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EX-32.1 - LIFE PARTNERS HOLDINGS INC | v162521_ex32-1.htm |
EX-31.1 - LIFE PARTNERS HOLDINGS INC | v162521_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act
of 1934
For the
quarterly period ended: August 31, 2009
or
¨
Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934
Commission
File Number: 0-7900
LIFE
PARTNERS HOLDINGS, INC.
(Exact
name of Registrant as specified in its charter)
Texas
(State
of incorporation)
|
74-2962475
(I.R.S.
Employer ID no.)
|
204
Woodhew Drive
Waco,
Texas
(Address
of Principal Executive Offices)
|
76712
(Zip
Code)
|
Registrant’s
telephone number, including area code: 254-751-7797
Check
whether the Registrant (1) filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to the filing requirements for at least the past 90 days. Yes
x
No ¨
Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
Registrant was required to submit and post such files). Yes ¨ No
¨
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer ¨
|
Accelerated
filer x
|
Non-accelerated
filer ¨
(Do
not check if a smaller reporting company)
|
Smaller
reporting company ¨
|
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
Shares of
Common Stock, $.01 par value, outstanding as of August 31, 2009:
15,024,354
LIFE
PARTNERS HOLDINGS, INC.
TABLE
OF CONTENTS
PART
I.
|
FINANCIAL
INFORMATION
|
|
Item
1.
|
Financial
Statements
|
|
Consolidated
Balance Sheets - August 31, 2009, and February 28, 2009
|
3-4
|
|
Consolidated
Statements of Income - For the Three and Six Months Ended
|
||
August
31, 2009 and 2008
|
5
|
|
Consolidated
Statements of Cash Flows - For the Six Months Ended
|
||
August
31, 2009 and 2008
|
6
|
|
Notes
to Consolidated Financial Statements
|
7-16
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition
|
|
and
Results of Operations
|
16-25
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
26
|
Item
4.
|
Controls
and Procedures
|
26
|
PART
II. OTHER INFORMATION
|
||
Item
1.
|
Legal
Proceedings
|
27
|
Item
4.
|
Submission
of Matters to a Vote of Shareholders
|
28
|
Item
6.
|
Exhibits
|
28
|
Signatures
|
29
|
|
Exhibit
Index
|
30
|
2
PART
I - FINANCIAL INFORMATION
LIFE
PARTNERS HOLDINGS, INC.
CONSOLIDATED
BALANCE SHEETS
AUGUST
31, 2009 (Unaudited) AND FEBRUARY 28, 2009
Page
1 of 2
ASSETS
August
31,
2009
|
February
28,
2009
|
|||||||
CURRENT
ASSETS:
|
||||||||
Cash
and cash equivalents
|
$ | 18,484,610 | $ | 15,261,217 | ||||
Certificates
of deposit
|
100,364 | 3,033,603 | ||||||
Accounts
receivable - trade
|
10,290,458 | 10,057,386 | ||||||
Accounts
receivable - employees and others
|
328,620 | 157,148 | ||||||
Notes
receivable
|
568,079 | 554,918 | ||||||
Income
tax overpayment
|
123,081 | - | ||||||
Prepaid
expenses
|
135,609 | 141,286 | ||||||
Total
current assets
|
30,030,821 | 29,205,558 | ||||||
PROPERTY
AND EQUIPMENT:
|
||||||||
Land
and building
|
2,262,416 | 2,131,285 | ||||||
Proprietary
software
|
511,405 | 499,046 | ||||||
Furniture,
fixtures and equipment
|
1,451,317 | 1,298,599 | ||||||
Transportation
equipment
|
9,800 | 9,800 | ||||||
Subtotal
|
4,234,938 | 3,938,730 | ||||||
Accumulated
depreciation
|
(1,498,427 | ) | (1,344,243 | ) | ||||
Net
property and equipment
|
2,736,511 | 2,594,487 | ||||||
OTHER
ASSETS:
|
||||||||
Premium
advances net of reserve for uncollectible of $6,024,157 and $5,416,621,
respectively
|
- | - | ||||||
Investment
in securities
|
4,209,315 | 2,704,063 | ||||||
Investments
in policies, including capitalized premiums
|
16,210,686 | 8,878,715 | ||||||
Investment
in corporation/partnership
|
5,281,290 | 4,935,875 | ||||||
Artifacts
and other
|
831,700 | 831,700 | ||||||
Deferred
income taxes
|
2,982,336 | 3,227,427 | ||||||
Total
other assets
|
29,515,327 | 20,577,780 | ||||||
Total
assets
|
$ | 62,282,659 | $ | 52,377,825 |
See the
accompanying summary of accounting policies and notes to the financial
statements.
3
LIFE
PARTNERS HOLDINGS, INC.
CONSOLIDATED
BALANCE SHEETS
AUGUST
31, 2009 (Unaudited) AND FEBRUARY 28, 2009
Page
2 of 2
LIABILITIES
AND SHAREHOLDERS' EQUITY
August
31,
2009
|
February
28,
2009
|
|||||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable
|
$ | 5,161,589 | $ | 5,068,961 | ||||
Accrued
liabilities
|
1,390,033 | 527,126 | ||||||
Dividends
payable
|
3,719,194 | 1,043,316 | ||||||
Accrued
settlement expense
|
344,249 | 462,341 | ||||||
Current
portion of long-term debt
|
- | 42,717 | ||||||
Deferred
revenue
|
235,300 | 227,300 | ||||||
Income
taxes payable
|
- | 244,333 | ||||||
Total
current liabilities
|
10,850,365 | 7,616,094 | ||||||
LONG-TERM
DEBT, net of current portion shown above
|
- | 736,356 | ||||||
Total
liabilities
|
10,850,365 | 8,352,450 | ||||||
SHAREHOLDERS'
EQUITY:
|
||||||||
Common
stock, $.01 par value 18,750,000 shares authorized; 15,024,354 shares
issued and outstanding
|
150,243 | 150,243 | ||||||
Additional
paid-in capital
|
11,460,311 | 11,460,311 | ||||||
Retained
earnings
|
42,948,671 | 36,348,525 | ||||||
Accumulated
other comprehensive loss, net of taxes
|
(1,491,867 | ) | (2,298,640 | ) | ||||
Less:
treasury stock, 165,338 shares
|
(1,635,064 | ) | (1,635,064 | ) | ||||
Total
shareholders' equity
|
51,432,294 | 44,025,375 | ||||||
Total
liabilities and shareholders' equity
|
$ | 62,282,659 | $ | 52,377,825 |
See the
accompanying summary of accounting policies and notes to the financial
statements.
4
LIFE
PARTNERS HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF INCOME
FOR
THE THREE AND SIX MONTHS ENDED AUGUST 31, 2009 AND 2008
(Unaudited)
Three
Months
Ended August 31,
|
Six
Months
Ended August 31,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
REVENUES
|
$ | 29,055,566 | $ | 24,788,725 | $ | 56,499,170 | $ | 49,226,871 | ||||||||
BROKERAGE
FEES
|
12,853,626 | 11,376,771 | 25,011,746 | 23,554,643 | ||||||||||||
REVENUES,
NET OF BROKERAGE FEES
|
16,201,940 | 13,411,954 | 31,487,424 | 25,672,228 | ||||||||||||
OPERATING
AND ADMINISTRATIVE EXPENSES:
|
||||||||||||||||
General
and administrative
|
3,307,290 | 2,882,570 | 6,963,349 | 5,226,840 | ||||||||||||
Premium
advances, net
|
394,510 | 507,992 | 806,725 | 768,364 | ||||||||||||
Settlement
costs
|
1,296,462 | 416,852 | 1,476,579 | 562,371 | ||||||||||||
Depreciation
|
79,476 | 83,647 | 154,184 | 160,611 | ||||||||||||
Total
operating and administrative expenses
|
5,077,738 | 3,891,061 | 9,400,837 | 6,718,186 | ||||||||||||
INCOME
FROM OPERATIONS
|
11,124,202 | 9,520,893 | 22,086,587 | 18,954,042 | ||||||||||||
OTHER
INCOME (EXPENSES):
|
||||||||||||||||
Interest
and other income
|
536,952 | 498,572 | 1,286,147 | 885,256 | ||||||||||||
Interest
expense
|
- | (15,236 | ) | (46,988 | ) | (34,638 | ) | |||||||||
Total
other income and expense
|
536,952 | 483,336 | 1,239,159 | 850,618 | ||||||||||||
INCOME
BEFORE INCOME TAXES
|
11,661,154 | 10,004,229 | 23,325,746 | 19,804,660 | ||||||||||||
INCOME
TAXES:
|
||||||||||||||||
Current
tax expense
|
4,124,151 | 3,518,893 | 8,444,586 | 7,155,213 | ||||||||||||
Deferred
tax benefit
|
(88,012 | ) | (118,155 | ) | (189,324 | ) | (202,618 | ) | ||||||||
Total
income taxes
|
4,036,139 | 3,400,738 | 8,255,262 | 6,952,595 | ||||||||||||
NET
INCOME
|
$ | 7,625,015 | $ | 6,603,491 | $ | 15,070,484 | $ | 12,852,065 | ||||||||
EARNINGS:
|
||||||||||||||||
Per
share - Basic and diluted
|
$ | 0.51 | $ | 0.44 | $ | 1.01 | $ | 0.86 | ||||||||
AVERAGE
COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: Basic and
diluted
|
14,859,016 | 14,859,016 | 14,859,016 | 14,873,201 | ||||||||||||
THE
COMPONENTS OF COMPREHENSIVE INCOME:
|
||||||||||||||||
Net
income
|
$ | 7,625,015 | $ | 6,603,491 | $ | 15,070,484 | $ | 12,852,065 | ||||||||
Unrealized
gains (losses) on investment securities, net of taxes
|
268,418 | (572,663 | ) | 806,772 | (456,895 | ) | ||||||||||
COMPREHENSIVE
INCOME
|
$ | 7,893,433 | $ | 6,030,828 | $ | 15,877,256 | $ | 12,395,170 |
See the
accompanying summary of accounting policies and notes to the financial
statements.
5
LIFE
PARTNERS HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE SIX MONTHS ENDED AUGUST 31, 2009 AND 2008
(Unaudited)
Six
Months
Ended August 31,
|
||||||||
2009
|
2008
|
|||||||
(Restated)
|
||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income
|
$ | 15,070,484 | $ | 12,852,065 | ||||
Adjustments
to reconcile net income to operating activities:
|
||||||||
Depreciation
|
154,184 | 160,611 | ||||||
Impairment
of investment in policies
|
33,840 | - | ||||||
Earnings
on partnership investment
|
(426,783 | ) | - | |||||
Deferred
income taxes
|
(189,324 | ) | (202,617 | ) | ||||
(Increase)
decrease in operating assets:
|
||||||||
Accounts
receivable
|
(404,544 | ) | (13,808,783 | ) | ||||
Note
receivable
|
(13,161 | ) | (16,973 | ) | ||||
Overpayment
in income taxes
|
(123,081 | ) | - | |||||
Prepaid
expenses
|
5,677 | 51,034 | ||||||
Increase
(decrease) in operating liabilities:
|
||||||||
Accounts
payable
|
92,629 | 2,605,313 | ||||||
Accrued
liabilities
|
862,907 | (40,614 | ) | |||||
Accrued
settlement expense
|
(118,092 | ) | - | |||||
Income
taxes payable
|
(244,333 | ) | 1,977,143 | |||||
Deferred
revenue
|
8,000 | 7,500 | ||||||
Net
cash provided by operating activities
|
14,708,402 | 3,584,679 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Investment
in certificates of deposit
|
- | (827,262 | ) | |||||
Certificate
of deposit maturities
|
2,933,239 | - | ||||||
Investment
in income funds
|
(264,064 | ) | (399,908 | ) | ||||
Purchases
of property and equipment
|
(296,209 | ) | (276,942 | ) | ||||
Return
of investment in corporation
|
81,368 | - | ||||||
Purchase
of policies for investment purposes and capitalized
premiums
|
(7,365,811 | ) | (5,266,597 | ) | ||||
Net
cash used in investing activities
|
(4,911,477 | ) | (6,770,709 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Proceeds
from short-term notes payable
|
- | 2,000,000 | ||||||
Payments
on short-term notes payable
|
- | (2,000,000 | ) | |||||
Payment
on notes payable
|
(779,073 | ) | (370,813 | ) | ||||
Purchases
of treasury shares
|
- | (699,051 | ) | |||||
Dividend
payable
|
- | - | ||||||
Dividends
paid
|
(5,794,459 | ) | (1,543,969 | ) | ||||
Net
cash used in financing activities
|
(6,573,532 | ) | (2,613,833 | ) | ||||
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
3,223,393 | (5,799,863 | ) | |||||
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
15,261,217 | 7,112,547 | ||||||
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
$ | 18,484,610 | $ | 1,312,684 | ||||
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||
Interest
paid, net of capitalized amounts
|
$ | 46,988 | $ | 34,637 | ||||
Income
taxes paid
|
$ | 8,812,000 | $ | 5,178,000 | ||||
SUPPLEMENTAL
DISCLOSURES OF NONCASH ITEMS:
|
||||||||
Accrued
interest receivable
|
$ | 13,161 | $ | 16,973 | ||||
Unrealized
gain (loss) on marketable securities, net of taxes
|
$ | 806,772 | $ | (456,895 | ) | |||
Dividends
declared and not paid by period end
|
$ | 3,715,738 | $ | 832,105 |
See
accompanying summary of accounting policies and notes to financial
statements.
6
Life
Partners Holdings, Inc.
Notes
to Consolidated Condensed Financial Statements
August
31, 2009
(Unaudited)
Reclassifications
and Adjustments
Certain
reclassifications have been made to the prior periods’ financial statements to
conform to the current year presentation. The reclassifications had no effect on
previously reported results of operations or retained earnings. It is
management’s opinion that all adjustments necessary for a fair statement of the
results for the interim period have been made and that all adjustments are of a
normal recurring nature.
Special
Note Regarding Forward-Looking Statements
Certain
statements in this quarterly report on Form 10-Q concerning our business
prospects or future financial performance, anticipated revenues, expenses,
profitability or other financial items, estimates as to size, growth in or
projected revenues from the life settlement market, developments in industry
regulations and the application of such regulations, and our strategies, plans
and objectives, together with other statements that are not historical facts,
are “forward-looking statements” as that term is defined under the federal
securities laws. All of these forward-looking statements are based on
information available to us on the date hereof, and we assume no obligation to
update any such forward-looking statements. You should carefully review the
risks described herein and in other documents we file from time to time with the
Securities and Exchange Commission, (“SEC”), including our Annual Report on
Form 10-K for the year ended February 28, 2009 (“Fiscal 2009”),
particularly in the sections entitled “Item 1A – Risk Factors” and “Item 7
- Management’s Discussion and Analysis of Financial Condition and Results of
Operations”. We do not undertake any obligation to release publicly any
revisions to such forward-looking statements to reflect events or uncertainties
after the date hereof or reflect the occurrence of unanticipated
events.
Unaudited
Interim Financial Information
These
Consolidated Condensed Financial Statements have been prepared without audit,
pursuant to the rules and regulations of the SEC, and reflect all adjustments
that are, in the opinion of management, necessary for a fair statement of the
results for the interim periods, on a basis consistent with the annual audited
financial statements. All such adjustments are of a normal recurring nature.
Certain information, accounting policies, and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such rules and regulations,
although we believe that the disclosures are adequate to make the financial
statements and information presented not misleading. These financial statements
should be read in conjunction with the financial statements and the summary of
significant accounting policies and notes thereto included in our most recent
Annual Report on Form 10-K.
(1)
DESCRIPTION OF BUSINESS
Life
Partners Holdings, Inc. (“we” or “Life Partners”) is a financial services
company and the parent company of Life Partners, Inc. (“LPI”). LPI is the oldest
and one of the most active companies in the United States engaged in the
secondary market for life insurance known generally as “life settlements”. LPI
performs services to transact policies between the seller and buyer of life
insurance policies, without taking title or control of the policies. These
financial transactions involve the purchase of life insurance policies at a
discount to their face value for investment purposes.
7
(2)
NEW ACCOUNTING PRONOUNCEMENTS
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement No. 157, “Fair
Value Measurements”
(“SFAS No. 157”). SFAS No. 157 addresses how companies
should measure fair value when they are required to use a fair value measure for
recognition or disclosure purposes under Generally Accepted Accounting
Principles (“GAAP”). SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. Effective March 1, 2008, management adopted SFAS 157
with the exception of certain non-financial assets and non-financial liabilities
that were specifically deferred by SFAS No. 157-2. In February 2008,
the FASB issued Staff Position No. SFAS 157-2 (FSP No.157-2), Effective Date of FASB Statement No.
157, that defers the effective date of SFAS 157 to fiscal years
beginning after November 15, 2008, for certain nonfinancial assets and
nonfinancial liabilities. Adoption of SFAS 157-2 at March 1, 2009, did not have
a material impact on our financial condition, results of operations or cash
flows. In April 2009, the FASB issued Staff Position No. SFAS 157-4 (FSP
No.157-4), Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly, that provides additional guidance for estimating fair value in
accordance with FASB Statement No. 157, when the volume and level of activity
for the asset or liability have significantly decreased. FSP No. 157-4 also
includes guidance on identifying circumstances that indicate a transaction is
not orderly. Adoption of FSP No. 157-4 during the six months ended August 31,
2009, had no impact on our financial condition, results of operations or cash
flows.
In
December 2007, the FASB issued Statement No. 160, Non-Controlling Interests in Consolidated
Financial Statements — an amendment of ARB No. 51. SFAS
No. 160, among other things, provides guidance and establishes amended
accounting and reporting standards for a parent company’s non-controlling
interest in a subsidiary. SFAS No. 160 was adopted on March 1, 2009, and
had no impact on our financial condition, results of operations or cash
flows.
In
March 2008, the FASB issued Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities (“SFAS 161”). SFAS
No. 161 expands the disclosure requirements in SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities about an entity’s derivative
instruments and hedging activities. Adopted on March 1, 2009, we currently have
no derivatives and hedging activities and so the adoption of SFAS
No. 161 had no impact on our financial condition, results of
operations or cash flows.
In May
2008, the FASB issued Statement No. 162, The Hierarchy of Generally Accepted
Accounting Principles (“SFAS 162”). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP. SFAS 162 directs the GAAP hierarchy to the
entity, not the independent auditors, as the entity is responsible for selecting
accounting principles for financial statements that are presented in conformity
with GAAP. SFAS 162 became effective 60 days following the SEC’s approval
of the Public Company Accounting Oversight Board amendments to remove the GAAP
hierarchy from the auditing standards, which was November 15, 2008. SFAS 162
does not have a material impact on our financial condition, results of
operations or cash flows.
In April
2009, FASB issued FSP No. 107-1/APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments. Entities shall include disclosures about
the fair value of financial instruments whenever it issues summarized financial
information for interim reporting periods. Entities shall disclose in the body
or in the accompanying notes of its summarized financial information the fair
value of all financial instruments for which it is practicable to estimate that
value, whether recognized or not recognized in the statement of financial
position, as required by Statement 107. Adopted March 1, 2009, FSP 107-1/APB
28-1 had no impact on our financial condition, results of operations or cash
flows.
8
In April
2009, FASB issued FSP No. 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments. This FSP amends the
other-than-temporary impairment guidance in U.S. GAAP for debt securities to
make the guidance more operational and to improve the presentation and
disclosure of the other-than-temporary impairments on debt and equity securities
in the financial statements. Adoption of FSP 115-2 and FAS 124-2 during
the six months ended August 31, 2009 had no impact on our financial condition,
results of operations or cash flows.
In May
2009, the FASB issued Statement No. 165, Subsequent Events (“SFAS
165”). SFAS 165 requires entities to disclose the date through which
they have evaluated subsequent events and whether the date corresponds with the
release of their financial statements. We have evaluated subsequent
events through October 9, 2009 and have determined that we have no subsequent
events to report. Adoption of SFAS 165 during the six months ended
August 31, 2009, had no impact on our financial condition, results of operations
or cash flows.
In June
2009, the FASB issued Statement No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles (“SFAS 168”). SFAS 168 will become the single
source of authoritative nongovernmental U.S. GAAP, superseding existing FASB,
American Institute of Certified Public Accountants (AICPA), Emerging Issues Task
Force (EITF), and related accounting literature. SFAS 168 reorganizes
the thousands of GAAP pronouncements into roughly 90 accounting topics and
displays them using a consistent structure. Also included is relevant
SEC guidance organized using the same topical structure in separate
sections. SFAS 168 will be effective for financial statements issued
for reporting periods that end after September 15, 2009. This will
have an impact on our financial statements since all future references to
authoritative accounting literature will be references in accordance with SFAS
168.
In
September 2009, the FASB issued Accounting Standards Update No. 2009-05, Fair Value Measurement and
Disclosures: Measuring Liabilities at Fair Value (“ASU
2009-05”). ASU 2009-05 is effective for the first reporting period
after September 2009. The guidance provides clarification on
measuring liabilities at fair value when a quoted price in an active market is
not available. In such circumstances, the ASU specifies that a
valuation technique should be applied that uses either the quote of the
liability when traded as an asset, the quoted prices for similar liabilities or
similar liabilities when traded as assets, or another valuation technique
consistent with existing fair value measurement guidance. We do not
believe we have any liabilities that will need to be measured at fair value and
anticipate no impact of this update on our financial condition, results of
operations or cash flows.
(3)
CASH AND CASH EQUIVALENTS
For
purposes of the balance sheet and statement of cash flows, we consider all
highly liquid investments available for current use with an original maturity of
three months or less to be cash equivalents. Any investments with an
original maturity of more than three months are classified as Certificates of
Deposit. The average balance of our general checking account balance
is generally in excess of $250,000, the current Federal Deposit Insurance
Corporation (“FDIC”) coverage limit. The FDIC provides unlimited coverage on
non-interest-bearing accounts. Amounts in interest-bearing accounts
which are in excess of $250,000 are at risk to the extent that their balances
exceed FDIC coverage. Money market investments typically do not have
FDIC protection. The amount of our cash accounts in excess of the
FDIC insurance limit at August 31, 2009, and February 28, 2009, was $12,760,912
and $13,289,475, respectively. We believe we have mitigated our exposure to loss
by placing deposits in a combination of two smaller, local banks and three of
the largest national financial institutions.
(4)
CERTIFICATES OF DEPOSIT
Certificates
of deposit are held in several banking institutions. Their original
maturities are greater than three months but do not exceed a
year. The FDIC currently insures all bank accounts up to
$250,000. The amount of our certificate of deposit accounts in excess
of the FDIC insurance limit at August 31, 2009, and February 28, 2009, was
zero and $1,933,244, respectively.
9
(5)
ACCOUNTS RECEIVABLE – TRADE
The
amounts shown on the balance sheets termed Accounts Receivable - Trade are
amounts reflecting transactions that have closed, and revenue has been
recognized, before the final funds are received to settle the
transactions. We also sometimes make non-interest-bearing advances to
facilitate a settlement transaction. We collect the advances
generally within 30 days after the transactions close, and we receive payment
before any of the parties involved in the transaction receive
funds. Our business model does not use leverage, so there are no
issues of collectability or adverse effects due to the current credit
environment. The amounts at August 31, 2009, and February 28, 2009,
were $10,290,458 and $10,057,386, respectively.
(6)
ACCOUNTS RECEIVABLE – EMPLOYEES AND OTHERS
The
amounts shown on the balance sheets termed Accounts Receivable – Employees and
Others are composed of a $250,000 receivable from an insurance company for a
policy maturity, $30,112 to a related- party company officer, $27,043 for an
equipment financing loan and $21,465 to various employees. The
company considers all receivables to be current and collectible. The
$250,000 insurance company receivable and the company officer receivable were
fully repaid with all accrued interest by October 9, 2009.
(7)
NOTES RECEIVABLE
The
amounts shown on the balance sheets termed Notes Receivable represent a note,
including interest at 5.0%, with a non-related partnership originally dated
January 8, 2008, and renewed with a guaranty and security agreement on January
23, 2009. The due date was February 28, 2009. Although not
collected by that date, we believe this note will be fully repaid with all
accrued interest during the next fiscal period. The amounts,
including accrued interest, at August 31, 2009, and February 28, 2009, were
$568,079 and $554,918, respectively.
(8)
INVESTMENTS IN SECURITIES
Our
securities investments are income and equity mutual funds and are classified as
trading securities. Trading securities are recorded at fair value on
the balance sheet in current assets, with the change in fair value during the
period included in earnings.
Securities
investments that we have the positive intent and ability to hold to maturity are
classified as held-to-maturity securities and are recorded at amortized cost in
investments and other assets. Securities investments not classified
as either held-to-maturity or trading securities are classified as
available-for-sale securities. Available-for-sale securities are
recorded at fair value in investments on the balance sheet, with the change in
fair value during the period excluded from earnings and recorded net of tax as a
component of other comprehensive income.
Our
securities investments had unrealized losses of $2,295,480 and $3,536,667 at
August 31, and February 28, 2009, respectively. Based on our analysis
of these securities and the fact that they have recovered significantly in value
in the most recent periods, we have concluded that the gross unrealized losses
are temporary in nature. However, facts and circumstances may change
which could result in a decline in market value considered to be other than
temporary.
The cost
and estimated market value of the investment securities classified as
available-for-sale as of August 31 and February 28, 2009, are as
follows.
10
Cost
|
Gross
Unrealized
Losses
|
Fair
Value
|
||||||||||
Market
income funds, August 31, 2009
|
$ | 6,504,795 | $ | 2,295,480 | $ | 4,209,315 | ||||||
Market
income funds, February 28, 2009
|
$ | 6,240,730 | $ | 3,536,667 | $ | 2,704,063 |
(9)
INVESTMENT IN POLICIES
From time
to time, we purchase interests in policies to hold for investment purposes. FASB
Staff Position No. 85-4-1 Accounting for Life Settlement
Contracts by Third-Party Investors (FSP FTB 85-4-1) states that a
purchaser may elect to account for its investments in life settlement contracts
based on the initial investment at the purchase price plus all initial direct
costs. Continuing costs (policy premiums, statutory interest, and
direct external costs, if any) to keep the policy in force are
capitalized. The balance of “Investment in Policies” is routinely
tested for impairment and valued accordingly. We recorded $151,810 of
impairment on the policies for the year ended February 28, 2009. We
recorded an additional $33,840 of impairment for the six months ended August 31,
2009.
The
balance of “Investment in Policies” increased significantly during the last
quarter of fiscal 2009 and in the first quarter ended May 31, 2009, the majority
of which resulted from a settlement of a case with the State of
Colorado. The Securities Commissioner for the State of Colorado filed
an action alleging violations of the Colorado Securities Act in connection with
certain life settlements transacted through our subsidiary,
LPI. Under the terms of the settlement, LPI agreed to offer to
purchase the life settlements from the Colorado investors alleged in the
complaint, and all purchasers that accepted the purchase offer received
additional compensation for the purchase equal to statutory
interest. As of February 28, 2009, we had purchased interests in 260
policies and paid $6,318,665, including $1,286,833 of statutory interest related
to the Colorado settlement. In the first quarter, we purchased
interests in an additional 264 policies related to the Colorado settlement and
paid $6,441,625, including $1,413,908 of statutory interest. LPI
completed this purchase offer by May 31, 2009. The total amount paid
to the purchasers who accepted this offer totaled interests in 524 policies and
$12,760,290, of which $2,700,741 represented the payment of statutory
interest.
The table
below describes the Investment in Policies account at August 31,
2009.
Remaining Life Expectancy
(in years)
|
Number of Life
Settlement
Contracts
|
Carrying
Value
|
Face
Value
|
|||||||||
0-1
|
548 | $ | 6,087,975 | $ | 9,551,278 | |||||||
1-2
|
161 | 3,899,675 | 5,828,786 | |||||||||
2-3
|
182 | 4,650,581 | 7,628,497 | |||||||||
3-4
|
56 | 1,234,212 | 2,430,353 | |||||||||
4-5
|
17 | 338,243 | 617,151 | |||||||||
Thereafter
|
- | - | - | |||||||||
Total
|
964 | $ | 16,210,686 | $ | 26,056,065 |
Remaining
life expectancy for year 0-1 includes all policies that have exceeded their
original life expectancy plus those policies that are scheduled to reach their
original life expectancy during the next 12 months. Remaining life
expectancy is based on original life expectancy estimates and is not an
indication of expected maturity. Actual maturity dates in any
category may vary significantly (either earlier or later) from the remaining
life expectancies reported above.
Premiums
to be paid for each of the five succeeding fiscal years to keep the life
settlement contracts in force as of August 31, 2009 are as follows.
Year
1
|
$ | 159,200 | ||
Year
2
|
282,700 | |||
Year
3
|
762,943 | |||
Year
4
|
280,742 | |||
Year
5
|
61,467 | |||
Total
estimated premiums
|
$ | 1,547,052 |
11
(10)
INVESTMENT IN CORPORATION
The
amount shown on the balance sheet termed “Investment in Corporation” is an
investment in an unaffiliated corporation created for the acquisition of life
settlement interests. On August 26, 2008, we entered into a
contractual agreement to purchase an interest in a limited partnership at a
total cost of $5 million. LPI performed policy-purchasing
services for this partnership and earned fees from it as it would from any other
LPI client. On May 31, 2009, our interest in the partnership was
converted from an equity method investment in a partnership to a cost method
investment in a corporation. As of August 31, 2009, we owned 15.9% of
the corporation, valued at $5.3 million. Fair market value for this
asset is not readily determinable. We have considered any potential
impairment to the investment and believe no adjustment to the investment value
is warranted.
(11)
CREDIT LINE
In the
event we require credit to facilitate our short-term cash flow management and
operating capital requirements, we maintain a credit line. It is
secured by cash and securities on deposit. As of August 31, 2009, it
carried an interest rate at Wall Street Journal Prime Rate of 3.25% and had
a borrowing, and available, base of $2.7 million. There was no
outstanding balance as of August 31 and February 28, 2009.
(12)
LONG-TERM DEBT
We
retired all of our outstanding long-term debt on April 28, 2009. As
of February 28, 2009, we had $736,356 of long-term debt, secured by land and an
office building with a net book value of $895,366.
(13)
INCOME TAXES
Temporary
timing differences between the reporting of income and expenses for financial
and income tax reporting purposes at August 31, 2009, result in a decrease in
the net deferred tax asset of $245,091. We believe the net deferred
tax asset to be fully realizable.
Following
are the components of the net deferred tax asset:
Aug. 31, 2009
|
Feb. 28, 2009
|
|||||||
Deferred
tax liability:
|
||||||||
Depreciation
|
$ | (153,826 | ) | $ | (152,732 | ) | ||
Deferred tax assets:
|
||||||||
Unrealized
loss on investments
|
803,418 | 1,237,834 | ||||||
Accrued
contingency costs
|
75,792 | 117,124 | ||||||
Accrued
vacation costs
|
38,824 | 31,555 | ||||||
Reserve
for premium advances
|
2,108,455 | 1,895,817 | ||||||
Reserve
for policy impairment
|
64,978 | 53,134 | ||||||
Reserve
for acquired life insurance policies
|
44,695 | 44,695 | ||||||
Total
deferred tax assets
|
3,136,162 | 3,380,159 | ||||||
Total net deferred income tax asset
|
$ | 2,982,336 | $ | 3,227,427 |
12
With a
few insignificant exceptions, we are no longer subject to U.S. federal, state or
local examinations by tax authorities for fiscal years 2005 and
prior.
Accounting for Uncertainty in Income
Taxes. In June 2006, the FASB issued Interpretation of FASB Statement No.
109 (“FIN 48”). FIN 48 is intended to clarify the accounting
for uncertainty in income taxes recognized in a company’s financial statements
and prescribes the recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance
on de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition.
Under FIN
48, evaluation of a tax position is a two-step process. The first
step is to determine whether it is more-likely-than-not that a tax position will
be sustained upon examination, including the resolution of any related appeals
or litigation based on the technical merits of that position. The
second step is to measure a tax position that meets the more-likely-than-not
threshold to determine the amount of benefit to be recognized in the financial
statements. A tax position is measured at the largest amount of
benefit that is greater than 50% likely of being realized upon the ultimate
settlement.
Tax
positions that previously failed to meet the more-likely-than-not recognition
threshold should be recognized in the first subsequent period in which the
threshold is met. Previously recognized tax positions that no longer
meet the more-likely-than-not criteria should be de-recognized in the first
subsequent financial reporting period in which the threshold is no longer
met.
(14)
|
COMPREHENSIVE
INCOME PER SHARE, SHAREHOLDERS’ EQUITY, STOCK TRANSACTIONS
AND COMMON STOCK OPTIONS
|
Comprehensive
income for the quarters ended August 31, 2009 and 2008, was $7,893,433 and
$6,030,828, respectively. Basic and diluted earnings per share for
comprehensive income for the quarters ended August 31, 2009 and 2008, net of
tax, were $0.53 and $0.41, respectively. Comprehensive income for the
six months ended August 31, 2009 and 2008, was $15,877,256 and $12,395,170,
respectively. Basic and diluted earnings per share for comprehensive
income for the six months ended August 31, 2009 and 2008, net of tax, were $1.07
and $0.83, respectively.
Dividends. We declared and paid
dividends when and in the amounts as set forth in the following
table:
Date Declared
|
Date Paid
|
Dividend Amount*
|
||||
02/08/08
|
03/14/08
|
$ | 0.0600 | |||
05/21/08
|
06/16/08
|
$ | 0.0700 | |||
08/07/08
|
09/15/08
|
$ | 0.0700 | |||
10/22/08
|
12/15/08
|
$ | 0.0800 | |||
02/24/09
|
03/16/09
|
$ | 0.0700 | |||
05/07/09
|
06/15/09
|
$ | 0.0700 | |||
05/14/09
|
06/15/09
|
$ | 0.2500 | |||
07/27/09
|
09/15/09
|
$ | 0.2500 |
________________
*
The dividend amounts reflect historical payments and are not adjusted for any
stock splits.
Stock Split. On January 6, 2009, our
board of directors authorized a five-for-four split of the common stock affected
in the form of a stock dividend to be distributed on or about February 16, 2009,
to holders of record on February 6, 2009. Accordingly, all references
to numbers of common shares and per share data in the accompanying financial
statements have been adjusted to reflect the stock split on a retroactive
basis. The par value of the additional shares of common stock issued
in connection with the stock split was credited to “Common stock” and a like
amount charged to “Additional paid-in-capital”. To accommodate this
and a previous split on August 15, 2007, we increased our authorized common
stock from 10,000,000 shares to 18,750,000 shares.
13
(15)
FAIR VALUE MEASUREMENTS
In
September 2006, the FASB issued Statement No. 157, “Fair Value Measurements”
(“SFAS No. 157”). SFAS No. 157 addresses how
companies should measure fair value when they are required to use a fair value
measure for recognition or disclosure purposes under GAAP.
SFAS No. 157 defines fair value, establishes a framework for measuring
fair value and expands disclosures about fair value
measurements. SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007. Effective March 1, 2008, management adopted
SFAS No. 157 with the exception of certain non-financial assets and
non-financial liabilities that were specifically deferred by SFAS No.
157-2. In February 2008, the FASB issued Staff Position No.
SFAS 157-2 (FSP No.157-2), Effective Date of FASB Statement
No. 157, that defers the
effective date of SFAS No. 157 for one year for certain nonfinancial assets
and nonfinancial liabilities. Adoption of SFAS 157-2 at March 1,
2008, did not have any impact on our financial condition, results of operations
or cash flows.
In
February 2008, the FASB agreed to defer the effective date of SFAS No. 157 for
one year for certain nonfinancial assets and liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). Examples of items that would be deferred
include:
|
·
|
Nonfinancial
assets and nonfinancial liabilities that initially are measured at fair
value in a business combination or other new basis event, but are not
measured at fair value in subsequent
periods;
|
|
·
|
Asset
retirement obligations that are measured at fair value at initial
recognition, but are not measured at fair value in subsequent
periods; or
|
|
·
|
Nonfinancial
liabilities for exit or disposal activities that are measured at fair
value at initial recognition, but are not measured at fair value in
subsequent periods.
|
The term
inputs refers to the
assumptions that market participants use in pricing the asset or
liability. SFAS No. 157 distinguishes between observable inputs and unobservable
inputs. Observable inputs reflect the assumptions market
participants would use in pricing the asset or liability based on market data
obtained from independent sources. Unobservable inputs reflect an
entity’s own assumptions about the assumptions market participants would use in
pricing the asset or liability. SFAS No. 157 indicates that valuation
techniques should maximize the use of observable inputs and minimize the use of
unobservable inputs. SFAS No. 157 establishes a fair value hierarchy
that prioritizes the inputs used in valuation techniques and creates the
following three broad levels, with Level 1 being the highest
priority:
|
·
|
Level
1 inputs: Level 1 inputs are quoted market prices in active markets for
identical assets or liabilities that are accessible at the measurement
date (e.g., equity securities traded on the New York Stock
Exchange).
|
|
·
|
Level
2 inputs: Level 2 inputs are from other than quoted market prices included
in Level 1 that are observable for the asset or liability, either directly
or indirectly (e.g., quoted market prices of similar assets or liabilities
in active markets, or quoted market prices for identical or similar assets
or liabilities in markets that are not
active).
|
|
·
|
Level
3 inputs: Level 3 inputs are unobservable (e.g., a company’s own data) and
should be used to measure fair value to the extent that observable inputs
are not available.
|
Following
is a table of Investment in Securities measured at fair value on a recurring
basis as of August 31 and February 28, 2009, using quoted prices in active
markets for identical assets (Level 1); significant other observable inputs
(Level 2); and significant unobservable inputs (Level 3).
14
Description
|
Level 1:
Quoted Prices in
Active Markets for
Identical Assets
|
Level 2:
Significant Other
Observable Inputs
|
Level 3:
Significant
Unobservable Inputs
|
Total
|
||||||||||||
August
31, 2009
|
$ | 4,209,315 | - | - | $ | 4,209,315 | ||||||||||
February
28, 2009
|
$ | 2,704,063 | - | - | $ | 2,704,063 |
Our
financial assets and liabilities are cash and cash equivalents, certificates of
deposit, accounts receivable, investments in securities, investments in
policies, accounts payable and accrued liabilities. The recorded
values of cash and cash equivalents, certificates of deposit, accounts
receivable, accounts payable, and accrued liabilities approximate their fair
values based on their short-term nature. The recorded value of
investments in securities is based on fair value and is discussed in
Note 7. The carrying value of our investment in policies totaled
$16,210,686, which includes $176,283 of capitalized premiums, and has an
estimated fair value of $14,185,062. Fair value of the investment in
policies account was calculated by performing a net present value calculation of
the face amount of the life policies for the total portfolio.
In April
2009, the FASB issued Staff Position No. SFAS 157-4 (FSP No.157-4), Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly, that
provides additional guidance for estimating fair value in accordance with FASB
Statement No. 157, when the volume and level of activity for the asset or
liability have significantly decreased. FSP No. 157-4 also includes
guidance on identifying circumstances that indicate a transaction is not
orderly. Adopted during the quarter ended August 31, 2009, FSP No.
157-4 had no impact on our financial condition, results of operations or cash
flows.
(16)
CONTINGENCIES
LPI is
aware of certain instances wherein the insurance companies denied payment on
policies in which it arranged the settlement with purchasers. Most of
these denials are related to unforeseeable reductions in face
value. Face value of the policies in question total $344,249 and are
recorded in accrued settlement expense at August 31, 2009. During the
six months ended August 31, 2009, we did not accrue any additional liability for
future claims that might arise in relation to these policies. We paid
$118,092 of settlements during the six months which had been accrued in previous
periods.
We record
provisions in the Consolidated Condensed Financial Statements for pending
litigation when we determine that an unfavorable outcome is probable and the
amount of the loss can be reasonably estimated. Except as discussed
elsewhere in this note:
(i) management has not concluded that it is probable that a loss has been
incurred in any pending litigation; or (ii) management is unable to
estimate the possible loss or range of loss that could result from an
unfavorable outcome of any pending litigation; and (iii) accordingly,
management has not provided any amounts in the Consolidated Condensed Financial
Statements for unfavorable outcomes, if any.
It is
possible that our consolidated results of operations, cash flows or financial
position could be materially affected in a particular fiscal quarter or fiscal
year by an unfavorable outcome or settlement of certain pending
litigation. Nevertheless, although litigation is subject to
uncertainty, management believes and we have been so advised by counsel handling
the respective cases that we have a number of valid claims and defenses in all
pending litigation to which we are a party, as well as valid bases for appeal of
adverse verdicts against us. All such cases are, and will continue to
be, vigorously defended and all valid counterclaims pursued. However,
we may enter into settlement discussions in particular cases if we believe it is
in the best interests of our shareholders to do so.
(17)
PENSION AND OTHER POST-RETIREMENT BENEFITS
We
established a 401(k) retirement plan on March 1, 2007. All employees
were eligible to participate on January 1, 2008, if they met specified
employment requirements. The 401(k) has a matching feature whereby we
will make an annual matching contribution to each participant’s plan account
equal to 100% of the lesser of the participant’s contribution to the plan for
the year or 4% of the participant’s eligible compensation for that
year. The contribution expense for our matching contributions to the
401(k) plan for the six months ended August 31, 2009, was $51,825 and for the
six months ended August 31, 2008, was $44,100.
15
(18)
RELATED PARTY TRANSACTION
We
periodically use an aircraft owned by our Chairman, Mr. Pardo, and pay him the
incremental costs of our use, as described in applicable Federal Aviation
Administration regulations (FAA Part 91, subpart F). We believe the
cost is well-below the fair rental value for such use. In the six
months ended August 31, 2009 and 2008, we paid Mr. Pardo $188,739 and $60,283,
respectively, for such use.
(19)
CORRECTION OF ERRORS IN PREVIOUSLY ISSUED FINANCIAL
STATEMENTS
We made
two changes that affected the six months ended August 31, 2008 Consolidated
Statement of Cash Flows. We moved $1,912,214 from Cash and Cash
Equivalents to a new line item called Certificates of Deposit, and we moved
$4,265,487 of Investment in Securities from Current Assets to Other
Assets. These changes more accurately describe their
nature. Cash held in certificates of deposit with original maturity
dates of more than three months are more properly described as certificates of
deposit. Investment in securities with the intention of holding them
for longer than 12 months are more properly described as
long-term. These changes are considered corrections of errors in
previously issued financial statements and, accordingly, the Consolidated
Statement of Cash Flows for fiscal 2009 are noted as
“Restated”. These changes had no effect on retained earnings,
components of shareholders’ equity, earnings per share, or results of operations
as reported in previous periods.
Statement of Cash Flows
|
Corrected
|
As Originally
Shown
|
||||||
Investment
in certificates of deposit
|
$ | (827,262 | ) | $ | - | |||
Net
decrease in cash and cash equivalents
|
$ | (5,799,863 | ) | $ | (4,972,600 | ) | ||
Cash
and cash equivalents, end of period
|
$ | 1,312,684 | $ | 3,224,899 |
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
Special
Note: Certain statements set forth below under this caption constitute
“forward-looking statements” within the meaning of the Reform
Act. See “Special Note Regarding Forward-Looking Statements” in the
Notes to Consolidated Condensed Financial Statements.
We
provide the following discussion to assist in understanding our financial
position as of August 31, 2009, and results of operations for the three and
six months ended August 31, 2009 and 2008. As you read this
discussion, refer to our Consolidated Condensed Statements of Income and our
Consolidated Condensed Balance Sheet. We analyze and explain the
differences between periods in the material line items of these
statements. We presume that readers have read or have access to our
Annual Report on Form 10-K for Fiscal 2009. The Notes to the
Consolidated Condensed Financial Statements contained in our Annual Report note
the significant accounting policies used in preparing our financial statements,
including policies relating to the recognition of revenue and the recording of
investments in life insurance policies. We presume that readers
understand the effect of these policies.
Critical
Accounting Estimates, Assumptions and Policies
Our
discussion and analysis of financial condition and results of operations are
based on our consolidated condensed financial statements that were prepared in
accordance with accounting principles generally accepted in the United States of
America. To guide our preparation, we follow accounting policies,
some of which represent critical accounting policies as defined by the
SEC. The SEC defines critical accounting policies as those that are
both most important to the portrayal of a company's financial condition and
results and require management's most difficult, subjective, or complex
judgment, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain and may change in subsequent
periods. Certain accounting estimates involve significant judgments,
assumptions and estimates by management that may have a material impact on the
carrying value of certain assets and liabilities, disclosures of contingent
liabilities, and the reported amounts of income and expenses during the
reporting period which management considers critical accounting
estimates. The judgments, assumptions and estimates used by
management are based on historical experience, management’s experience,
knowledge of the accounts and other factors that are believed to be
reasonable. Because of the nature of the judgments and assumptions
made by management, actual results may differ materially from these judgments
and estimates, which could have a material impact on the carrying values of
assets and liabilities and the results of our operations. Areas
affected by our estimates and assumptions are identified below.
16
We
recognize income at the time a settlement closes and the purchaser has obligated
itself to make the purchase. We defer $100 per viatical settlement
and $200 per life settlement to cover minor monitoring services provided
subsequent to the settlement date. We amortize this deferred cost over the
anticipated life expectancy of the insureds.
On March
27, 2006, FASB Staff Position No. FTB 85-4-1 Accounting for Life Settlement
Contracts by Third-Party Investors (FSP FTB 85-4-1) was
issued. The FASB Staff Position states that an investor may elect to
account for its investments in life settlement contracts using either the
investment method or the fair value method. The election shall be
made on an instrument-by instrument basis and is irrevocable. Under
the investment method, an investor shall recognize the initial investment at the
purchase price plus all initial direct costs. Continuing costs
(policy premiums and direct external costs, if any) to keep the policy in force
shall be capitalized. Under the fair value method, an investor
recognizes the initial investment at the purchase price. In
subsequent periods, the investor re-measures the investment at fair value in its
entirety at each reporting period and recognizes change in fair value earnings
(or other performance indicators for entities that do not report earnings) in
the period in which the changes occur. We adopted FSP FTB 85-4-1 as
of March 1, 2006 (the beginning of Fiscal 2007) and chose to value all of our
investments in life settlement contracts using the investment
method. As of August 31, 2009, the total of our investment in life
settlements held for our own account was valued at $16,210,686.
We
establish litigation and policy analysis loss reserves based on our best
estimates as to the ultimate outcome of contingent liabilities. This
reserve analysis is necessary to properly match current expenses to currently
recognized revenues and to recognize that there is a certain amount of liability
associated with litigation and policy losses. Through this reserve,
we recognize the estimated cost to settle pending litigation as an
expense. These estimates are reviewed on a quarterly basis and
adjusted to management’s best estimate of the anticipated liability on a
case-by-case basis. A high degree of judgment is required in
determining these estimated reserve amounts since the outcomes are affected by
numerous factors, many of which are beyond our control. As a result,
there is a risk that the estimates of future litigation and policy analysis loss
costs could differ from our currently estimated amounts. Any
difference between estimates and actual final outcomes should not have a
material impact on our financial statements.
As of
October 9, 2009, the only material change between our estimates and actual
results in the current or prior periods relates to the litigation with the State
of Florida. See Item1, Legal
Proceedings, Page 27. In that instance, we were unable to
estimate an amount or time with regard to the resolution of that action, so no
estimation of potential liability was made. That action was fully and
completely resolved during the current period, resulting in a charge of $770,000
to settlement expense in the most current quarter.
We must
make estimates of the collectability of accounts and notes receivable and
premium advances. The accounts associated with these areas are
critical to recognizing the correct amount of revenue in the proper
period. Because of the uncertainty about when policy advances will be
collected, we follow the practice of reserving all premium advances at the time
such advances are made. When premium advances are repaid, the
repayments are netted against premium expense. We have not
experienced any material changes in our estimates of collectability versus
actual results in the current or prior periods.
17
We review
the carrying value of the property and equipment for impairment whenever events
and circumstances indicate that the carrying value of an asset may not be
recoverable from the estimated future cash flows expected to result from its use
and eventual disposition. In cases where undiscounted expected future
cash flows are less than the carrying value, an impairment loss is recognized
equal to an amount by which the carrying value exceeds the fair value of
assets. The factors considered by management in performing this
assessment includes current operating results, trends and prospects, the manner
in which the property is used, and the effects of obsolescence, demand,
competition and other economic factors. Based on this assessment,
there was no impairment at August 31 and February 28, 2009.
We must
evaluate the useful lives of our property and equipment to assure that an
adequate amount of depreciation is being charged to
operations. Useful lives are based generally on specific knowledge of
an asset’s life in combination with the Internal Revenue Service rules and
guidelines for depreciable lives for specific types of assets.
We must
evaluate the carrying value of our investment in owned policies. We
adjust our total basis in the policies, (original cost plus capitalized
premiums), based on assumptions made about remaining life expectancy, funds
needed to maintain the asset until maturity, capitalization rates and potential
return. This evaluation provides us with any impairment of individual
policies and also provides us with an estimate of fair market
value.
We are
required to estimate our income taxes. This process involves
estimating our current tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and
liabilities. We must then assess the likelihood that our deferred tax
assets will be recovered from future taxable income, and, to the extent we
believe that recovery is not likely, we must establish a valuation
allowance. To the extent we establish a valuation allowance or
increase this allowance in a period, we must include a tax provision or reduce
our tax benefit in the statements of income. We use our judgment to
determine our provision or benefit for income taxes, deferred tax assets and
liabilities and any valuation allowance recorded against our net deferred tax
assets.
We cannot
predict what future laws and regulations might be passed that could have a
material effect on our results of operations. We assess the impact of
significant changes in laws and regulations on a regular basis and update the
assumptions and estimates used to prepare our financial statements when we deem
it necessary.
We have
not made any material changes to our critical accounting estimates or
assumptions or the judgments affecting the application of those estimates or
assumptions.
New
Accounting Pronouncements
In
September 2006, the FASB issued Statement No. 157, “Fair Value Measurements”
(“SFAS No. 157”). SFAS No. 157 addresses how companies
should measure fair value when they are required to use a fair value measure for
recognition or disclosure purposes under GAAP. SFAS No. 157 defines
fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007. Effective March 1, 2008,
management adopted SFAS 157 with the exception of certain non-financial assets
and non-financial liabilities that were specifically deferred by SFAS No.
157-2. In February 2008, the FASB issued Staff Position No.
SFAS 157-2 (FSP No.157-2), Effective Date of FASB Statement No.
157, that defers the effective date of SFAS 157 to fiscal years
beginning after November 15, 2008, for certain nonfinancial assets and
nonfinancial liabilities. Adoption of SFAS 157-2 at March 1, 2009,
did not have a material impact on our financial condition, results of operations
or cash flows. In April 2009, the FASB issued Staff Position No.
SFAS 157-4 (FSP No.157-4), Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly, that
provides additional guidance for estimating fair value in accordance with FASB
Statement No. 157, when the volume and level of activity for the asset or
liability have significantly decreased. FSP No. 157-4 also includes
guidance on identifying circumstances that indicate a transaction is not
orderly. Adoption of FSP No. 157-4 during the six months ended August
31, 2009 had no impact on our financial condition, results of operations or cash
flows.
18
In
December 2007, the FASB issued Statement No. 160, Non-Controlling Interests in Consolidated
Financial Statements — an amendment of ARB No.
51. SFAS No. 160, among other things, provides guidance and
establishes amended accounting and reporting standards for a parent company’s
non-controlling interest in a subsidiary. SFAS No. 160 was adopted on
March 1, 2009, and had no impact on our financial condition, results of
operations or cash flows.
In
March 2008, the FASB issued Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities (“SFAS
161”). SFAS No. 161 expands the disclosure requirements in SFAS No.
133, Accounting for Derivative
Instruments and Hedging Activities about an entity’s derivative
instruments and hedging activities. Adopted on March 1, 2009, we
currently have no derivatives and hedging activities and so the adoption of SFAS
No. 161 had no impact on our financial condition, results of
operations or cash flows.
In May
2008, the FASB issued Statement No. 162, The Hierarchy of Generally Accepted
Accounting Principles (“SFAS 162”). SFAS 162 identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with GAAP. SFAS 162 directs
the GAAP hierarchy to the entity, not the independent auditors, as the entity is
responsible for selecting accounting principles for financial statements that
are presented in conformity with GAAP. SFAS 162 became effective
on November 15, 2008. SFAS 162 does not have a material impact on our
financial condition, results of operations or cash flows.
In April
2009, FASB issued FSP No. 107-1/APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments. Entities shall include disclosures about
the fair value of financial instruments whenever it issues summarized financial
information for interim reporting periods. Entities shall disclose in
the body or in the accompanying notes of its summarized financial information
the fair value of all financial instruments for which it is practicable to
estimate that value, whether recognized or not recognized in the statement of
financial position, as required by Statement 107. Adopted March 1,
2009, FSP 107-1/APB28-1 had no impact on our financial condition, results of
operations or cash flows.
In April
2009, FASB issued FSP No. 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments. This FSP amends the
other-than-temporary impairment guidance in U.S. GAAP for debt securities to
make the guidance more operational and to improve the presentation and
disclosure of the other-than-temporary impairments on debt and equity securities
in the financial statements. Adoption of FSP 115-2 and FAS 124-2 during
the six months ended August 31, 2009, had no impact on our financial condition,
results of operations or cash flows.
In May
2009, the FASB issued Statement No. 165, Subsequent Events (“SFAS
165”). SFAS 165 requires entities to disclose the date through
which they have evaluated subsequent events and whether the date corresponds
with the release of their financial statements. We have evaluated
subsequent events through October 9, 2009 and have determined that we have no
subsequent events to report. Adoption of SFAS 165 during the six
months ended August 31, 2009, had no impact on our financial condition, results
of operations or cash flows.
In June
2009, the FASB issued Statement No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles (“SFAS 168”). SFAS 168 will become the single
source of authoritative nongovernmental U.S. GAAP, superseding existing FASB,
American Institute of Certified Public Accountants Emerging Issues Task Force,
and related accounting literature. SFAS 168 reorganizes the thousands
of GAAP pronouncements into roughly 90 accounting topics and displays them using
a consistent structure. Also included is relevant Securities and
Exchange Commission guidance organized using the same topical structure in
separate sections. SFAS 168 will be effective for financial
statements issued for reporting periods that end after September 15,
2009. This will have an impact on our financial statements since all
future references to authoritative accounting literature will be references in
accordance with SFAS 168.
19
In
September 2009, the FASB issued Accounting Standards Update No. 2009-05, Fair Value Measurement and
Disclosures: Measuring Liabilities at Fair Value (“ASU
2009-05”). ASU 2009-05 is effective for the first reporting period
after September 2009. The guidance provides clarification on
measuring liabilities at fair value when a quoted price in an active market is
not available. In such circumstances, ASU 2009-05 specifies that
a valuation technique should be applied that uses either the quote of the
liability when traded as an asset, the quoted prices for similar liabilities or
similar liabilities when traded as assets, or another valuation technique
consistent with existing fair value measurement guidance. We do not
believe we have any liabilities that will need to be measured at fair value and
anticipate no impact of this update on our financial condition, results of
operations or cash flows.
Life
Partners
General. Life
Partners Holdings, Inc. (“We” or “Life Partners”) is a financial services
company and the parent company of Life Partners, Inc. (“LPI”). LPI is
the oldest and one of the most active companies in the United States engaged in
the secondary market for life insurance known generally as “life
settlements”. These financial transactions involve the purchase of
the life insurance policies of terminally ill persons (viatical settlements) or
elderly persons (life settlements) at a discount to their face value for
investment purposes.
The Secondary Market for Life
Insurance Policies. LPI was incorporated in 1991 and has
conducted business under the registered service mark “Life Partners” since
1992. Our operating revenues are derived from fees for facilitating
viatical and life settlement transactions. Both viatical and life
settlement transactions involve the sale of an existing life insurance policy to
another party. By selling the policy, the policyholder receives an
immediate cash payment to use as he or she wishes. The purchaser
takes an ownership interest in the policy at a discount to its face value and
receives the death benefit under the policy when the insured dies.
Over the
past few years, the distinction between viatical and life settlements has
diminished and the markets have largely merged. Many state
regulations govern both types of transactions in the same manner and the
services we provide for both types of transactions are the
same. Thus, we view both viatical and life settlements to be within
the same line of business and do not distinguish between them for financial
reporting purposes. Throughout this report, we refer to all of our
transactions generally as “life settlements”.
We are a
financial services company, providing purchasing services for life settlements
to our client base. We do this by matching life settlors with
purchasers. We facilitate these transactions by identifying,
examining, and purchasing the policies as agent for the
purchasers. To meet market demand and maximize our value to our
clients, we have made significant investment in proprietary software and
processes that enable us to facilitate a higher volume of transactions while
maintaining our quality controls. Since our inception, we have
facilitated over 98,000 purchaser transactions associated with the purchase of
over 6,100 policies totaling over $2.1 billion in face value. We
believe our experience, infrastructure and intellectual capital gives us a
unique market position and will enable us to maintain sustainable growth within
the life settlement market.
The
following table shows the number of settlement contracts we have transacted, the
aggregate face values of those contracts, and the revenues we derived, for the
three and six months ended August 31, 2009 and 2008:
20
Three Months
|
Six Months
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Number
of settlements
|
52 | 50 | 104 | 98 | ||||||||||||
Face
value of policies
|
$ | 148,942,938 | $ | 187,830,823 | $ | 285,205,442 | $ | 369,170,531 | ||||||||
Average
revenue per settlement
|
$ | 558,761 | $ | 495,775 | $ | 543,261 | $ | 502,315 | ||||||||
Net
revenues derived*
|
$ | 16,201,940 | $ | 13,411,954 | $ | 31,487,424 | $ | 25,672,228 |
__________________
*
The revenues derived are exclusive of brokerage and referral
fees.
We have
increased our efforts to market our services to institutional clients and have
been successful in attracting institutional clients. We will continue
these marketing efforts to institutions and seek to develop services and lines
of business specifically tailored for the needs of institutional
clients.
Comparison
of the Three Months Ended August 31, 2009 and 2008
We
reported net income of $7,625,015 for the three months ended August 31, 2009
(“the Second Quarter of this year”), compared to net income of $6,603,491 for
the three months ended August 31, 2008 (“the Second Quarter of last
year”). Our stronger net income resulted primarily from a 17.2%
increase in revenues and our ability to reduce brokerage fees. The number
of settlements transacted increased from 50 to 52, the average revenue per
settlement increased by 12.7%, and total revenues net of brokerage fees
increased by 20.8%.
Revenues: Revenues increased
by $4,266,841 or 17.2% from $24,788,725 in the Second Quarter of last year to
$29,055,566 in the Second Quarter of this year. This increase was due
primarily to a 12.7% increase in our average revenue per settlement from
$495,775 in the Second Quarter of last year to $558,761 in the Second Quarter of
this year. This, in conjunction with reduced brokerage and licensee
fees, resulted in a 20.8% increase in the net revenues derived.
During
the periods, demand for our services remained strong and the number of policies
presented to us which met our purchasing qualifications remained
steady. Growth in supply of policies with higher face values
continued to increase and we anticipate this supply trend to continue for the
foreseeable future. Most of our competitors have adopted a single or
preferred client business model, which relies on a relatively narrow purchaser
base. In contrast, we employ a multi-client business model and our
purchaser base is much broader. While a single purchaser may account
for a substantial share of revenues during a particular quarterly period, we do
not intend to become reliant upon any single purchaser and expect that no single
purchaser will account for a substantial share of revenues during the
long-term.
We
believe the increasing demand for our services comes from several factors, one
of which is an investment trend toward diversifying investment portfolios and
avoiding economically sensitive investments. Returns on life
settlements are based on the inherent value in the face value of life insurance
policies, which are purchased at a discount to face value and adjusted for
projected future premiums and the projected holding period of the policy to
maturity. For this reason, life settlement returns are not correlated
to traditional equity and debt markets and commodity investments. We
benefit from the investment community searching for non-correlated, asset-based
investments. Although we serve both domestic and international
purchasers, domestic purchasers accounted for 98.5% of our revenues during the
Second Quarter of this year. The ratio of domestic clients to
international clients was relatively unchanged from last year. We do
not anticipate significant changes in the ratio between domestic and foreign
business during the remainder of this fiscal year.
21
Another
contributing factor has been the greater supply of higher face value
policies. We believe there is a growing awareness of the secondary
market for insurance policies among potential sellers, especially for those with
higher face value policies. This growing awareness has resulted in an
expansion of the supply of eligible policies, especially policies with higher
face values. We believe much of our increased business is due to the
greater supply of higher face value policies, and we believe this trend will
continue.
Brokerage and Referral Fees:
Brokerage and referral fees increased 13.0% or $1,476,855 from
$11,376,771 in the Second Quarter of last year to $12,853,626 in the Second
Quarter of this year. Brokerage and referral fees as a percentage of
gross revenue declined from 45.8% in the Second Quarter of last year to 44.2% in
the Second Quarter of this year. In the Second Quarter of this year,
broker referrals accounted for 100% of the total face value of policies
transacted compared with 99.9% of the policies transacted in the Second Quarter
of last year. Due to an increase in the number of brokers in the
market that are presenting policies to us, we have noted a reduction in the
concentration of brokers that provide policies to us. For the Second
Quarter of this year, only two brokers accounted for more than 10% of the face
value of all completed transactions, and constituted 29.2% of the total face
value of completed transactions compared to the Second Quarter of last year in
which policies presented from five brokers having 10.0% or more of the face
value transacted constituted 65.7% of the total face value of all completed
transactions.
Brokerage
and referral fees generally increase or decrease with revenues, face values of
policies transacted and the volume of transactions, although the exact ratio may
vary according to a number of factors. Brokers may adjust their fees
with the individual policyholders whom they represent. In some
instances, several brokers may compete for representation of the same seller,
which may result in lower broker fees. Referral fees also vary
depending on factors such as varying contractual obligations, market demand for
a particular kind of policy or life expectancy category and individual
agreements between clients and their referring financial planners. No
broker fees are paid when a life settlor is not represented by a broker and the
life settlor presents a policy to us directly.
Some
states are moving to license life settlement brokerage activity, which may
result in the capping of fees or greater disclosure of fees, either of which
would tend to lower the fees.
Expenses: Operating and
administrative expenses increased by 30.5% or $1,186,677 from $3,891,061 in the
Second Quarter of last year to $5,077,738 in the Second Quarter of this year due
primarily to increases in settlement costs, aircraft travel expenses and
employee and executive bonuses due to increased profitability. A
significant portion of the settlement costs was the result of a settlement with
the State of Florida in the amount $770,000. See Item 1, Legal Proceedings, Page
27.
During
the Second Quarters of this year and last year, we made premium advances of
$542,651 and $608,776, respectively, and were reimbursed $148,141 and $100,784,
respectively. In the typical life settlement, policy premiums for the
insured’s projected life expectancy are added to the purchase price and reserved
to pay future premiums. When the premium reserve is exhausted, purchasers
are contractually obligated to pay policy premiums. In some instances,
purchasers have failed to pay the premiums and we have advanced the premiums to
maintain the policies. While we have no contractual or other legal
obligation to do so, and do not do so in every instance, we have made premium
advances as an accommodation to certain purchasers based on our assumptions that
we will ultimately recoup the advances. While some purchasers repay the
advances directly, reimbursements these premiums will come most likely as a
priority payment from the policy proceeds when an insured dies. We record
the premium advances as an expense at the time of the advance and treat
reimbursements as a reduction in this expense. We are unable to estimate
the amount of any future advances we may elect to make or the amount of
reimbursements we are likely to receive. Because of our inability to
estimate these amounts, we do not accrue amounts for future advances or
reimbursements.
Other
income and expense increased from $483,336 of income in the Second Quarter
of last year to $536,952 of income in the Second Quarter of this year primarily
due to gains from maturities of owned policies. The Second Quarter of
this year shows no interest expense compared to the Second Quarter of last year
due to retiring the long-term debt in April 2009.
22
Income Taxes: Income tax
expense increased by $635,401, from $3,400,738 in the Second Quarter of last
year to $4,036,139 in the Second Quarter of this year. The increase
was due primarily to a $1,656,925 increase in income before income taxes, taxed
at 35%.
Comparison
of the Six Months Ended August 31, 2009 and 2008
We
reported net income of $15,070,484 for the six months ended August 31, 2009
(“the First Six Months of this year”), compared to net income of $12,852,065 for
the six months ended August 31, 2008 (“the First Six Months of last
year”). Our stronger net income resulted primarily from a 14.8%
increase in revenues and our ability to reduce brokerage fees and the increase
in interest and other income. The number of settlements transacted
increased from 98 to 104, the average revenue per settlement increased by 8.1%,
and revenues net of brokerage fees increased by 22.7%.
Revenues: Revenues increased
by $7,272,299 or 14.8% from $49,226,871 in the First Six Months of last year to
$56,499,170 in the First Six Months of this year. This increase was
due primarily to an 8.1% increase in our average revenue per settlement from
$502,315 in the First Six Months of last year to $543,261 in the First Six
Months of this year, continuing a trend toward transactions with larger face
amounts. This, in conjunction with reduced brokerage and licensee
fees, resulted in a 22.7% increase in the net revenues derived.
During
the periods, demand for our services remained strong and the number of policies
presented to us which met our purchasing qualifications remained
steady. Growth in the supply of policies with higher face values
continued to increase and we anticipate this supply trend to continue for the
foreseeable future. Most of our competitors have adopted a single or
preferred-client business model, which relies on a relatively narrow purchaser
base. In contrast, we employ a multi-client business model, and our
purchaser base is much broader. While a single purchaser may account
for a substantial share of revenues during a particular quarterly period, we do
not intend to become reliant upon any single purchaser and expect that no single
purchaser will account for a substantial share of revenues during the long
term.
We
believe the increasing demand for our services results from several factors, one
of which is an investment trend toward diversifying investment portfolios and
avoiding economically sensitive investments. Returns on life
settlements are based on the inherent value in the face value of life insurance
policies, which are purchased at a discount to face value and adjusted for
projected future premiums and the projected holding period of the policy to
maturity. For this reason, life settlement returns are not correlated
to traditional equity and debt markets and commodity investments. We
benefit from the investment community searching for non-correlated, asset-based
investments. Although we serve both domestic and international
purchasers, during the First Six Months of this year, domestic purchasers
accounted for 98.3% of our revenues. The ratio of domestic clients to
international clients was relatively unchanged from last year. We do
not anticipate significant changes in the ratio between domestic and foreign
business during the remainder of this fiscal year.
Another
contributing factor has been the greater supply of higher face value
policies. We believe there is a growing awareness of the secondary
market for insurance policies among potential sellers, especially for those with
higher face value policies. This growing awareness has resulted in an
expansion of the supply of eligible policies, especially policies with higher
face values. We believe much of our increased business is due to the
greater supply of higher face value policies, and we believe this trend will
continue.
23
Brokerage and Referral Fees:
Brokerage and referral fees increased 6.2% or $1,457,103 from $23,554,643
in the First Six Months of last year to $25,011,746 in the First Six Months of
this year. Brokerage and referral fees as a percentage of gross
revenue declined from 47.8% in the First Six Months of last year to 44.2% in the
First Six Months of this year. In the First Six Months of this year,
broker referrals accounted for 98.6% of the total face value of policies
transacted compared with 99.9% of the policies transacted in the First Six
Months of last year. Due to an increase in the number of brokers in
the market that are presenting policies to us, we have noted a reduction in the
concentration of brokers that provide policies to us and a decrease in brokerage
fees. For the First Six Months of this year, no brokers accounted for
more than 10% of the face value of all completed
transactions. Policies presented from five brokers having 10.0% or
more of face value transacted constituted 64.0% of the total face value of all
completed transactions during the First Six Months of last year.
Brokerage
and referral fees generally increase or decrease with revenues, face values of
policies transacted and the volume of transactions, although the exact ratio may
vary according to a number of factors. Brokers may adjust their fees
with the individual policyholders whom they represent. In some instances,
several brokers may compete for representation of the same seller, which may
result in lower broker fees. Referral fees also vary depending on
factors such as varying contractual obligations, market demand for a particular
kind of policy or life expectancy category and individual agreements between
clients and their referring financial planners. No broker fees are
paid when a life settlor is not represented by a broker and the life settlor
presents a policy to us directly.
Some
states are moving to license life settlement brokerage activity, which may
result in the capping of fees or greater disclosure of fees, either of which
would tend to lower the fees.
Expenses: Operating and
administrative expenses increased by 39.9% or $2,682,651 from $6,718,186 in the
First Six Months of last year to $9,400,837 in the First Six Months of this year
due primarily to increases in settlement costs; employee and executive bonuses
due to increased profitability; investor relations; state franchise taxes due to
increased profitability; employee wages due to our higher number of employees;
and aircraft travel expenses. A significant portion of the settlement
costs was the result of a settlement with the State of Florida in the amount
$770,000. See Item
1, Legal Proceedings, Page 27.
During
the First Six Months of this year and last year, we made premium
advances of $1,113,739 and $967,338, respectively, and were reimbursed $307,014
and $198,974, respectively. In the typical life settlement, policy
premiums for the insured’s projected life expectancy are added to the purchase
price and reserved to pay future premiums. When the premium reserve is
exhausted, purchasers are contractually obligated to pay policy premiums.
In some instances, purchasers have failed to pay the premiums and we have
advanced the premiums to maintain the policies. While we have no
contractual or other legal obligation to do so, and do not do so in every
instance, we have made premium advances as an accommodation to certain
purchasers based on our assumptions that we will ultimately recoup the
advances. While some purchasers repay the advances directly,
reimbursements these premiums will come most likely as a priority payment from
the policy proceeds when an insured dies. We record the premium advances
as an expense at the time of the advance and treat reimbursements as a reduction
in this expense. We are unable to estimate the amount of any future
advances we may elect to make or the amount of reimbursements we are likely to
receive. Because of our inability to estimate these amounts, we do not
accrue amounts for future advances or reimbursements.
Other
income and expense increased from $850,618 of income in the First Six
Months of last year to $1,239,159 of income in the First Six Months of this year
primarily due to the $426,783 gain from the Investment in Partnership converting
to an Investment in Corporation at May 31, 2009, and gains from maturities of
owned policies.
Income Taxes: Income tax
expense increased by $1,302,667 from $6,952,595 in the First Six Months of last
year to $8,255,262 in the First Six Months of this year. The increase
was due primarily to a $3,521,086 increase in income before income taxes, taxed
at 35%.
24
Contractual
Obligations
The
following table summarizes our outstanding lease commitments as of August 31,
2009:
Payments Due By Year
|
||||||||||||||||||||
Contractual Obligations
|
Total
|
Less than 1
Year
|
1 to 3 Years
|
4 to 5 Years
|
After 5 years
|
|||||||||||||||
Lease
commitments
|
$ | 140,548 | $ | 59,997 | $ | 66,759 | $ | 13,792 | $ | - | ||||||||||
Total
|
$ | 140,548 | $ | 59,997 | $ | 66,759 | $ | 13,792 | $ | - |
Liquidity
and Capital Resources
Operating Activities: Net cash flows provided by
operating activities for the First Six Months of this year were
$14,708,402. The cash flows from operating activities resulted
primarily from net income of $15,070,484. Net cash flows provided by
operating activities for the First Six Months of last year were
$3,584,679. The cash flows from operating activities for last year
resulted primarily from net income of $12,852,065, an increase in accounts
payable of $2,605,313 and an increase in income taxes payable of $1,977,143,
reduced by an increase in accounts receivable of $13,808,783. The
large increase in accounts receivable for last year was due to large premium
finance loans outstanding at the end of the quarter.
Investing Activities: Net cash flow used in
investing activities was $4,911,477 during the First Six Months of this
year. This amount consists of $7,365,811 used for the purchase of
policies for investment purposes, $296,209 for purchases of property and
equipment and $264,064 invested in marketable securities less the $2,933,239 of
certificate of deposit maturities and $81,368 in return of equity in the
corporation investment. In comparison, in the First Six Months of
last year, we used $6,770,709 for investing activities, of which $5,266,597 was
for the purchase of policies for investment purposes, $827,262 for investments
in certificates of deposit, $399,908 for marketable securities and $276,942 for
purchases of property and equipment.
Financing Activities: We used $6,573,532 of net
cash in financing activities during the First Six Months of this
year. The components of financing activities are $5,794,459 for
dividends and $779,073 to retire our long term debt. We used
$2,613,833 of net cash in financing activities in the First Six Months of last
year. We paid dividends of $1,543,969, purchased treasury stock for
$699,051 and made payments of $370,813 on our long-term debt. Our
treasury stock purchases follow the Board’s decision of January 15, 2008, to
repurchase up to one million shares of our common stock when we believe market
conditions warrant and we have adequate funds. The authorized
resolution is still in effect. Since the authorization, we have
repurchased 165,338 shares at a total cost of $1,635,064. We did not make any
treasury stock purchases during the current First Six Months.
Working Capital and Capital
Availability: As
of August 31, 2009, we had working capital of $19,180,456. Although it is
unlikely we would use it, we maintain a credit line to facilitate our
short-term cash flow management and operating capital
requirements. The credit line is secured by cash and securities on
deposit. As of August 31, 2009, it carried an interest rate at Wall
Street Journal Prime Rate of 3.25% and had a borrowing, and available, base
of $2.7 million. There was no outstanding balance as of
August 31 or February 28, 2009.
We
believe future income from operating activities will generate sufficient profits
and cash flows to meet our anticipated working capital needs.
25
Outlook
We
continue to produce strong financial results and expect that our growth trends
will continue. We believe our company and our industry are
fundamentally sound and well positioned to deal with the current uncertainty in
the financial and capital markets. Our life settlements are not
correlated to the financial or commodities markets, which increases their appeal
in uncertain times. Further, we have comfortable amounts of cash and
cash equivalents. We carry no operational debt and do not rely on
leverage in our capital structure. We do rely, however, upon the
availability of investment capital. While it is conceivable that a
deep financial crisis could diminish the supply of investment capital throughout
the economy, our experience during the First Six Months of this year indicates
that greater investment capital will be placed in life
settlements. We believe this is due to the fact that returns in life
settlements are relatively attractive and not correlated to the performance of
the financial markets.
Our
operating strategy is to increase cash flows generated from operations by
increasing revenues while controlling brokerage and operating and administrative
expenses. We believe that domestic and international demand for life
settlements will continue to grow as the prospects for economic conditions
remain uncertain and investors look for alternative investments. In
response to the projected growth in demand for qualified life settlement
transactions, on the demand side, we are exploring the use of special purpose
entities to expand our market for life settlement investments and continue
efforts to attract institutional clients. On the supply side, we are
increasing our advertising and professional awareness marketing to potential
sellers of policies and to strengthen our broker network.
Off-Balance
Sheet Arrangements
We do not
engage in any off-balance sheet arrangements or transactions.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our risk
exposure in the financial markets consists of exposure to interest rate changes
and changes in the market values of our investments. Our risk
exposure to changes in interest rates relates primarily to our investment
portfolio. We invest our excess cash in depository accounts with
financial institutions and in income and equity-oriented investment
funds. We attempt to protect and preserve our invested funds by
limiting default, market, and reinvestment risk through portfolio
diversification and review of the financial stability of the institutions with
which we deposit funds. We do not hold derivative financial
instruments or financial instruments such as credit default swaps, auction rate
securities, mortgage-backed securities or collateralized debt obligations in our
investment portfolio.
Investments
in both fixed rate and floating rate interest earning instruments carry a degree
of interest rate risk. Because our business strategy does not rely on
generating material returns from our investment portfolio, we do not expect our
market risk exposure on our interest-bearing investment portfolio to be
material.
Some of
our investment funds may have investments in derivative instruments or other
structured securities resulting in indirect exposure for us. But, any
indirect exposure that we might have to these financial instruments through our
holdings in these funds is relatively small and thus
immaterial. Fixed rate securities may have their fair market value
adversely impacted due to a rise in interest rates, while floating rate
securities may produce less income than expected if interest rates
fall. Due in part to these factors, our future investment income may
fluctuate due to changes in interest rates. We may suffer losses in
principal if forced to sell securities that have declined in market value due to
negative market fluctuations and this potential loss may have a material impact
on our financial condition, results of operations or cash flows.
ITEM
4. CONTROLS AND PROCEDURES
Disclosure Controls and
Procedures. With the participation of our Chief Executive
Officer and Chief Financial Officer, we have evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”)), as of the end of the periods covered by this report.
Based upon such evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of such periods, our
disclosure controls and procedures were effective in ensuring that
(i) information required to be disclosed by us in the reports that we file
or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities Exchange
Commission’s rules and forms and (ii) information required to be disclosed
by us in the reports that we file or submit under the Exchange Act is
accumulated and communicated to our management, including our principal
executive and principal financial officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
26
Internal Control over Financial
Reporting. For the year ended February 28, 2009, our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act) were not effective as a result of reported material
weaknesses. We have taken the following steps that we believe will
address the issues associated with our material weaknesses over financial
footnote disclosures, which involve implementing process-focused changes to
improve the design and operation of the controls.
|
·
|
Developed
and improved maintenance of internal controls regarding the accounting for
investments in policies and in an outside
venture;
|
|
·
|
Improved
and updated the review of internal control documents, revising and
supplementing as needed, and documenting the
review;
|
|
·
|
Instituted
oversight and monitoring of accounting procedures and review of our
financial statements and footnote disclosures by an outside consulting
firm; and,
|
|
·
|
Incorporated
the use of standardized SEC and GAAP disclosure checklists during the
preparation and review of financial
statements.
|
We
implemented these changes during the quarter ended May 31, 2009. We
believe that testing of our internal controls and review of our financial
statements will determine that the enhanced controls are operating
effectively. Internal controls other than the reporting areas
reported as material weaknesses have not changed and are still in place and
functioning effectively.
Subsequent
to the evaluation and through the date of this filing of this report, other than
the material weaknesses noted in the Form 10-K for the fiscal year ended
February 28, 2009, there were no changes in our internal control over financial
reporting that have materially affected, or are reasonable likely to materially
affect, our internal control over financial reporting.
PART
II – OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
During
the First Six Months of this year and last year, we incurred settlement expenses
of $1,476,579 and $562,371, respectively, for the resolution of litigation or
potential litigation. In some instances, we have repurchased
interests in policies to settle claims. In these cases, only the
excess (if any) of the settlement payment over the investment cost of the
repurchased policy interest is charged to settlement expense. The
balance is recorded on our balance sheet as an asset under “Investments in
policies”, and the cash expenditure is recorded on our cash flow statement under
“Purchase of policies for investment purposes and capitalized
premiums”. For these types of settlements during the First Six Months
of this year, we recorded $7,202,561 for purchases of policies for investment
purposes, the bulk of which related to the settlement of a proceeding with the
Securities Commissioner for the State of Colorado. See footnote 8,
Investment in Policies, to the Consolidated Condensed Financial
Statements.
27
On March
28, 2008, in response to a Notice of Hearing received from the Florida Office of
Insurance Regulation, LPI filed a declaratory judgment action against the
Florida Commissioner of the Office of Insurance Regulation in the United States
District Court for the Northern District of Florida to determine whether LPI was
required to be licensed as a life settlement provider in order to purchase
policies from Florida residents. We claimed that the Florida Office
of Insurance Regulation did not have jurisdiction over LPI and that to assert
jurisdiction violated the Commerce Clause, Contracts Clause, and the Due Process
Clause of the United States Constitution. On July 28, 2009, the
matter was settled and the declaratory judgment action was dismissed pursuant to
a Consent Order entered into between Florida Insurance Commissioner and
LPI. Under the terms of the Consent Order, LPI denied that it had
violated any provision of Florida law, agreed to dismiss the declaratory
judgment action against the Office of Insurance Regulation, paid a settlement
amount of $770,000, and agreed to comply with the Florida Viatical Settlement
Act in the future. The Consent Order provides that nothing in the
order shall in any way be used as an admission of liability by LPI or as an
admission of any violation of Florida law and that the Florida Insurance
Commission shall not disapprove or refuse to accept LPI’s application for
licensure on the grounds that it entered into the Consent Order or the
allegations of the Florida Insurance Commission. The Consent Order
resolves all matters related to allegations of unlicensed transactions prior to
July 28, 2009. Because LPI has not accepted presentations from any Florida
residents since 2007, we believe that this settlement will have no material
effect on our future earnings or operations.
We are
subject to other legal proceedings in the ordinary course of
business. When we determine that an unfavorable outcome is probable
and the amount of the loss can be reasonably estimated, we reserve for such
losses. Except as discussed above: (i) management has not
concluded that it is probable that a loss has been incurred in any of our
pending litigation; or, (ii) management is unable to estimate the possible
loss or range of loss that could result from an unfavorable outcome of any
pending litigation; and, (iii) accordingly, management has not provided any
amounts in the consolidated financial statements for unfavorable outcomes, if
any.
It is
possible that our consolidated results of operations, cash flows or financial
position could be materially affected in a particular fiscal quarter or fiscal
year by an unfavorable outcome or settlement of any pending
litigation. Nevertheless, although litigation is subject to
uncertainty, management believes and we have been so advised by counsel handling
the respective cases, that we have a number of valid claims and defenses in all
pending litigation to which we are a party, as well as valid bases for appeal of
adverse verdicts against us. All such cases are, and will continue to
be, defended vigorously and all valid counterclaims pursued. However,
we may enter into settlement discussions in particular cases if we believe it is
in the best interests of our shareholders to do so. In some
instances, we have repurchased interests in policies to settle
claims. In these cases, only the excess, if any, of the settlement
payment amount over the investment value of the repurchased policy interest is
charged to settlement expense.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
We held
our 2009 Annual Meeting of Shareholders on August 6, 2009, the results of which
were reported under Item 8.01 in a Form 8-K, which was filed on
August 7, 2009. The information under Item 8.01 is
incorporated in response to this item.
ITEM
6. EXHIBITS
31.1
Rule 13a-14(a) Certifications
32.1
Section 1350 Certification
28
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date:
October 9, 2009
Life
Partners Holdings, Inc.
|
By: /s/ Brian D.
Pardo
|
Brian
D. Pardo
|
President
and Chief Executive Officer
|
(Signing
on behalf of the registrant and as principal
executive
officer)
|
By: /s/ David M.
Martin
|
David
M. Martin
|
Chief
Financial
Officer
|
29
EXHIBIT
INDEX
DESCRIPTION
OF EXHIBITS
Number
|
Description
|
Page
|
||
31.1
|
Rule
13a-14(a) Certifications
|
31-32
|
||
32.1
|
|
Section
1350 Certification
|
|
33
|
30