UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2001
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)
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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, including 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
18, 2002 as reported on the London Stock Exchange (using an exchange rate of
GBP1.00 = $1.42) was $90,454,991. 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 is not necessarily conclusive that these persons
are affiliates of the registrant.
As of March 18, 2002, the registrant had outstanding 64,439,073 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 7, 2002, 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........................................................ 12
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........................................... 13
Item 6. Selected Financial Data........................................... 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 17
Item 7A. Quantitative and Qualitative Disclosures about Market Risk........ 33
Item 8. Financial Statements and Supplementary Data....................... 35
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................... 75
PART III
Item 10. Directors and Executive Officers of the Registrant................ 75
Item 11. Executive Compensation............................................ 75
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 75
Item 13. Certain Relationships and Related Transactions.................... 76
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 77
Financial Statement Schedules................................................ 81
Signatures ...................................................................88
Exhibit Index ............................................................. 89
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
Statements contained in this Annual Report on Form 10-K 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, consulting or administration as of
December 31, 2001 totaled approximately $5.6 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 currently
trades 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 Market (SM) 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.
London Pacific Group Limited currently has offices in Jersey (Channel
Islands), California and North Carolina.
1
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
18 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 3,500 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.
2
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.
Under one type of contract, LPLA guarantees the policyholder's principal
and credits the accumulated deposit with a rate of 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, 2001, 2000 and 1999, sales of these products accounted for $261.1 million,
$174.1 million and $136.2 million, respectively, or 64%, 36% and 42%,
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 2001, 2000 and 1999, sales of these products accounted for
$121.2 million, $286.0 million and $149.1 million, respectively, or 30%, 58% and
46%, respectively, of total premiums collected. These multi-year guaranteed rate
contracts range in terms from three to seven years. Fluctuations in the product
mix occur as LPLA's marketing emphasis shifts in response to changes in the
level of interest rates, customer preferences and competition.
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
2001, 2000 and 1999, the average rate credited on outstanding annuity contracts
was 5.98%, 5.89% and 5.48% respectively.
Single premium immediate annuities accounted for $21.1 million, $19.1
million and $20.8 million, or 5%, 4% and 6%, respectively, of total premiums
collected in 2001, 2000 and 1999, 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 4.67%, 4.65% and 4.71% for 2001, 2000 and 1999,
respectively.
Variable annuities accounted for $1.4 million, $8.0 million and $13.1
million, or 0.4%, 2% and 4%, respectively, of total premiums collected in 2001,
2000 and 1999, 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 $1.0 million, $1.5 million and
$2.4 million, or 0.3%, 0.3% and 0.7%, respectively, of total premiums collected
in 2001, 2000 and 1999, respectively. Universal life insurance products provide
whole life insurance with adjustable rates of return based on current interest
rates.
3
Administration
With over 47,000 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
U.S. make it possible for LPLA to service policyholders nationwide over an 11
hour workday. These operating efficiencies play an important role in the 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 December 1999. LPAL sells Sterling, U.S. dollar and Euro guaranteed
return bonds in its home market of Jersey, Channel Islands, and in the U.K.,
Guernsey, Isle of Man and other permitted jurisdictions. The products guarantee
both capital and yield for the duration of the investment period, which is
typically three or five years.
LPAL has over 200 sales agreements in place with financial intermediaries,
giving the company access to over 9,000 independent financial advisors ("IFAs")
in place. LPAL is actively seeking to enter into similar agreements with
financial intermediary networks and advisory divisions of retail banks and
building societies.
One of the early priorities of LPAL has been to establish a strong
customer service capability to support the growth of the business. The company
continues to benefit from the high quality back office at LPLA, based in
Raleigh, North Carolina. Policy applications are scanned in Jersey and
transmitted to Raleigh over the Internet. The customer records are created in
Raleigh later in the day and policy forms are printed in Jersey the next
morning. This allows LPAL to achieve its service standard of issuing policies
within 24 hours. The administrative synergy between the Group's two insurance
companies has enabled LPAL to minimize its operating overheads and focus on
business development.
Products
LPAL offers three types of guaranteed return bonds: Sterling bonds, U.S.
dollar bonds and Euro denominated bonds. All of LPAL's guaranteed return 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 bonds offer an investment period of either three or five years.
Sterling bond yields can be either taken as periodic payments or as a guaranteed
lump sum at maturity. The periodic payments may be taken monthly, quarterly or
annually. The U.S. dollar and Euro denominated bonds return their original
capital in full plus guaranteed growth at the end of the investment period.
In early 2002, LPAL launched the Guaranteed Protected Income Bond. This
new product is a seven-year and one day single premium assurance policy. It
offers investors a guaranteed minimum yield set annually, together with a
guaranteed return of capital at maturity.
From LPAL's start of operations in the first quarter of 2000 through the
end of 2001, LPAL generated premiums totaling $128.5 million. LPAL makes sales
directly to the public and through financial intermediaries in the Channel
Islands, U.K., Isle of Man and other international locations, with approximately
44% of the premiums received through the end of 2001 from investors, or through
financial intermediaries, in the Channel Islands.
4
Investment Portfolios
The insurance subsidiaries' $2.1 billion portfolio of securities (at fair
value) as of December 31, 2001 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 high technology companies arranged by Berkeley International
Capital Corporation represented approximately 8.8% of total assets of the
insurance subsidiaries as of December 31, 2001. The insurance subsidiaries'
trading portfolio of listed equity securities, at market value, decreased to
$36.5 million as of December 31, 2001, from $248.7 million as of December 31,
2000. This decrease was primarily due to the decline in market value of the
trading securities during 2001. 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 through
acquisitions.
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 2001, 2000 and 1999,
the total return on average invested assets was -8.97%, 12.32% and 16.79%,
respectively, and the average interest rate credited to policyholders was 6.02%,
5.89% and 5.62%, 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 and their
effect on the profitability of the insurance segment.
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.
The Group believes its insurance subsidiaries are able to compete
effectively because of their: (i) 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) 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
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 ("AIST"), an insurance agency. LPAS, LPS and AIST are
collectively known as London Pacific Advisors
5
("LPA"). LPA is located in Sacramento, California. The total value of assets
under LPA management, consulting or administration as of December 31, 2001 was
$2.3 billion.
LPA changed its business strategy in 2000. The LPA business previously
focused on providing back office services to independent financial advisors (and
small groups of advisors). In 2000, LPA expanded its focus considerably to
include large institutional clients and to encompass a full range of web based
front office and back office services. LPA has branded this new package of
services as myOfficeOnline (SM), and it now delivers these services primarily
over the Internet, or through an institution's intranet. By June 2002, it is
expected that more than 5,000 advisors at partner institutions will be using
myOfficeOnline (SM). LPA is currently in the process of completing an updated
version of the platform, which includes several enhancements designed to keep
LPA at the forefront of this rapidly developing industry. Release of the new
version is planned for early in the second quarter of 2002.
The change in LPA's strategy appears to hold considerable potential for
growing LPA's revenues and greatly strengthening its competitive position.
Already, LPA is performing under contracts with prominent institutions including
Wells Fargo & Co., CSFBdirect, H&R Block Financial Advisors, ORBA (R) Financial
Management, Cambridge Investment Research and five other institutions. In
addition, LPA is presently in the contract phase with seven more firms and has
at least ten strong candidates for future partnerships.
Products, Services and Revenues
LPA provides a comprehensive menu of services to financial advisors and
institutions, with an emphasis on web based technologies, investment consulting
and back office services. Its products and services are used primarily to
research, build, manage and administer managed accounts comprised of separate
account managers, mutual funds and exchange traded funds. The term "managed
account" generally denotes an investment advisory program where the client pays
one asset based fee for a package of services that includes money management,
asset allocation, trading, custody, clearing and back office services. This
segment of the investment management industry is experiencing rapid and
accelerating growth, as investors move away from mutual funds, which lack the
flexibility of managed accounts and often carry higher fees and tax costs. To
date, all of LPA's clients are U.S. based, but the managed account business is
gaining momentum outside of the U.S. as well, and LPA is positioned to address
these developing markets.
LPA offers a full complement of services, including portfolio accounting
and performance reporting, to the managed account industry. The open, "menu
driven" architecture of its software systems allows a client to select the
specific capabilities it deserves to utilize on the platform, and then to
integrate those capabilities with its own, and third party, functionalities. The
result is a customized solution that is private labeled to maximize each
client's brand awareness.
LPA earns revenues from four principal sources: (i) asset management and
consulting fees are generated under contracts providing for fees calculated as a
percentage of assets under management or consulting by its financial advisors
and institutional clients; (ii) back office fees and web platform fees are
generated under contracts providing for fees calculated as a percentage of
assets under management or administration by its clients; (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.
A portion of LPA's revenues is paid out as commissions to its affiliated
advisors. The percentage payouts apply only to business generated by those
advisors, and the percentages vary based on the source of the revenue and the
contractual relationship with the advisor.
Net asset management and consulting fees increased to $4.7 million in 2001
from $4.2 million in 2000. These fees contributed 72%, 65% and 64% to net
revenues (i.e., gross revenues less commissions) for the years ended December
31, 2001, 2000 and 1999, respectively. The composition of these fees is changing
as new institutional client fees are realized and older back office fee
contracts reach maturity. The increase for 2001 was achieved despite a
significant decline in market values of the assets upon which the fees are
based.
6
Net commissions received from the sale by advisors of insurance products
contributed approximately 3%, 5% and 5% to net revenues for 2001, 2000 and 1999,
respectively, while net brokerage fees contributed 16%, 22% and 21% to net
revenues for 2001, 2000 and 1999, 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 second 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
increase 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 Leaders (R), and was registered on August 3, 1999. The registration has
an initial ten year "in force" period, unless terminated earlier as provided by
law. In August 2000, LPA applied for a trademark registration for myOfficeOnline
(SM), 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,
consulting and technical personnel, its growing base of prestigious clients,
successful performance for those clients 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 currently manages only Group
assets.
Berkeley Capital Management
BCM is a San Francisco based investment manager, established in 1972, and
is the Group's primary asset management subsidiary. The company managed assets
totaling approximately $2.8 billion as of the end of 2001, including
approximately $1.8 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 at BCM 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.
7
BCM has two principal 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, investment grade and 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 16% of BCM's total
fees during 2001, were received from the Group's insurance subsidiaries, again
based on a percentage of assets under management.
BCM has managed account marketing agreements with over 20 firms, and
assets managed under these agreements represent 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 and PaineWebber. During 2001, fees from each of these two customers
represented more than 10% of BCM's revenues.
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. Competition for positions in these programs is
becoming increasingly fierce, enhancing the value of BCM's incumbent status.
Intellectual Property
Management believes that the name and reputation of Berkeley Capital
Management is a material asset and protects its name through appropriate
registration. BCM registered with the U.S. Patent and Trademark office a
trademark for financial management and mutual fund investment (Berkeley Capital
Management) on June 15, 1999. The registration has an initial ten year "in
force" period, unless terminated earlier as provided by law.
Berkeley International Limited
Berkeley International Limited ("BIL") is located in Jersey, Channel
Islands. Currently, BIL manages only the listed equity securities held by the
Group's U.S. insurance subsidiary in its investment portfolio.
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
8
client assets with any manager and because performance records tend to vary from
year to year. In relation to direct institutional and individual client
relationships, BCM competes based on the same principal factors and price may be
a secondary factor. There are, however, other firms with significantly greater
assets under management than BCM in each category in which it competes. 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 alpha test of their product and need to scale up their
engineering, marketing and sales infrastructure. With this strategy, BICC has
been able to identify many promising young technology companies that have grown
in prominence in their fields and gone on to successful public offerings or
acquisition transactions.
Over the past 22 years, BICC arranged over $1.9 billion of placements in
the private capital markets on behalf of Group companies and clients. These
placements 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.
During 2001, 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.
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 insurance subsidiaries are: Agility Communications, Inc.,
Alacritech, Inc., BeamReach Networks, Inc., BRECIS Communications Corporation,
Catena Networks, Inc., Ceon Corporation, Fast-Chip, Inc., KnowledgeNet, Inc.,
LightChip, Inc., LongBoard, Inc., Mahi Networks, Inc., Telera, Inc., Triscend
Corporation, Westwave Communications, Inc. and Xtera Communications, Inc.
Berkeley International Capital Limited
BICL, formed in 1988 and based in Guernsey, Channel Islands, takes
principal positions in connection with private equity transactions arranged by
its sister company, BICC. These private equity positions may become 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, 2001, BICL held $45.3 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
9
seeking opportunities to invest in later stage venture capital companies
contracted in 2001 but there is still demand for high quality technology
companies.
REGULATION
Life Insurance and Annuities - London Pacific Life & Annuity Company and
London Pacific Assurance Limited
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 inquiries from individual state insurance departments. Based
on the 2001 statutory financial statements, LPLA was outside the usual range of
four ratios: net change in capital and surplus, gross change in capital and
surplus, net income to total income, and change in premium. LPLA has not
received any communications from any insurance departments related to these
ratios. In the past, variances in certain ratios resulted in inquiries from
certain insurance departments to which LPLA responded. Such inquiries did not
lead to any restrictions affecting LPLA's operations.
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. Further losses on LPLA's equity investments could
result in a decline in LPLA's capital that could, in turn, limit the company's
ability to generate new business due to the required RBC ratios. In the event
that LPLA's statutory capital is not sufficient to meet regulatory minimums, the
company could be prohibited from writing any new business.
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 practices. The purpose of the codification was to create
uniformity in statutory financial reporting across the U.S. LPLA adopted the new
statutory accounting practices effective January 1, 2001. The new statutory
accounting practices provide for the same principal differences from U.S.
generally accepted accounting principles that existed prior to January 1, 2001,
except that it established criteria for recognizing deferred income taxes.
However, the methodologies used to determine the amount of deferred income taxes
are different under the new statutory accounting practices than under U.S.
generally accepted accounting principles ("U.S. GAAP"). The implementation of
the new statutory accounting practices resulted in a decrease in LPLA's
statutory surplus of $24.9 million, almost entirely related to deferred income
taxes.
10
LPLA is subject to guaranty fund assessment laws which exist in all U.S.
jurisdictions 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, 2001,
LPLA has accrued $0.8 million for estimated expected future assessments in its
financial statements.
LPAL is regulated by the Jersey Financial Services Commission ("JFSC").
Under Article 6 of the Insurance Business (Jersey) Law 1996, LPAL is permitted
to conduct long-term insurance business. LPAL is required to submit annual
audited financial statements (prepared under U.S. GAAP which is permitted), 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. The annual filing contains a report from the Appointed
Actuary on the matching of investments to liabilities.
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 GBP50,000 or 2.5% of the
value of the long-term business fund, (iii) 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 (iv) assets equal
to not less than 90% of liabilities must be placed with approved independent
custodians. As of December 31, 2001, LPAL met all of these conditions.
LPAL is also required under the insurance laws to appoint an actuary. The
actuary must be qualified as defined under the laws and is required to supervise
the long-term insurance fund. No transfers, except in satisfaction of long-term
insurance business liabilities, including dividends, are permitted from the
long-term insurance fund without written consent from the actuary.
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 each of these subsidiaries has $25 million or more of
assets under management, each is 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 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.,
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,
11
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 was previously registered with and subject
to regulation by the Jersey Financial Services Commission under the Investment
Business (Jersey) Law 1998, and was authorized to manage private closed-end
investment funds, as defined by law. During 2001, BIL gave notice to terminate
its license to manage such funds as it no longer manages investment portfolios
for third parties.
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, 2001, the Group had 212 employees. The breakdown by
business segment was as follows: life insurance and annuities, 83; financial
advisory services, 88; asset management, 17; venture capital management, 15; 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
74,000 square feet of space in the aggregate. All offices are leased.
Approximately 36,000 square feet is leased in Jersey, Raleigh and Sacramento,
under leases expiring in 2010, 2005 and 2012, respectively, pertaining to the
Group's life insurance and annuities business. Approximately 22,000 square feet
is leased in Sacramento, under a lease expiring in 2012, pertaining to the
Group's financial advisory services segment. Under a lease expiring in 2004,
approximately 11,000 square feet is leased in San Francisco of which 60%
pertains to the Group's asset management segment and 40% to the Group's venture
capital management segment. Approximately 5,000 square feet is leased for
corporate activities in Jersey and San Francisco, under leases expiring in 2010
and 2004, respectively. Management believes that existing facilities are
suitable and adequate for the conduct of the business. See Note 12 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, 2001.
12
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 each representing one Ordinary Share, are
represented by ADRs for which The Bank of 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 Market (SM) under the symbol "LPGL," and since November 1999 on the New
York Stock Exchange under the symbol "LDP." As of December 31, 2001, there were
64,439,073 Ordinary Shares outstanding. Also as of that date, there were
19,906,706 ADSs outstanding, representing 19,906,706 Ordinary Shares or 30.9% 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 the New York Stock Exchange (as
restated to reflect the four-for-one split in March 2000):
London New York
Pounds Per U.S. Dollars
Ordinary Share Per ADS
------------------------ ------------------------
High Low High Low
----------- ----------- ----------- -----------
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......................... 8.05 3.45 12.00 4.45
Second quarter........................ 4.73 3.08 6.90 3.90
Third quarter......................... 4.18 1.88 5.99 2.50
Fourth quarter........................ 2.75 1.78 4.35 2.55
Holders
As of March 18, 2002, the Company had approximately 1,727 shareholders of
record and 75 ADS holders of record. Because many Ordinary 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 in every year since
it became listed on the London Stock Exchange in 1985. Dividends on its Ordinary
Shares are paid twice a year. An interim gross
13
dividend on the Company's Ordinary Shares of $0.11 per share was declared by the
Board of Directors in August 2001 and was paid on September 14, 2001. In March
2002, the directors recommended a final gross dividend for 2001 of $0.05 per
Ordinary Share which, together with the interim dividend, will make a total
gross dividend for 2001 of $0.16 ($0.128 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 7, 2002, and, if approved, will be paid
on May 8, 2002.
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 2001 of
$0.04 per ADS (net of 20% Jersey tax) on May 17, 2002.
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.
U.S. Dollars Per Ordinary Share U.S. Dollars Per ADS
-------------------------------------------------------- ---------------------------
Gross Net
--------------------------- --------------------------- ---------------------------
Interim Final Total Interim Final Total Interim Final Total
--------------------------- --------------------------- ---------------------------
2000 ............. $ 0.11 $ 0.18 $ 0.29 $ 0.088 $ 0.144 $ 0.232 $ 0.088 $ 0.144 $ 0.232
2001 ............. $ 0.11 $ 0.05* $ 0.16* $ 0.088 $ 0.040* $ 0.128* $ 0.088 $ 0.040* $ 0.128*
- ----------------------------
* The final dividend is subject to formal approval by shareholders at the Annual
General Meeting on May 7, 2002.
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 8 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 18,
2002, 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.
14
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 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% (18% if the ADR or Ordinary
Share is held for more than five years and was acquired after December 31,
2000).
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 (currently at
a rate of 30%) 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 GBP5. Gifts
and other transfers which are neither
15
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 GBP5 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 GBP5 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 GBP5) 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.
16
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,
----------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(In thousands, except per share and ADS data)
Operating Results
Revenues from continuing operations, including net realized
and change in net unrealized investment gains and losses.. $ (203,746) $ 189,521 $ 472,566 $ 150,497 $ 140,712
Income (loss) from continuing operations before income
taxes..................................................... (401,227) 15,010 305,662 28,882 26,877
Income from discontinued operations......................... - - - 4,089 921
Income tax expense (benefit)................................ (56,443) (17,447) 53,786 6,515 2,920
Net income (loss)........................................... (344,784) 32,457 251,876 26,456 24,878
Earnings (loss) per share and ADS:
Basic..................................................... (6.76) 0.64 5.05 0.51 0.45
Diluted................................................... (6.76) 0.53 4.54 0.49 0.43
Financial Position
Cash and investments........................................ 2,018,069 2,127,414 1,857,143 1,482,757 1,439,034
Total assets................................................ 2,536,328 2,562,988 2,194,157 1,635,024 1,606,049
Long-term debt.............................................. 36,874 35,556 - - -
Shareholders' equity........................................ 221,653 567,742 552,475 328,481 345,346
Book value per share and ADS*............................... 4.37 11.00 11.25 6.67 6.27
Ordinary Share and ADS Data
Ordinary Shares outstanding as of December 31............... 64,439 64,433 64,433 64,424 68,328
Weighted average shares used in:
Basic earnings per share calculation...................... 50,984 50,795 49,892 52,206 55,490
Diluted earnings per share calculation.................... 50,984 60,728 55,445 53,552 57,295
Total dividends per share relating to the year (gross)**.... $ 0.16 $ 0.29 $ 0.29 $ 0.29 $ 0.29
Total dividends per ADS relating to the year**.............. $ 0.128 $ 0.232 $ 0.232 $ 0.232 $ 0.232
Market price per share on December 31....................... GBP 2.60 GBP 5.53 GBP 5.59 GBP 1.87 GBP 1.77
Market price per ADS on December 31......................... $ 3.96 $ 7.56 $ 9.00 $ 3.14 $ 3.00
Market capitalization as of December 31..................... $ 244,611 $ 530,431 $ 583,495 $ 199,449 $ 198,341
* Based on the net asset value of the Group after deducting the cost of the
shares held by the employee benefit trusts, and on the number of shares issued
excluding the shares held by the employee benefit trusts.
** Of the total dividends per share and ADS relating to 2001, $0.05 (ADS $0.04)
is the recommended final dividend for 2001, which is subject to formal approval
by shareholders at the Annual General Meeting on May 7, 2002.
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" set forth below and in the Group's other filings with the
SEC.
17
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 Form 10-K 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 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 Form 10-K 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,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
(In thousands)
Income before income taxes by operating segment:
Life insurance and annuities (1) , (2)................................. $ (341,703) $ 132,671 $ 147,753
Financial advisory services............................................ (3,638) (2,261) 166
Asset management (1)................................................... 1,533 1,778 1,036
Venture capital management (2)......................................... (51,262) (110,444) 158,627
------------ ------------ ------------
(395,070) 21,744 307,582
Reconciliation of segment amounts to consolidated amounts:
Interest income........................................................ 2,004 1,574 2,836
Corporate expenses..................................................... (5,692) (7,388) (4,366)
Goodwill amortization.................................................. (221) (248) (348)
Interest expense....................................................... (2,248) (672) (42)
------------ ------------ ------------
Consolidated income (loss) before income taxes......................... $ (401,227) $ 15,010 $ 305,662
------------ ------------ ------------
------------ ------------ ------------
(1) Included in the revenues of the asset management segment are management fees
from the life insurance and annuities segment of $1,954,000, $2,775,000 and
$1,597,000 in 2001, 2000 and 1999, respectively.
(2) Included in the revenues of the venture capital management segment are
management fees from the life insurance and annuities segment of $9,924,000,
$7,474,000 and $7,943,000 in 2001, 2000 and 1999, respectively.
18
Business segment data contained in Note 18 to the Consolidated Financial
Statements should be read in conjunction with this discussion. A detailed
discussion of the results for each reportable segment follows.
Life Insurance and Annuities
Certain information regarding the life insurance and annuities segment's
results of operations is as follows:
Years Ended December 31,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
(In thousands)
Revenues:
Investment income.................................................................... $ 129,141 $ 103,909 $ 85,768
Insurance policy charges............................................................. 5,672 7,400 6,671
Net realized investment gains (losses), including related amortization (1) ,(2)...... (103,024) 123,661 3,986
Change in net unrealized investment gains and losses on trading
securities, including related amortization (1) ,(2)................................ (239,961) 8,269 144,861
Other fee income..................................................................... 1,369 1,684 1,421
------------ ------------ ------------
Total revenues and investment gains (losses), including related
amortization (1)................................................................... (206,803) 244,923 242,707
Expenses:
Interest credited on insurance policyholder accounts................................. 118,965 94,065 73,753
Amortization of deferred policy acquisition costs related to operations (1).......... 7,408 9,420 8,324
Mortality expenses (gains)........................................................... (79) (340) (167)
General and administrative expenses.................................................. 8,606 9,107 13,044
------------ ------------ ------------
Total expenses related to operations (1)............................................. 134,900 112,252 94,954
------------ ------------ ------------
Income (loss) before income taxes.................................................... $ (341,703) $ 132,671 $ 147,753
------------ ------------ ------------
------------ ------------ ------------
(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
$16,332,000, $11,735,000 and $8,473,000 in 2001, 2000 and 1999, 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 statements, but is
netted against net realized investment gains (losses) ($16,332,000 $7,544,000
and $4,276,000 in 2001, 2000 and 1999, respectively) and the change in net
unrealized investment gains and losses ($0, $4,191,000 and $4,197,000 in 2001,
2000 and 1999, respectively).
(2) Realized investment gains in the amount of $37,763,000 were recorded in 2001
by the life insurance and annuities segment, related to intersegmental
investment sales to the venture capital management segment. These realized
investment gains were offset by a corresponding decrease in unrealized
investment gains on trading securities for the same amount. These gains have
been eliminated in the Group's consolidated financial statements.
2001 compared to 2000
In 2001, the life insurance and annuities segment, which consists of
London Pacific Life & Annuity Company and London Pacific Assurance Limited,
contributed a loss before income taxes of $341.7 million to the Group's overall
loss before taxes, compared to income of $132.7 million in 2000. Net realized
investment losses in 2001, including related amortization of deferred policy
acquisition costs ("DPAC"), were $103.0 million, compared to net realized
investment gains of $123.7 million in 2000. The loss from the change in net
unrealized investment gains and losses, including related DPAC amortization, was
$240.0 million in 2001, compared to a net gain of $8.3 million in 2000. The
spread between investment income and interest credited to policyholder accounts
increased by $0.3 million; amortization of DPAC, excluding amortization related
to investment gains and losses, decreased by $2.0 million; and general and
administrative expenses decreased
19
by $0.5 million, each as compared to 2000. Policy charges for 2001 decreased by
$1.7 million and other fee income decreased by $0.3 million, each as compared to
2000.
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 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 Jersey, Channel Islands market in the
first quarter of 2000 and in the U.K. market during the second quarter of 2000.
Premiums received for all life, annuity and guaranteed bond products were
$481.4 million during 2001, a decrease of 11%, over the premiums received during
2000. LPAL generated $75.7 million of the total premiums received during 2001,
an increase of $22.9 million over the amount generated in 2000. The premium
volume in 2001 for LPAL reflects a full year of operations in 2001, compared to
nine months in 2000. LPAL's premium volume, however, decreased during the last
quarter of 2001 as a result of lowering interest crediting rates. LPLA generated
premiums of $405.7 million in 2001, a 17% decrease over the premiums received in
2000. The $82.9 million decrease in LPLA's premiums reflected the impact of a
declining U.S. interest rate environment. As a result of lower reinvestment
rates, LPLA again reduced annuity crediting rates during 2001, which reduced the
competitiveness of its annuity product line. LPLA's mix of business continued to
shift toward traditional annuities, which typically guarantee crediting rates
for one year, but have surrender charge periods ranging from seven to ten years.
Sales of traditional annuities in 2001 increased to $261.1 million, compared to
$174.1 million in 2000, as a result of production from new distributors that
have been attracted to LPLA because of its strong track record. The declining
U.S. interest rate environment had the most significant impact on LPLA's
multi-year guaranteed rate annuities, sales of which in 2001 decreased to $121.2
million, compared to $286.0 million in 2000. If interest rates remain at their
current level, sales of the multi-year guaranteed rate annuities may continue to
decline.
Interest and dividend income on investments was $129.1 million in 2001 as
compared with $103.9 million in 2000. This $25.2 million increase was primarily
due to asset growth from new business, offset by lower reinvestment rates and by
acquisitions of capital appreciation (zero yield) securities. The carrying value
of the private equity portfolio as of December 31, 2001 was $180.7 million,
compared with $234.2 million as of December 31, 2000 and $145.5 million as of
December 31, 1999.
Net investment losses, including related DPAC amortization, were $343.0
million in 2001, compared to net investment gains of $131.9 million in 2000. Net
investment losses in 2001 were comprised of net realized investment losses of
$86.7 million, a $240.0 million loss from the change in net unrealized gains and
losses on the listed equity securities held in the trading portfolio, and
related DPAC amortization of $16.3 million. The trading portfolio decreased from
$248.7 million as of December 31, 2000, to $36.5 million as of December 31,
2001. Additions to the trading portfolio during 2001 of $62.6 million resulted
from the $55.8 million purchase of certain listed equity securities from the
venture capital management segment, $5.0 million due to the conversion of a
private preferred stock to common stock of a publicly traded company, and the
transfer of a $1.8 million listed equity security from the available-for-sale
classification. LPLA and LPAL sold certain trading positions during 2001, which
resulted in net realized gains of $42.0 million based on their aggregate
original cost of $20.6 million. Disposals of certain listed equity securities to
the venture capital management segment resulted in realized gains of $37.8
million based on their aggregate cost of $14.2 million. These realized gains
were more than offset by realized losses of $167.6 million, including write-offs
and write-downs on fourteen private placement securities, one listed equity, and
six corporate bonds. The life insurance and annuities segment also recorded $1.1
million in net realized gains from the sale of certain corporate bonds and other
investments during the year. All intersegmental investment gains have been
eliminated in the Group's consolidated statements of income.
If the Group's investment portfolio continues to decline due to further
market or other declines in 2002, additional other-than-temporary investment
impairments are possible which could have an impact on LPLA's
20
and LPAL's ability to write new business at the same level as in 2001. LPLA is
currently seeking to reduce the volatility of its regulatory capital base, due
to its equity holdings, through a number of strategic initiatives. One option
could include the sale of a percentage of its private equity securities in
exchange for an equity-linked note issued by a major insurer. LPAL is
significantly smaller than LPLA, and any necessary capital infusion would be on
a much smaller scale.
Total invested assets (defined as total assets excluding DPAC, other
assets and income tax related accounts) remained level at $2.2 billion as of
December 31, 2001. On total average invested assets for 2001, the average net
return, including both realized and unrealized investment gains and losses, was
- -8.97%, compared with 12.32% for 2000. This decrease in average net return
resulted primarily from the net investment losses discussed above.
Policy surrender and mortality charge income decreased by $1.7 million in
2001 to $5.7 million, compared with $7.4 million in 2000. Full policy surrenders
totaled $99.8 million in 2001, a $46.9 million decrease over 2000. Internal
policy conversions accounted for $28.9 million of the full surrenders in 2001,
compared to $47.5 million in 2000. The decrease in policy surrenders reflects
one of the effects of the declining U.S. interest rate environment, which has
reduced yields on competing products. Although the current U.S. interest rate
environment favors higher policy persistency, annuity surrenders may increase in
future periods, particularly if interest rates increase, as the portion of the
business that can be withdrawn by policyholders without incurring a surrender
charge penalty grows. Higher surrenders could slow down the growth of the asset
base of the company.
Interest credited on policyholder accounts increased by $24.9 million in
2001 to $119.0 million, compared with $94.1 million in 2000. The increase was
primarily due to new business growth, offset by favorable renewal rates on
certain blocks of business. The average rate credited to policyholders was 6.02%
in 2001, compared with 5.89% in 2000.
Amortization of DPAC, excluding amortization related to investment gains
and losses, was $7.4 million in 2001, a decrease of $2.0 million over 2000. This
decrease was primarily due to the lower level of policy surrenders, partially
offset by new business growth. Realized and unrealized investment gains and
losses were included in the gross profits used to calculate the amortization of
DPAC. This inclusion of investment gains and losses resulted in additional
amortization of $16.3 million in 2001, compared with $11.7 million in 2000.
General and administrative expenses were $8.6 million in 2001, compared
with $9.1 million in 2000. This $0.5 million decrease was primarily due to lower
business development costs and lower insurance guaranty fund assessments during
2001, offset by higher staff costs in LPAL due to additional headcount to
support its growth, and reflecting a full year of operations in 2001, compared
to nine months in 2000. The expense ratio in 2001, which is defined as general
and administrative expenses divided by the average book value of total cash and
investments, was 0.37%, compared with 0.44% in 2000.
Effective December 31, 2001, LPLA entered into a reinsurance transaction
related to approximately 90% of LPLA's universal life business with an
authorized domestic reinsurance company. Under the terms of the reinsurance
agreement, LPLA ceded approximately $42.0 million of statutory reserves related
to this business to the reinsurer and the reinsurer placed assets equal to the
reserves ceded in a trust established for the benefit of LPLA. LPLA is entitled
to receive an ongoing administration fee equal to $27 per in-force policy and
received an upfront ceding commission of $6.5 million in 2001 that has been
deferred for U.S. GAAP and will be amortized into revenue over the remaining
life of the universal life business. LPLA has accounted for this transaction in
accordance with Statement of Financial Accounting Standards No. 113, "Accounting
and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts,"
which requires insurance companies to apply the gross reporting concept for
reinsurance transactions. The reinsurance transaction had no impact on LPLA's
2001 operating results and is not expected to have any material impact on future
operating results.
21
2000 compared to 1999
In 2000, the life insurance and annuities segment 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
DPAC, were $123.7 million, compared to $4.0 million in 1999. The gain from the
change in net unrealized investment gains and losses, including related DPAC
amortization, decreased from $144.9 million in 1999 to $8.3 million in 2000. The
spread between investment income and interest credited to policyholder accounts
decreased by $2.2 million; amortization of DPAC, excluding amortization related
to investment gains and losses, increased by $1.1 million; and general and
administrative expenses decreased by $3.9 million, each as compared to 1999.
Policy charges for 2000 increased by $0.7 million and other fee income increased
by $0.3 million, each as compared to 1999.
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
environment.
Interest and dividend income on investments was $103.9 million in 2000 as
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 net realized investment gains of $131.2 million, a $12.4
million change in net unrealized gains and losses on the listed equity
securities held in the trading portfolio, and related DPAC amortization of $11.7
million. 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 realized gains were
partially offset by other-than-temporary impairment write-downs of $49.7 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 had 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 net return, including both realized and
unrealized investment gains and losses, was 12.3%, compared with 16.8% for 1999.
This decrease in average 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.
22
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, 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 and losses were included in the gross
profits used to calculate the amortization of DPAC. This inclusion of investment
gains and losses 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 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.
Financial Advisory Services
Certain information regarding the financial advisory services segment's
results of operations is as follows:
Years Ended December 31,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
(In thousands)
Gross financial advisory services fees................................. $ 18,627 $ 22,952 $ 19,913
Payouts due to independent advisors.................................... (12,039) (16,441) (13,314)
------------ ------------ ------------
6,588 6,511 6,599
Operating expenses..................................................... 10,226 8,772 6,433
------------ ------------ ------------
Income (loss) before income taxes...................................... $ (3,638) $ (2,261) $ 166
------------ ------------ ------------
------------ ------------ ------------
2001 compared to 2000
The pre-tax loss from the financial advisory services segment increased to
$3.6 million in 2001 from $2.3 million in 2000, primarily due to an increase in
operating expenses, partially offset by an increase in net revenues resulting
from new client contracts.
Net revenues increased from $6.5 million in 2000 to $6.6 million in 2001.
Net asset management and consulting fees increased from the prior year as a
result of a shift toward higher margin managed and consulting accounts, while
net revenues from brokerage and commission product sales decreased due to a
change in focus toward fee based (rather than commission based) services and the
difficult market conditions prevailing during 2001. Assets under management,
consulting or administration increased from $1.5 billion as of December 31, 2000
to $2.3 billion as of December 31, 2001. The addition of assets from new
institutional clients more than offset the decline in managed assets resulting
from the negative market conditions.
Operating expenses increased to $10.2 million in 2001, compared with $8.8
million in 2000. Before the capitalization and amortization of web development
costs, expenses totaled $10.5 million in 2001, compared with $10.8 million in
2000. The mix of expenses changed in 2001 as outside consulting costs of the web
23
development project were replaced by additional staff costs. Staffing additions
were made over the course of the last year to support the institutional and
Internet based initiatives discussed below.
In late 1999, the Group decided to make the London Pacific Advisors
business the foundation for an Internet based initiative that could then be
migrated to other vertical markets in which the Group has expertise. This
initiative aims to deliver a full complement of consulting and back office
services to institutions and financial advisors through the Internet. An
overview of the project is available at www.lpadvisors.com.
The total investment in the Internet based project through December 31,
2001 was $3.2 million, including $0.5 million in 2001. Of this total, $2.6
million has been capitalized as software development costs and is being
amortized (as a component of operating expenses) over five years; amortization
of these costs began in May 2001 and the amount amortized during 2001 was $0.3
million.
The Internet based initiative has opened the door for marketing of
financial advisory services to institutions and large groups of advisors. To
date, service contracts have been signed with ten major institutions, and
additional contracts are currently under negotiation. The revenue impact of
these contracts increased during the second half of 2001 as newly contracted
business came on line. Net asset management and consulting fees are expected to
increase significantly during the second quarter of 2002 as new business from
institutional clients comes onto the myOfficeOnline (SM) platform.
2000 compared to 1999
Pre-tax income from the financial advisory services segment decreased to a
loss of $2.3 million in 2000 from $0.2 million in income in 1999, primarily due
to the contractual adjustment to certain administration fee revenues as
discussed below, as well as due to the costs of the Internet based initiative.
Revenues of LPA 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 or 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 payouts to independent advisors of $3.1 million
to $16.4 million.
LPA's net financial advisory services fees for 2000 were $6.5 million,
which was level with 1999. The rate of growth in net revenues 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 administration 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.
The costs for the Internet based initiative included in the income
statement for 2000 were $0.7 million.
24
Asset Management
Certain information regarding the asset management segment's results of
operations is as follows:
Years Ended December 31,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
(In thousands)
Revenues............................................................... $ 6,764 $ 7,799 $ 6,826
Operating expenses..................................................... 5,231 6,021 5,790
------------ ------------ ------------
Income before income taxes............................................. $ 1,533 $ 1,778 $ 1,036
------------ ------------ ------------
------------ ------------ ------------
2001 compared to 2000
Berkeley Capital Management, the Group's U.S. asset manager, generates
most of this segment's revenues and expenses. BCM's revenues increased in 2001
by $0.2 million to $5.7 million, which included $0.9 million of management fees
from the life insurance and annuities segment. Expenses decreased in 2001 by
$0.7 million to $5.2 million. The increased revenues and lower expenses together
increased BCM's contribution to segment income by $0.9 million for 2001 compared
to 2000.
Total wrap fee account assets under management were $997 million as of
December 31, 2001, compared to $955 million as of December 31, 2000. The
additional assets under management resulted from the 19% net increase in the
number of wrap accounts in 2001. Wrap account assets under management in BCM's
Income Equity style, which represents the majority of BCM's equity assets,
increased during the year as the inflow of new account assets more than offset
market value declines. Wrap account assets under management in BCM's Growth
Equity style decreased during the year primarily due to market value declines.
BCM implemented a cost reduction program during the second quarter of
2001, which caused its operating margins to increase during the second half as
compared with the first half.
BCM will seek to add an additional wrap account product during 2002 with
the objective of further boosting BCM's assets under management and
profitability in future years.
Other revenues in the asset management segment decreased by $0.2 million
in 2001, following the conclusion at the end of the third quarter of 2000 of a
development capital fund management contract handled by Berkeley International
Limited, the Group's asset management subsidiary in Jersey.
Included in the revenues of the asset management segment for 2001 were
portfolio management fees from the life insurance and annuities segment of $2.0
million, compared with $2.8 million in 2000. These reduced fees primarily
account for the overall decrease in income in the asset management segment. The
lower fees resulted from the decline in the market value of the listed equity
securities portfolio held by the U.S. life insurance operation which is managed
by BIL.
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
during 2000. The higher fees resulted from the larger portfolio of listed equity
securities held by the U.S. life insurance operation which is managed by BIL.
25
Revenues at BCM 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 account assets under management as of December 31, 2000
were $955 million, up from $890 million as of June 30, 2000, but down from $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 Income 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 2000, 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.
Venture Capital Management
Certain information regarding the venture capital management segment's
results of operations is as follows:
Years Ended December 31,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
(In thousands)
Revenues:
Management fees........................................................ $ 9,924 $ 9,398 $ 7,943
Investment income...................................................... - 273 863
Net realized investment gains (losses) (1)............................. 42,876 14,341 (16,843)
Change in net unrealized investment gains and losses on
trading securities (1)............................................... (93,470) (123,474) 199,848
------------ ------------ ------------
Total revenues and net investment gains (losses)....................... (40,670) (99,462) 191,811
Operating expenses..................................................... 10,592 10,982 33,184
------------ ------------ ------------
Income (loss) before income taxes...................................... $ (51,262) $ (110,444) $ 158,627
------------ ------------ ------------
------------ ------------ ------------
(1) Realized investment gains in the amount of $37,269,000 were recorded during
2001 by the venture capital management segment, related to intersegmental
investment sales to the life insurance and annuities segment. These realized
investment gains were offset by a corresponding decrease in unrealized
investment gains on trading securities for the same amount. These gains have
been eliminated in the Group's consolidated financial statements.
2001 compared to 2000
The loss before income taxes from the venture capital management segment
decreased from $110.4 million in 2000 to $51.3 million in 2001. The loss in both
years was primarily attributable to the change in net unrealized gains and
losses 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 change in net unrealized gains and losses in the listed equity trading
portfolio during 2001 was a loss of $93.5 million. The trading portfolio
decreased from $105.2 million as of December 31, 2000 to $45.3 million as of
December 31, 2001. The decline in value reflected the general downward trend in
the market for technology stocks during 2001. Additions to the trading portfolio
during 2001 of $52.0 million resulted from the purchase of certain listed equity
securities from the life insurance and annuities segment. Disposals of certain
26
listed equity securities to the life insurance and annuities segment resulted in
realized gains of $37.3 million based on their aggregate cost of $18.5 million.
Significant fluctuations in net unrealized gains and losses in the listed
equity trading portfolio are likely in future periods, reflecting equity market
volatility, especially in the technology sector.
Included in the revenues of the venture capital management segment for
2001 are portfolio management fees from the life insurance and annuities segment
of $9.9 million, compared to $7.5 million in 2000. The $2.4 million increase in
fees reflects the larger portfolio of private investments held by LPLA during
2001 which were monitored by Berkeley International Capital Corporation. BICC
sources and monitors private investments for LPLA, for which LPLA pays BICC
management fees. Total financings completed by BICC during 2001 were $62.1
million, compared to $131.1 million during 2000. Financings totaling $51.1
million were made in four new investee companies, and follow-on investments
totaling $11.0 million were added in selected portfolio companies where, in some
cases, larger ownership stakes could be taken in promising companies at
attractive prices. This decreased level of activity in venture capital
placements reflected the general trend in the industry as a whole during 2001,
as venture capitalists adopted a wait and see policy in view of the difficulties
experienced by the market and the technology sector in particular. Other
non-recurring fees of $1.9 million were received in 2000.
Operating expenses in 2001 were $10.6 million, compared to $11.0 million
in 2000. This $0.4 million decrease was primarily attributable to lower staff
costs and other general expenses due to the decreased level of activity in this
business area.
2000 compared to 1999
Income before income 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 and losses 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 and losses in the listed equity trading
portfolio during 2000 was a loss of $123.5 million. 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 write-downs on
private placement debt securities.
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. BICC sources and monitors
private investments for LPLA, for which LPLA pays BICC management fees. Total
financings completed by BICC 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 business segment in 2000.
Corporate and Other
2001 compared to 2000
Corporate expenses decreased by $1.7 million to $5.7 million in 2001, as
compared to $7.4 million for 2000. This decrease was primarily due to
compensation expense of $2.2 million relating to the extension of employee share
options recorded in 2000, which was not repeated in 2001. This was offset by an
increase of
27
$0.5 million in corporate expense in 2001 related to the grant of employee share
options at an exercise price below fair market value on the date of the grant.
Interest income earned by the Group (excluding the life insurance and
annuities segment) increased by $0.4 million to $2.0 million in 2001 as compared
with 2000, primarily due to the increase in cash and cash equivalents held by
the Group. Interest expense incurred by the Group (excluding the life insurance
and annuities segment) increased by $1.6 million to $2.2 million in 2001 as
compared with 2000, primarily due to higher bank borrowings during 2001. A
discussion of the Group's sources and uses of cash is discussed in "Liquidity
and Capital Resources" below.
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.
Interest income earned by the Group (excluding the life insurance and
annuities 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 annuities segment) increased by $0.6 million to $0.7 million in 2000,
primarily due to bank borrowings during the latter part of 2000.
Consolidated Income (Loss) Before Income Taxes
2001 compared to 2000
Consolidated income before income taxes decreased from $15.0 million in
2000 to a loss of $401.2 million in 2001. This loss was primarily attributable
to the change in net unrealized investment gains and losses on the listed equity
securities held in the trading portfolio, as well as net realized investment
losses.
Consolidated income before income taxes for 2002 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. Other-than-temporary
impairments of the Group's private equity securities primarily in the technology
sector could also effect consolidated income before income taxes in future
periods. 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.
2000 compared to 1999
Consolidated income before income taxes for 2000 was $15.0 million,
compared to $305.7 million in 1999. The lower income for 2000 was primarily
attributable to a significant decrease in the level of net realized and
unrealized investment gains.
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.
28
2001 compared to 2000
The effective tax credit rate, as a percentage of the loss before income
taxes for 2001, was 14%. This low effective tax credit rate was primarily
attributable to losses of $223.7 million contributed by the Jersey and Guernsey
operations during 2001, which primarily consisted of unrealized investment
losses for which no tax benefits will be realized. 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 $17.9 million tax
benefit. Income of $70.4 million was contributed by the Jersey and Guernsey
operations during 2000, which primarily consisted of untaxed investment gains.
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%.
CRITICAL ACCOUNTING POLICIES
Management has identified those accounting policies that are most
important to the portrayal of the Group's financial condition and results of
operations and that require management's most complex or subjective judgements,
often as a result of the need to make estimates about the effect of matters that
are inherently uncertain. These most critical accounting policies pertain to the
Group's investments, and to the accounting for life insurance policy liabilities
and deferred policy acquisition costs. These critical accounting policies are
described in Note 1 to the Consolidated Financial Statements, as well as below.
Determination of Fair Values of Investments
When a quoted market price is available for a security, the Group uses
this price in the determination of fair value. If a quoted market price is not
available for a security, management estimates the security's fair value based
on valuation methodologies as described below.
The Group holds investments in privately held equity securities, primarily
convertible preferred stock in venture capital companies doing business in
various segments of technology industries. Venture capital investing entails
making investments in companies that are developing products or services for
large emerging markets with the belief that these investments will yield
superior returns if these companies are successful. These investments are
normally held for a number of years. When the Group makes these investments,
most of the companies are still developing the products they intend to bring to
market or are in the early stages of product sales. Venture capital companies
are net consumers of cash and often dependent upon additional financing to
execute their business plans. These investments involve substantial risk and the
companies generally lack meaningful historical financial results used in
traditional valuation models. The process of pricing these securities range from
fierce competitive bidding between financial institutions to existing investors
negotiating prices with the company without outside investor validation.
Investments in convertible preferred stock come with rights that vary
dramatically both from company to company and between rounds of financing within
the same company. These rights, such as anti-dilution, redemption, liquidation
preferences and participation, bear directly on the price an investor is willing
to pay for a security. The returns on these investments are generally realized
through an initial public offering of the company's shares or, more commonly,
through the company's acquisition by a public company.
One of the factors affecting fair value is the amount of time before a
company requires additional financing to support its operations. Management
believes that companies that are financed to the estimated point of operational
profitability or for a period greater than one year will most likely return
value to the investor through an acquisition between a willing buyer and seller,
as the company does not need to seek financing from an opportunistic investor or
insider in an adverse investment environment. If a particular company needs
capital in the near term, management considers a range of factors in its fair
value analysis, including the
29
Group's ability to recover its investment through surviving liquidation
preferences. Management's valuation methodologies also include fundamental
analysis that evaluates the investee company's progress in developing products,
building intellectual property portfolios and securing customer relationships,
as well as overall industry conditions, conditions in and prospects for the
investee's geographic region, and overall equity market conditions. This is
combined with analysis of comparable acquisition transactions and values to
determine if the security's liquidation preferences will ensure full recovery of
the Group's investment in a likely acquisition outcome. In its valuation
analysis, management also considers the most recent transaction in a company's
shares.
The determination of fair values of investments requires the application
of significant judgement. It is possible that the factors evaluated by
management and fair values will change in subsequent periods, especially with
respect to the Group's privately held equity securities in technology companies,
resulting in material impairment charges in future periods.
Other-than-Temporary Impairments
Management performs an ongoing review of all investments in its portfolio
to determine if there are any declines in fair value that are
other-than-temporary.
As the Group's listed equity securities are classified as trading
securities, impairment adjustments are not required as any change in the market
value of these securities between reporting periods is included in earnings.
In relation to the Group's equity securities that do not have a readily
determinable fair value and are classified as available-for-sale, factors
considered in impairment reviews include: (i) the length of time and extent to
which estimated fair values have been below cost and the reasons for the
decline, (ii) the investee's recent financial performance and condition,
earnings trends and future prospects, (iii) the market condition of either the
investee's geographic area or industry as a whole, and (iv) concerns regarding
the investee's ability to continue as a going concern (such as the inability to
obtain additional financing). If the evidence supports that a decline in fair
value is other-than-temporary, then the investment is reduced to its estimated
fair value, which becomes its new cost basis, and a realized loss is reflected
in earnings.
A fixed maturity security is deemed to be impaired when it is determined
that it is probable that amounts due (principal and interest) will not be fully
collected according to the security's contractual terms. This determination is
made by considering all available facts and circumstances, including the Group's
intent and ability to continue to hold the investment to maturity. Factors
considered include: (i) the length of time and extent to which the market values
have been below amortized cost and the reasons for the decline, (ii) the
issuer's recent financial performance and condition, earnings trends and future
prospects in the near to mid-term, (iii) changes in the issuer's debt rating
and/or regulatory actions or other events that may effect the issuer's
operations, (iv) the market condition of either the issuer's geographic area or
industry as a whole, and (v) factors that raise doubt about the issuer's ability
to continue as a going concern. If the evidence supports that a decline in fair
value is other-than-temporary, then the fixed maturity security is written down
to its quoted market value, if such a value is available. If a readily
determinable fair value does not exist, then the fixed maturity security is
written down to management's estimate of its fair value, which is based on the
valuation methodologies as described above. Write-downs are recorded as realized
losses and included in earnings.
The evaluations for other-than-temporary impairments require the
application of significant judgement. It is possible that the impairment factors
evaluated by management and fair values will change in subsequent periods,
especially with respect to the Group's privately held equity securities in
technology companies, resulting in material impairment charges in future
periods.
Life Insurance Policy Liabilities
Life insurance policy liabilities 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." Life insurance policy liabilities for
deferred
30
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.
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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 1 to the Consolidated Financial Statements for a summary of
recently issued accounting pronouncements.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents of the Group decreased during 2001 by $31.9
million to $82.4 million. This decrease resulted from a $320.7 million use of
cash in investing activities, partially offset by $50.9 million and $237.9
million provided by operating and financing activities, respectively. The
majority of cash used in investing activities relates to investment transactions
within the life insurance and annuities segment. As of December 31, 2001, cash
and cash equivalents of the Group, excluding the life insurance and annuities
segment, amounted to $58.3 million, an increase of $5.0 million from December
31, 2000 and $28.4 million from December 31, 1999. The Group, excluding the life
insurance and annuities segment, also held $24.4 million of listed equity
securities which could be sold within a short period of time as of December 31,
2001, compared to $102.7 million as of December 31, 2000 and $213.4 million as
of December 31, 1999.
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 which was completed 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.
As of December 31, 2001, the Group held $42.0 million in private corporate
debt securities and $180.8 million in private corporate equity securities. These
securities were held almost exclusively in the investment portfolios of the
Group's insurance subsidiaries (LPLA and LPAL). Liquid markets exist for $10.1
million of these private securities. No public price information is available
for the remainder of these securities. Debt securities that are classified as
held-to-maturity are valued at amortized cost, unless these securities become
other-than-temporarily impaired, and all other debt and equity securities are
classified as available-for-sale and valued at estimated fair value based on the
valuation methodologies as described in the above section entitled "Critical
Accounting Policies." Debt securities largely represent loans to an array of
companies that are diversified by industry, geography and financial structure.
The majority of these debt securities generally contain covenant restrictions
that management believes should provide a degree of financial protection to the
debt holders, including the Group's insurance subsidiaries. The private equity
securities are primarily convertible preferred stock holdings in technology
companies and are described in more detail in the above
31
section entitled "Critical Accounting Policies." Financial information on the
issuers of these debt and equity securities is received and reviewed
periodically by Group's management. Contact with company management is
maintained through ongoing dialogue to examine future plans and prospects.
The Group's investment portfolio includes 15 private equity investments in
technology companies with an aggregate fair value of $148.0 million as of
December 31, 2001. After applying the valuation methodologies as described in
the above section entitled "Critical Accounting Policies," management determined
that five of these investments were other-than-temporarily impaired and $32.8
million of realized losses were reflected in the consolidated income statement.
The remaining aggregate fair value of these five investments as of December 31,
2001 was $39.8 million.
During 2001, certain other private corporate debt and equity investments
were considered by management to be other-than-temporarily impaired and realized
losses totaling $80.3 million were recorded in the consolidated income statement
for the differences between cost, or amortized cost, and the estimated fair
value of these securities. As of December 31, 2001, the remaining carrying value
of these private investments totaled $42.4 million.
During 2001, certain public corporate debt securities classified as
available-for-sale were considered by management to be other-than-temporarily
impaired and realized losses totaling $39.1 million were recorded in the
consolidated income statement for the difference between amortized cost and the
fair value of these securities. As of December 31, 2001, the fair value of these
securities totaled $19.2 million.
LPLA invests in collateralized mortgage obligations ("CMOs") as part of
its ongoing efforts to maintain a broadly diversified portfolio. As of December
31, 2001, LPLA's portfolio held $169.8 million in investment grade, liquid CMOs.
At year-end, the market value of these securities was $171.7 million. Of the
total CMO securities as of December 31, 2001, none were considered to be 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, 2001, the insurance subsidiaries' fixed maturity
security portfolios had $34.0 million in unrealized gains and $63.9 million in
unrealized losses. LPLA and LPAL believe that changes in interest rates should
neither materially alter the average maturity of their security portfolios, nor
alter their ability to hold fixed maturity securities until their scheduled
maturities.
Shareholders' equity decreased during 2001 by $346.0 million from $567.7
million to $221.7 million, primarily due to a net loss for the period of $344.8
million and dividends paid of $11.8 million. Shareholders' equity increased
during 2000 by $15.3 million from the prior year, primarily due to net income
for the period of $32.5 million, less dividends paid of $11.6 million. As of
December 31, 2001 and 2000, $63.6 million and $58.0 million, respectively, 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.
Until the latter part of 2000, London Pacific Group financed operations
and capital expenditures with internally generated funds and existing liquid
resources. As of December 31, 1999, the Group had no bank borrowings, bond
issues or convertible securities outstanding. However, as of December 31, 1999,
$11.8 million 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. As of December 31, 2001, the Group had utilized $12.7 million of the bank
facility in the form of letters of credit and guarantees, and had drawn down
$36.9 million in loans. These loans were used for general corporate purposes and
are scheduled for repayment in May 2003.
The Group had no material commitments outstanding as of December 31, 2001
for capital expenditures or additional funding for private equity portfolio
companies. Management believes that the balances of cash,
32
liquid resources and available borrowings should be sufficient to satisfy the
Group's anticipated liquidity requirements during the next twelve months.
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, 2001, LPLA's U.S. GAAP equity amounted to $118.5 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.
LPLA, in common with other U.S. insurers, is also subject to regulation
and supervision by the states and jurisdictions in which it does business. The
National Association of Insurance Commissioners ("NAIC") has developed
risk-based capital ("RBC") requirements. RBC relates an individual insurance
company's statutory surplus to the risk inherent in its overall operations. As
of December 31, 2001, LPLA's adjusted capital exceeded its RBC standards.
Further losses on LPLA's equity investments could result in a decline in LPLA's
capital that could, in turn, limit the company's ability to generate new
business due to the required RBC ratios.
There are statutory restrictions on LPAL's ability to make dividend
payments. Jersey insurance companies, including LPAL, are regulated by the
Jersey Financial Services Commission under Jersey insurance laws. A requirement
of these laws is to maintain at all times, within an insurance company's
long-term insurance fund, sufficient assets approved under the laws, to cover
liabilities plus a required solvency margin, currently established at 2.5% of
the value of the fund. Under the law, no transfers, except in satisfaction of
long-term insurance liabilities, including dividends, are permitted from the
long-term insurance fund without written consent from LPAL's Appointed Actuary.
As of December 31, 2001, LPAL's approved assets exceeded its liabilities plus
its required solvency margin by approximately $26.5 million.
As discussed above, LPLA and LPAL hold most of the Group's private
corporate debt and equity investments. Private corporate debt and equity
investments held by LPLA and LPAL, at December 31, 2001, totaled $206.6 million
and $15.2 million, respectively. Further declines in the value of these
investments could have an adverse impact on the statutory capital of the two
insurance subsidiaries. A decrease in statutory capital could limit the ability
of the insurance subsidiaries to generate new business due to statutory
restrictions on premium to surplus ratios and required statutory capital
parameters. If the insurance subsidiaries cannot generate sufficient statutory
capital to maintain minimum statutory requirements through increased statutory
profitability, reinsurance or other capital generating alternatives, the
insurance subsidiaries will be limited in their ability to generate additional
premium from new business growth, which could result in lower net income under
U.S. GAAP, or in the event that statutory capital is not sufficient to meet
regulatory minimums, the insurance subsidiaries could be prohibited from writing
any new business.
The Group is considering various options to reduce the level of risk in
its operating plan. One option would be to sell a significant percentage of its
private equity securities in exchange for an equity-linked note issued by a
major insurer. Other options include reinsurance, capital raising or a range of
other strategic initiatives.
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 changes in interest rates
and public equity prices adversely affect the value of invested assets.
Interest Rate Risk
The Group's life insurance and annuities 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 to interest rate fluctuations by managing the
characteristics of their assets and liabilities so that the
33
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 LPLA's universal life products and for all of LPAL's
products, given that policyholder liabilities are only $48.0 million and $132.0
million, respectively, 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, 2001, 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 $1.9 billion, would have decreased by $82.4 million, compared with
a decrease of $76.9 million for the calculated market value of liabilities,
which was approximately $1.8 billion. Conversely, a sudden decrease of 100 basis
points would have increased the investment portfolio's fair value by $85.3
million, compared with an increase in the calculated market value of liabilities
of $95.2 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 fair value of the Group's listed equity portfolio as of December
31, 2001 and 2000, which totaled $82.9 million and $356.5 million, respectively,
had abruptly increased or decreased by 50%, the fair value of the listed
equity portfolio would have increased or decreased by $41.5 million and $178.3
million, respectively.
The Group's listed equity securities largely represent investments that
were originally made as private equity investments that either completed an
initial public offering or were acquired by a larger publicly traded company.
The performance of these listed equity securities can be highly volatile, but
the Group attempts to manage its risk in various ways. Firstly, the performance
of the listed equity securities are monitored daily. Secondly, the Group seeks
to sell investments after a period of time, particularly in the case of large
public company securities.
As of December 31, 2001, the Group held $170.7 million in private
corporate equity securities primarily in technology companies for which liquid
markets do not exist. Private equity prices do not fluctuate directly with
public equity markets, but significant market movements may trigger a review for
other-than-temporary adjustment of the carrying values of these Group's private
equity securities. The risks inherent in these private equity investments relate
primarily to the viability of the investee companies. These risks are managed in
various ways. Firstly, the investments are diversified in a number of technology
companies to avoid excessive concentration in any one company. Secondly,
extensive due diligence procedures are performed prior to making an investment.
Thirdly, regular reviews of the progress of the investee companies are carried
out.
For additional information relating to the Group's financial risk profile,
see Note 13 to the Consolidated Financial Statements in Item 8 "Financial
Statements and Supplementary Data" of this Form 10-K.
34
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Auditors............................................... 36
Consolidated Balance Sheets as of December 31, 2001 and 2000................. 37
Consolidated Statements of Income for the Years Ended
December 31, 2001, 2000 and 1999..................................... 38
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999..................................... 39
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 2001, 2000 and 1999............................... 41
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2001, 2000 and 1999..................................... 43
Notes to Consolidated Financial Statements................................... 44
35
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,
2000 and 2001, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2001 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 77, 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
April 1, 2002
36
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 31,
--------------------------
2001 2000
------------ ------------
ASSETS
Investments, principally of life insurance subsidiaries:
Fixed maturities:
Available-for-sale, at fair value (amortized cost: $1,595,080 and $1,352,313
as of December 31, 2001 and 2000, respectively)............................... $ 1,562,790 $ 1,292,015
Held-to-maturity, at amortized cost (fair value: $100,936 and $129,400
as of December 31, 2001 and 2000, respectively)............................... 98,619 127,514
Equity securities:
Trading, at fair value (cost: $86,036 and $99,747 as of December 31,
2001 and 2000, respectively).................................................. 81,787 353,896
Available-for-sale, at fair value (cost: $185,539 and $238,942 as of
December 31, 2001 and 2000, respectively)..................................... 181,927 229,403
Policy loans...................................................................... 10,529 10,301
------------ ------------
Total investments................................................................... 1,935,652 2,013,129
Cash and cash equivalents........................................................... 82,417 114,285
Accrued investment income........................................................... 33,373 28,629
Deferred policy acquisition costs................................................... 168,826 168,102
Assets held in separate accounts.................................................... 227,675 206,325
Reinsurance assets.................................................................. 42,025 -
Other assets........................................................................ 46,360 32,518
------------ ------------
Total assets........................................................................ $ 2,536,328 $ 2,562,988
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Life insurance policy liabilities................................................... $ 2,031,852 $ 1,691,601
Liabilities related to separate accounts............................................ 226,015 203,806
Notes payable....................................................................... 36,874 35,556
Deferred income tax liabilities..................................................... - 41,587
Accounts payable, accruals and other liabilities.................................... 19,934 22,696
------------ ------------
Total liabilities................................................................... 2,314,675 1,995,246
------------ ------------
Commitments and contingencies
Shareholders' equity:
Ordinary shares, $0.05 par value per share: 86,400,000 shares authorized;
64,439,073 and 64,433,313 shares issued and outstanding as of
December 31, 2001 and 2000, respectively.......................................... 3,222 3,222
Additional paid-in capital.......................................................... 68,346 67,591
Retained earnings................................................................... 223,590 580,176
Employee benefit trusts, at cost (13,698,181 and 12,811,381 shares as of
December 31, 2001 and 2000, respectively)......................................... (63,599) (58,003)
Accumulated other comprehensive income (loss)....................................... (9,906) (25,244)
------------ ------------
Total shareholders' equity.......................................................... 221,653 567,742
------------ ------------
Total liabilities and shareholders' equity.......................................... $ 2,536,328 $ 2,562,988
------------ ------------
------------ ------------
See accompanying Notes to Consolidated Financial Statements.
37
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share and ADS amounts)
Years Ended December 31,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
Revenues:
Investment income...................................................... $ 143,022 $ 116,005 $ 99,007
Insurance policy charges............................................... 5,672 7,400 6,671
Financial advisory services, asset management and other fee income..... 24,807 31,584 26,563
Net realized investment gains (losses)................................. (118,848) 145,546 (8,581)
Change in net unrealized investment gains and losses on trading
securities........................................................... (258,399) (111,014) 348,906
------------ ------------ ------------
(203,746) 189,521 472,566
Expenses:
Interest credited on insurance policyholder accounts................... 118,965 94,065 73,753
Amortization of deferred policy acquisition costs...................... 23,740 21,155 16,797
Operating expenses..................................................... 52,307 58,371 75,964
Goodwill amortization.................................................. 221 248 348
Interest expense....................................................... 2,248 672 42
------------ ------------ ------------
197,481 174,511 166,904
------------ ------------ ------------
Income (loss) before income tax expense................................ (401,227) 15,010 305,662
Income tax expense (benefit)........................................... (56,443) (17,447) 53,786
------------ ------------ ------------
Net income (loss)...................................................... $ (344,784) $ 32,457 $ 251,876
------------ ------------ ------------
------------ ------------ ------------
Basic earnings (loss) per share and ADS (1)............................ $ (6.76) $ 0.64 $ 5.05
Diluted earnings (loss) per share and ADS (1).......................... $ (6.76) $ 0.53 $ 4.54
(1) ADS amounts have been restated to reflect the four-for-one split in March 2000.
See accompanying Notes to Consolidated Financial Statements.
38
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss)...................................................... $ (344,784) $ 32,457 $ 251,876
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization.......................................... 1,739 1,175 1,055
Amortization of deferred policy acquisition costs...................... 23,740 21,155 16,797
Deferred income tax expense (benefit).................................. (66,807) (12,502) 54,265
Interest credited on insurance policyholder accounts................... 118,965 94,065 73,753
Net realized investment losses (gains)................................. 118,848 (145,546) 8,581
Change in net unrealized investment gains and losses on trading
securities........................................................... 258,399 111,014 (348,906)
Net amortization of investment premiums and discounts.................. (2,178) (1,966) (3,309)
Net changes in operating assets and liabilities:
Trading equity securities............................................ 57,500 121,450 11,307
Accrued investment income............................................ (4,744) (6,461) (3,093)
Deferred policy acquisition costs.................................... (37,468) (39,026) (25,840)
Reinsurance assets................................................... (42,025) - -
Other assets......................................................... 8,817 2,019 (1,235)
Life insurance policy liabilities.................................... (33,812) (86,089) (65,545)
Accounts payable, accruals and other liabilities..................... (1,694) (17,310) 23,990
Income taxes payable................................................. (3,734) (3,598) (628)
Other operating cash flows............................................. 183 (2,240) (4,901)
------------ ------------ ------------
Net cash provided by (used in) operating activities.................... 50,945 68,597 (11,833)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of held-to-maturity fixed maturity securities................ (4,725) (4,201) (10,126)
Purchases of available-for-sale fixed maturity securities.............. (810,147) (357,950) (345,004)
Purchases of available-for-sale equity securities...................... (61,536) (140,959) (109,900)
Proceeds from redemption of held-to-maturity fixed maturity securities. 28,643 51,141 38,560
Proceeds from sale of available-for-sale fixed maturity securities..... 522,265 63,093 206,729
Proceeds from sale of available-for-sale equity securities............. 6,554 100,101 49,710
Capital expenditures................................................... (1,488) (3,659) (1,184)
Other cash flows from investing activities............................. (228) 3,123 3,166
------------ ------------ ------------
Net cash provided by (used in) investing activities.................... (320,662) (289,311) (168,049)
------------ ------------ ------------
See accompanying Notes to Consolidated Financial Statements.
39
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
Years Ended December 31,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
Cash flows from financing activities:
Insurance policyholder contract deposits............................... 450,919 493,998 305,514
Insurance policyholder benefits paid................................... (195,669) (226,796) (173,414)
Issuance of Ordinary Shares............................................ 3 - 5
Dividends paid......................................................... (11,802) (11,625) (11,446)
Purchases of Ordinary Shares by the employee benefit trusts............ (6,005) (12,712) (4,043)
Proceeds from disposal of shares by the employee benefit trusts........ 440 8,407 2,344
Notes payable.......................................................... - 35,000 -
Bank overdrafts........................................................ - (593) (789)
------------ ------------ ------------
Net cash provided by financing activities.............................. 237,886 285,679 118,171
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents................... (31,831) 64,965 (61,711)
Cash and cash equivalents at beginning of year......................... 114,285 49,703 111,414
Foreign currency translation adjustment................................ (37) (383) -
------------ ------------ ------------
Cash and cash equivalents at end of year............................... $ 82,417 $ 114,285 $ 49,703
------------ ------------ ------------
------------ ------------ ------------
Supplemental disclosure of cash flow information:
Cash paid (received) during the year for:
Interest............................................................... $ 930 $ 50 $ 42
Income taxes (net of amounts recovered)................................ $ 14,099 $ (1,347) $ (270)
Supplemental disclosure of non-cash investing activities:
Exchange of available-for-sale equity securities for trading equity
securities........................................................... $ 5,000 $ 97,857 $ 31,372
See accompanying Notes to Consolidated Financial Statements.
40
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(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, 1999.........$ 3,221 $ 62,199 $ 318,785 $ (52,282) $ (3,442) $ 328,481
Net income............................ - - 251,876 - - 251,876
Change in net unrealized gains
and 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)
Issuance 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
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Net income............................$ - $ - $ 32,457 $ - $ - $ 32,457
Change in net unrealized gains
and 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.
See accompanying Notes to Consolidated Financial Statements.
41
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Continued)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(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, 2001.........$ 3,222 $ 67,591 $ 580,176 $ (58,003) $ (25,244) $ 567,742
Net income (loss)..................... - - (344,784) - - (344,784)
Change in net unrealized gains
and losses on available-for-sale
securities.......................... - - - - 15,453 15,453
Foreign currency translation
adjustment.......................... - - - - (115) (115)
Exercise of employee share
options, including income
tax effect.......................... - 191 - 409 - 600
Grant of employee share
options, below fair
market value........................ - 530 - - - 530
Net realized gains on disposal
of shares held by the employee
benefit trusts...................... - 31 - - - 31
Cash dividends (23.2 cents net
per share and ADS )................. - - (11,802) - - (11,802)
Issuance of Ordinary Shares........... - 3 - - - 3
Purchase of shares by the
employee benefit trusts............. - - - (6,005) - (6,005)
---------- ---------- ---------- ---------- ---------- ----------
Balance as of December 31, 2001.......$ 3,222 $ 68,346 $ 223,590 $ (63,599) $ (9,906) $ 221,653
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
See accompanying Notes to Consolidated Financial Statements.
42
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Years Ended December 31,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
Net income (loss)...................................................... $ (344,784) $ 32,457 $ 251,876
Other comprehensive income (loss), net of deferred income taxes:
Foreign currency translation adjustments, net of income taxes of $0.... (115) (42) -
Change in net unrealized gains and losses:
Change in net unrealized gains and losses on available-for-sale
securities......................................................... 34,796 (16,259) (42,742)
Deferred policy acquisition cost amortization adjustments............ (12,993) 5,740 20,794
Deferred income taxes................................................ (6,350) 3,682 7,025
------------ ------------ ------------
Other comprehensive income (loss)...................................... 15,338 (6,879) (14,923)
------------ ------------ ------------
Comprehensive income (loss)............................................ $ (329,446) $ 25,578 $ 236,953
------------ ------------ ------------
------------ ------------ ------------
See accompanying Notes to Consolidated Financial Statements.
43
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 annuities business. The
Group's other businesses are financial advisory services, asset management and
venture capital management.
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 years
prior to 2000, 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 was 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, was 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 income taxes and adjustments to deferred
policy acquisition cost amortization as a separate component of
accumulated other 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.
44
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
When a quoted market price is available for a security, the Group uses
this price in the determination of fair value. If a quoted market price is not
available for a security, management estimates the security's fair value.
Management's valuation methodologies include fundamental analysis that evaluates
the investee company's progress in developing products, building intellectual
property portfolios and securing customer relationships, as well as overall
industry conditions, conditions in and prospects for the investee's geographic
region, overall equity market conditions, and the level of financing already
secured and available. This is combined with analysis of comparable acquisition
transactions and values to determine if the security's liquidation preferences
will ensure full recovery of the Group's investment in a likely acquisition
outcome. In its valuation analysis, management also considers the most recent
transaction in a company's shares.
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. Any other-than-temporary declines in the fair value of
available-for-sale or held-to-maturity securities, below the cost or amortized
cost basis, are recognized as realized losses on the consolidated statements of
income. The cost basis of such securities is adjusted to reflect the write-down
recorded.
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 discounts or premiums.
Prepayment assumptions are obtained from dealer surveys and are based on the
current interest rate and economic environment. 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.
Reinsurance Assets
Reinsurance assets include estimated amounts due from reinsurers related
to unpaid policy claims and future policy benefits on reinsured policies.
Amounts received as ceding commissions for reinsurance contracts are recorded as
deferred commission income. Reinsurance receivables and deferred commission
income are accounted for over the terms of the underlying reinsured policies
using assumptions consistent with those used to account for the policies.
Other Assets
Other assets consist primarily of the following:
45
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
a) Deferred Income Tax Assets and Income Tax Refunds Receivable
Income taxes are discussed below.
b) 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.
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.
c) 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, either
legally or on a book basis, for the benefit of certain policyholders and are
recorded at fair value. For non-guaranteed policies (variable annuities), 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 (fixed
annuities with market value adjustment provisions) issued in certain states
which require the segregation of the assets on a book basis, 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. The fair value of the investments backing the guaranteed policies
included in separate account assets total approximately $177,559,000 and
$146,168,000 at December 31, 2001 and 2000, respectively.
46
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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
expense based upon the intrinsic value of the stock options as of the date of
grant. 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.
47
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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."
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 non-U.S.
dollar based subsidiaries.
Recently Issued Accounting Pronouncements
On January 1, 2001, the Group adopted Statement of Financial Accounting
Standard No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and
Hedging Activities." This standard, as amended, establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires that all derivative instruments be recorded on the balance sheet at
fair value unless the derivative qualifies as a hedge. The adoption of SFAS 133
did not have a material impact on the Group's consolidated financial position or
results of operations for the year ended December 31, 2001.
48
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 141 ("SFAS 141"), "Business
Combinations," which superseded Accounting Principles Board ("APB") Opinion No.
16, "Business Combinations." SFAS 141 eliminates the pooling-of-interests method
of accounting for business combinations and modifies the application of the
purchase accounting method. SFAS 141 also specifies criteria that intangible
assets acquired in a business combination must meet to be recognized and
reported separately from goodwill. The elimination of the pooling-of-interests
method is effective for transactions initiated after June 30, 2001. The
remaining provisions of SFAS 141 are effective for transactions accounted for
using the purchase method for which the date of acquisition is July 1, 2001 or
later. The adoption of this statement did not have an effect on the Group's
consolidated financial position or results of operations for the year ended
December 31, 2001.
In June 2001, the FASB also issued Statement of Financial Accounting
Standard No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which
superseded APB Opinion No. 17, "Intangible Assets." SFAS 142 eliminates the
current requirement to amortize goodwill and indefinite-lived intangible assets,
addresses the amortization of intangible assets with a defined life, and
addresses the impairment testing and recognition for goodwill and intangible
assets. The provisions of SFAS 142 are effective for fiscal years beginning
after December 15, 2001. Impairment losses, if any, due to the initial
application of SFAS 142 are to be reported as resulting from a change in
accounting principle. The Group will apply the new rules on accounting for
goodwill and other intangible assets beginning in the first quarter of 2002, and
the adoption of this Statement will not have a material effect on its
consolidated results of operations or financial position. For the year ended
December 31, 2001, goodwill amortization amounted to $221,000.
In August 2001, the FASB issued Statement of Financial Accounting Standard
No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets." SFAS 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supercedes, with exceptions,
Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets to Be Disposed Of." The provisions of SFAS 144
are effective for fiscal years beginning after December 15, 2001, and interim
periods within those fiscal years, with early application encouraged. The Group
does not expect adoption of this statement to have a material effect on its
consolidated results of operations or 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 the valuation of investments, 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.
49
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,
--------------------------------------------------------------------------------------------------
2001 2000
----------------------------------------------- ------------------------------------------------
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..$ 985 $ 97 $ - $ 1,082 $ 982 $ - $ (13) $ 969
Non-U.S. government
debt securities......... 7,629 97 - 7,726 21,750 1,037 - 22,787
Non-U.S. corporate
debt securities......... 253,736 4,952 (8,273) 250,415 178,167 3,558 (6,616) 175,109
Corporate debt securities. 1,157,406 23,159 (42,309) 1,138,256 923,179 12,992 (63,885) 872,286
Mortgage-backed securities 101,788 3,184 (1) 104,971 99,334 1,584 (179) 100,739
Private corporate debt
securities.............. 24,122 - (1,500) 22,622 33,708 29 (1,488) 32,249
Other debt securities..... 49,414 146 (11,842) 37,718 95,193 676 (7,993) 87,876
---------- --------- --------- ---------- ---------- --------- ---------- ----------
$1,595,080 $ 31,635 $ (63,925) $1,562,790 $1,352,313 $ 19,876 $ (80,174) $1,292,015
---------- --------- --------- ---------- ---------- --------- ---------- ----------
Held-to-Maturity:
U.S. treasury securities..$ 2,200 $ 68 $ - $ 2,268 $ 2,240 $ 15 $ (22) $ 2,233
U.S. municipal securities. 1,919 13 - 1,932 2,044 41 - 2,085
Non-U.S. government
debt securities......... 192 1 - 193 195 - - 195
Non-U.S. corporate
debt securities......... 311 15 - 326 1,301 28 - 1,329
Corporate debt securities. 9,837 267 (9) 10,095 11,410 186 (64) 11,532
Mortgage-backed securities 64,812 1,888 (3) 66,697 88,151 1,626 (153) 89,624
Private corporate debt
securities.............. 19,348 77 - 19,425 22,173 229 - 22,402
---------- --------- --------- ---------- ---------- --------- ---------- ----------
$ 98,619 $ 2,329 $ (12) $ 100,936 $ 127,514 $ 2,125 $ (239) $ 129,400
---------- --------- --------- ---------- ---------- --------- ---------- ----------
Total fixed maturity
securities..............$1,693,699 $ 33,964 $ (63,937) $1,663,726 $1,479,827 $ 22,001 $ (80,413) $1,421,415
---------- --------- --------- ---------- ---------- --------- ---------- ----------
---------- --------- --------- ---------- ---------- --------- ---------- ----------
During 2001, two fixed maturity securities classified as held-to-maturity
were sold for $147,000, resulting in a realized loss of $54,000. These
securities were sold due to credit concerns. There were no such sales 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.
During 2000 and 1999, fixed maturity securities classified as
held-to-maturity with an aggregate carrying value of $29,020,000 and
$20,122,000, respectively, were exchanged into preferred stock and classified as
50
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. There were no such transfers in 2001.
Fixed maturity securities totaling $5,958,000 at amortized cost as of
December 31, 2001, were non-income producing for the twelve months preceding
December 31, 2001.
As of December 31, 2001, fixed maturity securities classified as
held-to-maturity with an aggregate carrying value of $10,150,000 were on deposit
with U.S. state insurance departments to satisfy regulatory requirements.
Contractual Maturities
The amortized cost and estimated fair value of fixed maturity securities
as of December 31, 2001 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)
Due in one year or less................................. $ 48,473 $ 47,135 $ 10,436 $ 10,584
Due after one year through five years................... 514,596 521,474 11,029 11,215
Due after five years through ten years.................. 615,833 599,085 515 533
Due after ten years..................................... 314,390 290,125 11,827 11,907
---------- ---------- ---------- ----------
1,493,292 1,457,819 33,807 34,239
Mortgage-backed securities.............................. 101,788 104,971 64,812 66,697
---------- ---------- ---------- ----------
$1,595,080 $1,562,790 $ 98,619 $ 100,936
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Equity Securities
Equity securities are comprised of available-for-sale and trading
securities. An analysis of equity securities is as follows:
December 31,
--------------------------------------------------------------------------------------------------
2001 2000
----------------------------------------------- ------------------------------------------------
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............. $ 183,621 $ 4,043 $ (6,876) $ 180,788 $ 226,799 $ - $ - $ 226,799
Listed equity securities. 1,918 - (779) 1,139 12,143 124 (9,663) 2,604
---------- --------- --------- ---------- ---------- --------- ---------- ----------
Total available-for-sale
equity securities...... 185,539 4,043 (7,655) 181,927 238,942 124 (9,663) 229,403
Trading securities....... 86,036 17,755 (22,004) 81,787 99,747 264,433 (10,284) 353,896
---------- --------- --------- ---------- ---------- --------- ---------- ----------
Total equity securities.. $ 271,575 $ 21,798 $ (29,659) $ 263,714 $ 338,689 $ 264,557 $ (19,947) $ 583,299
---------- --------- --------- ---------- ---------- --------- ---------- ----------
---------- --------- --------- ---------- ---------- --------- ---------- ----------
51
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Trading securities are carried at fair value with changes in net
unrealized gains and losses of $(258,399,000), $(111,014,000) and $348,906,000
included in earnings for the years ended December 31, 2001, 2000 and 1999,
respectively.
Investment Concentration and Risk
As of December 31, 2001, there were no investments in either fixed
maturity or equity securities in any one issuer representing more than ten
percent of shareholders' equity. 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 New Focus, Inc. and Siebel Systems, Inc. recorded at market
values of $160,385,000 and $62,487,000, respectively, as of December 31, 2000.
Fixed maturity securities considered less than investment grade approximated
8.7% and 13.1% of total fixed maturity securities as of December 31, 2001 and
2000, 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, 2001 totaled $13,243,000 before tax and $8,118,000 after tax, and
as of December 31, 2000 totaled $29,118,000 before tax and $18,993,000 after
tax. The net unrealized losses on equity securities classified as
available-for-sale as of December 31, 2001 totaled $3,612,000 before tax and
$1,631,000 after tax, and as of December 31, 2000 totaled $9,539,000 before tax
and $6,209,000 after tax.
52
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Changes in net unrealized gains and losses on available-for-sale
securities included in other comprehensive income for the years ended December
31, 1999, 2000 and 2001 were as follows:
Net Unrealized Gains (Losses)
-------------------------------------------
Fixed
Maturity Equity
Securities Securities Total
------------- ------------- -------------
(In thousands)
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:
Change in net unrealized gains and losses on available-for-sale securities.... (38,452) (4,290) (42,742)
Decrease in amortization of deferred policy acquisition costs................. 20,794 - 20,794
Decrease in deferred income tax liabilities................................... 6,180 845 7,025
------------- ------------- -------------
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:
Change in net unrealized gains and losses on available-for-sale securities.... (10,197) (6,062) (16,259)
Decrease in amortization of deferred policy acquisition costs................. 5,740 - 5,740
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)
Changes during the year ended December 31, 2001:
Change in net unrealized gains and losses on available-for-sale securities.... 28,869 5,927 34,796
Increase in amortization of deferred policy acquisition costs................. (12,993) - (12,993)
Increase in deferred income tax liabilities................................... (5,001) (1,349) (6,350)
------------- ------------- -------------
Net unrealized gains (losses) on available-for-sale securities as of
December 31, 2001............................................................. $ (8,118) $ (1,631) $ (9,749)
------------- ------------- -------------
------------- ------------- -------------
53
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net Investment Income
The details of investment income, net of investment expenses, are as
follows:
Years Ended December 31,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
(In thousands)
Interest on fixed maturity securities................................. $ 138,948 $ 112,039 $ 94,546
Dividends on equity securities........................................ 13 431 213
Interest on policy loans.............................................. 625 640 606
Interest on cash and cash equivalents................................. 3,849 3,389 3,780
------------ ------------ ------------
Gross investment income............................................... 143,435 116,499 99,145
Investment expenses................................................... (413) (494) (138)
------------ ------------ ------------
143,022 116,005 99,007
Interest credited on insurance policyholder accounts.................. (118,965) (94,065) (73,753)
------------ ------------ ------------
Net investment income................................................. $ 24,057 $ 21,940 $ 25,254
------------ ------------ ------------
------------ ------------ ------------
Investment expenses included professional fees, salaries and other
allocated costs of investment management and administration.
Realized Gains and Losses
Information about net and gross realized gains and losses on securities
transactions is as follows:
Years Ended December 31,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
(In thousands)
Net realized gains (losses) on securities transactions:
Fixed maturities, available-for-sale.................................. $ (44,942) $ 13 $ (6,735)
Fixed maturities, held-to-maturity.................................... (5,897) (28,274) (36,862)
Equity securities, trading............................................ 42,019 186,516 34,403
Equity securities, available-for-sale................................. (110,028) (12,709) 613
------------ ------------ ------------
$ (118,848) $ 145,546 $ (8,581)
------------ ------------ ------------
------------ ------------ ------------
54
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
(In thousands)
Gross realized gains (losses) on securities transactions:
Fixed maturities, available-for-sale:
Gross gains......................................................... $ 19,304 $ 244 $ 2,179
Gross losses........................................................ (64,246) (231) (8,914)
Fixed maturities, held-to-maturity:
Gross losses........................................................ (5,897) (28,274) (36,862)
Equity securities, trading:
Gross gains......................................................... 43,665 187,717 34,403
Gross losses........................................................ (1,646) (1,201) -
Equity securities, available-for-sale:
Gross gains......................................................... 1,591 179 7,822
Gross losses........................................................ (111,619) (12,888) (7,209)
------------ ------------ ------------
Net realized investment gains (losses) on securities transactions..... $ (118,848) $ 145,546 $ (8,581)
------------ ------------ ------------
------------ ------------ ------------
During 2001, management determined that five private equity investments in
technology companies were other-than-temporarily impaired and consequently $32.8
million of realized losses were reflected in the consolidated income statement.
Certain other private corporate debt and equity investments were considered by
management to be other-than-temporarily impaired and realized losses totaling
$80.3 million were recorded in the consolidated income statement. In addition
during 2001, certain public corporate debt securities classified as
available-for-sale were considered by management to be other-than-temporarily
impaired and realized losses totaling $39.1 million were recorded in the
consolidated income statement for the difference between amortized cost and the
fair value of these securities.
Listed Equity Securities Held in Escrow
As a result of third party acquisitions of companies in which the Group
held private equity investments during 2001 and 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 securities have been
fully reflected in the consolidated financial statements as of December 31, 2001
and 2000.
The aggregate market value of the Group's listed equity securities held in
escrow as of December 31, 2001 and 2000, was $627,000 and $22,956,000,
respectively. During 2001, the equity securities held in escrow as of December
31, 2000 were released and no claims were made by the acquiring companies. The
Group is not aware of any actual or potential claims against the securities held
in escrow as of December 31, 2001.
55
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3. Deferred Policy Acquisition Costs
Deferred policy acquisition cost activity was as follows:
Years Ended December 31,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
(In thousands)
Balance as of January 1............................................... $ 168,102 $ 144,518 $ 114,681
Deferral of costs relating to:
Commissions........................................................... 33,214 32,634 21,996
Other................................................................. 4,254 6,392 3,844
------------ ------------ ------------
37,468 39,026 25,840
Amortization relating to:
Operations............................................................ 7,408 9,420 8,324
Investment gains...................................................... 16,332 11,735 8,473
------------ ------------ ------------
23,740 21,155 16,797
------------ ------------ ------------
Net deferral.......................................................... 13,728 17,871 9,043
Adjustment for unrealized losses (gains) on available-for-sale fixed
maturity securities................................................. (12,993) 5,740 20,794
Decrease due to foreign exchange...................................... (11) (27) -
------------ ------------ ------------
Balance as of December 31 $ 168,826 $ 168,102 $ 144,518
------------ ------------ ------------
------------ ------------ ------------
Note 4. Reinsurance Assets
During 2001, the Group's U.S. life insurance subsidiary, London Pacific
Life & Annuity Company ("LPLA") entered into a reinsurance agreement to reduce
its exposure to mortality risk associated with universal life policies written
by LPLA. Under the agreement, approximately 90% of the premiums and benefits
payable under specified policies were ceded to another insurance company. LPLA
will continue to service the policies, and the reinsurer will pay LPLA a service
fee of $27 per in-force policy.
The reinsurance contract does not relieve LPLA from its obligations to
policyholders. A contingent liability exists with respect to insurance ceded
which could become a liability should the reinsurer be unable to meet the
obligations assumed under the reinsurance agreement. To minimize its exposure,
LPLA evaluates the financial condition of its reinsurers and monitors
concentrations of credit risk. Additionally, assets related to the reinsured
business have been placed in trust for the benefit of LPLA.
At December 31, 2001, reinsurance assets were $42.0 million, and deferred
commission income relating to reinsurance contracts was $6.5 million. The
deferred commission income will be amortized into revenue over the remaining
life of the universal life business. These amounts relate to one reinsurance
agreement with a single reinsurer.
56
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 5. Other Assets
An analysis of other assets is as follows:
December 31,
--------------------------
2001 2000
------------ ------------
(In thousands)
Deferred income tax assets............................................ $ 23,308 $ 4,277
Property, equipment and leasehold improvements, net................... 4,987 4,901
Intangible assets, net................................................ 3,868 4,213
Prepayments........................................................... 2,638 1,901
Receivables:
Income tax refunds receivable....................................... 9,399 5,520
Fee income receivable............................................... 774 1,666
Allowance for doubtful accounts..................................... (5) (5)
Other receivables................................................... 1,387 1,242
Due from brokers.................................................... - 8,799
Other assets.......................................................... 4 4
------------ ------------
Total other assets.................................................... $ 46,360 $ 32,518
------------ ------------
------------ ------------
Note 6. Intangible Assets
Intangible assets (included in other 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,
--------------------------
2001 2000
------------ ------------
(In thousands)
Cost:
Balance as of January 1............................................ $ 8,116 $ 8,155
Disposals............................................................. - (39)
------------ ------------
Balance as of December 31............................................. 8,116 8,116
Accumulated amortization:
Accumulated amortization as of January 1.............................. 3,903 3,480
Amortization recorded................................................. 345 462
Accumulated amortization on disposals................................. - (39)
------------ ------------
Accumulated amortization as of December 31............................ 4,248 3,903
------------ ------------
Net book value as of December 31...................................... $ 3,868 $ 4,213
------------ ------------
------------ ------------
57
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7. Life Insurance Policy Liabilities
An analysis of life insurance policy liabilities is as follows:
December 31,
--------------------------
2001 2000
------------ ------------
(In thousands)
Future policy benefits:
Immediate annuities................................................. $ 170,051 $ 169,357
Policyholder contract deposits:
Deferred annuities.................................................. 1,812,262 1,468,070
Universal life products............................................. 48,010 49,574
Other policy claims and benefits...................................... 1,529 4,600
------------ ------------
$ 2,031,852 $ 1,691,601
------------ ------------
------------ ------------
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 4.0%
to 6.25% in 2001, and from 5.5% to 6.25% in 2000. Guarantees ranged from 4.0% to
5.5% in both 2001 and 2000. For annuity products, credited interest rates
generally ranged from 3.25% to 8.75% in 2001, and from 5.0% to 8.75% in 2000.
The interest rates credited on immediate annuities ranged from 1% to 11% in both
2001 and 2000.
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 the 1983 IAM Mortality
Table.
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 8. Statutory Financial Information and Restrictions
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
the codification was to create uniformity in statutory financial reporting
across the U.S. LPLA adopted the new SAP effective January 1, 2001. The
implementation of the new SAP resulted in a decrease in LPLA's statutory surplus
of $24.9 million, almost entirely related to deferred income taxes.
58
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
The new SAP provides for the same principal differences between SAP and
GAAP that existed prior to January 1, 2001, except that it established criteria
for recognizing deferred income taxes. However, the methodologies used to
determine the amount of deferred income taxes are different under the new SAP
than under GAAP.
A comparison of net income and statutory capital and surplus of LPLA
determined on the basis of SAP to net income and shareholder's equity of LPLA on
the basis of GAAP is as follows:
2001 2000 1999
------------ ------------ ------------
(In thousands)
Statutory Accounting Practices:
Net income (loss) for the years ended December 31..................... $ (42,261) $ (13,246) $ 993
Statutory capital and surplus as of December 31....................... 82,945 152,955 166,701
Generally Accepted Accounting Principles:
Net income (loss) for the years ended December 31..................... (120,739) (33,538) 95,593
Shareholder's equity as of December 31................................ $ 118,526 $ 179,097 $ 215,134
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, 2001, LPLA's adjusted capital and
surplus exceeded its authorized control level of RBC. Included within the
statutory capital and surplus as of December 31, 2001 and 2000 shown above were
$15,000,000 and $20,000,000, respectively, 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 2002 without regulatory
approval.
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.
LPAL is required to submit annual audited financial statements (prepared under
U.S. GAAP which is permitted), 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
59
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
assumptions, assets are sufficient to cover all liabilities. The annual filing
contains a report from the Appointed Actuary on the matching of investments to
liabilities.
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 GBP50,000 or 2.5% of the
value of the long-term business fund, (iii) 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 (iv) assets equal
to not less than 90% of liabilities must be placed with approved independent
custodians. As of December 31, 2001, LPAL met all of these conditions.
LPAL is also required under the insurance laws to appoint an actuary. The
actuary must be qualified as defined under the laws and is required to supervise
the long-term insurance fund. No transfers, except in satisfaction of long-term
insurance business liabilities, including dividends, are permitted from the
long-term insurance fund without written consent from the actuary.
Note 9. Notes Payable
In June 2001, the Group's credit facility with a bank was extended until
May 2003, under which the Group may borrow up to $50,000,000 for general
corporate purposes. As of December 31, 2001 and 2000, $36,874,000 and
$35,556,000, respectively, was outstanding under this credit facility, and
$12,704,000 and $14,074,000, 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, 2001 and
2000 was 3.0% and 7.375%, respectively, and commitment fees were charged at
0.375% per annum on the unutilized balance during 2001 and 2000. The facility
may be extended annually by mutual consent of the Group and the lender after May
2003. The final lump sum repayment date of the credit facility is May 2003
unless extended.
Note 10. 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 2001, 2000 and 1999.
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.
A breakdown of the Group's income (loss) before income taxes by tax
jurisdiction follows:
Years Ended December 31,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
(In thousands)
Income (loss) before income taxes:
Jersey, Guernsey and United Kingdom................................... $ (224,085) $ 70,227 $ 165,576
United States......................................................... (177,142) (55,217) 140,086
------------ ------------ ------------
Total income (loss) before income taxes............................... $ (401,227) $ 15,010 $ 305,662
------------ ------------ ------------
------------ ------------ ------------
60
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 income taxes. The sources and tax effects of the difference are as
follows:
Years Ended December 31,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
(In thousands)
Income taxes computed at Jersey statutory income tax rate of 20%...... $ (80,245) $ 3,002 $ 61,132
Realized and unrealized investment gains not subject to taxation in
Jersey (losses not deductible)...................................... 30,550 (37,344) 112
Other losses not deductible in Jersey................................. 627 1,676 796
Income in Guernsey not subject to taxation (losses not deductible).... 15,141 23,171 (32,414)
Taxes on income at higher than 20% statutory Jersey rate:
Realized and unrealized investment gains and losses in the U.S...... (24,781) (6,273) 22,793
Other income and losses in the U.S.................................. 2,165 (626) 1,375
Adjustment of prior years' provisions................................. - (1,053) -
Other................................................................. 100 - (8)
------------ ------------ ------------
Actual tax expense (benefit).......................................... $ (56,443) $ (17,447) $ 53,786
------------ ------------ ------------
------------ ------------ ------------
The components of the actual tax expense (benefit) are as follows:
Years Ended December 31,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
(In thousands)
Jersey, Guernsey and United Kingdom:
Current tax expense................................................. $ 1,601 $ 1,549 $ 1,602
Deferred tax expense................................................ - - -
United States:
Current tax expense (benefit)....................................... 8,763 (6,494) (2,081)
Deferred tax expense (benefit)...................................... (66,807) (12,502) 54,265
------------ ------------ ------------
Total actual tax expense (benefit).................................... $ (56,443) $ (17,447) $ 53,786
------------ ------------ ------------
------------ ------------ ------------
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 assets existed as of December 31,
2001, and net deferred income tax liabilities existed as of December 31, 2000,
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, 2001 and 2000
in the U.S. non-life insurance subsidiaries which file consolidated federal tax
returns for two separate non-life insurance groups.
61
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
--------------------------
2001 2000
------------ ------------
(In thousands)
U.S. non-life insurance subsidiaries:
Deferred income tax assets:
Net operating loss carry forwards............................................. $ 5,712 $ 6,553
Revenues and expenses recognized on a cash basis for income tax purposes...... 1,124 1,713
Unrealized losses on investments.............................................. 186 -
Other assets.................................................................. 2,705 2,490
Valuation allowance........................................................... (3,462) (6,121)
------------ ------------
Deferred income tax assets, net of valuation allowance........................ 6,265 4,635
Deferred income tax liabilities:
Depreciation, amortization and other.......................................... (402) (358)
Other liabilities............................................................. (359) -
------------ ------------
(761) (358)
------------ ------------
Net deferred income tax assets - U.S. non-life insurance subsidiaries......... 5,504 $ 4,277
------------ ------------
------------
U.S. life insurance subsidiary:
Deferred income tax assets:
Net operating loss carry forwards............................................. - 6,822
Unrealized losses on investments.............................................. 31,549 27,967
Insurance policyholder liabilities............................................ 32,752 27,013
Other assets.................................................................. 2,811 26
------------ ------------
67,112 61,828
------------ ------------
Deferred income tax liabilities:
Unrealized gains on investments............................................... - (46,687)
Accretion recognized on a cash basis for income tax purposes.................. (4,255) (3,830)
Cost of policies produced..................................................... (40,053) (52,757)
Other liabilities............................................................. (5,000) (141)
------------ ------------
(49,308) (103,415)
------------ ------------
Net deferred income tax assets (liabilities) - U.S. life insurance subsidiary. 17,804 (41,587)
------------ ------------
Total net deferred income tax assets (liabilities)............................ $ 23,308 $ (41,587)
------------ ------------
------------ ------------
62
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2001, the U.S. non-life insurance subsidiaries had
pre-tax federal net operating loss carrryforwards of approximately $13.8 million
expiring as follows: approximately $1.6 million from 2002 to 2019, and
approximately $12.2 million from 2020 to 2021. These subsidiaries have
California net operating loss carryforwards of approximately $11.5 million
expiring as follows: approximately $2.7 million from 2002 to 2004, and
approximately $8.8 million from 2010 to 2011. The Group has recorded a valuation
allowance of $589,000 as of December 31, 2001 for those carryforward amounts
that are expected to expire prior to being utilized.
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,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
(In thousands)
Potential tax liability on distributable earnings of subsidiaries..... $ 11,260 $ 24,507 $ 30,985
------------ ------------ ------------
------------ ------------ ------------
Note 11. Shareholders' Equity
The Company has authorized 86,400,000 Ordinary Shares with a par value of
$0.05 per share. As of December 31, 2001 and 2000, there were 64,439,073 and
64,433,313 Ordinary Shares issued and outstanding, respectively.
Changes in the number of Ordinary Shares were as follows:
Years Ended December 31,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
(In thousands)
Shares issued as of January 1......................................... 64,433 64,433 64,424
New share capital issued.............................................. 6 - 9
------------ ------------ ------------
Shares issued as of December 31....................................... 64,439 64,433 64,433
------------ ------------ ------------
------------ ------------ ------------
Total dividends declared and paid 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, 2001, 2000 and 1999, or $11,802,000,
$11,625,000 and $11,446,000, respectively, in total. Dividends per ADS have been
restated to reflect the four-for-one split in March 2000.
Accumulated other comprehensive income (loss) consists of two components,
foreign currency translation adjustments and the change in net unrealized gains
and losses of available-for-sale securities. Accumulated foreign currency
translation adjustments were $(157,000), $(42,000) and $0 as of December 31,
2001, 2000 and 1999, respectively. The accumulated change in net unrealized
gains and losses on available-for-sale securities were $(9,749,000),
$(25,202,000) and $(18,365,000) as of December 31, 2001, 2000 and 1999,
respectively.
63
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Group has two share incentive plans as described in Note 15 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,
----------------------------------------------------------------------------------
2001 2000 1999
-------------------------- -------------------------- --------------------------
ESOT ALOT ESOT ALOT ESOT ALOT
------------ ------------ ------------ ------------ ------------ ------------
(In thousands)
Shares held as of January 1.... 12,374 438 14,682 650 14,527 650
Purchased...................... 1,027 - 694 - 865 -
Exercised...................... (141) - (3,214) - (710) -
Transferred between trusts - - 212 (212) - -
------------ ------------ ------------ ------------ ------------ ------------
Shares held as of December 31.. 13,260* 438 12,374* 438 14,682 650
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
* 834,000 and 604,000 held in ADR form for the years ended December 31, 2001
and 2000, respectively.
Note 12. 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
$1,610,000, $1,237,000 and $1,442,000 for the years ended December 31, 2001,
2000 and 1999, respectively.
Future minimum lease payments required under capital and non-cancellable
operating leases with terms of one year or more, as of December 31, 2001, were
as follows:
Capital Operating
Leases Leases
------------ ------------
(In thousands)
2002.................................................................. $ 269 $ 1,071
2003.................................................................. 166 1,326
2004.................................................................. 65 1,325
2005.................................................................. 30 1,193
2006.................................................................. 2 1,093
2007 and thereafter................................................... - 6,279
------------ ------------
Total................................................................. 532 $12,287
------------
------------
Less amounts representing interest.................................... (57)
------------
Present value of net minimum lease payments........................... $ 475
------------
------------
64
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 9 to the
Consolidated Financial Statements.
Note 13. 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, estimated
fair value is based on valuation methodologies performed by management, which
evaluate company, industry, geographical and overall equity market factors that
would influence the security's fair value.
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.
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,
------------------------------------------------------
2001 2000
-------------------------- --------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------ ------------ ------------ ------------
(In thousands)
Financial assets:
Cash and cash equivalents.............................. $ 82,417 $ 82,417 $ 114,285 $ 114,285
Investments:
Fixed maturities:
Available-for-sale................................. 1,562,790 1,562,790 1,292,015 1,292,015
Held-to-maturity................................... 98,619 100,936 127,514 129,400
Equity securities:
Trading............................................ 81,787 81,787 353,896 353,896
Available-for-sale................................. 181,927 181,927 229,403 229,403
Policy loans......................................... 10,529 10,529 10,301 10,301
Assets held in separate accounts....................... 227,675 227,675 206,325 206,325
Financial liabilities:
Life insurance policy liabilities...................... 2,031,852 1,917,383 1,691,601 1,597,951
Liabilities related to separate accounts............... 226,015 212,976 203,806 188,683
Notes payable.......................................... 36,874 36,874 35,556 35,556
65
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 actively traded fixed maturity
securities classified as available-for-sale and held-to-maturity were generally
based upon quoted market prices. Fair values for private corporate debt
securities were based on the results of valuation methodologies performed by
management.
Equity Securities:
a) Trading Securities: Fair values 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 based upon the results of management's valuation
methodologies, including analysis of company, industry, geographical and overall
equity market factors which influence fair value.
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 14. 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
66
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
The Group's liability under this plan was as follows:
December 31,
--------------------------
2001 2000
------------ ------------
(In thousands)
Employee deferrals and realized appreciation of underlying investments
credited to participants............................................... $ 2,691 $ 3,740
Unrealized appreciation of underlying investments not yet credited to
participants........................................................... 29 1,662
------------ ------------
Deferred compensation liability.......................................... $ 2,720 $ 5,402
------------ ------------
------------ ------------
The Group recognized expense related to this deferred compensation plan of
$1,412,000 and $2,476,000 for the years ended December 31, 2000 and 1999,
respectively. For the year ended December 31, 2001, there was a credit to
expense of $943,000 due to the reversal of unrealized appreciation on certain
underlying listed investments.
Note 15. 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 Employee Share Option Trust ("ESOT"), which
was approved by shareholders in 1990, 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
generally 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. While the loan is
limited up to an annual maximum of 5% of the consolidated net assets of the
Group, the ESOT is not limited as to the number of options that may be granted.
The loan is secured by the shares held in the trust is interest free and is
eliminated in the consolidated financial statements. The ESOT has waived its
entitlement to dividends on any shares held. See Note 11 to the Consolidated
Financial Statements for a summary of the share activity within the ESOT.
67
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Share option activity for the years ended December 31, 2001, 2000 and 1999
was as follows:
2001 2000 1999
-------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
(Options in thousands) Options Pice Options Pice Options Pice
------------ ------------ ------------ ------------ ------------ ------------
Outstanding as of January 1................ 12,213 $ 4.32 15,256 $ 3.61 14,215 $ 3.47
Granted.................................... 2,388 5.19(1) 431 19.55 1,852 4.50
Exercised.................................. (141) 3.13 (3,214) 2.62 (710) 3.30
Forfeited.................................. (89) 12.44 (160) 12.59 (101) 3.32
Expired.................................... (1,108) 2.48 (100) 2.50 - -
------------ ------------ ------------ ------------ ------------ ------------
Outstanding as of December 31.............. 13,263 $ 4.59 12,213 $ 4.32 15,256 $ 3.61
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
Options exercisable as of December 31...... 11,757 $ 4.44 9,632 $ 4.05 11,444 $ 3.54
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
(1) Of the options granted during 2001, those granted at market price had a
weighted average exercise price of $5.44 and those granted less than
market price had a weighted average exercise price of $2.46. All options
granted during 2000 and 1999 were granted at market price.
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." In accordance with APB 25, the Group
recorded compensation expense relating to stock options of $530,000 in 2001 and
$2,943,000 in 2000. This expense represented the difference between the exercise
price of options and the market value of the underlying shares at the date of
grant or modification and was recognized in full as all options were fully
vested. The Group extended the expiration date on 310,000 outstanding options
during 2000. Of the options modified, 250,000 were extended for an additional
three years from the original date of expiration, and 60,000 were extended for
an additional ten years from the 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:
68
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
(In thousands, except per share
and ADS amounts)
Net income (loss):
As reported........................................................... $ (344,784) $ 32,457 $ 251,876
Pro forma............................................................. (349,419) 30,896 250,971
Basic earnings (loss) per share and ADS (1):
As reported........................................................... (6.76) 0.64 5.05
Pro forma............................................................. (6.85) 0.61 5.03
Diluted earnings (loss) per share and ADS (1):
As reported........................................................... (6.76) 0.53 4.54
Pro forma............................................................. (6.85) 0.51 4.53
Weighted average fair value of options granted
at market price during year......................................... 2.38 9.24 0.76
Weighted average fair value of options granted
at less than market price during year............................... $ 2.86 $ - $ -
(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:
2001 2000 1999
------------ ------------ ------------
Expected dividend yield (2)........................................... - - -
Expected stock price volatility....................................... 76% 67% 31%
Risk-free interest rate............................................... 5.09% 6.07% 5.49%
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.
Summary information about the Group's share options outstanding as of
December 31, 2001 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)
$ 1.00 - $ 5.00 8,278 2.58 $ 3.36 7,313 $ 3.36
5.01 - 10.00 4,673 5.83 5.84 4,291 5.75
10.01 - 15.00 65 5.42 12.75 16 12.75
15.01 - 20.00 147 8.65 19.18 37 19.18
20.01 - 25.00 100 8.68 21.00 100 21.00
--------------- ------------- ------------- ------------- ------------- -------------
$ 1.00 - $25.00 13,263 3.85 $ 4.59 11,757 $ 4.44
--------------- ------------- ------------- ------------- ------------- -------------
--------------- ------------- ------------- ------------- ------------- -------------
69
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. The ALOT was established in 1997 without
shareholders approval. 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 11 to the Consolidated Financial Statements for a
summary of the share activity within the ALOT.
SAR activity for the years ended December 31, 2001, 2000 and 1999 was as
follows:
2001 2000 1999
-------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Award Exercise of Award Exercise of Award Exercise
(Award units in thousands) Units Pice Units Pice Units Pice
------------ ------------ ------------ ------------ ------------ ------------
Outstanding as of January 1................ 438 $ 3.71 576 $ 3.65 613 $ 3.35
Granted.................................... - - - - 94 5.19
Exercised.................................. (10) 3.46 (109) 3.50 (84) 3.35
Forfeited.................................. (24) 3.41 (29) 3.35 (47) 3.35
------------ ------------ ------------ ------------ ------------ ------------
Outstanding as of December 31.............. 404 $ 3.73 438 $ 3.71 576 $ 3.65
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
Award units exercisable as of December 31.. 173 $ 3.64 68 $ 3.62 62 $ 3.35
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
Summary information about the Group's SARs outstanding as of December 31,
2001 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)
$ 3.35 320 3.00 $ 3.35 146 $ 3.35
5.19 84 4.28 5.19 27 5.19
--------------- ------------- ------------- ------------- ------------- -------------
$ 3.35 - $ 5.19 404 3.26 $ 3.73 173 $ 3.64
--------------- ------------- ------------- ------------- ------------- -------------
--------------- ------------- ------------- ------------- ------------- -------------
70
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
$20,000, $1,943,000 and $300,000 for the years ended December 31, 2001, 2000 and
1999, respectively, 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 16. 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,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
(In thousands, except per share
and ADS amounts)
Net income (loss)..................................................... $ (344,784) $ 32,457 $ 251,876
Basic earnings per share and ADS:
Weighted average number of Ordinary Shares outstanding,
excluding shares held by the employee benefit trusts................ 50,984,146 50,794,731 49,891,778
------------ ------------ ------------
------------ ------------ ------------
Basic earnings (loss) per share and ADS............................... $ (6.76) $ 0.64 $ 5.05
------------ ------------ ------------
------------ ------------ ------------
Diluted earnings per share and ADS:
Weighted average number of Ordinary Shares outstanding,
excluding shares held by the employee benefit trusts................ 50,984,146 50,794,731 49,891,778
Effect of dilutive securities (employee share options)................ - 9,932,897 5,553,591
------------ ------------ ------------
Weighted average Ordinary Shares used in diluted earnings per
share calculations.................................................. 50,984,146 60,727,628 55,445,369
------------ ------------ ------------
------------ ------------ ------------
Diluted earnings (loss) per share and ADS............................. $ (6.76) $ 0.53 $ 4.54
------------ ------------ ------------
------------ ------------ ------------
As the Group recorded a net loss for the year ended December 31, 2001, the
calculation of diluted earnings per share for this year does not include
potentially dilutive employee share options as they are anti-dilutive and would
result in a reduction of net loss per share. If the Group had reported net
income for the year ended December 31, 2001, there would have been an additional
3,022,963 shares included in the calculation of diluted earnings per share.
71
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 17. Transactions with Related Parties
The Group paid legal fees of approximately $60,000, $418,000 and $560,000
during 2001, 2000 and 1999, respectively, to a law firm of which one of its
directors, Victor A. Hebert, is a member.
Note 18. 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, 2001, 2000 and 1999,
there were included in the asset management and venture capital management
segments, portfolio management fees from the life insurance and annuities
segment of $11,878,000, $10,249,000 and $9,540,000, respectively. These
management fees have been approved by the insurance regulatory body in the life
insurance company's U.S. state of domicile.
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,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
(In thousands)
Jersey................................................................ $ (145,358) $ 181,516 $ (4,956)
Guernsey.............................................................. (59,268) (99,098) 195,107
United States......................................................... 880 107,103 282,415
------------ ------------ ------------
Consolidated revenues and net investment gains (losses)............... $ (203,746) $ 189,521 $ 472,566
------------ ------------ ------------
------------ ------------ ------------
Total assets by geographic segment were as follows:
December 31,
--------------------------
2001 2000
------------ ------------
(In thousands)
Jersey................................................................ $ 50,319 $ 251,255
Guernsey.............................................................. 166,657 176,173
United States......................................................... 2,319,352 2,135,560
------------ ------------
Consolidated total assets............................................. $ 2,536,328 $ 2,562,988
------------ ------------
------------ ------------
72
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenues and income before taxes for the Group's reportable operating
segments, based on management's internal reporting structure, were as follows:
Years Ended December 31,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
(In thousands)
Revenues:
Life insurance and annuities (1), (2), (3)............................ $ (190,471) $ 256,658 $ 251,180
Financial advisory services........................................... 18,627 22,952 19,913
Asset management (2).................................................. 6,764 7,799 6,826
Venture capital management (3)........................................ (40,670) (99,462) 191,811
------------ ------------ ------------
(205,750) 187,947 469,730
Reconciliation of segment amounts to consolidated amounts:
Interest income....................................................... 2,004 1,574 2,836
------------ ------------ ------------
Consolidated revenues and net investment gains (losses)............... $ (203,746) $ 189,521 $ 472,566
------------ ------------ ------------
------------ ------------ ------------
Income before income taxes:
Life insurance and annuities (1), (2), (3)............................ $ (341,703) $ 132,671 $ 147,753
Financial advisory services........................................... (3,638) (2,261) 166
Asset management (2).................................................. 1,533 1,778 1,036
Venture capital management (3)........................................ (51,262) (110,444) 158,627
------------ ------------ ------------
(395,070) 21,744 307,582
Reconciliation of segment amounts to consolidated amounts:
Interest income....................................................... 2,004 1,574 2,836
Corporate expenses.................................................... (5,692) (7,388) (4,366)
Goodwill amortization................................................. (221) (248) (348)
Interest expense...................................................... (2,248) (672) (42)
------------ ------------ ------------
Consolidated income (loss) before income taxes........................ $ (401,227) $ 15,010 $ 305,662
------------ ------------ ------------
------------ ------------ ------------
- -------------------------------------
(1) Netted against the revenues (investment income) of the life insurance and
annuities segment are management fees paid to the asset management and
venture capital management segments of $11,878,000, $10,249,000 and
$9,540,000 in 2001, 2000 and 1999, respectively.
(2) Included in the revenues of the asset management segment are management
fees from the life insurance and annuities segment of $1,954,000,
$2,775,000 and $1,597,000 in 2001, 2000 and 1999, respectively.
(3) Included in the revenues of the venture capital management segment are
management fees from the life insurance and annuities segment of
$9,924,000, $7,474,000 and $7,943,000 in 2001, 2000 and 1999,
respectively.
73
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Assets attributable to each of the Group's reportable operating segments,
based on management's reporting structure, were as follows:
December 31,
--------------------------
2001 2000
------------ ------------
(In thousands)
Assets:
Life insurance and annuities.......................................... $ 2,416,900 $ 2,360,806
Financial advisory services........................................... 10,199 9,966
Asset management...................................................... 8,334 8,749
Venture capital management............................................ 46,253 109,604
Corporate and other................................................... 54,642 73,863
------------ ------------
Consolidated total assets............................................. $ 2,536,328 $ 2,562,988
------------ ------------
------------ ------------
Note 19. Selected Quarterly Financial Information (Unaudited)
Unaudited quarterly financial information (in thousands, except per share
and ADS amounts) is as follows:
2001
--------------------------------------------------------------------
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
------------ ------------ ------------ ------------ ------------
Revenues including net investment gains (losses)....... $ (144,571) $ 75,959 $ (114,902) $ (20,232) $ (203,746)
Income (loss) before income taxes...................... (191,618) 26,108 (165,501) (70,216) (401,227)
Net income (loss)...................................... (180,226) 29,383 (144,445) (49,496) (344,784)
Basic earnings (loss) per share and ADS................ (3.50) 0.58 (2.85) (0.98) (6.76)
Diluted earnings (loss) per share and ADS.............. $ (3.50) $ 0.54 $ (2.85) $ (0.98) $ (6.76)
2000
--------------------------------------------------------------------
First Second Third Fourth Full
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 taxes...................... (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
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.
74
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 Form 10-K
and is incorporated by reference to the Company's definitive Proxy Statement for
its Annual Meeting of Shareholders to be held on May 7, 2002 (the "Proxy
Statement"), which will be filed with the SEC not later than 120 days after the
end of the fiscal year covered by this Form 10-K.
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 53, is the founder
and a principal shareholder of London Pacific Group Limited. He has worked for
the Company for more than 25 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 47, 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. Mr. Whitehead is a
member of the Institute of Chartered Accountants in England and Wales.
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 AND
RELATED STOCKHOLDER MATTERS
The information regarding security ownership of certain beneficial owners
and management is incorporated by reference to the section entitled "Information
Regarding Beneficial Ownership of Principal Shareholders, Directors and
Executive Officers" in the Proxy Statement.
75
The following table is a summary of selected information for the Company's
equity compensation plans as of December 31, 2001.
Number of Shares
Number of Shares to Weighted Average Remaining Available for
be Issued Upon Exercise Exercise Price of Future Issuance Under
of Outstanding Options, Outstanding Options, Equity Compensation
Warrants and Rights Warrants and Rights Plans
_______________________ ____________________ _______________________
$
Equity compensation plans
approved by shareholders.............. 13,262,621 (1) 4.59 (1)
Equity compensation plans not
approved by shareholders.............. 403,500 (1) 3.73 (1)
---------- -----
Total 13,666,121 4.42
---------- -----
---------- -----
________________
(1) The equity compensation plans of the Company do not contain a limit on the
number of options that may be granted to employees. However, the plans do
not allow for the issuance of previously authorized and unissued shares to
meet the obligations of the plans upon an employee option exercise. When
an option is granted, the trust that administers the plan borrows funds
from the Company or one of its subsidiaries and uses those funds to
purchase the number of shares underlying the option grant. The maximum
loan allowed in any given year is equal to 5% of consolidated net assets
as of the end of the previous fiscal year.
The information regarding the features of the equity compensation plan not
approved by shareholders is incorporated by reference to Note 15 to the
Consolidated Financial Statements presented in Item 8 "Financial
Statements and Supplementary Data" of this Form 10-K.
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.
76
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 Form 10-K:
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................................. 36
Consolidated Balance Sheets as of
December 31, 2001 and 2000................................... 37
Consolidated Statements of Income for the Years Ended
December 31, 2001, 2000 and 1999............................. 38
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999............................. 39
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 2001, 2000 and 1999......... 41
Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 2001, 2000 and 1999................. 43
Notes to the Consolidated Financial Statements................. 44
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..................................... 81
Schedule II - Condensed Financial Information of Registrant
Condensed Balance Sheets as of
December 31, 2001 and 2000................................... 82
Condensed Statements of Income for the Years Ended
December 31, 2001, 2000 and 1999............................. 83
Condensed Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999............................. 84
Note to Condensed Financial Statements......................... 85
Schedule III - Supplementary Insurance Information................... 86
Schedule IV - Reinsurance............................................ 87
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
77
financial statements or notes thereto in Item 8 "Financial Statements and
Supplementary Data" of this Form 10-K.
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 (filed previously as Exhibit 4.1
to the Company's Form 10-K for the year ended December 31, 2000).
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).
78
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).
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 (filed previously as Exhibit 10.3.1 to the Company's Form
10-K for the year ended December 31, 2000).
10.3.2 (1) Berkeley (USA) Holdings Limited Amended and Restated 1993 Deferred
Compensation Plan dated December 16, 1999 (filed previously as
Exhibit 10.3.2 to the Company's Form 10-K for the year ended
December 31, 2000).
10.3.3 (1) London Pacific Advisers Limited Retirement Scheme confirmation dated
December 5, 2000 for Ian Kenneth Whitehead.
10.4.1 Settlement dated May 23, 1997 among BG Services Limited and A.L.O.T.
Trustee Limited establishing Agent Loyalty Opportunity Trust.
10.4.2 Executed Deed dated July 16, 1997 by A.L.O.T. Trustee Limited
relating to Agent Loyalty Opportunity Trust.
10.4.3 Executed Deed dated August 13, 1997 by A.L.O.T. Trustee Limited
relating to Agent Loyalty Opportunity Trust.
10.4.4 Executed Deed dated August 20, 1998 by A.L.O.T. Trustee Limited
relating to Agent Loyalty Opportunity Trust.
10.4.5 Executed Deed of Amendment and Appointment dated December 11, 2001
among Berkeley International Capital Limited and A.L.O.T. Trustee
Limited relating to Agent Loyalty Opportunity Trust.
21 Subsidiaries of the Company as of March 18, 2002.
____________
(1) Management contract or compensatory arrangement filed in response to Item
14(a)(3) of the instructions to Form 10-K.
79
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 2001.
(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 81 through 87.
80
SCHEDULE I - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
As of December 31, 2001
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......................................... $ 3,212 $ 3,377 $ 3,308
States, municipalities and political subdivisions.................. 1,919 1,932 1,919
Foreign governments................................................ 7,821 7,919 7,918
Public utilities................................................... 94,166 92,608 92,599
Convertibles and bonds with warrants attached...................... 21,123 19,623 19,623
All other corporate bonds.......................................... 1,555,961 1,528,851 1,526,626
Redeemable preferred stock........................................... 9,497 9,416 9,416
------------ ------------ ------------
Total fixed maturity securities...................................... 1,693,699 1,663,726 1,661,409
------------ ------------ ------------
------------
Equity securities:
Common stocks:
Industrial, miscellaneous and all other............................ 88,004 82,976 82,976
Non-redeemable preferred stocks...................................... 183,571 180,738 180,738
------------ ------------ ------------
Total equity securities.............................................. 271,575 $ 263,714 263,714
------------ ------------ ------------
------------
Policy loans......................................................... 10,529 10,529
------------ ------------
Total investments.................................................... $ 1,975,803 $ 1,935,652
------------ ------------
------------ ------------
- --------------------------
(1) Cost of fixed maturity securities is original cost, reduced by
other-than-temporary impairments, repayments and adjusted for amortization
of premiums and accretion of discounts. Cost of equity securities is
original cost, reduced by other-than-temporary impairments.
(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.
81
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
LONDON PACIFIC GROUP LIMITED
CONDENSED BALANCE SHEETS
December 31,
--------------------------
2001 2000
------------ ------------
ASSETS (In thousands, except share amounts)
Cash and cash equivalents............................................................ $ 8,497 $ 31,933
Investment in subsidiaries........................................................... 152,243 462,028
Intercompany balances................................................................ 65,777 77,143
Other assets......................................................................... 563 503
------------ ------------
Total assets......................................................................... $ 227,080 $ 571,607
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, accruals and other liabilities..................................... $ 2,814 $ 2,938
Intercompany balances................................................................ 2,613 927
------------ ------------
Total liabilities.................................................................... 5,427 3,865
------------ ------------
Commitments and contingencies
Shareholders' equity:
Ordinary shares, $0.05 par value per share: 86,400,000 shares authorized;
64,439,073 and 64,433,313 shares issued and outstanding as of
December 31, 2001 and 2000, respectively........................................... 3,222 3,222
Additional paid-in capital........................................................... 68,346 67,591
Retained earnings.................................................................... 223,590 580,176
Employee benefit trusts, at cost (13,698,181 and 12,811,381 shares as of
December 31, 2001 and 2000, respectively).......................................... (63,599) (58,003)
Accumulated other comprehensive income (loss)........................................ (9,906) (25,244)
------------ ------------
Total shareholders' equity........................................................... 221,653 567,742
------------ ------------
Total liabilities and shareholders' equity........................................... $ 227,080 $ 571,607
------------ ------------
------------ ------------
See accompanying Note to Condensed Financial Statements.
82
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
LONDON PACIFIC GROUP LIMITED
CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
(In thousands)
Revenues:
Investment income..................................................... $ 605 $ 1,092 $ 499
Interest and fees from subsidiaries, net (1).......................... 15,047 15,994 14,119
Financial advisory services, asset management and other fee income.... - 2,092 302
Gain on redemption of preferred shares by subsidiary (1).............. - - 84,040
Distribution from subsidiary (1)...................................... 52,462 - 29,238
------------ ------------ ------------
68,114 19,178 128,198
Expenses:
Staff costs........................................................... 3,180 5,944 3,718
Escrow release........................................................ (100) (1,000) -
Other operating expenses.............................................. 2,579 3,488 3,160
------------ ------------ ------------
5,659 8,432 6,878
------------ ------------ ------------
Income before income tax expense and equity in
undistributed net income (loss) of subsidiaries..................... 62,455 10,746 121,320
Income tax expense.................................................... 1,579 1,550 1,602
------------ ------------ ------------
Income before equity in undistributed net income (loss) of
subsidiaries........................................................ 60,876 9,196 119,718
Equity in undistributed net income (loss) of subsidiaries (1)......... (405,660) 23,261 132,158
------------ ------------ ------------
Net income (loss)..................................................... $ (344,784) $ 32,457 $ 251,876
------------ ------------ ------------
------------ ------------ ------------
(1) Eliminated on consolidation.
See accompanying Note to Condensed Financial Statements.
83
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
LONDON PACIFIC GROUP LIMITED
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
(In thousands)
Cash flows from operating activities:
Net income (loss)..................................................... $ (344,784) $ 32,457 $ 251,876
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Equity in undistributed net income (loss) of subsidiaries............. 405,660 (23,261) (132,158)
Distributions from subsidiary......................................... (52,462) - -
Gain on redemption of preferred shares of subsidiary.................. - - (84,040)
Gain on liquidation of subsidiary..................................... - - (29,238)
Other operating cash flows............................................ 299 923 22,290
------------ ------------ ------------
Net cash provided by operating activities............................. 8,713 10,119 28,730
------------ ------------ ------------
Cash flows from investing activities:
Investment in subsidiaries............................................ (33,380) (7,668) -
Distributions from subsidiary......................................... 52,462 - 29,248
Cash proceeds from redemption of preferred shares of subsidiary....... - - 8,230
Advances to subsidiaries.............................................. (39,410) - (40,508)
Other cash flows from investing activities............................ (23) (42) 3,930
------------ ------------ ------------
Net cash provided by (used in) investing activities................... (20,351) (7,710) 900
------------ ------------ ------------
Cash flows from financing activities:
Dividends paid........................................................ (11,801) (11,777) (11,599)
Issuance of Ordinary Shares........................................... 3 - 5
Repayments from subsidiaries.......................................... - 16,351 -
------------ ------------ ------------
Net cash provided by (used in) financing activities................... (11,798) 4,574 (11,594)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents.................. (23,436) 6,983 18,036
Cash and cash equivalents at beginning of year........................ 31,933 24,950 6,914
------------ ------------ ------------
Cash and cash equivalents at end of year.............................. $ 8,497 $ 31,933 $ 24,950
------------ ------------ ------------
------------ ------------ ------------
See accompanying Note to Condensed Financial Statements.
84
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, 2001.
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,
2001.
85
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Life Insurance and Annuities Segment
Years Ended/As of December 31,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
(In thousands)
Deferred policy acquisition costs..................................... $ 168,826 $ 168,102 $ 144,518
Future policy benefits, losses, claims and loss expenses (1).......... 2,030,323 1,687,001 1,414,391
Unearned premiums..................................................... N/A N/A N/A
Other policy claims and benefits payable (1).......................... 1,529 4,600 2,032
Premium revenue (2)................................................... 5,672 7,400 6,671
Net investment income (3)............................................. 129,141 103,909 85,768
Benefits, claims, losses and settlement expenses...................... N/A N/A N/A
Amortization of deferred policy acquisition costs..................... 23,740 21,155 16,797
Other operating expenses.............................................. 8,606 9,107 13,044
Premiums written...................................................... N/A N/A N/A
- ---------------------------
(1) For additional disclosure regarding life insurance policyholder
liabilities, see Note 7 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, 2001.
(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.
86
SCHEDULE IV - REINSURANCE
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
Life Insurance and Annuities Segment
Column A Column B Column C Column D Column E Column F
- ------------------------------------------------ ------------ ------------ ------------ ------------ ------------
Percentage
(In thousands) Of
----------------------------------------------------- Amount
Ceded to Assumed Assumed
Other From Other to
Gross Amount Companies Companies Net Amount Net
------------ ------------ ------------ ------------ ------------
Year ended December 31, 2001:
Life insurance in force at end of year.................. $ 300,088 $ 271,136 $ - $ 28,952 0%
Premium revenue recorded in
income statement...................................... $ - $ - $ - $ - 0%
Year ended December 31, 2000:
Life insurance in force at end of year.................. $ 318,205 $ - $ - $ 318,205 0%
Premium revenue recorded in
income statement...................................... $ - $ - $ - $ - 0%
Year ended December 31, 1999:
Life insurance in force at end of year.................. $ 353,472 $ - $ - $ 353,472 0%
Premium revenue recorded in
income statement...................................... $ - $ - $ - $ - 0%
87
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: April 1, 2002 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: April 1, 2002 Arthur I. Trueger
Executive Chairman
(Principal Executive Officer)
/s/ Ian K. Whitehead
--------------------------------
Date: April 1, 2002 Ian K. Whitehead
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Victor A. Hebert
--------------------------------
Date: April 1, 2002 Victor A. Hebert
Deputy Chairman and Non-Executive Director
/s/ John Clennett
--------------------------------
Date: April 1, 2002 John Clennett
Non-Executive Director
/s/ Harold E. Hughes, Jr.
--------------------------------
Date: April 1, 2002 Harold E. Hughes, Jr.
Non-Executive Director
/s/ The Viscount Trenchard
--------------------------------
Date: April 1, 2002 The Viscount Trenchard
Non-Executive Director
/s/ Gary L. Wilcox
--------------------------------
Date: April 1, 2002 Gary L. Wilcox
Non-Executive Director
88
LONDON PACIFIC GROUP LIMITED AND SUBSIDIARIES
EXHIBIT INDEX FOR THE ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2001
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 (filed previously as Exhibit 4.1
to the Company's Form 10-K for the year ended December 31, 2000).
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).
89
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 (filed previously as Exhibit 10.3.1 to the Company's Form
10-K for the year ended December 31, 2000).
10.3.2 (1) Berkeley (USA) Holdings Limited Amended and Restated 1993 Deferred
Compensation Plan dated December 16, 1999 (filed previously as
Exhibit 10.3.2 to the Company's Form 10-K for the year ended
December 31, 2000).
10.3.3 (1) London Pacific Advisers Limited Retirement Scheme confirmation dated
December 5, 2000 for Ian Kenneth Whitehead.
10.4.1 Settlement dated May 23, 1997 among BG Services Limited and A.L.O.T.
Trustee Limited establishing Agent Loyalty Opportunity Trust.
10.4.2 Executed Deed dated July 16, 1997 by A.L.O.T. Trustee Limited
relating to Agent Loyalty Opportunity Trust.
10.4.3 Executed Deed dated August 13, 1997 by A.L.O.T. Trustee Limited
relating to Agent Loyalty Opportunity Trust.
10.4.4 Executed Deed dated August 20, 1998 by A.L.O.T. Trustee Limited
relating to Agent Loyalty Opportunity Trust.
10.4.5 Executed Deed of Amendment and Appointment dated December 11, 2001
among Berkeley International Capital Limited and A.L.O.T. Trustee
Limited relating to Agent Loyalty Opportunity Trust.
21 Subsidiaries of the Company as of March 18, 2002.
____________
(1) Management contract or compensatory arrangement filed in response to Item
14(a)(3) of the instructions to Form 10-K.
90