Limited Amended and Restated 1993 Deferred
Compensation Plan dated December 16, 1999.
21 Subsidiaries of the Company as of March 5, 2001.
- ------------
(1) Management contract or compensatory arrangement filed in response to Item
14(a)(3) of the instructions to Form 10-K.
75