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EX-32.1 - LIFE PARTNERS HOLDINGS INC | v171060_ex32-1.htm |
EX-31.1 - LIFE PARTNERS HOLDINGS INC | v171060_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: November 30, 2009
or
o 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 o
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 o No o
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 o
|
Accelerated
filer x
|
Non-accelerated
filer o
(Do
not check if a smaller reporting company)
|
Smaller
reporting company o
|
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
Shares of
Common Stock, $.01 par value, outstanding as of November 30, 2009: 14,859,016
(15,024,354 issued and outstanding less 165,338 treasury
shares)
LIFE
PARTNERS HOLDINGS, INC.
TABLE
OF CONTENTS
PART
I.
|
FINANCIAL
INFORMATION
|
|
Item
1.
|
Financial
Statements
|
|
Consolidated
Balance Sheets – November 30, 2009 and February 28, 2009
|
3-4
|
|
Consolidated
Statements of Income - For the Three and Nine Months Ended
|
||
November
30, 2009 and 2008
|
5
|
|
Consolidated
Statements of Cash Flows - For the Nine Months Ended
|
||
November
30, 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
|
25
|
Item
4.
|
Controls
and Procedures
|
26
|
PART
II. OTHER INFORMATION
|
||
Item
1.
|
Legal
Proceedings
|
27
|
Item
6.
|
Exhibits
|
27
|
Signatures
|
28
|
|
Exhibit
Index
|
29
|
2
PART
I - FINANCIAL INFORMATION
LIFE
PARTNERS HOLDINGS, INC.
CONSOLIDATED
BALANCE SHEETS
NOVEMBER
30, 2009 (Unaudited) AND FEBRUARY 28, 2009
Page
1 of 2
ASSETS
November
30,
2009
|
February
28,
2009
|
|||||||
CURRENT
ASSETS:
|
||||||||
Cash
and cash equivalents
|
$ | 22,008,482 | $ | 15,261,217 | ||||
Certificates
of deposit
|
100,364 | 3,033,603 | ||||||
Accounts
receivable - trade
|
13,129,444 | 10,057,386 | ||||||
Accounts
receivable - employees and others
|
24,408 | 157,148 | ||||||
Notes
receivable
|
574,623 | 554,918 | ||||||
Prepaid
expenses
|
76,984 | 141,286 | ||||||
Total
current assets
|
35,914,305 | 29,205,558 | ||||||
PROPERTY
AND EQUIPMENT:
|
||||||||
Land
and building
|
2,270,016 | 2,131,285 | ||||||
Proprietary
software
|
511,405 | 499,046 | ||||||
Furniture,
fixtures and equipment
|
1,502,250 | 1,298,599 | ||||||
Transportation
equipment
|
9,800 | 9,800 | ||||||
Subtotal
|
4,293,471 | 3,938,730 | ||||||
Accumulated
depreciation
|
(1,578,362 | ) | (1,344,243 | ) | ||||
Net
property and equipment
|
2,715,109 | 2,594,487 | ||||||
OTHER
ASSETS:
|
||||||||
Premium
advances net of reserve for uncollectible of $6,449,109 and $5,416,621,
respectively
|
- | - | ||||||
Investment
in securities
|
4,471,091 | 2,704,063 | ||||||
Investments
in policies, including capitalized premiums
|
16,346,696 | 8,878,715 | ||||||
Investment
in corporation/partnership
|
5,483,755 | 4,935,875 | ||||||
Artifacts
and other
|
834,700 | 831,700 | ||||||
Deferred
income taxes
|
3,181,899 | 3,227,427 | ||||||
Total
other assets
|
30,318,141 | 20,577,780 | ||||||
Total
assets
|
$ | 68,947,555 | $ | 52,377,825 |
See the
accompanying summary of accounting policies and notes to the financial
statements.
3
LIFE
PARTNERS HOLDINGS, INC.
CONSOLIDATED
BALANCE SHEETS
NOVEMBER
30, 2009 (Unaudited) AND FEBRUARY 28, 2009
Page
2 of 2
LIABILITIES
AND SHAREHOLDERS' EQUITY
November
30,
2009
|
February
28,
2009
|
|||||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable
|
$ | 6,173,164 | $ | 5,068,961 | ||||
Accrued
liabilities
|
1,342,837 | 527,126 | ||||||
Dividends
payable
|
3,719,027 | 1,043,316 | ||||||
Accrued
settlement expense
|
596,867 | 462,341 | ||||||
Current
portion of long-term debt
|
- | 42,717 | ||||||
Deferred
revenue
|
238,200 | 227,300 | ||||||
Income
taxes payable
|
613,135 | 244,333 | ||||||
Total
current liabilities
|
12,683,230 | 7,616,094 | ||||||
LONG-TERM
DEBT, net of current portion shown above
|
- | 736,356 | ||||||
Total
liabilities
|
12,683,230 | 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
|
47,665,446 | 36,348,525 | ||||||
Accumulated
other comprehensive loss, net of taxes
|
(1,376,611 | ) | (2,298,640 | ) | ||||
Less:
treasury stock, 165,338 shares
|
(1,635,064 | ) | (1,635,064 | ) | ||||
Total
shareholders' equity
|
56,264,325 | 44,025,375 | ||||||
Total
liabilities and shareholders' equity
|
$ | 68,947,555 | $ | 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 NINE MONTHS ENDED NOVEMBER 30, 2009 AND 2008
(Unaudited)
Three
Months
Ended November 30,
|
Nine
Months
Ended November 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
REVENUES
|
$ | 30,967,256 | $ | 28,103,930 | $ | 87,466,426 | $ | 77,330,801 | ||||||||
BROKERAGE
FEES
|
14,503,000 | 13,857,587 | 39,514,746 | 37,412,230 | ||||||||||||
REVENUES,
NET OF BROKERAGE FEES
|
16,464,256 | 14,246,343 | 47,951,680 | 39,918,571 | ||||||||||||
OPERATING
AND ADMINISTRATIVE EXPENSES:
|
||||||||||||||||
General
and administrative
|
2,843,131 | 2,878,139 | 9,806,480 | 8,104,979 | ||||||||||||
Premium
advances, net
|
471,160 | 292,717 | 1,277,885 | 1,061,081 | ||||||||||||
Settlement
costs
|
477,821 | 390,510 | 1,954,400 | 952,881 | ||||||||||||
Depreciation
|
79,935 | 82,514 | 234,119 | 243,125 | ||||||||||||
Total
operating and administrative expenses
|
3,872,047 | 3,643,880 | 13,272,884 | 10,362,066 | ||||||||||||
INCOME
FROM OPERATIONS
|
12,592,209 | 10,602,463 | 34,678,796 | 29,556,505 | ||||||||||||
OTHER
INCOME (EXPENSES):
|
||||||||||||||||
Interest
and other income
|
464,307 | 650,433 | 1,750,454 | 1,535,688 | ||||||||||||
Interest
expense
|
- | (13,513 | ) | (46,988 | ) | (48,151 | ) | |||||||||
Total
other income and expense
|
464,307 | 636,920 | 1,703,466 | 1,487,537 | ||||||||||||
INCOME
BEFORE INCOME TAXES
|
13,056,516 | 11,239,383 | 36,382,262 | 31,044,042 | ||||||||||||
INCOME
TAXES:
|
||||||||||||||||
Current
tax expense
|
4,886,216 | 4,030,839 | 13,330,802 | 11,186,052 | ||||||||||||
Deferred
tax benefit
|
(261,624 | ) | (74,334 | ) | (450,948 | ) | (276,952 | ) | ||||||||
Total
income taxes
|
4,624,592 | 3,956,505 | 12,879,854 | 10,909,100 | ||||||||||||
NET
INCOME
|
$ | 8,431,924 | $ | 7,282,878 | $ | 23,502,408 | $ | 20,134,942 | ||||||||
EARNINGS:
|
||||||||||||||||
Per
share - Basic and diluted
|
$ | 0.57 | $ | 0.49 | $ | 1.58 | $ | 1.35 | ||||||||
AVERAGE
COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: Basic and
diluted
|
14,859,016 | 14,859,016 | 14,859,016 | 14,868,508 | ||||||||||||
THE
COMPONENTS OF COMPREHENSIVE INCOME:
|
||||||||||||||||
Net
income
|
$ | 8,431,924 | $ | 7,282,878 | $ | 23,502,408 | $ | 20,134,942 | ||||||||
Unrealized
gains (losses) on investment securities, net of taxes
|
115,256 | (1,168,911 | ) | 922,028 | (1,625,806 | ) | ||||||||||
COMPREHENSIVE
INCOME
|
$ | 8,547,180 | $ | 6,113,967 | $ | 24,424,436 | $ | 18,509,136 |
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 NINE MONTHS ENDED NOVEMBER 30, 2009 AND 2008
(Unaudited)
Nine
Months
Ended November 30,
|
||||||||
2009
|
2008
|
|||||||
(Restated)
|
||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income
|
$ | 23,502,408 | $ | 20,134,942 | ||||
Adjustments
to reconcile net income to operating activities:
|
||||||||
Depreciation
|
234,119 | 243,125 | ||||||
Impairment
of investment in policies
|
188,125 | - | ||||||
Earnings
on investment in corporation
|
(649,027 | ) | - | |||||
Deferred
income taxes
|
(450,948 | ) | (276,951 | ) | ||||
(Increase)
decrease in operating assets:
|
||||||||
Accounts
receivable
|
(2,939,318 | ) | 5,388,580 | |||||
Note
receivable
|
(19,705 | ) | (23,517 | ) | ||||
Prepaid
expenses
|
64,302 | 315,951 | ||||||
Increase
(decrease) in operating liabilities:
|
||||||||
Accounts
payable
|
1,104,203 | (1,539,724 | ) | |||||
Accrued
liabilities
|
815,711 | (46,802 | ) | |||||
Accrued
settlement expense
|
134,526 | - | ||||||
Income
taxes payable
|
368,802 | 107,983 | ||||||
Deferred
revenue
|
10,900 | (43,400 | ) | |||||
Net
cash provided by operating activities
|
22,364,098 | 24,260,187 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Investment
in certificates of deposit
|
- | (1,941,258 | ) | |||||
Certificate
of deposit maturities
|
2,933,237 | - | ||||||
Investment
in income funds
|
(348,522 | ) | (460,053 | ) | ||||
Purchases
of property and equipment
|
(354,741 | ) | (336,018 | ) | ||||
Investment
in partnership/corporation
|
- | (1,750,000 | ) | |||||
Return
of investment in corporation
|
101,147 | - | ||||||
Increase
in other assets
|
(3,000 | ) | - | |||||
Purchase
of policies for investment purposes and capitalized
premiums
|
(7,656,105 | ) | (6,480,655 | ) | ||||
Net
cash used in investing activities
|
(5,327,984 | ) | (10,967,984 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Proceeds
from short-term notes payable
|
- | 2,000,000 | ||||||
Payments
on short-term notes payable
|
- | (2,001,621 | ) | |||||
Payment
on notes payable
|
(779,073 | ) | (375,803 | ) | ||||
Purchases
of treasury shares
|
- | (699,051 | ) | |||||
Dividend
payable
|
- | - | ||||||
Dividends
paid
|
(9,509,776 | ) | (2,370,977 | ) | ||||
Net
cash used in financing activities
|
(10,288,849 | ) | (3,447,452 | ) | ||||
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
6,747,265 | 9,844,751 | ||||||
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
15,261,217 | 7,112,547 | ||||||
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
$ | 22,008,482 | $ | 16,957,298 | ||||
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||
Interest
paid, net of capitalized amounts
|
$ | 46,988 | $ | 48,151 | ||||
Income
taxes paid
|
$ | 12,962,000 | $ | 11,078,000 | ||||
SUPPLEMENTAL
DISCLOSURES OF NONCASH ITEMS:
|
||||||||
Accrued
interest receivable
|
$ | 19,705 | $ | 23,517 | ||||
Unrealized
gain (loss) on marketable securities, net of taxes
|
$ | 922,028 | $ | (1,625,806 | ) | |||
Dividends
declared and not paid by period end
|
$ | 3,719,027 | $ | 953,697 |
See
accompanying summary of accounting policies and notes to financial
statements.
6
Life
Partners Holdings, Inc.
Notes
to Consolidated Condensed Financial Statements
November
30, 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)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
We follow
accounting standards set by the Financial Accounting Standards Board, commonly
referred to as the “FASB”. The FASB sets the U.S. generally accepted
accounting principles (“GAAP”) that we follow to ensure we consistently report
our financial condition, results of operations and cash
flows. References to GAAP issued by the FASB in these footnotes are
to the FASB Accounting
Standards Codification Topic 105 (the “ASC”). In June 2009,
the FASB approved the FASB ASC, which, as of July 1, 2009, became the
single source of authoritative, nongovernmental GAAP. The ASC was not
intended to change GAAP. Rather, the ASC reorganizes all previous
GAAP pronouncements into accounting topics, and displays all topics using a
consistent structure. All existing standards that were used to create
the ASC are now superseded, aside from those issued by the SEC, replacing the
previous references to specific Statements of Financial Accounting Standards
with numbers used in the ASC’s structural organization. All guidance
in the ASC has an equal level of authority. The ASC is effective for
financial statements that cover interim and annual periods ending after
September 15, 2009. There was no impact on our financial
position, results of operations or cash flows as a result of the
ASC.
ASC 820,
Fair Value Measurements and
Disclosures, addresses how companies should measure fair value when they
are required to use a fair value measure for recognition or disclosure purposes
under GAAP. ASC 820 defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value
measurements. Effective March 1, 2008, management adopted ASC 820
with the exception of certain non-financial assets and non-financial liabilities
that were specifically deferred by ASC 820-10. In February 2008,
the FASB issued ASC 820-10 that defers the effective date of ASC 820 to fiscal
years beginning after November 15, 2008, for certain nonfinancial assets
and nonfinancial liabilities. In April 2009, the FASB issued ASC
820-10, which provides additional guidance for estimating fair value in
accordance with ASC 820, when the volume and level of activity for the asset or
liability have significantly decreased. ASC 820-10 also includes
guidance on identifying circumstances that indicate a transaction is not
orderly. ASC 820 also provides clarification on measuring liabilities
at fair value when a quoted price in an active market is not
available. In such circumstances, the ASC 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. Adoption of ASC 820-10 during the nine
months ended November 30, 2009, had no impact on our financial condition,
results of operations or cash flows.
ASC 810,
Consolidation, among
other things, provides guidance and establishes amended accounting and reporting
standards for a parent company’s non-controlling interest in a
subsidiary. ASC 810 was adopted on March 1, 2009, and had
no impact on our financial condition, results of operations or cash
flows.
ASC 815,
Derivatives and Hedging, expands the disclosure
requirements in ASC 815, Derivatives and Hedging about an entity’s
derivative instruments and hedging activities. We currently have no
derivatives and hedging activities and so the adoption of ASC 815 on
March 1, 2009, had no impact on our financial condition, results of
operations or cash flows.
ASC 825,
Financial
Instruments directs that 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 their 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. Adopted on March 1, 2009, ASC 825 had no impact on our
financial condition, results of operations or cash flows.
ASC 320,
Investments – Debt and Equity
Securities, and ASC 958-320, Investments – Debt and Equity
Securities amends the other-than-temporary impairment guidance in 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 ASC 320
and ASC 958-320 during the nine months ended November 30, 2009, had no impact on
our financial condition, results of operations or cash
flows.
8
ASC 855,
Subsequent Events
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
January 11, 2010, and have determined that we have no subsequent events to
report. Adoption of ASC 855 during the nine months ended November 30,
2009, had no impact on our financial condition, results of operations or cash
flows.
In August
2009, the FASB issued Accounting Standards Update 2009-05, Fair Value Measurements and
Disclosures (ASC Topic 820), Measuring Liabilities at Fair
Value. This ASC applies to all entities that measure
liabilities at fair value within the scope of Topic 820 and provides
clarification that in circumstances in which a quoted price in an active market
for the identical liability is not available, a reporting entity is required to
measure fair value using one or more other valuation techniques. We
have no liabilities that are traded or exchanged, requiring measurement at fair
value. Adoption of ASC Topic 820 for measuring liabilities during the
nine months ended November 30, 2009, had no impact 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 November 30, 2009, and
February 28, 2009, was $16,880,581 and $13,289,475, respectively. We
believe we have mitigated our exposure to loss by spreading our deposits over a
combination of three of the largest national financial institutions and two
smaller, local banks.
(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 November 30, 2009, and February 28, 2009, was
zero and $1,933,244, respectively.
(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, but before the final funds have been received from the escrow agent
to settle the transactions. We also sometimes make
non-interest-bearing advances to facilitate a settlement
transaction. We generally collect the advances from the escrow agent
within 30 days after the transactions close, and we receive payment before any
of the parties involved in the transaction receive funds. Because
these funds are distributed from escrow and because our business model does not
use leverage, there are no issues of collectability or credit risk normally
associated with accounts receivable. The amounts at November 30,
2009, and February 28, 2009, were $13,129,444 and $10,057,386,
respectively.
9
(6)
ACCOUNTS RECEIVABLE – EMPLOYEES AND OTHERS
The
amount shown on the balance sheet termed Accounts Receivable – Employees and
Others, at November 30, 2009 is composed of loans of $19,715 to various
employees and $4,693 for an equipment financing loan for a total of
$24,408. The amount for February 28, 2009 is composed of $94,969 of
miscellaneous receivables, $33,666 to related-party company officers, $18,065 to
various employees and $10,448 for an equipment financing loan for a total of
$157,148. We consider all receivables to be current and
collectible. Our officers receivable was 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. This note is
substantially collateralized and we have instituted collection proceedings which
we believe will result in collection of the full amount of this note (including
all accrued interest) before the end of our fiscal year. The amounts, including
accrued interest, at November 30, 2009, and February 28, 2009, were $574,623 and
$554,918, respectively.
(8)
INVESTMENTS IN SECURITIES
Our
securities investments are income and equity mutual funds and are classified as
available-for-sale securities. 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 $2,118,163 and $3,536,667 at November 30, 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 November 30 and February 28, 2009, are as
follows.
Cost
|
Gross
Unrealized
Losses
|
Fair
Value
|
||||||||||
Market
income funds, November 30, 2009
|
$ | 6,589,254 | $ | 2,118,163 | $ | 4,471,091 | ||||||
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. ASC 325-30, Investments in Insurance Contracts,
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 $188,125 of impairment for the nine
months ended November 30, 2009.
10
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. Statutory interest was considered part of the purchase
price and is included in the stated carrying value.
The table
below describes the Investment in Policies account at November 30,
2009.
Remaining
Life Expectancy
(in years)
|
Number
of Life
Settlement Contracts
|
Carrying
Value
|
Face
Value
|
|||||||||
0-1
|
677
|
$ | 7,804,524 | $ | 12,435,702 | |||||||
1-2
|
122
|
3,011,762 | 4,602,103 | |||||||||
2-3
|
169
|
4,266,947 | 6,937,638 | |||||||||
3-4
|
46
|
1,024,461 | 2,128,103 | |||||||||
4-5
|
12
|
239,002 | 434,114 | |||||||||
Thereafter
|
-
|
- | - | |||||||||
Total
|
1,026
|
$ | 16,346,696 | $ | 26,537,660 |
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 November 30, 2009, are as
follows.
Year
1
|
$ | 226,864 | ||
Year
2
|
202,920 | |||
Year
3
|
663,644 | |||
Year
4
|
106,148 | |||
Year
5
|
47,570 | |||
Total
estimated premiums
|
$ | 1,247,146 |
(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 LPI would from any
other 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 November 30, 2009, we owned
15.9% of the corporation, valued at $5.5 million. In December 2009 we
made an additional $1 million investment in this corporation, bringing our cost
basis to $6.5 million, which represents 19.9% ownership. The
corporation owns a portfolio of life insurance settlements with a face value of
$706 million which we anticipate will mature over the next few years. The
corporation has experienced some maturities during the course of this year and
we have been paid from these maturities. 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
(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 November 30, 2009,
it carried an interest rate at Wall Street Journal Prime Rate of 3.25% and
had a borrowing, and available base of $2.9 million. There was no
outstanding balance at November 30 and February 28, 2009.
(12)
LONG-TERM DEBT
We
retired all of our outstanding debt on April 28, 2009. As of February
28, 2009, we had $779,073 of current and 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 November 30, 2009, result in a decrease in
the net deferred tax asset of $45,528. We believe the net deferred
tax asset to be fully realizable.
Following
are the components of the net deferred tax asset:
Nov. 30, 2009
|
Feb. 28, 2009
|
|||||||
Deferred
tax liability:
|
||||||||
Depreciation
|
$ | (175,339 | ) | $ | (152,732 | ) | ||
Deferred
tax assets:
|
||||||||
Unrealized
loss on investments
|
741,357 | 1,237,834 | ||||||
Accrued
contingency costs
|
164,208 | 117,124 | ||||||
Accrued
vacation costs
|
30,813 | 31,555 | ||||||
Reserve
for premium advances
|
2,257,188 | 1,895,817 | ||||||
Reserve
for policy impairment
|
118,977 | 53,134 | ||||||
Reserve
for acquired life insurance policies
|
44,695 | 44,695 | ||||||
Total
deferred tax assets
|
3,357,238 | 3,380,159 | ||||||
Total
net deferred income tax asset
|
$ | 3,181,899 | $ | 3,227,427 |
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. ASC
740, Income Taxes, 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. ASC
740 also provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure and
transition.
Under ASC
740, 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.
12
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.
We had no
items of uncertainty that were accrued or recognized that had any impact on
income tax expense for the quarter and nine months ended November 30, 2009 and
2008.
(14)
|
COMPREHENSIVE
INCOME PER SHARE, SHAREHOLDERS’ EQUITY, STOCKTRANSACTIONS
AND COMMON STOCK OPTIONS
|
Comprehensive
income for the quarters ended November 30, 2009 and 2008, was $8,547,180 and
$6,113,967, respectively. Basic and diluted earnings per share for
comprehensive income for the quarters ended November 30, 2009 and 2008, net of
tax, were $0.58 and $0.41, respectively. Comprehensive income for the
nine months ended November 30, 2009 and 2008, was $24,424,436 and $18,509,136,
respectively. Basic and diluted earnings per share for comprehensive
income for the nine months ended November 30, 2009 and 2008, net of tax, were
$1.64 and $1.24, 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
|
$ | 0.06 | |||
05/21/08
|
06/16/08
|
$ | 0.07 | |||
08/07/08
|
09/15/08
|
$ | 0.07 | |||
10/22/08
|
12/15/08
|
$ | 0.08 | |||
02/24/09
|
03/16/09
|
$ | 0.07 | |||
05/07/09
|
06/15/09
|
$ | 0.07 | |||
05/14/09
|
06/15/09
|
$ | 0.25 | |||
07/27/09
|
09/15/09
|
$ | 0.25 | |||
10/27/09
|
12/15/09
|
$ | 0.25 |
*
|
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, which was 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.
(15)
FAIR VALUE MEASUREMENTS
ASC 820,
Fair Value
Measurements and
Disclosures addresses how companies should measure fair value when they
are required to use a fair value measure for recognition or disclosure purposes
under GAAP. ASC 820 defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements.
ASC 820 is effective for fiscal years beginning after November 15,
2007. Effective March 1, 2008, management adopted ASC 820 with the
exception of certain non-financial assets and non-financial liabilities that
were specifically deferred by 820-10. In February 2008, the FASB
issued ASC 820-10 that defers the effective date of ASC 820 for one year for
certain nonfinancial assets and nonfinancial liabilities. Adoption of
ASC 820-10 at March 1, 2008, did not have any impact on our financial condition,
results of operations or cash flows.
13
In
February 2008, the FASB agreed to defer the effective date of ASC 820 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. ASC 820 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. ASC 820 indicates that valuation
techniques should maximize the use of observable inputs and minimize the use of
unobservable inputs. ASC 820 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 November 30 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).
Description
|
Level
1:
Quoted Prices
in
Active
Markets for
Identical Assets
|
Level
2:
Significant
Other
Observable Inputs
|
Level
3:
Significant
Unobservable Inputs
|
Total
|
||||||||||||
November
30, 2009
|
$ | 4,471,091 | - | - | $ | 4,471,091 | ||||||||||
February
28, 2009
|
$ | 2,704,063 | - | - | $ | 2,704,063 |
Our
financial assets and liabilities are cash and cash equivalents, certificates of
deposit, accounts receivable, a note receivable, investments in securities,
investments in policies, an investment in a corporation, 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 and are discussed in Notes 3-6. The recorded value of the note
receivable is the original note amount plus accrued interest. Market
value is not readily determinable; the note is discussed in Note
7. The recorded value of investments in securities is based on fair
value and is discussed in Note 8. The carrying value of our
investment in policies totaled $16,346,696, which includes $271,255 of
capitalized premiums, and has an estimated fair value of
$14,453,823. 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. The investment in policies
is discussed in Note 9. The recorded value of the investment in the
corporation is cost. Market value is not readily determinable; the
investment is discussed in Note 10.
14
In April
2009, the FASB issued ASC 820-10, Fair Value Measurements and
Disclosures, that provides additional guidance for estimating fair value
in accordance with ASC 820, when the volume and level of activity for the asset
or liability have significantly decreased. ASC 820-10 also includes
guidance on identifying circumstances that indicate a transaction is not
orderly. ASC 820-10 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 LPI 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 $756,751 and are
recorded in accrued settlement expense at November 30, 2009. During
the nine months ended November 30, 2009, we accrued an additional $394,628 for
future claims that might arise in relation to these policies and paid $260,102
of settlements during the nine months which had been accrued in the current and
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 nine months ended November 30, 2009 and 2008 was $73,882 and
$55,320, respectively.
(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 nine
months ended November 30, 2009 and 2008, we paid Mr. Pardo $262,462 and $98,708,
respectively, for such use.
15
(19)
CORRECTION OF ERRORS IN PREVIOUSLY ISSUED FINANCIAL
STATEMENTS
We made
two changes that affected the nine months ended November 30, 2008 Consolidated
Statement of Cash Flows. We moved $3,026,210 from Cash and Cash
Equivalents to a new line item called Certificates of Deposit, and we moved
$2,512,222 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
|
$ | (1,941,258 | ) | $ | - | |||
Net
increase in cash and cash equivalents
|
$ | 9,844,751 | $ | 11,786,009 | ||||
Cash
and cash equivalents, end of period
|
$ | 16,957,298 | $ | 19,983,508 |
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 November 30, 2009, and results of operations for the three and
nine months ended November 30, 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, ASC 325-30, Investments in Insurance Contracts,
was issued. The ASC 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 ASC 325-30 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 November 30, 2009, the total of our investment in life
settlements held for our own account was valued at $16,346,696.
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.
The only
material change between our estimates and actual results in the current or prior
periods related to the litigation with the State of Florida. 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
quarter ended August 31, 2009, and resulted in a charge of $770,000 to
settlement expense in that quarter and in our nine months settlement expenses
ended November 30, 2009.
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.
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 November 30 and February 28, 2009.
17
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
We follow
accounting standards set by the Financial Accounting Standards Board, commonly
referred to as the “FASB”. The FASB sets the U.S. generally accepted
accounting principles (“GAAP”) that we follow to ensure we consistently report
our financial condition, results of operations and cash
flows. References to GAAP issued by the FASB in these footnotes are
to the FASB Accounting
Standards Codification Topic 105 (the “ASC”). In June 2009,
the FASB approved the FASB ASC, which, as of July 1, 2009, became the
single source of authoritative, nongovernmental GAAP. The ASC was not
intended to change GAAP. Rather, the ASC reorganizes all previous
GAAP pronouncements into accounting topics, and displays all topics using a
consistent structure. All existing standards that were used to create
the ASC are now superseded, aside from those issued by the SEC, replacing the
previous references to specific Statements of Financial Accounting Standards
with numbers used in the ASC’s structural organization. All guidance
in the ASC has an equal level of authority. The ASC is effective for
financial statements that cover interim and annual periods ending after
September 15, 2009. There was no impact on our financial
position, results of operations or cash flows as a result of the
ASC.
In
September 2006, the FASB issued ASC 820, Fair Value Measurements and
Disclosures. ASC 820 addresses how companies should
measure fair value when they are required to use a fair value measure for
recognition or disclosure purposes under GAAP. ASC 820 defines fair
value, establishes a framework for measuring fair value and expands disclosures
about fair value measurements. Effective March 1, 2008, management adopted
ASC 820 with the exception of certain non-financial assets and non-financial
liabilities that were specifically deferred by ASC 820-10. In
February 2008, the FASB issued ASC 820-10 that defers the effective date of
ASC 820 to fiscal years beginning after November 15, 2008, for certain
nonfinancial assets and nonfinancial liabilities. In April 2009, the FASB
issued ASC 820-10, which provides additional guidance for estimating fair
value in accordance with ASC 820, when the volume and level of activity for the
asset or liability have significantly decreased. ASC 820-10 also
includes guidance on identifying circumstances that indicate a transaction is
not orderly. ASC 820 also provides clarification on measuring
liabilities at fair value when a quoted price in an active market is not
available. In such circumstances, the ASC 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. Adoption of ASC 820-10 during the nine
months ended November 30, 2009, had no impact on our financial condition,
results of operations or cash flows.
18
In
December 2007, the FASB issued ASC 810, Consolidation. ASC 810,
among other things, provides guidance and establishes amended accounting and
reporting standards for a parent company’s non-controlling interest in a
subsidiary. ASC 810 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 ASC 815, Derivatives and Hedging. ASC 815 expands the
disclosure requirements about an entity’s derivative instruments and hedging
activities. We currently have no derivatives and hedging activities
and so the adoption of ASC 815 on March 1, 2009, had no impact on our
financial condition, results of operations or cash flows.
In April
2009, FASB issued ASC 825, 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 their 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. Adopted on March 1, 2009, ASC 825 had no impact on our
financial condition, results of operations or cash flows.
In April
2009, FASB issued ASC 320, Investments – Debt and Equity
Securities. This ASC amends the other-than-temporary
impairment guidance in 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 ASC 320 during the nine months ended November
30, 2009, had no impact on our financial condition, results of operations or
cash flows.
In May
2009, the FASB issued ASC 855, Subsequent
Events. ASC 855 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 January 11, 2010 and have determined that we have no
subsequent events to report. Adoption of ASC 855 during the nine
months ended November 30, 2009, had no impact on our financial condition,
results of operations or cash flows.
In August
2009, the FASB issued Accounting Standards Update 2009-05, Fair Value Measurements and
Disclosures (ASC Topic 820), Measuring Liabilities at Fair
Value. This ASC applies to all entities that measure
liabilities at fair value within the scope of Topic 820 and provides
clarification that in circumstances in which a quoted price in an active market
for the identical liability is not available, a reporting entity is required to
measure fair value using one or more other valuation techniques. We
have no liabilities that are traded or exchanged, requiring measurement at fair
value. Adoption of ASC Topic 820 for measuring liabilities during the
nine months ended November 30, 2009, had no impact 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”. 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.
19
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
life settlement transactions. 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. The traditional
viatical business has been inconsequential for several years. 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 100,000 purchaser transactions associated with the purchase of
over 6,200 policies totaling over $2.2 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 nine months ended November 30, 2009 and 2008:
Three Months
|
Nine Months
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Number
of settlements
|
52 | 56 | 156 | 154 | ||||||||||||
Face
value of policies
|
$ | 162,131,377 | $ | 195,459,950 | $ | 447,336,819 | $ | 564,630,481 | ||||||||
Average
revenue per settlement
|
$ | 595,524 | $ | 501,856 | $ | 560,682 | $ | 502,148 | ||||||||
Net
revenues derived*
|
$ | 16,464,256 | $ | 14,246,343 | $ | 47,951,680 | $ | 39,918,571 |
*
The revenues derived are exclusive of brokerage and referral
fees.
Comparison
of the Three Months Ended November 30, 2009 and 2008
We
reported net income of $8,431,924 for the three months ended November 30, 2009
(“the Third Quarter of this year”), compared to net income of $7,282,878 for the
three months ended November 30, 2008 (“the Third Quarter of last
year”). Our stronger net income resulted primarily from a 10.2%
increase in revenues and our ability to increase our operating margins by
remaining highly selective in our purchasing strategies. The number of
settlements transacted decreased from 56 to 52, the average revenue per
settlement increased by 18.7%, and revenues net of brokerage fees increased by
15.6%.
Revenues: Revenues increased
by $2,863,326 or 10.2% from $28,103,930 in the Third Quarter of last year to
$30,967,256 in the Third Quarter of this year. This increase was due
primarily to an 18.7% increase in our average revenue per settlement from
$501,856 in the Third Quarter of last year to $595,524 in the Third Quarter of
this year. This, in conjunction with highly selective purchasing,
resulted in a 15.6% increase in the net revenues derived.
20
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 99.1% of our revenues during the
Third 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.
Another
contributing factor has been a greater supply of financially attractive policies
with high face value. 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 and financially attractive
policies. We believe much of our increased business is due to the
greater supply of these policies, and we believe this trend will
continue.
Brokerage and Referral Fees:
Brokerage and referral fees increased 4.7% or $645,413 from $13,857,587
in the Third Quarter of last year to $14,503,000 in the Third Quarter of this
year. Brokerage and referral fees as a percentage of gross revenue
declined from 49.3% in the Third Quarter of last year to 46.8% in the Third
Quarter of this year. In the Third Quarter of this year, broker
referrals accounted for 100% of the total face value of policies transacted
which is unchanged from Third 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 substantial reduction in the concentration of brokers that
provide policies to us. For the Third Quarter of this year, only two
brokers accounted for more than 10% of the face value of all completed
transactions, and constituted 23.5% of the total face value of completed
transactions compared to the Third Quarter of last year in which policies
presented from two brokers having 10.0% or more of the face value
transacted constituted 40.6% 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 of
fees 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.
Many
states now 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.
21
Expenses: Operating and
administrative expenses increased by 6.3% or $228,167 from $3,643,880 in the
Third Quarter of last year to $3,872,047 in the Third Quarter of this year
due. The increase is a result of increases in primarily premium
advances, impairment in owned policies, and bonuses, netted by a large decrease
in legal and professional fees.
During
the Third Quarters of this year and last year, we made premium advances of
$621,590 and $399,626, respectively, and were reimbursed $150,430 and $106,909,
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 of 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 decreased from $636,920 of income in the Third Quarter
of last year to $464,307 of income in the Third Quarter of this year primarily
due to interest rate declines on investments. The Third Quarter of this year
shows no interest expense compared to the Third Quarter of last year due to
retiring the long-term debt in April 2009.
Income Taxes: Income tax
expense increased by $668,087 from $3,956,505 in the Third Quarter of last year
to $4,624,592 in the Third Quarter of this year. The increase was due
primarily to a $1,817,133 increase in income before income taxes, taxed at
35%.
Comparison
of the Nine Months Ended November 30, 2009 and 2008
We
reported net income of $23,502,408 for the Nine Months ended November 30, 2009
(“the First Nine Months of this year”), compared to net income of $20,134,942
for the Nine Months ended November 30, 2008 (“the First Nine Months of last
year”). Our stronger net income resulted primarily from a 13.1%
increase in revenues and our ability to increase our operating margins by
remaining highly selective in our purchasing strategies. The number of
settlements transacted increased from 154 to 156, the average revenue per
settlement increased by 11.7%, and revenues net of brokerage fees increased by
20.1%.
Revenues: Revenues increased
by $10,135,625 or 13.1% from $77,330,801 in the First Nine Months of last year
to $87,466,426 in the First Nine Months of this year. This increase
was due primarily to an 11.7% increase in our average revenue per settlement
from $502,148 in the First Nine Months of last year to $560,682 in the First
Nine Months of this year, continuing a trend toward transactions with larger
face amounts. This, in conjunction with highly selective purchasing,
resulted in a 20.1% 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.
22
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 Nine Months of this year, domestic purchasers
accounted for 98.8% 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 a greater supply of financially attractive policies
with high face value. 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 and financially attractive
policies. We believe much of our increased business is due to the
greater supply of these policies, and we believe this trend will
continue.
Brokerage and Referral Fees:
Brokerage and referral fees increased 5.6% or $2,102,516 from $37,412,230
in the First Nine Months of last year to $39,514,746 in the First Nine Months of
this year. Brokerage and referral fees as a percentage of gross
revenue declined from 48.4% in the First Nine Months of last year to 45.2% in
the First Nine Months of this year. In the First Nine Months of this
year, broker referrals accounted for 99.1% of the total face value of policies
transacted compared with 99.9% of the policies transacted in the First Nine
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 Nine Months of this year, one broker accounted
for more than 10% of the face value of all completed transactions and
represented 15.8% of completed transactions. Policies presented from
four brokers having 10% or more of face value transacted constituted 55.7% of
the total face value of all completed transactions during the First Nine 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.
Many
states now 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 28.1% or $2,910,818 from $10,362,066 in the
First Nine Months of last year to $13,272,884 in the First Nine Months of this
year due primarily to increases in settlement costs, employee and executive
bonuses due to increased profitability, hourly and salaried employee wages due
to our higher number of employees, premium advances, investor relations,
impairment of owned policies, state franchise taxes due to increased
profitability 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.
23
During
the First Nine Months of this year and last year, we made premium advances
of $1,734,760 and $1,366,964, respectively, and were reimbursed $456,875 and
$305,883, 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 of 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 $1,487,537 of income in the First Nine
Months of last year to $1,703,466 of income in the First Nine Months of this
year primarily due to gains from the Investment in Partnership converting to an
Investment in Corporation at May 31, 2009, gains from maturities of owned
policies, reduced by lower interest income.
Income Taxes: Income tax
expense increased by $1,970,754 from $10,909,100 in the First Nine Months of
last year to $12,879,854 in the First Nine Months of this year. The
increase was due primarily to a $5,338,220 increase in income before income
taxes, taxed at 35%.
Contractual
Obligations
The
following table summarizes our outstanding lease commitments as of November 30,
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
|
$ | 152,758 | $ | 61,751 | $ | 67,000 | $ | 24,007 | $ | - | ||||||||||
Total
|
$ | 152,758 | $ | 61,751 | $ | 67,000 | $ | 24,007 | $ | - |
Liquidity
and Capital Resources
Operating Activities: Net cash flows provided by
operating activities for the First Nine Months of this year were
$22,364,098. The cash flows from operating activities resulted
primarily from net income of $23,502,408; an increase in accounts payable of
$1,104,203 that is related to commissions due on closings; and an increase in
accrued liabilities of $815,711 due primarily to accrued bonuses; reduced by an
increase in accounts receivable of $2,939,318 due to timing of closings at the
end of the quarter. Net cash flows provided by operating activities
for the First Nine Months of last year were $24,260,187. The cash
flows from operating activities for last year resulted primarily from net income
of $20,134,942 and a decrease in accounts receivable of $5,388,580 due primary
to collection of premium loans; less an increase in accounts payable of
$1,539,724.
Investing Activities: Net cash flow used in
investing activities was $5,327,984 during the First Nine Months of this
year. This amount consists of $7,656,105 used for the purchase of
policies for investment purposes, $354,741 for purchases of property and
equipment and $348,522 invested in marketable securities less the $2,933,237 of
certificate of deposit maturities and $101,147 in return of equity in the
corporation investment. In comparison, in the First Nine Months of
last year, we used $10,967,984 for investing activities, of which $6,480,655 was
for the purchase of policies for investment purposes, $1,941,258 for investments
in certificates of deposit, $1,750,000 for an investment in a partnership (now a
corporation), $460,053 for marketable securities and $336,018 for purchases of
property and equipment.
Financing Activities: We used $10,288,849 of net
cash in financing activities during the First Nine Months of this
year. The components of financing activities are $9,509,776 for
dividends and $779,073 to retire our long term debt. We used
$3,447,452 of net cash in financing activities in the First Nine Months of last
year. We paid dividends of $2,370,977, purchased treasury stock for
$699,051 and made payments of $377,424 on 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 Nine Months.
24
Working Capital and Capital
Availability: As
of November 30, 2009, we had working capital of $23,231,075. 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 November 30, 2009, it carried an interest rate at Wall
Street Journal Prime Rate of 3.25% and had a borrowing, and available, base
of $2.9 million. There was no outstanding balance as of November 30
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.
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 Nine 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.
25
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 SEC’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.
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.
26
PART
II – OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
During
the First Nine Months of this year and last year, we incurred settlement
expenses of $1,954,400 and $952,881, 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 Nine
Months of this year, we recorded $7,656,106 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 9, Investment in Policies, to the Consolidated Condensed Financial
Statements.
On June
9, 2006, a putative class action case entitled Earl Parchia et al. v. Life
Partners, Inc., Cause No. 2006-2258-4, was filed against us in
the 170th
District Court of McLennan County, Texas. This action alleged
breach of contract in connection with advising purchasers of premiums that come
due on policies in which the escrow for premiums has been
exhausted. The class was never certified and, on October 16, 2009,
Plaintiff amended his complaint withdrawing all claims of a class
action. On December 8, 2009, Plaintiff withdrew his complaint
and the matter was resolved without incurring any settlement
expense.
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
6. EXHIBITS
31.1
Rule 13a-14(a) Certifications
32.1
Section 1350 Certification
27
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:
January 11, 2010
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
|
28
EXHIBIT
INDEX
DESCRIPTION
OF EXHIBITS
Number
|
Description
|
Page
|
||
31.1
|
Rule
13a-14(a) Certifications
|
30-31
|
||
32.1
|
Section
1350 Certification
|
32
|
29