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EX-23.2 - EX-23.2 - EMERGENT CAPITAL, INC.w78831exv23w2.htm
EX-21.1 - EX-21.1 - EMERGENT CAPITAL, INC.w78831exv21w1.htm
EX-10.28 - EX-10.28 - EMERGENT CAPITAL, INC.w78831exv10w28.htm
EX-10.35 - EX-10.35 - EMERGENT CAPITAL, INC.w78831exv10w35.htm
EX-10.12 - EX-10.12 - EMERGENT CAPITAL, INC.w78831exv10w12.htm
EX-10.30 - EX-10.30 - EMERGENT CAPITAL, INC.w78831exv10w30.htm
EX-10.29 - EX-10.29 - EMERGENT CAPITAL, INC.w78831exv10w29.htm
EX-10.34 - EX-10.34 - EMERGENT CAPITAL, INC.w78831exv10w34.htm
As filed with the Securities and Exchange Commission on August 12, 2010
Registration No. 333-      
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form S-1
 
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
 
 
 
IMPERIAL HOLDINGS, INC.
(to be converted from Imperial Holdings, LLC)
(Exact name of registrant as specified in its charter)
 
         
Florida
(State or other jurisdiction of
Incorporation or organization)
  6199
(Primary Standard Industrial
Classification Code Number)
  77-0666377
(I.R.S. Employer
Identification No.)
 
701 Park of Commerce Boulevard — Suite 301
Boca Raton, Florida 33487
(561) 995-4200
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
 
 
 
Jonathan Neuman
President and Chief Operating Officer
701 Park of Commerce Boulevard — Suite 301
Boca Raton, Florida 33487
(561) 995-4200
(Address, including zip code, and telephone number, including area code, of agent for service)
 
 
 
 
Copies to:
 
     
Michael B. Kirwan
John J. Wolfel, Jr.
Foley & Lardner LLP
One Independent Drive, Suite 1300
Jacksonville, Florida 32202
(904) 359-2000
  J. Brett Pritchard
Melissa M. Choe
Locke Lord Bissell & Liddell LLP
111 South Wacker Drive
Chicago, Illinois 60606
(312) 443-0700
 
 
 
 
Approximate date of commencement of proposed sale to the public:  As soon as practicable after the Registration Statement becomes effective.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  o
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o Accelerated filer o Non-accelerated filer þ Smaller reporting company o
(Do not check if a smaller reporting company)
 
CALCULATION OF REGISTRATION FEE
 
                     
      Proposed Maximum
    Amount of
Title of Each Class of
    Aggregate
    Registration
Securities to be Registered     Offering Price(1)(2)     Fee
Common Stock, par value $0.01 per share
    $ 287,500,000       $ 20,498.75  
                     
 
(1) Includes amount attributable to shares of common stock issuable upon the exercise of the underwriters’ over-allotment option.
(2) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.
 
 
 
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
 


 

The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
 
SUBJECT TO COMPLETION, DATED AUGUST 12, 2010
 
PRELIMINARY PROSPECTUS
 
[          ] Shares
 
IMPERIAL HOLDINGS, INC.
 
Common Stock
 
 
 
 
We are a specialty finance company with a focus on providing premium financing for individual life insurance policies and purchasing structured settlements.
 
This is our initial public offering. We are offering [          ] shares of our common stock in this firm commitment underwritten public offering. We anticipate that the initial public offering price of our common stock will be $[     ] per share.
 
Prior to this offering, there has been no public market for our common stock, and our common stock is not currently listed on any national exchange or market system. We intend to apply to list our common stock on the New York Stock Exchange under the symbol “IFT.”
 
Investing in our common stock involves risks. See “Risk Factors” beginning on page 13 of this prospectus to read about the risks you should consider before buying our common stock.
 
 
 
 
                 
    Per Share   Total
 
Price to public
  $                $             
Discounts and commissions to underwriters
  $       $    
Net proceeds (before expenses) to us
  $       $  
 
We have granted the underwriters the right to purchase up to [          ] additional shares of our common stock at the public offering price, less the underwriting discounts, solely to cover over-allotments, if any. The underwriters can exercise this right at any time within 30 days after the date of our underwriting agreement with them.
 
Neither the Securities and Exchange Commission nor any state securities commission or other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
The underwriters expect to deliver the shares of our common stock to purchasers against payment on or about [          ], 2010.
 
FBR Capital Markets
 
The date of this prospectus is [          ], 2010.


 

You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with information that is different from that contained in this prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. We and the underwriters are offering to sell and seeking offers to buy these securities only in jurisdictions where offers and sales are permitted. You should assume that the information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of common stock. Our business, financial condition, results of operations and prospects may have changed since that date.
 
TABLE OF CONTENTS
 
         
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    F-1  
    II-7  


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CERTAIN IMPORTANT INFORMATION
 
For your convenience we have included below definitions of terms used in this prospectus.
 
In this prospectus references to:
 
  •  “Imperial,” “Company,” “we,” “us,” or “our” refer to Imperial Holdings, LLC and its consolidated subsidiaries prior to the corporate conversion as described in this prospectus and to Imperial Holdings, Inc. and its consolidated subsidiaries after the corporate conversion, unless the context suggests otherwise. Unless otherwise stated, in this prospectus all references to us, our shares and our shareholders assume that the corporate conversion has already occurred. Our conversion from a limited liability company to a corporation is described under “Corporate Conversion.” The corporate conversion will be completed prior to the closing of this offering.
 
  •  “financing cost” refer to the aggregate cost attributable to credit facility interest, other lender charges and, where applicable, obtaining lender protection insurance on our premium finance loans.
 
  •  “principal balance of the loan” refer to the principal amount loaned by us in a premium finance transaction without including origination fees or interest.
 
  •  “premium finance” refer to a financial transaction in which a policyholder obtains a loan, predominately through an irrevocable life insurance trust established by the insured, to pay life insurance premiums, with the loan being collateralized by the underlying policy.
 
  •  “structured settlement” refer to a transaction in which the recipient of a deferred payment stream (usually obtained by a plaintiff in a personal injury, product liability or medical malpractice lawsuit in exchange for an agreement to settle the lawsuit) sells a certain number of fixed, scheduled future settlement payments on a discounted basis in exchange for a single lump sum payment.
 
Unless otherwise stated, in this prospectus all references to the number of shares of our common stock outstanding before and after this offering assume:
 
  •  no exercise of the underwriters’ over-allotment option;
 
  •  the consummation of the corporate conversion, pursuant to which all outstanding common and preferred limited liability company units of Imperial Holdings, LLC (including all accrued but unpaid dividends thereon) will be converted into [          ] shares of our common stock; and
 
  •  the conversion of $[     ] million of our promissory notes and $[     ] million of related accrued interest into [          ] shares of our common stock at an assumed initial public offering price of $[     ] per share, which is the midpoint of the price range on the cover of this prospectus, upon the closing of this offering.


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PROSPECTUS SUMMARY
 
This summary highlights information contained elsewhere in this prospectus. Before making a decision to purchase our common stock, you should read the entire prospectus carefully, including the “Risk Factors” and “Forward-Looking Statements” sections and our consolidated financial statements and the notes to those financial statements. Except as otherwise noted, all information in this prospectus assumes that all of the shares of common stock offered hereby will be sold and that the underwriters will not exercise their over-allotment option.
 
Prior to the closing of the offering described in this prospectus, we will complete a reorganization in which Imperial Holdings, Inc. will succeed to the business of Imperial Holdings, LLC and the members of Imperial Holdings, LLC will become shareholders of Imperial Holdings, Inc. In this prospectus, we refer to this reorganization as the corporate conversion. Unless otherwise stated, in this prospectus all references to us, our shares and our shareholders assume that the corporate conversion has already occurred.
 
Overview
 
We are a specialty finance company founded in December 2006 with a focus on providing premium financing for individual life insurance policies issued by insurance companies generally rated “A+” or better by Standard & Poor’s or “A” or better by A.M. Best Company and purchasing structured settlements backed by annuities issued by such insurance companies or their affiliates. During the three months ended March 31, 2010 and the year ended December 31, 2009, we had income before expenses of $19.7 million and $96.6 million, respectively. As of March 31, 2010, we had total assets of $257.4 million.
 
In our premium finance business we earn revenue from interest charged on loans, loan origination fees and fees from referring agents. We have historically relied on debt financing to operate this business. Since 2008, our financing cost for a premium finance transaction has increased significantly. For the three months ended March 31, 2010, our financing cost was approximately 30.5% per annum of the principal balance of the loans compared to 14.5% per annum for the twelve months ended December 31, 2007. With the net proceeds of this offering we intend to fund our future premium finance transactions with equity financing instead of debt financing, thereby substantially reducing the cost of operating this business and increasing its profitability.
 
In our structured settlement business we purchase structured settlements at a discounted rate and sell such assets to third parties. For the three months ended March 31, 2010 and the year ended December 31, 2009, we purchased structured settlements at weighted average discount rates of 17.0% and 16.3%, respectively.
 
Our Services and Products
 
Premium Finance Transactions
 
A premium finance transaction is a transaction in which a life insurance policyholder obtains a loan to pay insurance premiums for a fixed period of time, which allows a policyholder to maintain coverage without having to make premium payments during the term of the loan. Since our inception, we have originated premium finance transactions collateralized by life insurance policies with an aggregate death benefit in excess of $4.0 billion.
 
As of March 31, 2010, the average principal balance of the loans we have originated since inception is approximately $216,000. The life insurance policies that serve as collateral for our premium finance loans are predominately universal life policies that have an average death benefit of approximately $4 million and insure persons over age 65.
 
Our typical premium finance loan is approximately two years in duration and is collateralized by the underlying life insurance policy. We generate revenue from our premium finance business in the form of agency fees from referring agents, interest income and origination fees. We charge the referring agent an agency fee for services related to premium finance loans. Agency fees as a percentage of the principal balance of the loans originated during the three months ended March 31, 2010 and year ended


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December 31, 2009 were 50.0% and 50.6%, respectively. These agency fees are charged when the loan is funded and collected on average within 45 days thereafter. Substantially all of the interest rates we charge on our premium finance loans are floating rates that are calculated at the one-month LIBOR rate plus an applicable margin ranging between 700 to 1200 basis points. In addition, our premium finance loans have a floor interest rate ranging between 9.0% and 11.5% and are capped at 16.0% per annum. For loans with floating rates, each month the interest rate is recalculated to equal one-month LIBOR plus the applicable margin, and then, if necessary, adjusted so as to remain at or above the stated floor rate and not to exceed the capped rate of 16.0% per annum. The weighted average per annum interest rate for premium finance loans outstanding as of March 31, 2010 and December 31, 2009 was 11.1% and 10.9%, respectively. In addition, on each premium finance loan we charge a loan origination fee that is added to the loan and is due upon the date of maturity or upon repayment of the loan. Origination fees as a percentage of the principal balance of the loans originated during the three months ended March 31, 2010 and the year ended December 31, 2009 were 41.1% and 44.7%, respectively.
 
At the end of the loan term, the policyholder either repays the loan in full (including all interest and origination fees) or defaults under the loan. In the event of default, the borrower typically relinquishes to us control of the policy serving as collateral for the loan, after which we may either seek to sell the policy, hold it for investment, or, if the loan is insured, we are paid a claim equal to the insured value of the policy, which may be equal to or less than the amount we are owed under the loan. As of March 31, 2010, 92.4% of our outstanding loans have collateral whose value is insured. With the net proceeds from this offering, we expect to retain for investment a number of the policies relinquished to us upon a default. When we choose to retain the policy for investment, we are responsible for all future premium payments needed to keep the policy in effect. We have developed proprietary systems and processes that, among other things, determine the minimum monthly premium outlay required to maintain each retained life insurance policy. We use strict loan underwriting guidelines that we believe have been effective in mitigating fraud-related risks.
 
Structured Settlements
 
Structured settlements refer to a contract between a plaintiff and defendant whereby the plaintiff agrees to settle a lawsuit (usually a personal injury, product liability or medical malpractice claim) in exchange for periodic payments over time. A defendant’s payment obligation with respect to a structured settlement is usually assumed by a casualty insurance company. This payment obligation is then satisfied by the casualty insurer through the purchase of an annuity from a highly rated life insurance company which provides a high credit quality stream of payments to the plaintiff.
 
Recipients of structured settlements are permitted to sell their deferred payment streams pursuant to state statutes that require certain disclosures, notice to the obligors and state court approval. Through such sales, we purchase a certain number of fixed, scheduled future settlement payments on a discounted basis in exchange for a single lump sum payment, thereby serving the liquidity needs of structured settlement holders.
 
We use national television marketing to generate in-bound telephone and internet inquiries. As of March 31, 2010, we had a database of over 23,000 structured settlement leads. We believe our database provides a strong pipeline of purchasing opportunities. As our database has grown and we have completed more transactions, the average marketing cost per structured settlement transaction has decreased.


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The following table shows the number of structured settlement transactions, the face value of undiscounted payments purchased, the weighted average purchase effective discount rate, the number of transactions sold, the weighted average discount rate at which the assets were sold and the average marketing cost per transaction (dollars in thousands):
 
                                         
        Three Months Ended
    Year Ended December 31,   March 31,
    2007   2008   2009   2009   2010
 
Number of transactions
    10       276       396       79       105  
Face value of undiscounted future payments purchased
  $ 701     $ 18,295     $ 28,877     $ 5,828     $ 7,297  
Weighted average purchase effective discount rate
    11.0 %     12.0 %     16.3 %     14.2 %     17.0 %
Number of transactions sold
          226       439       11        
Weighted average sale discount rate
          10.8 %     11.5 %     10.0 %      
Average marketing cost per transaction
  $ 205.6     $ 19.2     $ 11.3     $ 14.2     $ 10.0  
 
We believe that we have various funding alternatives for the purchase of structured settlements. In addition to available cash, we entered into a committed forward sale arrangement in February 2010 with Slate Capital LLC (“Slate”), a subsidiary of American International Group, Inc. (“AIG”), under which we are obligated to sell, and Slate is obligated to purchase, up to $250 million of structured settlements each year at pre-determined prices if such settlements meet pre-determined asset criteria. Our first closing under the forward sale arrangement with Slate occurred in April 2010. This agreement terminates in May, 2013 unless otherwise terminated earlier pursuant to the terms of the agreement. We also have other parties to whom we have sold structured settlement assets in the past, and to whom we believe we can sell assets in the future. In the future, we will continue to evaluate alternative financing arrangements, which could include securing a warehouse line of credit that would allow us to aggregate structured settlements. The majority of our revenue in this line of business currently is earned in cash from the gain on sale of structured settlements that we originate.
 
Dislocations in the Capital Markets
 
Since 2007, the United States’ capital markets have experienced extensive distress and dislocation due to the global economic downturn and credit crisis. During this period of dislocation in the capital markets, our borrowing costs increased dramatically in our premium finance business and we were unable to access traditional sources of capital to finance the acquisition and sale of structured settlements. At certain points, we were unable to obtain any debt financing. With the net proceeds of this offering, we intend to operate our premium finance business without relying on debt financing.
 
Premium Finance.  Similar to many of our competitors, market conditions have forced us to pay higher interest rates on borrowed capital since the beginning of 2008. However, because we were a relatively new company with few maturing debt obligations, the credit crisis presented an opportunity for us to gain market share and create brand recognition while we believe many of our competitors experienced financial distress.
 
Every credit facility we have entered into since December 2007 has required us to provide credit enhancement in the form of lender protection insurance for each loan originated under such credit facility. We have obtained lender protection insurance coverage from Lexington Insurance Company (“Lexington”), a subsidiary of AIG. This coverage provides insurance on the value of the policy serving as collateral underlying the loan for the benefit of our lender should our borrower default. After a payment default by the borrower, Lexington takes beneficial ownership of the life insurance policy and we are paid a claim equal to the insured value of the policy. The cost of lender protection insurance generally has ranged from 8% to 11% per annum of the principal balance of the loans. While lender protection insurance provides us with liquidity, it prevents us from realizing the appreciation, if any, of the underlying policy when a borrower relinquishes ownership of the policy upon default. We currently are only originating premium finance loans with lender protection insurance.


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We have experienced two adverse consequences from our high financing costs: reduced profitability and decreased loan originations. While the use of lender protection insurance coverage allows us to access debt financing to support our premium finance business, the high costs also substantially reduced our profitability. Additionally, the funding guidelines required by our lender protection insurance providers have reduced the number of otherwise viable premium finance transactions that we could originate. We believe that the net proceeds from this offering will allow us to increase the profitability and number of new premium finance loans by eliminating the high cost of debt financing and lender protection insurance and the limitations on loan originations that lender protection insurance imposes.
 
The following table shows our financing costs per annum for funding our premium finance loans as a percentage of the principal balance of the loans originated during the following periods:
 
                                         
    Year Ended
       
    December 31,     Three Months Ended March 31,  
    2007     2008     2009     2009     2010  
 
Lender protection insurance cost
          8.5 %     10.9 %     10.4 %     10.1 %
Interest cost and other lender funding charges under credit facilities
    14.5 %     13.7 %     18.2 %     16.7 %     20.4 %
                                         
Total financing cost
    14.5 %     22.2 %     29.1 %     27.1 %     30.5 %
 
Structured Settlements.  During 2008 and 2009, market conditions required us to offer discount rates as high as 12% in order to complete sales of structured settlements. During this period, we continued to invest heavily in our structured settlement infrastructure. This investment is benefiting us today because we have found that some structured settlement recipients sell portions of their future payment streams in multiple transactions. As our business matures and grows, our structured settlement business has been, and should continue to be, bolstered by additional transactions with existing customers and additional purchases of structured settlements with new customers. Purchases from past customers increase overall transaction volume and also decrease average transaction costs.
 
During the first six months of 2010, we have seen a return to more favorable market conditions for our sales of structured settlements. Our forward sale agreement with Slate allows us to sell structured settlements at discount rates as low as 8%.
 
Competitive Strengths
 
We believe our competitive strengths are:
 
  •  Complementary mix of business lines.  Unlike many of our competitors who are focused on either structured settlements or premium financings, we operate in both lines of business. This diversification provides us with a complementary mix of business lines as the revenues generated by our structured settlement business are generally short-term cash receipts in comparison to the revenue from our premium financing business which is collected over time.
 
  •  Scalable and cost-effective infrastructure.  We have created an efficient, cost-effective, scalable infrastructure that complements our businesses. We have developed proprietary systems and models that allow for cost-effective review of both premium finance and structured settlement transactions that utilize our underwriting standards and guidelines. Our systems allow us to efficiently process transactions while maintaining our underwriting standards. As a result of our investments in our infrastructure, we have developed a structured settlement business model that we believe has sufficient scalability to permit our structured settlement business to continue to grow with only minor incremental costs.
 
  •  Barriers to entry.  We believe that there are significant barriers to entry into the premium financing and structured settlement businesses. With respect to premium finance, obtaining the requisite state licenses and developing a network of referring agents is time intensive and expensive. With respect to structured settlements, the various state regulations require special knowledge as well as a network of attorneys experienced in obtaining court approval of these transactions. Our management and key


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  personnel from our purchasing, underwriting and information technology departments are well trained in our specialized businesses and, in many cases, have almost a decade of experience working together at Imperial and at prior employers. Our management team has significant experience operating in this highly regulated industry.
 
  •  Strength and financial commitment of management team with proven track record.  Our senior management team is experienced in the premium finance and structured settlement industries. In the mid-1990s, several members of our management team worked together at Singer Asset Finance, where they were early entrants in structured settlement asset classes. After Singer was acquired in 1997 by Enhance Financial Services, several members of our senior management team joined Peach Holdings, Inc. At Peach Holdings, they held senior positions, including Chief Operating Officer, Head of Life Finance and Head of Structured Settlements. In addition, Antony Mitchell, our chief executive officer, and Jonathan Neuman, our president and chief operating officer, each have over $7 million of their own capital invested in our company. This financial commitment aligns the interests of our principal executive officers with those of our shareholders.
 
Strategy
 
Guided by our experienced management team, with the net proceeds from this offering, we intend to pursue the following strategies in order to increase our revenues, profit margins and net profits:
 
  •  Reduce or eliminate the use of debt financing in our premium finance business.  The capital generated by this offering will enable us to fund new premium finance loans and maintain investments in life insurance policies that we acquire upon relinquishment by our borrowers without the need for additional debt financing. In contrast to our existing leveraged business model that has made us reliant on third-party financing that is often unavailable or expensive, we intend to use equity capital from this offering to engage in premium finance transactions at profit margins significantly greater than what we have historically experienced. In the future, we expect to consider debt financing for our premium finance transactions and structured settlement purchases only if such financing is available on attractive terms.
 
  •  Eliminate the use of lender protection insurance.  With the proceeds of this offering, we will no longer require debt financing and lender protection insurance for new premium finance business. As a result, we expect to experience considerable cost savings, and in addition expect to be able to produce more premium finance loans because we will not be subject to production limitations imposed by our lender protection insurer.
 
  •  Continue to develop structured settlement database.  We intend to increase our marketing budget and grow our sales staff in order to increase the number of leads in our structured settlement database and to originate more structured settlement transactions. As our database of structured settlements grows, our sales staff is able to increase our transaction volume due in part to repeat transactions from our existing customers.
 
Our Organization and Corporate Conversion
 
Imperial Holdings, LLC was organized on December 15, 2006. Our principal executive offices are located at 701 Park of Commerce Boulevard, Suite 301, Boca Raton, Florida 33487 and our telephone number is (561) 995-4200. Our website address is www.imprl.com. The information on or accessible through our website is not part of this prospectus.
 
Prior to closing this offering, Imperial Holdings, LLC will convert from a Florida limited liability company to a Florida corporation. In connection with the corporate conversion, each class of limited liability company interest (including all accrued but unpaid dividends thereon) of Imperial Holdings, LLC will be converted into shares of common stock of Imperial Holdings, Inc. Following the corporate conversion and upon closing of this offering, our shareholders will cause the conversion of $[     ] million of our promissory notes and $[     ] million of related accrued interest into [          ] shares of our common stock. See “Corporate Conversion” on page 37 for further information regarding the corporate conversion.


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The principal subsidiaries that comprise our corporate structure, giving effect to the corporate conversion, are as follows:
 
(CHART)
 
  •  Imperial Premium Finance, LLC is a licensed insurance premium financer that originates and services our premium finance transactions.
 
  •  Imperial Life and Annuity Services, LLC is a licensed insurance agency that receives agency fees from referring life insurance agents in connection with our premium finance transactions.
 
  •  Imperial Life Settlements, LLC is a licensed life/viatical settlement provider.
 
  •  Imperial Finance & Trading, LLC employs all of our staff and provides services to each of our other operating subsidiaries.
 
  •  Washington Square Financial, LLC originates and services our structured settlement transactions.


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The Offering
 
Shares of common stock offered by us
[          ] shares.
 
Over-allotment shares of common stock offered by us
[          ] shares.
 
Shares of common stock to be outstanding after the offering
[          ] shares.
 
Use of proceeds
We estimate that our net proceeds from this offering will be approximately $[     ], after deducting the estimated underwriting discounts and commissions and our estimated offering expenses, and, if the underwriters exercise their over-allotment in-full, we estimate that our net proceeds will be approximately $[     ]. We intend to use the majority of the net proceeds to support our premium finance transactions and for general corporate purposes. See “Use of Proceeds.”
 
Dividend policy
We do not expect to pay any cash dividends on our common stock for the foreseeable future. We currently intend to retain any future earnings to finance our operations and growth. Any future determination to pay cash dividends on our common stock will be at the discretion of our board of directors and will be dependent on our earnings, financial condition, operating results, capital requirements, any contractual, regulatory and other restrictions on the payment of dividends by us or by our subsidiaries to us, and other factors that our board of directors deems relevant.
 
Exchange listing
We intend to apply to list our common stock on the New York Stock Exchange under the symbol “IFT.”
 
The number of shares of our common stock outstanding after this offering:
 
  •  reflects the consummation of the corporate conversion, pursuant to which all outstanding common and preferred limited liability company units (including all accrued but unpaid dividends thereon) will be converted into [          ] shares of our common stock;
 
  •  reflects the conversion of $[     ] million of our promissory notes and $[     ] million of related accrued interest into [          ] shares of our common stock at an assumed initial public offering price of $[     ] per share, which is the midpoint of the price range on the cover of this prospectus, upon the closing of this offering;
 
  •  excludes up to [          ] shares of common stock that may be issued pursuant to the underwriters’ over-allotment option;
 
  •  excludes [          ] shares of common stock issuable upon the exercise of stock options we intend to grant to our directors, executive officers and other employees upon completion of this offering, at an exercise price equal to the initial public offering price;
 
  •  excludes [          ] shares of common stock issuable upon the exercise of warrants that will be issued to our existing shareholders prior to the closing of this offering as described in “Description of Capital Stock — Warrants”; and
 
  •  excludes [          ] additional shares of common stock available for future issuance under our 2010 Omnibus Incentive Plan (the “2010 Plan”).


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Summary Historical and Unaudited
Pro Forma Consolidated and Combined Financial and Operating Data
 
The following tables set forth summary historical and unaudited pro forma consolidated and combined financial and operating data of Imperial Holdings, LLC (to be converted into Imperial Holdings, Inc. prior to the closing of this offering) on or as of the dates and for the periods indicated. The summary unaudited pro forma financial data for the year ended December 31, 2009 and the three-month period ended March 31, 2010 give pro forma effect to the corporate conversion and conversion of promissory notes as if they had occurred on the first day of the periods presented. The summary unaudited pro forma financial and operating data set forth below are presented for information purposes only, should not be considered indicative of actual results of operations that would have been achieved had the corporate conversion been consummated on the dates indicated, and do not purport to be indicative of balance sheet data or income statement data as of any future date or future period. The summary historical and unaudited pro forma consolidated financial and operating data presented below should be read together with the other information contained in this prospectus, including “Selected Historical and Unaudited Pro Forma Consolidated and Combined Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated and combined financial statements, including notes to those consolidated and combined financial statements appearing elsewhere in this prospectus.
 
We have derived the summary historical financial data as of December 31, 2009, 2008 and 2007, from the historical audited consolidated and combined financial statements of Imperial Holdings, LLC included elsewhere in this prospectus. The summary historical financial data for the three-month periods ended March 31, 2010 and 2009 were derived from the unaudited consolidated and combined financial statements of Imperial Holdings, LLC included elsewhere in this prospectus. The historical results for Imperial Holdings, LLC for any prior period are not necessarily indicative of the results to be expected in any future period.
 


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    Historical     Pro Forma  
                                        Three
 
                                  Year
    Months
 
                      Three Months Ended
    Ended
    Ended
 
    Years Ended December 31,     March 31,     Dec. 31,     March 31,  
    2007     2008     2009     2009     2010     2009     2010  
                      (Unaudited)     (Unaudited)  
    (In thousands, except share data)  
 
Income
                                                       
Agency fee income
  $ 24,515     $ 48,004     $ 26,114     $ 10,634     $ 5,279     $ 26,114     $ 5,279  
Interest income
    4,888       11,914       21,483       4,978       5,583       21,483       5,583  
Origination fee income
    526       9,399       29,853       5,694       7,299       29,853       7,299  
Gain on sale of structured settlements
          443       2,684       39             2,684        
Gain on forgiveness of debt
                16,410       8,591       1,765       16,410       1,765  
Change in fair value of investment in life settlements
                            (203 )           (203 )
Other income
    2       47       71       16       23       71       23  
                                                         
Total income
    29,931       69,807       96,615       29,952       19,746       96,615       19,746  
                                                         
Expenses
                                                       
Interest expense
    1,343       12,752       33,755       7,092       8,969       28,763 (1)     7,797 (1)
Provision for losses on loans receivable
    2,332       10,768       9,830       2,793       3,367       9,830       3,367  
Loss (gain) on loan payoffs and settlements, net
    (225 )     2,738       12,058       8,130       1,378       12,058       1,378  
Amortization of deferred costs
    126       7,569       18,339       3,573       5,847       18,339       5,847  
Selling, general and administrative expenses
    24,335       41,566       31,269       8,527       7,672       31,269       7,672  
Provision for income taxes
                                  [— ](2)     [— ](2)
                                                         
Total expenses
    27,911       75,393       105,251       30,115       27,233       100,259       26,061  
                                                         
Net income (loss)
  $ 2,020     $ (5,586 )   $ (8,636 )   $ (163 )   $ (7,487 )   $ (3,644 )   $ (6,315 )
                                                         
Earnings per Share
                                                       
Basic
                                                       
Diluted
                                                       
Weighted Average Common Shares Outstanding
                                                       
Basic
                                                       
Diluted
                                                       
 
 
(1) Reflects reduction of interest expense of $5.0 million for the year ended December 31, 2009 and $1.2 million for the three months ended March 31, 2010, due to conversion of promissory notes payable into shares of our common stock which will occur upon the closing of this offering.
 
(2) The results of the Company being treated for the pro forma presentation as a “C” corporation resulted in no impact to the consolidated and combined balance sheet or statements of operations for the pro forma periods presented. The primary reasons for this are that the losses produce no current benefit and any net operating losses generated and other deferred tax assets (net of deferred tax liabilities) would be fully reserved due to historical operating losses. The Company, therefore, has not recorded any pro forma tax provision.
 

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    As of
                   
    December 31, 2009     As of March 31, 2010  
                      Pro Forma As
 
    Actual     Actual     Pro Forma     Adjusted(3)  
          (Unaudited)        
    (In thousands, except share data)  
 
Assets:
                               
Cash and cash equivalents
  $ 15,891     $ 7,490     $ 8,190 (1)   $             
Certificate of deposit — restricted
    670       1,342       1,342          
Agency fees receivable, net of allowance for doubtful accounts
    2,165       407       407          
Deferred costs, net
    26,323       23,677       23,677          
Interest receivable, net
    21,034       23,350       23,350          
Loans receivable, net
    189,111       191,331       191,331          
Structured settlements receivables, net
    152       2,778       2,778          
Investment in life settlements, at estimated fair value
    4,306       2,411       2,411          
Investment in life settlement fund
    542       1,270       1,270          
Prepaid expenses and other assets
    3,526       3,363       3,363          
                                 
Total assets
  $ 263,720     $ 257,419     $ 258,119     $  
                                 
Liabilities:
                               
Accounts payable and accrued expenses
  $ 3,170     $ 3,822     $ 3,822     $    
Interest payable
    12,627       15,591       13,354 (2)        
Notes payable
    231,064       221,633       193,306 (2)        
                                 
Total liabilities
  $ 246,861     $ 241,046     $ 210,482     $    
Member units — Series A preferred (500,000 authorized; 90,796 issued and outstanding, actual; 0 issued and outstanding, pro forma and pro forma as adjusted)
    4,035       4,035       (1)        
Member units — Series B preferred (50,000 authorized; 50,000 issued and outstanding, actual; 0 issued and outstanding, pro forma and pro forma as adjusted)
    5,000       5,000       (1)        
Member units — Series C preferred (75,000 authorized; 70,000 issued and outstanding, actual; 0 issued and outstanding, pro forma and pro forma as adjusted)
          7,000       (1)        
Member units — Series D preferred (7,000 authorized; 7,000 issued and outstanding, actual; 0 issued and outstanding, pro forma and pro forma as adjusted)
                (1)        
Member units — common (500,000 authorized; 450,000 issued and outstanding, actual; 0 issued and outstanding, pro forma and pro forma as adjusted)
    19,924       19,924       (1)        
Common stock
                [— ](1)(2)        
Paid-in capital
                [67,223 ](1)(2)        
Retained earnings (accumulated deficit)
    (12,100 )     (19,586 )     (19,586 )        
                                 
Total members’/stockholders’ equity
    16,859       16,373       47,637          
                                 
Total liabilities and members’/stockholders’ equity
  $ 263,720     $ 257,419       258,119          
                                 
 
 
(1) Reflects the conversion of all common and preferred limited liability company units of Imperial Holdings, LLC into [          ] shares of common stock of Imperial Holdings, Inc. as a result of the corporate conversion. Also reflects the sale of 7,000 Series D preferred units in June 2010 for $700,000, which also will be converted into shares of our common stock as a result of the corporate conversion.
 
(2) Reflects conversion of $28.3 million of promissory notes payable and $2.2 million of accrued interest, which will be converted into shares of our common stock upon the closing of this offering.
 
(3) Reflects our sale of [          ] shares of common stock at an initial public offering price of $[     ] per share, which is the midpoint of the price range on the cover of this prospectus, after the deduction of the underwriting discounts and commissions and the estimated offering expenses payable by us.

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Premium Finance Segment — Selected Operating Data (dollars in thousands):
 
                                         
          Three Months Ended
 
    Year Ended December 31,     March 31,  
    2007     2008     2009     2009     2010  
 
Period Originations:
                                       
Number of loans originated
    196       499       194       72       52  
Principal balance of loans originated
  $ 44,501     $ 97,559     $ 51,573     $ 19,418     $ 10,561  
Aggregate death benefit of policies underlying loans originated
  $ 794,517     $ 2,283,223     $ 942,312     $ 364,135     $ 252,400  
Selling general and administrative expenses
  $ 15,082     $ 21,744     $ 13,742     $ 4,113     $ 2,643  
Average Per Origination During Period:
                                       
Age of insured at origination
    75.5       74.9       74.9       74.8       73.8  
Life expectancy (years)
    12.9       13.2       13.2       13.9       14.3  
Monthly premium (year after origination)
  $ 14.0     $ 14.9     $ 16.0     $ 16.8     $ 13.4  
Death benefit of policies underlying loans originated
  $ 4,053.7     $ 4,575.6     $ 4,857.3     $ 5,057.4     $ 4,853.8  
Principal balance of the loan
  $ 227.0     $ 195.5     $ 265.8     $ 269.7     $ 203.1  
Interest rate charged
    10.5 %     10.8 %     11.4 %     11.3 %     11.5 %
Agency fee
  $ 125.1     $ 96.2     $ 134.6     $ 147.7     $ 101.5  
Agency fee as % of principal balance
    55.1 %     49.2 %     50.6 %     54.8 %     50.0 %
Origination fee
  $ 45.8     $ 77.9     $ 118.9     $ 127.6     $ 83.5  
Origination fee as % of principal balance
    20.2 %     39.9 %     44.7 %     47.3 %     41.1 %
End of Period Loan Portfolio
                                       
Loans receivable, net
  $ 43,650     $ 148,744     $ 189,111     $ 172,314     $ 191,331  
Number of policies underlying loans receivable
    240       702       692       717       676  
Aggregate death benefit of policies underlying loans receivable
  $ 1,065,870     $ 2,895,780     $ 3,091,099     $ 3,086,603     $ 3,096,236  
Average Per Loan:
                                       
Age of insured in loans receivable
    76.3       75.3       75.4       75.2       75.4  
Monthly premium
  $ 7.7     $ 9.1     $ 8.5     $ 7.7     $ 6.6  
Loan receivable, net
  $ 181.9     $ 211.9     $ 273.3     $ 240.3     $ 283.0  
Interest rate
    10.2 %     10.4 %     10.9 %     10.6 %     11.1 %


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Structured Settlements Segment — Selected Operating Data (dollars in thousands):
 
                                         
          Three Months Ended
 
    Year Ended December 31,     March 31,  
    2007     2008     2009     2009     2010  
 
Period Originations:
                                       
Number of transactions
    10       276       396       79       105  
Number of transactions from repeat customers
          23       52       10       24  
Weighted average purchase effective discount rate
    11.0 %     12.0 %     16.3 %     14.2 %     17.0 %
Face value of undiscounted future payments purchased
  $ 701     $ 18,295     $ 28,877     $ 5,828     $ 7,297  
Amount paid for settlements purchased
  $ 369     $ 8,010     $ 10,947     $ 2,507     $ 2,574  
Marketing costs
  $ 2,056     $ 5,295     $ 4,460     $ 1,124     $ 1,048  
Selling, general and administrative (excluding marketing costs)
  $ 666     $ 4,475     $ 5,015     $ 995     $ 1,580  
Average Per Origination During Period:
                                       
Face value of undiscounted future payments purchased
  $ 70.1     $ 66.3     $ 72.9     $ 73.8     $ 69.5  
Amount paid for settlement purchased
  $ 36.9     $ 29.0     $ 27.6     $ 31.7     $ 24.5  
Duration (months)
    80.3       113.8       109.7       106.8       124.8  
Marketing cost per transaction
  $ 205.6     $ 19.2     $ 11.3     $ 14.2     $ 10.0  
Segment selling, general and administrative (excluding marketing costs) per transaction
  $ 66.6     $ 16.2     $ 12.7     $ 12.6     $ 15.1  
Period Sales:
                                       
Number of transactions sold (Slate)
                             
Gain on sale of structured settlements (Slate)
  $     $     $     $     $  
Average sale discount rate (Slate)
                             
Number of structured settlements (buyers other than Slate)
          226       439       11        
Gain on sale of structured settlements (buyers other than Slate)
  $     $ 443     $ 2,684     $ 39     $  
Average sale discount rate (buyers other than Slate)
          10.8 %     11.5 %     10.0 %      


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RISK FACTORS
 
An investment in our common stock involves a number of risks. Before making a decision to purchase our common stock, you should carefully consider the following information about these risks, together with the other information contained in this prospectus. Many factors, including the risks described below, could result in a significant or material adverse effect on our business, financial condition and results of operations. If this were to happen, the price of our common stock could decline significantly and you could lose all or part of your investment.
 
Risk Factor Relating to the Dislocations in the Capital Markets
 
Difficult conditions in the credit and equity markets have adversely affected and may continue to adversely affect the growth of our business, our financial condition and results of operations.
 
Since 2007, the United States’ capital markets have experienced extensive distress and dislocation due to the global economic downturn and credit crisis. During this period of dislocation in the capital markets, our borrowing costs increased dramatically in our premium finance business, and we were unable to access traditional sources of capital to finance the acquisition and sale of structured settlements. At certain points, we were unable to obtain any debt financing. Furthermore, such market conditions forced us to obtain lender protection insurance coverage for our premium finance loans. The cost of this insurance, together with our credit facility interest rate costs, has resulted in total average financing costs of approximately 30.5% per annum of the principal balance of the loans as of March 31, 2010. Our ability to grow depends, in part, on our ability to increase transaction volume in each of our businesses, while successfully managing our growth, and on our ability to access sufficient capital or enter into financing arrangements on favorable terms. With the net proceeds from this offering, we expect to rely on equity financing and our existing debt financing arrangements to fund our business going forward. However, should additional financing be needed in the future, continued or future dislocations in the capital markets may adversely affect our ability to obtain debt or equity financing and, if we are unable to access sufficient capital or enter into financing arrangements on favorable terms in the future, the growth of our business, our financial condition and results of operations may be materially adversely affected.
 
Risk Factors Related to Premium Finance Transactions
 
Uncertainty in valuing the life insurance policies collateralizing our premium finance loans can affect the fair value of the collateral and if the fair value of the collateral decreases, we will incur losses.
 
We evaluate all of our premium finance loans for impairment, on a monthly basis, based on the fair value of the underlying life insurance policies, as the collectability is primarily dependent on the fair value of the policy serving as collateral. For loans without lender protection insurance, the fair value of the policy is determined using our valuation model, which is a Level 3 fair value measurement. For loans with lender protection insurance, the fair value of the policy is based on the amount of the lender protection insurance. The lender protection insurance provider limits the amount of coverage to an amount equal to or less than their determination of the underlying policy’s economic value. For all loans, the amount of impairment, if any, is calculated as the difference in the fair value the life insurance policy and the carrying value of the loan. A loan impairment valuation is established as losses on our loans are estimated and charged to the provision for losses on loans receivable, and the provision is charged to earnings. Once established, the loan impairment valuation cannot be reversed to earnings.
 
In the ordinary course of business, a large portion of our borrowers may default by not paying off the loan and relinquish beneficial ownership of the life insurance policy to us in exchange for our release of the underlying loan. When this occurs, we record the investment in the policy at the carrying value of the loan and then adjust the carrying value to fair value. If the carrying value of the loan is less than the outstanding premium finance loan balance at maturity, we establish an impairment valuation in the amount of the difference. Additionally, at the end of each quarter, we re-value the life insurance policies we own. If the calculation results in a decrease in the fair value of the policy, we also establish an impairment valuation in the amount of the difference.


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This evaluation of the fair value of life insurance policies is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Using our valuation model, we determine the fair value of life insurance policies using a discounted cash flow basis, incorporating current life expectancy assumptions. The discount rate incorporates current information about market interest rates, the credit exposure to the insurance company that issued the life insurance policy and our estimate of the risk margin an investor in the policy would require. To determine the life expectancy of an insured, we utilize medical reviews from four different medical underwriters. The health of the insured is summarized by the medical underwriters into a life assessment which is based on the review of historical and current medical records. The medical underwriter assesses the characteristics and health risks of the insured in order to quantify the health into a mortality rating that represents their life expectancy. The probability of mortality for an insured is then calculated by applying the life expectancy estimate to an actuarial table. If the calculation of fair value results in a decrease in value, we record this reduction as a loss.
 
Insurable interest concerns regarding a life insurance policy can also adversely impact its fair value. A claim or the perceived potential for a claim for rescission by an insurance company or by persons with an insurable interest in the insured of a portion of or all of the policy death benefit can negatively impact the fair value of a life insurance policy.
 
As and when loan impairment valuations are established due to the decline in the fair value of the policies collateralizing our loans, our net income will be reduced by the amount of such impairment valuations in the period in which the valuations are established, and as a result our business, financial condition and results of operations may be materially adversely affected.
 
Our success in operating our premium finance business using equity financing depends on our assumptions about life expectancies being accurate.
 
With the net proceeds of this offering, we intend to fund our new premium finance business with equity financing instead of relying on debt financing and lender protection insurance. Without lender protection insurance coverage on our loans, we plan to retain the policies that borrowers will relinquish to us in the event of default instead of transferring them to the lender protection insurer. In such instances, we will be responsible for paying all premiums necessary to keep the policy in force. Therefore, our cash flow projections will become dependent on our assumptions about life expectancies being accurate.
 
Life expectancies are estimates of the expected longevity or mortality of an insured and are inherently uncertain. There can be no assurance that any life expectancy obtained on an insured for a life insurance policy will be predictive of the future longevity or mortality of the insured. Inaccurate forecasting of an insured’s life expectancy could result from, among other things: (i) advances in medical treatment (e.g., new cancer treatments) resulting in deaths occurring later than forecasted; (ii) inaccurate diagnosis or prognosis; (iii) changes to life style habits or the individual’s ability to fight disease, resulting in improved health; (iv) reliance on outdated or incomplete age or health information about the insured, or on information that is inaccurate (whether or not due to fraud or misrepresentation by the insured); or (v) improper or flawed methodology or assumptions in terms of modeling or crediting of medical conditions. In forecasting estimated life expectancies, we utilize third party medical underwriters to evaluate the medical condition and life expectancy of each insured. The firms that provide health assessments and life expectancy information may depend on, among other things, actuarial tables and model inputs for insureds and third-party information from independent physicians who, in turn, may not have personally performed a physical examination of any of the insureds and may have relied solely on reports provided to them by attending physicians with whom they were authorized to communicate. The accuracy of this information has not been and will not be independently verified by us or our service providers.
 
If these life expectancy valuations underestimate the longevity of the insureds, the actual maturity date of the life insurance policies may therefore be longer than projected. Consequently, we may not have sufficient reserves for payment of insurance premiums and we may allow the policies to lapse, resulting in a loss of our investment in those policies, or if we continue to fund premium payments, the time period within which we


14


 

could expect to receive a return of our investment in such life insurance policies may be extended, either of which could have a material adverse effect on our business, financial condition and results of operation.
 
Our success in our premium finance business depends on maintaining relationships within our referral networks.
 
We rely primarily upon agents and brokers to refer potential premium finance customers to us. These relationships are essential to our operations and we must maintain these relationships to be successful. We do not have fixed contractual arrangements with the referring agents and brokers and they are free to do business with our competitors. Our ability to build and maintain relationships with our agents and brokers depends upon the amount of agency fees we charge and the value we bring to our clients. For the three months ended March 31, 2010, our top ten agents and brokers referred to us approximately 47.3% and 56.7%, respectively, of our premium finance business, based upon the loan maturity balances of the loans originated during such period. The loss of any of our top-referring agents and brokers could have a material adverse effect on our business, financial condition and results of operations.
 
If a regulator or court decides that trusts that are formed to own many of the life insurance policies that serve as collateral for our premium finance loans do not have an insurable interest in the life of the insured, such determination could have a material adverse effect on our business, financial condition and results of operations.
 
All states require that the initial purchaser of a new life insurance policy insuring the life of an individual has an insurable interest in such individual’s life at the time of original issuance of the policy. Whether an insurable interest exists in the context of the purchase of a life insurance policy is critical because, in the absence of a valid insurable interest, life insurance policies are unenforceable under most states’ laws. Where a life insurance policy has been issued to a policyholder without an insurable interest in the life of the individual who is insured, the life insurance company may be able to void or rescind the policy, but must repay to the owner of the policy all premium payments, usually without interest. Even if the insurance company cannot void or rescind the policy, however, the insurable interest laws of a number of states provide that persons with an insurable interest on the life of the insured may have the right to recover a portion or all of the death benefit payable under a policy from a person who has no insurable interest on the life of the insured. These claims can generally only be brought if the policy was originally issued to a person without an insurable interest in the life of the insured. However, some states may require that this insurable interest not only exist at the time that a life insurance policy was issued, but also at any later time that the policy is transferred.
 
Generally, there are two forms of insurable interests in the life of an individual, familial and financial. Additionally, an individual is deemed to have an insurable interest in his or her own life. It is also a common practice for an individual, as a grantor or settlor, to form an irrevocable trust to purchase and own a life insurance policy insuring the life of the grantor or settlor, where the beneficiaries of the trust are persons who themselves, by virtue of certain familial relationships with the grantor or settlor, also have an insurable interest in the life of the insured. In the event of a payment default on our premium finance loans when we are otherwise unable to sell the underlying policy, we will acquire life insurance policies owned by trusts (or the beneficial interests in the trust itself) that we believe had an insurable interest in the life of the related insureds. However, a state insurance regulatory authority or a court may determine that the trust does not have an insurable interest in the life of the insured. Any such determination could result in our being unable to receive the proceeds of the life insurance policy, which could lead to a total loss of all amounts loaned in the premium finance transaction. Any such loss or losses could have a material adverse effect on our business, financial condition and results of operations.
 
Premium finance loan originations are susceptible to practices which can invalidate the underlying life insurance policy and subject us to material fines or license suspension or revocation.
 
Many states in which we do business have laws which define and prohibit stranger-originated life insurance (“STOLI”) practices, which in general involve the issuance of life insurance policies as part of or in


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connection with a practice or plan to initiate life insurance policies for the benefit of a third party investor who, at the time of the policy issuance, lacked a valid insurable interest in the life of the insured. Most of these statutes expressly provide that premium finance loans that only advance life insurance premiums and certain permissible expenses are not STOLI practices or transactions. Under these statutes, a premium finance loan, as well as any life insurance policy collateralizing such loan, must meet certain criteria or such policy can be invalidated, or deemed unenforceable, in its entirety. We cannot control whether a state regulator or borrower will assert that any of our loans should be treated as STOLI transactions or that the loans do not meet the criteria required under the statutes.
 
The legality and merit of “investor-initiated” leveraged life insurance products have been questioned by members of the industry, certain life insurance providers and certain regulators. As an illustration, the New York Department of Insurance issued a General Counsel’s opinion in 2006 concluding that arrangements intended to facilitate the procurement of life insurance policies for resale violated New York’s insurable interest statute and may also constitute a violation of New York state’s prohibition against premium rebates/free insurance.
 
The premium finance industry has been tainted by lawsuits based on allegations of fraud and misconduct. These lawsuits involve allegations of fraud, breaches of fiduciary duty and other misconduct by industry participants. Some of these cases are brought by life insurance companies attacking the original issuance of the policies on insurable interest and fraud grounds. Notwithstanding the litigation in this industry, there is a lack of judicial certainty in the legal standards used to determine the validity of insurable interest supporting a life insurance policy or the existence of STOLI practices. Lawsuits sometimes focus on transfers of equity interests of the policyholder (e.g., beneficial interests of an irrevocable trust holding a policy) that occur very shortly after or contemporaneously with the issuance of the policy or arrangements whereby the premium finance lender, the life insurance agent and the insured agree to transfer the policy to the premium finance lender or another third party shortly after the policy issuance or the “contestability period.” The “contestability period” is a period of time, usually two years, after which the policy cannot be contested by the issuing life insurance company under the terms of the policy other than for the nonpayment of premiums. Some states have adopted exceptions to such limitation for fraud or other similar malfeasance by the policyholder.
 
While our loan underwriting guidelines are designed to lessen the risks of our participation in STOLI or other business that originates life insurance policies not supported by a valid insurable interest, a regulator’s or carrier’s assertion to the contrary and subsequent successful enforcement could have a material adverse effect on the fair value of the policies collateralizing our premium finance loans and our ability to originate business going forward. In particular, the closer the origination date of a premium finance loan transaction is to the life insurance policy issuance date, there is increasing risk that a life insurance policy may be subject to contest or rescission on the basis that such policy was issued as part of STOLI practices or was not supported by a valid insurable interest. As of March 31, 2010, 99.7% of our premium finance loans outstanding were originated within two years of the issuance of the underlying life insurance policy. Regulatory, legislative or judicial changes in these areas could materially and adversely affect our ability to participate in the premium finance business and could significantly increase the costs of compliance, resulting in lower revenue or a complete cessation of our premium finance business. No assurance can be given that any such changes will not occur. In addition, in this arena, regulatory action for statutory or regulatory infractions could involve fines or license suspension or revocation. No assurance can be given that we will be able to obtain or maintain the licenses necessary for us to conduct our premium finance business, or that any such licenses will not be suspended or revoked.
 
The life insurance policies securing our premium finance loans may be subject to contest, rescission and/or non-cooperation by the issuing life insurance company, which may have a material adverse effect on our business, financial condition and results of operations.
 
Our premium finance loans are secured by the underlying life insurance policy. If the underlying policy is subject to contest or rescission, the fair value of the collateral could be reduced to zero. Life insurance policies may generally be contested or rescinded by the issuing life insurance company within the contestability period and sometimes beyond the contestability period, depending on the grounds for rescission and applicable law.


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Misrepresentations, fraud, omissions or lack of insurable interest can all form the basis of loss of right to payment under a life insurance policy for many years beyond the contestability period. Whether or not there exists a reasonable legal basis for a contest or rescission, it can result in a cloud on the title or collectability of the policy. Contestation can be based upon any material misrepresentation or omission made in the life insurance policy application, even if unintentional. Misleading or incomplete answers by the insured to any questions asked by the insurance carrier regarding the financing of premiums, the policyholder’s net worth or the insured’s health and medical history and condition as well as to any other questions on a life insurance policy application, can lead to claims that a material misrepresentation or omission was made and may give rise to the insurance carrier’s right to void, contest or rescind the policy. Lack of a valid insurable interest of the life insurance policy owner in the insured also may give rise to the insurance carrier’s right to void, contest or rescind the policy. Although we obtain representations and warranties from the insured, policyholders and referring agents, we may not know whether the applicants for any of our policies have made any material misrepresentations or omissions on the policy applications, or whether the policy owner has a valid insurable interest in the insured, and as such, the policies securing our loans are subject to the risk of contestability or rescission. In addition, some insurance carriers have contested policies as STOLI arrangements, specifically citing the existence of certain nonrecourse premium financing arrangements as a basis to challenge the validity of the policies used to collateralize the financing. A policy may be voided or rescinded by the insurance carrier if found to be a STOLI policy where a valid insurable interest did not exist in the insured at policy inception. While the impact on our business from these risks has not been significant to date, there can be no assurance that any future challenges to the policies that we own or hold as collateral for our premium finance loans will not have a material adverse effect on our business, financial condition and results of operations.
 
If the insurance company successfully contests or rescinds a policy, the policy will be declared void, and in such event, the insurance company’s liability would be limited to a refund of all the insurance premiums paid for the policy without any accrued interest. While defending an action to contest or rescind a policy, premium payments may have to continue to be made to the life insurance company. Furthermore, a life insurance company may refuse to refund any of the premiums paid and seek to retain them as an offset to damages it claims to have suffered in connection with the issuance of the life insurance policy. Additionally, the issuing insurance company may refuse to cooperate with us by not providing information, processing notices and/or paperwork required to document the transaction. Hence, in the case of a contest or rescission, there cannot be any assurance that any of the premiums paid to the carrier (including those paid during the pendency of a contest or rescission action) will be refunded. If they are not, we may suffer a complete loss with respect to this portion of the loan amount which may adversely affect our business, financial condition and results of operations.
 
Premium financed life insurance policies are susceptible to a higher risk of fraud and misrepresentation in life insurance applications.
 
While fraud and misrepresentation by applicants and potential insureds in completing life insurance applications (especially with respect to the health and medical history and condition of the potential insured as well as the applicant’s net worth) exist generally in the life insurance industry, such risk of fraud and misrepresentation is heightened in connection with life insurance policies for which the premiums are financed through premium finance loans. In particular, there is a significant risk that applicants and potential insureds may not answer truthfully or completely to any questions related to whether the life insurance policy premiums will be financed through a premium finance loan or otherwise, the applicants’ purpose for purchasing the policy or the applicants’ intention regarding the future sale or transfer of the life insurance policy. Such risk may be further increased to the extent life insurance agents communicate to applicants and potential insureds regarding potential premium finance arrangements or transfer of life insurance policies through payment defaults under premium finance loans. In the ordinary course of business, our sales team receives inquiries from life insurance agents and brokers regarding the availability of premium finance loans for their clients. However, any communication between the life insurance agent and the potential policyholder or insured is beyond our control and we may not know whether a life insurance agent discussed with the potential policyholder or the insured the possibility of a premium finance loan by us or the subsequent transfer of the life insurance policy in the event of a payment default under the loan. Consequently, notwithstanding the


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representations and certifications we obtain from the policyholders, insureds and the life insurance agents, there is a risk that we may finance premiums for policies subject to contest or rescission by the insurance carrier based on fraud or misrepresentation in any information provided to the life insurance company, including the life insurance application.
 
Our liquidity depends upon a secondary market for life insurance policies.
 
With respect to a potential sale of a life insurance policy owned by us, the fair value depends significantly on an active secondary market for life insurance, which may contract or disappear depending on the impact of potential government regulation, future economic conditions and/or other market variables. Many investors who invest in life insurance policies are foreign investors who are attracted by potential investment returns from life insurance policies issued by United States life insurers with high ratings and financial strength as well as by the view that such investments are non-correlated assets — meaning changes in the equity or debt markets should not affect returns on such investments. In the event that the United States dollar loses value in comparison to other currencies, foreign investors suffer a reduction in value of their United States dollar denominated investments. In 2008, the United States dollar declined in value against other currencies and a number of United States life insurers suffered a downgrade in their ratings. These events caused investors in life insurance policies to reduce their demand for such products as well as reduced their demand for United States dollar denominated investments, which reduced the fair value of life insurance policies in the secondary market. Any of the above factors may result in us selling a policy for less than its fair value, resulting in a loss of profitability.
 
Delays in payment and non-payment of life insurance policy proceeds may have a material adverse effect on our business, financial condition and results of operations.
 
A number of arguments may be made by former beneficiaries (including but not limited to spouses, ex-spouses and descendants of the insured) under a life insurance policy, by the beneficiaries of the trust holding the policy, by the estate or legal heirs of the insured or by the insurance company issuing such policy, to deny or delay payment of proceeds following the death of an insured, including arguments related to lack of mental capacity of the insured, contestability or suicide provisions in a policy. In addition, the insurable interest and life settlement laws of certain states may prevent or delay the liquidation of the life insurance policy serving as collateral for a loan. Furthermore, if the death of an insured cannot be verified and no death certificate can be produced, the related insurance company may not pay the proceeds of the life insurance policy until the passage of a statutory period (usually five to seven years) for the presumption of death without proof. Such delays in payment or non-payment of policy proceeds may have a material adverse effect on our business, financial condition and results of operations.
 
Bankruptcy of the insured, a beneficiary of the trust owning the life insurance policy or the trust itself could prevent a claim under our lender protection insurance policy.
 
In many instances, individuals establish an irrevocable trust to hold and own their life insurance policy for estate planning reasons. In our premium finance business, the majority of the premium finance borrowers are trusts owning life insurance policies. A bankruptcy of the insured, a bankruptcy of a beneficiary of a trust owning the life insurance policy or a bankruptcy of the trust itself could prevent us from acquiring the life insurance policy following an event of default under the related premium finance loan unless consent of the applicable bankruptcy court is obtained or it is determined that the automatic stay generally arising following a bankruptcy filing is not applicable. A failure to promptly obtain any required bankruptcy court consent within one hundred twenty (120) days following the maturity date of the related premium finance loan could delay or prevent us from making a claim under the lender protection insurance policy for any loss sustained following a default under the premium finance loan. Lender protection insurance policies insure us and our lenders against certain risks of loss associated with our premium finance loans, including payment default by the borrower. If a premium finance loan is not repaid, the lender protection insurance policy provider repays the loan in full and takes ownership of the underlying life insurance policy. If we are delayed or otherwise prevented from making a claim under the lender protection insurance policy for any loss sustained following a


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default under the premium finance loan, additional premium payments will be required to be made to keep the life insurance policy in force. As a result, we may be forced to expend additional funds, or borrow funds at unfavorable rates if such financing is even available, in order to fund the premiums or, if we are unable to obtain the necessary funds, we may be forced to allow the policy to lapse, resulting in the loss of the premiums we financed in the transaction. Such events could have a material adverse effect on our business, financial condition and results of operations.
 
Our lender protection insurance policies have significant exclusions and limitations.
 
Coverage under our lender protection insurance policies is not comprehensive and each of these policies is subject to significant exclusions, limitations and coverage gaps. In the event that any of the exclusions or limitations to coverage set forth in the lender protection insurance policies are applicable or there is a coverage gap, there will be no coverage for any losses we may suffer, which would have a material adverse effect on our business, financial condition and results of operations. The coverage exclusions include, but are not limited to: (a) the lapse of the related life insurance policy due to the failure to pay sufficient premiums during the term of the applicable premium finance loan; (b) certain losses relating to situations where the life insured has died and there has been a bankruptcy or insolvency of the life insurance company that issued the applicable policy; (c) any loss caused by our fraudulent, illegal, criminal, malicious or grossly negligent acts; (d) a surrender of the related life insurance policy to the issuing life insurance carrier or the sale of such policy or the beneficial interest therein, in each case without the prior written consent of the lender protection insurer; (e) our failure to timely obtain necessary rights, free and clear of any lien or encumbrance, with respect to the applicable life insurance policy as required under the lender protection insurance policy; (f) our failure to timely submit a properly completed proof of loss certificate to the lender protection insurance policy insurer; (g) our failure to timely notify the lender protection insurance policy insurer of (i) the occurrence of certain prohibited acts, as described in the lender protection insurance policy, or (ii) material non-compliance of the related loan with applicable laws, in each case after obtaining actual knowledge of such events; (h) our making of a claim under the lender protection insurance policy knowing the same to be fraudulent; or (i) the related life insurance policy being contested prior to the effective date of the related coverage certificate issued under the lender protection insurance policy and we have actual knowledge of such contest.
 
Failure to perfect a security interest in the underlying life insurance policy or the beneficial interests therein could result in our interest being subordinated to other creditors.
 
Payment by the related premium finance loan borrower of amounts owed pursuant to each loan is secured by the underlying life insurance policy or by the beneficial interests in a trust established to hold the insurance policy. If we fail to perfect a security interest in such policy or beneficial interests, our interest in such policy or beneficial interests may be subordinated to those of other parties, including, in the event of a bankruptcy or insolvency, a bankruptcy trustee, receiver or conservator.
 
Some life insurance companies are opposed to the financing of life insurance policies.
 
Some United States life insurance companies and their trade associations have voiced concerns about the life settlement and premium finance industries generally and the transfer of life insurance policies to investors. These life insurance companies may oppose the transfer of a policy to, or honoring of a life insurance policy held by, third parties unrelated to the original insured/owner, especially when they may believe the initial premiums for such life insurance policies might have been financed, directly or indirectly, by investors that lacked an insurable interest in the continuing life of the insured. If the life insurance companies seek to contest or rescind life insurance policies acquired by us based on such aversion to the financing of life insurance policies, we may experience a substantial loss with respect to the related premium finance loans and the underlying life insurance policies, which could have a material adverse effect on our business, financial condition and results of operations. These life insurance companies and their trade associations may also seek additional state and federal regulation of the life settlement and premium finance industries. If such additional regulations were adopted, we may experience material adverse effects on our business, financial condition and results of operations.


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We are dependent on the creditworthiness of the life insurance companies that issue the policies serving as collateral for our premium finance loans. If a life insurance company defaults on its obligation to pay death benefits on a policy we own, we would experience a loss of our investment, which would have a material adverse effect on our business, financial condition and results of operations.
 
We are dependent on the creditworthiness of the life insurance companies who issue the policies serving as collateral for our premium finance loans. We assume the credit risk associated with life insurance policies issued by various life insurance companies. Furthermore, there is a concentration of life insurance companies who issue the policies that serve as collateral for our premium finance loans. Over 50% of our premium finance loans outstanding as of March 31, 2010 are secured by life insurance policies issued by 3 life insurance companies. The failure or bankruptcy of any such life insurance company or annuity company could have a material adverse impact on our ability to achieve our investment objectives. A life insurance company’s business tends to track general economic and market conditions that are beyond its control, including extended economic recessions or interest rate changes. Changes in investor perceptions regarding the strength of insurers generally and the policies or annuities they offer can adversely affect our ability to sell or finance our assets. Adverse economic factors and volatility in the financial markets may have a material adverse effect on a life insurance company’s business and credit rating, financial condition and operating results, and an issuing life insurance company may default on its obligation to pay death benefits on the life insurance policies we acquired following a payment default on our premium finance loans when we are otherwise unable to sell the underlying policy. In such event, we would experience a loss of our investment in such life insurance policies which would have a material adverse effect on our business, financial condition and results of operations.
 
If a life insurance company is able to increase the premiums due on life insurance policies that we own or finance, it will adversely affect our returns on such life insurance policies.
 
For any life insurance policies that we own or finance, we will be responsible for paying insurance premiums due. If a life insurance company is able to increase the cost of insurance charged for any of the life insurance policies that we own or finance, the amounts required to be paid for insurance premiums due for these life insurance policies may increase, requiring us to incur additional costs for the life insurance policies, which may adversely affect returns on such life insurance policies and consequently reduce the secondary market value of such life insurance policies. Failure to pay premiums on the life insurance policies when due will result in termination or “lapse” of the life insurance policies. The insurer may in a “lapse” situation view reinstatement of a life insurance policy as tantamount to the issuance of a new life insurance policy and may require the current owner to have an insurable interest in the life of the insured as of the date of the reinstatement. In such event, we would experience a loss of our investment in such life insurance policy.
 
If an insured reaches age 95 or 100, the policy may terminate.
 
Some life insurance policies terminate if the insured lives to the age of 100, or in some cases at age 95. Thus if the insured under a policy acquired by us outlives such policy, we would receive nothing on such life insurance policy as the insurer is relieved of its obligations thereunder. Such termination of a life insurance policy would result in a loss of investment return on such life insurance policy and eliminate any potential proceeds realizable by us from the sale or the maturation of such life insurance policy.
 
Failure to protect our premium finance transaction clients’ confidential information and privacy could adversely affect our business.
 
Our premium finance business is subject to privacy regulations and to confidentiality obligations. For example, the collection and use of medical data is subject to national and state legislation, including the Health Insurance Portability and Accountability Act of 1996, or HIPAA. The actions we take to protect such confidential information include, among other things:
 
  •  training and educating our employees regarding our obligations relating to confidential information;
 
  •  actively monitoring our record retention plans and any changes in state or federal privacy and compliance requirements;


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  •  maintaining secure storage facilities for tangible records; and
 
  •  limiting access to electronic information.
 
However, if we do not properly comply with privacy regulations and protect confidential information, we could experience adverse consequences, including regulatory sanctions, such as penalties, fines and loss of licenses, as well as loss of reputation and possible litigation.
 
Risk Factors Related to Structured Settlements
 
We are dependent on third parties to purchase our structured settlements. Any inability to sell structured settlements or, in the alternative, to access additional capital to purchase structured settlements, may have a material adverse effect on our ability to grow our business, our financial condition and results of operations.
 
We are dependent on third parties, such as Slate, to purchase our structured settlements. Our ability to grow our business depends upon our ability to sell our structured settlements at favorable discount rates and to establish alternative financing arrangements. There can be no assurance that such third party purchasers or other financing will be available to us in the future on favorable terms or at all. If such financing were not available, then we may be required to seek additional equity financing, if available, which would dilute the interests of shareholders who purchase common stock in this offering.
 
No assurance can be given that we will continue to be able to sell our structured settlements to third parties at favorable discount rates or that financing through borrowings or other means will be available on acceptable terms to satisfy our cash requirements and to grow our business.
 
Any change in current tax law could have a material adverse effect on our business, financial condition and results of operations.
 
The use of structured settlements is largely the result of the favorable federal income tax treatment of such transactions. In 1982, the Internal Revenue Service issued a private revenue ruling that the income tax exclusion of personal injury settlements applied to related periodic payments. Thus, claimants receiving installment payments as compensation for a personal injury were exempt from all federal income taxation, provided certain conditions were met. This ruling, and its subsequent codification into federal tax law, resulted in the proliferation of structured settlements as a means of settling personal injury lawsuits. Changes to tax policies that eliminate this exemption of structured settlements from federal taxation could have a material adverse effect on our future profitability. If the tax treatment for structured settlements were changed adversely by a statutory change or a change in interpretation, the dollar volume of structured settlements could be reduced significantly which would also reduce the level of our structured settlement business. In addition, if there were a change in the federal tax code that would result in adverse tax consequences for the assignment or transfer of structured settlements, such change could have a material adverse effect on our business, financial condition and results of operations.
 
Fluctuations in interest rates may decrease our yield on structured settlement transactions.
 
Our profitability is directly affected by levels of and fluctuations in interest rates. Such profitability is largely determined by the difference, or “spread,” between the discount rate at which we purchase the structured settlements and the discount rate at which we can resell these assets or the interest rate at which we can finance those assets. Structured settlements are purchased at effective yields which are fixed, while rates at which structured settlements are sold, with the exception of our forward purchase arrangement with Slate, are generally a function of the prevailing market rates for short-term borrowings. As a result, increases in prevailing market interest rates after structured settlements are acquired could have a material adverse effect on our yield on structured settlement transactions.


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The insolvency of a holder of a structured settlement could have an adverse effect on our business, financial condition and results of operations.
 
Our rights to scheduled payments in structured settlement transactions will be adversely affected if any holder of a structured settlement, the special purpose vehicle to which an insurance company assigns its obligations to make payments under the settlement (the “Assumption Party”) or the annuity provider becomes insolvent and/or becomes a debtor in a case under the Bankruptcy Code.
 
If a holder of a structured settlement were to become a debtor in a case under the Bankruptcy Code, a court could hold that the scheduled payments transferred by the holder under the applicable settlement purchase agreement would not constitute property of the estate of the claimant under the Bankruptcy Code. If, however, a trustee in bankruptcy or other receiver were to assert a contrary position, such as by requiring us (or any securitization vehicle) to establish our right to those payments under federal bankruptcy law or by persuading courts to recharacterize the transaction as secured loans, such result could have a material adverse effect on our business. If the rights to receive the scheduled payments are deemed to be property of the bankruptcy estate of the claimant, the trustee may be able to avoid assignment of the receivable to us.
 
Furthermore, a general creditor or representative of the creditors (such as a trustee in bankruptcy) of an Assumption Party could make the argument that the payments due from the annuity provider are the property of the estate of such Assumption Party (as the named owner thereof). To the extent that a court would accept this argument, the resulting delays or reductions in payments on our receivables could have a material adverse effect on our business, financial condition and results of operations.
 
If the identities of structured settlement holders become readily available, it could have an adverse effect on our structured settlement business, financial condition and results of operations.
 
We do not believe that there are any readily available lists of holders of structured settlements, which makes brand awareness critical to growing market share. We use national television marketing to generate in-bound telephone and internet inquiries and we have built a proprietary database of clients and prospective clients. As of March 31, 2010, we had a database of over 23,000 structured settlement leads. If the identities of structured settlement holders were to become readily available to our competitors or to the general public, we could face increased competition and the value of our proprietary database would be diminished, which would have a negative effect on our structured settlement business, financial condition and results of operations.
 
Adverse judicial developments could have an adverse effect on our business, financial condition and results of operations.
 
Adverse judicial developments have occasionally occurred in the structured settlement industry, especially with regard to anti-assignment concerns and issues associated with non-disclosure of material facts and associated misconduct. Any adverse judicial developments calling into doubt such laws and regulations could materially and adversely affect our investments in structured settlements.
 
Risk Factors Relating to Our General Business
 
Changes to statutory, licensing and regulatory regimes governing premium financing or structured settlements could have a material adverse effect on our activities and revenues.
 
Changes to statutory, licensing and regulatory regimes could result in the enforcement of stricter compliance measures or adoption of additional measures on us or on the insurance companies or annuity providers that stand behind the insurance policies that collateralize our premium finance loans and the structured settlements that we purchase, either of which could have a material adverse impact on our business activities and revenues. Any change to the regulatory regime covering the resale of any of these asset classes, including any change specifically applicable to our activities or to investor eligibility, could restrict our ability to finance, acquire or sell these assets or could lead to significantly increased compliance costs.


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There is additional regulatory risk with respect to the acquisition of life insurance policies in the event of a payment default when we are otherwise unable to sell the policy collateralizing our premium finance loans. The making, enforcement and collection of premium finance loans is extensively regulated by the laws and regulations of many states and other applicable jurisdictions. These laws and regulations vary widely, but often:
 
  •  require that premium finance lenders be licensed by the applicable jurisdiction;
 
  •  require certain disclosure agreements and strictly govern the content thereof;
 
  •  regulate the amount of late fees and finance charges that may be charged if a borrower is delinquent on its payments; and/or
 
  •  allow imposition of potentially significant penalties on lenders for violations of such jurisdiction’s applicable insurance premium finance laws.
 
In addition, our premium finance transactions are subject to state usury laws, which limit the interest rate that can be charged. While we attempt to structure these transactions to avoid being deemed in violation of usury laws, we cannot assure you that we will be successful in doing so. Loans found to be at usurious interest rates may be voided, which would mean the loss of our principal and interest. Also, the Securities and Exchange Commission recently issued a report recommending that sales of life insurance policies in life settlement transactions be regulated as securities for purposes of the federal securities laws. Any legislation implementing such regulatory change could lead to increased compliance costs and adversely affect our ability to acquire or sell life insurance policies.
 
To the extent that more restrictive regulations or more stringent interpretations of existing regulations are adopted in the future, the future costs of compliance with such changes in regulations could be significant and our ability to conduct our business may be materially adversely affected. For example, if a state insurance regulator were to take the position that our premium finance loans or the acquisition of life insurance policies serving as collateral for such loans should be characterized as life settlement transactions subject to applicable regulations, we could be issued a cease and desist order effectively requiring us to suspend premium finance transactions for an indefinite period, and be subject to fines and other penalties.
 
Negative press from media or consumer advocacy groups and as a result of litigation involving industry participants could have a material adverse effect on our business, financial condition and results of operations.
 
The premium finance and structured settlement industries periodically receive negative press from the media and consumer advocacy groups and as a result of litigation involving industry participants. A sustained campaign of negative press resulting from media or consumer advocacy groups, industry litigation or other factors could adversely affect the public’s perception of these industries as a whole, and lead to reluctance to sell assets to us or to provide us with third party financing, which could have a material adverse effect on our business, financial condition and results of operations.
 
We have limited operating experience.
 
Our business operations began in December 2006. Consequently, while certain of our management are very experienced in the premium finance and structured settlement businesses, we have limited operating history in both of our business segments. Therefore, the historical performance of our operations may be of limited relevance in predicting future performance.
 
The loss of any of our key personnel could have a material adverse effect on our business, financial condition and results of operations.
 
Our success depends to a significant degree upon the continuing contributions of our key executive officers including Antony Mitchell, our chief executive officer, and Jonathan Neuman, our president and chief operating officer. These officers have significant experience operating businesses in structured settlements and


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premium finance transactions, which are highly regulated industries. In connection with this offering, we have entered into employment agreements with each of these executive officers. We do not maintain key man life insurance with respect to any of our executives. Mr. Mitchell is a citizen of the United Kingdom who is working in the United States as a lawful permanent resident on a conditional basis. In order to retain his lawful permanent residency, Mr. Mitchell will need to apply to have the conditions on his permanent resident status removed prior to March 31, 2011. Although Mr. Mitchell intends to apply to have the conditions on his lawful permanent residency removed, there can be no assurance that he will satisfy the requirements to have the conditions removed, or that his application to do so will be approved. The failure to remove the conditions on his permanent residency could result in Mr. Mitchell having to leave the United States or cause him to seek an alternative immigration status in the United States. The loss of Mr. Mitchell or Mr. Neuman or other executive officers or key personnel could have a material adverse effect on our business, financial condition and results of operations.
 
We compete with a number of other finance companies and may encounter additional competition.
 
There are a number of finance companies that compete with us. Many are significantly larger and possess considerably greater financial, marketing, management and other resources than we do. The premium finance business and structured settlement business could also prove attractive to new entrants. As a consequence, competition in these sectors may increase. In addition, existing competitors may increase their market penetration and purchasing activities in one or more of the sectors in which we participate. The availability of the type of insurance policies that meet our actuarial and underwriting standards for our premium finance transactions is limited and sought by many of our competitors. Also, we rely on life insurance agents and brokers to refer premium finance transactions to us, and our competitors may offer better terms and conditions to such life insurance agents and brokers. Increased competition could result in reduced origination volume, reduced discount rates and/or other fees, each of which could materially adversely affect our revenue, which would have a material adverse effect on our business, financial condition and results of operations.
 
Risks Related to Our Common Stock and This Offering
 
There has been no prior public market for our common stock, and, therefore, you cannot be certain that an active trading market or a specific share price will be established.
 
Currently, there is no public trading market for our common stock, and it is possible that an active trading market will not develop upon completion of this offering or that the market price of our common stock will decline below the initial public offering price. We intend to apply to list our common stock on the New York Stock Exchange under the symbol “IFT.” The initial public offering price per share will be determined by negotiation among us and the underwriters and may not be indicative of the market price of our common stock after completion of this offering.
 
The trading price of our common stock may decline after this offering.
 
The trading price of our common stock may decline after this offering for many reasons, some of which are beyond our control, including, among others:
 
  •  our results of operations;
 
  •  changes in expectations as to our future results of operations, including financial estimates and projections by securities analysts and investors;
 
  •  changes in laws and regulations applicable to structured settlements or premium finance transactions;
 
  •  increased competition for premium finance lending or the acquisition of structured settlements;
 
  •  our ability to secure credit facilities on favorable terms or at all;
 
  •  results of operations that vary from those expected by securities analysts and investors;
 
  •  future sales of our common stock;


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  •  fluctuations in interest rates, inflationary pressures and other changes in the investment environment that affect returns on invested assets; and
 
  •  volatile and unpredictable developments, including man-made, weather-related and other natural catastrophes or terrorist attacks.
 
In addition, the stock market in general has experienced significant volatility that often has been unrelated to the operating performance of companies whose shares are traded. These market fluctuations could adversely affect the trading price of our common stock, regardless of our actual operating performance. As a result, the trading price of our common stock may be less than the initial public offering price, and you may not be able to sell your shares at or above the price you pay to purchase them.
 
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.
 
The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. Additionally, since we do not believe that there are other similar public companies involved in both the premium finance business and the structured settlement business as we are, the risk that we may never obtain research coverage by securities and industry analysts is heightened. If no securities or industry analysts commence coverage of us, the trading price for our stock would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.
 
Public investors will suffer immediate and substantial dilution as a result of this offering.
 
The initial public offering price per share is significantly higher than our pro forma net tangible book value per share of our common stock. Accordingly, if you purchase shares in this offering, you will suffer immediate and substantial dilution of your investment. Based upon the issuance and sale of [          ] shares of our common stock at an assumed initial offering price of $[     ] per share, which is the midpoint of the price range on the cover of this prospectus, less an amount equal to the underwriting discounts and commissions, you will incur immediate dilution of approximately $[     ] in the pro forma net tangible book value per share if you purchase common stock in this offering. In addition, investors in this offering will:
 
  •  pay a price per share that substantially exceeds the pro forma net tangible book value of our assets after subtracting liabilities; and
 
  •  contribute [     ]% of the total amount invested to date to fund us based on an assumed initial offering price to the public of $[     ] per share, which is the midpoint of the price range on the cover of this prospectus, but will own only [     ]% of the shares of common stock outstanding after completion of this offering.
 
Future sales of our common stock may affect the trading price of our common stock and the future exercise of options may lower the price of our common stock.
 
We cannot predict what effect, if any, future sales of our common stock, or the availability of shares for future sale, will have on the trading price of our common stock. Sales of a substantial number of shares of our common stock in the public market after completion of this offering, or the perception that such sales could occur, may adversely affect the trading price of our common stock and may make it more difficult for you to sell your shares at a time and price that you determine appropriate. Upon completion of this offering, after giving effect to (i) the corporate conversion, pursuant to which all outstanding common and preferred limited liability company units of Imperial Holdings, LLC (including all accrued but unpaid dividends thereon) will be converted into [          ] shares of our common stock; (ii) the conversion of $[     ] million of our


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promissory notes and $[     ] million of related accrued interest into [          ] shares of our common stock upon the closing of this offering at an assumed initial public offering price of $[     ] per share, which is the midpoint of the price range on the cover of this prospectus and (iii) the sale of [          ] shares in this offering, there will be [          ] shares of our common stock outstanding. Up to an additional [          ] shares of common stock will be issuable upon the exercise of warrants issued to our existing members prior to the completion of this offering. Moreover, [          ] additional shares of our common stock are issuable upon the exercise of options that we intend to grant to our directors, executive officers and other employees upon the completion of this offering, at an exercise price equal to the initial public offering price. Following completion of this offering, we intend to register all of the [          ] shares issuable or reserved for issuance under the 2010 Plan. See “Description of Capital Stock” and “Executive Compensation.” We and our current directors, executive officers and shareholders have entered into 180-day lock-up agreements. The lock-up agreements are described in “Shares Eligible for Future Sale — Lock-Up Agreements.” An aggregate of [          ] shares of our common stock will be subject to these lock-up agreements upon completion of this offering.
 
Being a public company will increase our expenses and administrative workload and will expose us to risks relating to evaluation of our internal controls over financial reporting required by Section 404 of the Sarbanes-Oxley Act of 2002.
 
As a public company, we will need to comply with additional laws and regulations, including the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, and related rules of the Securities and Exchange Commission, or the SEC, and requirements of the New York Stock Exchange. We were not required to comply with these laws and requirements as a private company. Complying with these laws and regulations will require the time and attention of our board of directors and management and will increase our expenses. Among other things, we will need to: design, establish, evaluate and maintain a system of internal controls over financial reporting in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board; prepare and distribute periodic reports in compliance with our obligations under the federal securities laws; establish new internal policies, principally those relating to disclosure controls and procedures and corporate governance; institute a more comprehensive compliance function; and involve to a greater degree our outside legal counsel and accountants in the above activities.
 
In addition, we also expect that being a public company will make it more expensive for us to obtain director and officer liability insurance. We may be required to accept reduced coverage or incur substantially higher costs to obtain this coverage. These factors could also make it more difficult for us to attract and retain qualified executives and members of our board of directors, particularly directors willing to serve on our audit committee.
 
We are in the process of evaluating our internal control systems to allow management to report on, and our independent auditors to assess, our internal controls over financial reporting. We plan to perform the system and process evaluation and testing (and any necessary remediation) required to comply with the management certification and auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. We are required to comply with Section 404 in our annual report for the year ending December 31, 2011.
 
However, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations. Furthermore, upon completion of this process, we may identify control deficiencies of varying degrees of severity under applicable SEC and Public Company Accounting Oversight Board rules and regulations that remain unremediated.
 
If we fail to implement the requirements of Section 404 in a timely manner, we might be subject to sanctions or investigation by regulatory agencies such as the SEC. In addition, failure to comply with Section 404 or the report by us of a material weakness may cause investors to lose confidence in our financial statements or the trading price of our common stock to decline. If we fail to remediate any material weakness, our financial statements may be inaccurate, our access to the capital markets may be restricted and the trading price of our common stock may decline.


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As a public company, we will be required to report, among other things, control deficiencies that constitute a “material weakness” or changes in internal controls that materially affect, or are reasonably likely to materially affect, internal controls over financial reporting. A “control deficiency” exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A “significant deficiency” is a control deficiency, or combination of control deficiencies, that adversely affects the ability to initiate, authorize, record, process or report financial data reliably in accordance with generally accepted accounting principles that results in more than a remote likelihood that a misstatement of financial statements that is more than inconsequential will not be prevented or detected. A “material weakness” is a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.
 
Our independent registered public accounting firm has in the past identified certain deficiencies in our internal controls that it considered to be control deficiencies and material weaknesses. If we fail to remediate these internal control deficiencies and material weaknesses and maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our financial results.
 
During their audit of our financial statements for the years ended December 31, 2008 and 2007, Grant Thornton LLP, our independent registered public accounting firm, identified certain deficiencies in our internal controls, including deficiencies that they considered to be significant deficiencies and material weaknesses. Specifically, in their audit of our financial statements for the year ended December 31, 2008, our independent auditors identified a material weakness relating to the number of adjustments recorded to reconcile differences and to correct accounts improperly booked relating to the year-end closing and reporting process. In their audit of our financial statements for the year ended December 31, 2007, our independent auditors identified material weaknesses relating to (i) the incorrect recordation of agency fees, (ii) a reversal of capital contributions entry due to inaccuracies in the timing of the payments and (iii) inaccuracies in the input of maturity dates of loans. Additionally, the audit identified a significant control deficiency with respect to the number of adjusting journal entries as a result of us having a limited accounting staff.
 
In response, we initiated corrective actions to remediate these control deficiencies and material weaknesses. Although no material deficiencies were identified during the audit of our financial statements for the period ended December 31, 2009, it is possible that we or our independent auditors may identify significant deficiencies or material weaknesses in our internal control over financial reporting in the future. Any failure or difficulties in implementing and maintaining these controls could cause us to fail to meet the periodic reporting obligations that we will become subject to after this offering or result in material misstatements in our financial statements. The existence of a material weakness could result in errors to our financial statements requiring a restatement of our financial statements, cause us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial information, which could lead to a decline in our stock price.
 
Due to the concentration of our capital stock ownership with certain of our executive officers, they may be able to influence shareholder decisions, which may conflict with your interests as a shareholder.
 
Immediately upon completion of this offering Antony Mitchell, our chief executive officer, and Jonathan Neuman, our chief operating officer, directly and through corporations that they control, will each beneficially own shares representing approximately [     ]% and [     ]%, respectively, of the voting power of our common stock. As a result, these executive officers may have the ability to significantly influence matters requiring shareholder approval, including, without limitation, the election or removal of directors, mergers, acquisitions, changes of control of our company and sales of all or substantially all of our assets. Your interests as a shareholder may conflict with their interests, and the trading price of shares of our common stock could be adversely affected.


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Provisions in our executive officers’ employment agreements and provisions in our articles of incorporation and bylaws and under the laws of the State of Florida could impede an attempt to replace or remove our directors or otherwise effect a change of control, which could diminish the price of our common stock.
 
We have entered into employment agreements with our executive officers as described in the section title “Executive Compensation — Employment Agreements.” The agreements for our Chief Executive Officer and President provide for substantial payments in the event of a material change in the geographic location where such officers perform their duties, upon a material diminution of their base salaries or responsibilities or upon their resignation for any reason within sixty days following a change in control. These payments may deter any transaction that would result in a change in control.
 
Our articles of incorporation and bylaws contain provisions that may entrench directors and make it more difficult for shareholders to replace directors even if the shareholders consider it beneficial to do so. In particular, shareholders are required to provide us with advance notice of shareholder nominations and proposals to be brought before any annual meeting of shareholders, which could discourage or deter a third party from conducting a solicitation of proxies to elect its own slate of directors or to introduce a proposal. In addition, our articles of incorporation eliminate our shareholders’ ability to act without a meeting and require the holders of not less than 50% of the voting power of our common stock to call a special meeting of shareholders.
 
These provisions could delay or prevent a change of control that a shareholder might consider favorable. For example, these provisions may prevent a shareholder from receiving the benefit from any premium over the market price of our common stock offered by a bidder in a potential takeover. Even in the absence of an attempt to effect a change in management or a takeover attempt, these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging changes in management and takeover attempts in the future.
 
Furthermore, our articles of incorporation and our bylaws provide that the number of directors shall be fixed from time to time by our board of directors, provided that the board shall consist of at least three and no more than fifteen members. Additionally, subject to certain exceptions, the Florida Business Corporation Act prohibits the voting of shares in a publicly held Florida corporation that are acquired in a “control share acquisition” unless:
 
  •  the board of directors approves the control share acquisition; or
 
  •  the holders of a majority of the corporation’s voting shares (excluding shares held by the acquiring party or officers or inside directors of the corporation) approve the granting of voting rights to the acquiring party.
 
A “control share acquisition” is defined as an acquisition that immediately thereafter entitles the acquiring party, directly or indirectly, to vote in the election of directors within any of the following ranges of voting power:
 
  •  1/5 or more but less than 1/3;
 
  •  1/3 or more but less than a majority; and
 
  •  a majority or more.
 
Additionally, one of our subsidiaries, Imperial Life Settlements, LLC, a Delaware limited liability company, is licensed as a viatical settlement provider and is regulated by the Florida Office of Insurance Regulation. As a Florida viatical settlement provider, Imperial Life Settlements, LLC is subject to regulation as a specialty insurer under certain provisions of the Florida Insurance Code. Under applicable Florida law, no person can finally acquire, directly or indirectly, more than 10% of the voting securities of a viatical settlement provider or its controlling company without the written approval of the Florida Office of Insurance Regulation. Accordingly, any person who acquires beneficial ownership of 10% or more of our voting securities will be required by law to notify the Florida Office of Insurance Regulation no later than five days after any form of tender offer or exchange offer is proposed, or no later than five days after the acquisition of securities or


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ownership interest if no tender offer or exchange offer is involved. Such person will also be required to file with the Florida Office of Insurance Regulation an application for approval of the acquisition no later than 30 days after the same date that triggers the 5-day notice requirement.
 
The Florida Office of Insurance Regulation may disapprove the acquisition of 10% or more of our voting securities by any person who refuses to apply for and obtain regulatory approval of such acquisition. In addition, if the Florida Office of Insurance Regulation determines that any person has acquired 10% or more of our voting securities without obtaining its regulatory approval, it may order that person to cease the acquisition and divest itself of any shares of our voting securities which may have been acquired in violation of the applicable Florida law. In addition, the Florida Office of Insurance Regulation may assess administrative fines against the purchaser not to exceed $20,000 per willful violation, subject to a cap of $100,000 for violations arising from one transaction. Due to the requirement to file an application with and obtain approval from the Florida Office of Insurance Regulation, purchasers of 10% or more of our voting securities may incur additional expenses in connection with preparing, filing and obtaining approval of the application, and the effectiveness of the acquisition will be delayed pending receipt of approval from the Florida Office of Insurance Regulation.
 
The Florida Office of Insurance Regulation may also take disciplinary action against Imperial Life Settlements, LLC’s license if it finds that an acquisition of our voting securities is made in violation of the applicable Florida law and would render the further transaction of business hazardous to our customers, creditors, shareholders or the public.


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FORWARD-LOOKING STATEMENTS
 
Some of the statements under the captions “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” and elsewhere in this prospectus may include forward-looking statements. These statements reflect the current views of our management with respect to future events and our financial performance. These statements include forward-looking statements with respect to our business and the insurance industry in general. Statements that include the words “expect,” “intend,” “plan,” “believe,” “project,” “estimate,” “may,” “should,” “anticipate” and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the federal securities laws or otherwise.
 
Forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. We believe that these factors include, but are not limited to, the following:
 
  •  our results of operations;
 
  •  our ability to continue to grow our businesses;
 
  •  our ability to obtain financing on favorable terms or at all;
 
  •  changes in laws and regulations applicable to premium finance transactions or structured settlements;
 
  •  changes in mortality rates and the accuracy of our assumptions about life expectancies;
 
  •  increased competition for premium finance lending or for the acquisition of structured settlements;
 
  •  adverse developments in capital markets;
 
  •  loss of the services of any of our executive officers;
 
  •  the effects of United States involvement in hostilities with other countries and large-scale acts of terrorism, or the threat of hostilities or terrorist acts; and
 
  •  changes in general economic conditions, including inflation, changes in interest rates and other factors.
 
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this prospectus, including in particular the risks described under “Risk Factors” beginning on page 13 of this prospectus. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Any forward-looking statements you read in this prospectus reflect our views as of the date of this prospectus with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. Before making a decision to purchase our common stock, you should carefully consider all of the factors identified in this prospectus that could cause actual results to differ.


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USE OF PROCEEDS
 
We estimate that our net proceeds from this offering, based on the sale of [          ] shares of our common stock at an assumed initial public offering price of $[     ] per share, which is the midpoint of the price range set forth on the cover of this prospectus, after deducting the underwriting discounts and commissions and our estimated offering expenses, will be approximately $[     ]. We estimate that our net proceeds from this offering will be $[     ] if the underwriters exercise their over-allotment option in full.
 
We intend to contribute approximately $[     ] to our subsidiary, Imperial Premium Finance, LLC, to support its premium financing lending activities. We intend to use the remaining $[     ] of the net proceeds for general corporate purposes.
 
Pending the use of the net proceeds from this offering, we may invest some of the proceeds in short-term investment-grade instruments.


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DIVIDEND POLICY
 
We do not expect to pay any cash dividends on our common stock for the foreseeable future. We currently intend to retain any future earnings to finance our operations and growth. Any future determination to pay cash dividends on our common stock will be at the discretion of our board of directors and will be dependent on our earnings, financial condition, operating results, capital requirements, any contractual, regulatory and other restrictions on the payment of dividends by us or by our subsidiaries to us, and other factors that our board of directors deems relevant.
 
Imperial is a holding company and has no direct operations. Our ability to pay dividends in the future depends on the ability of our operating subsidiaries to pay dividends to us. In addition, future debt arrangements may contain certain prohibitions or limitations on the payment of dividends.


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CORPORATE CONVERSION
 
In connection with this offering, our board of directors and the holders of our outstanding common and preferred limited liability company units will complete a reorganization in which Imperial Holdings, Inc., a Florida corporation, will succeed to the business of Imperial Holdings, LLC, a Florida limited liability company, and the members of Imperial Holdings, LLC will become shareholders of Imperial Holdings, Inc. We refer to this reorganization as the corporate conversion. In order to consummate the corporate conversion, a certificate of conversion will be filed with the Florida Secretary of State prior to the closing of this offering. In connection with the corporate conversion, all of our outstanding common and preferred limited liability company units will be converted into an aggregate of [          ] shares of common stock of Imperial Holdings, Inc. as follows:
 
  •  holders of common units will receive an aggregate of [          ] shares of common stock based on a conversion ratio of [          ] shares of common stock for each common unit; and
 
  •  holders of Series A, B, C, and D preferred units will receive an aggregate of [          ] shares of common stock based on a conversion ratio of [          ] shares of common stock for each preferred unit.
 
After the corporate conversion and prior to the closing of this offering, our shareholders will consist of three Florida corporations and one Florida limited liability company. These four shareholders will reorganize so that their beneficial owners who are listed under “Principal Shareholders”, including Messrs. Mitchell and Neuman, will receive the [          ] shares of common stock of Imperial Holdings, Inc. issuable to the members of Imperial Holdings, LLC in the corporate conversion. We do not expect any of the prior losses which the members of Imperial Holdings, LLC have accumulated to carry forward into Imperial Holdings, Inc., as a result of the corporate conversion.
 
Following the corporate conversion and upon the closing of this offering, our shareholders will cause the conversion of $[     ] million of our promissory notes and $[     ] million of related accrued interest into [          ] shares of our common stock at an assumed initial public offering price of $[     ] per share, which is the midpoint of the price range on the cover of this prospectus. Such shares will be issued to [          ] and [          ].
 
In addition, following the corporate conversion and upon the closing of this offering, our four current shareholders will receive warrants that may be exercised for up to [          ] shares of common stock, as described elsewhere herein under the subsection “Warrants” in the section titled “Description of Capital Stock.”


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CAPITALIZATION
 
The following table sets forth our capitalization as of March 31, 2010:
 
  •  on an actual basis;
 
  •  on a pro forma basis to give effect to:
 
  (i)  the sale of 7,000 Series D Preferred Units for $700,000 which occurred in June 2010; and
 
  (ii)  the consummation of the corporate conversion, pursuant to which all outstanding common and preferred limited liability company units (including all accrued but unpaid dividends thereon) will be converted into [          ] shares of our common stock; and
 
  (iii)  the conversion of $28.3 million of our promissory notes and $2.2 million of related accrued interest into [          ] shares of our common stock at an assumed initial public offering price of $[     ] per share, which is the midpoint of the price range on the cover of this prospectus; and
 
  •  on a pro forma as adjusted basis to give effect to the above and:
 
  (i)  our sale of [          ] shares of common stock at an assumed initial public offering price of $[     ] per share, which is the midpoint of the price range on the cover of this prospectus, after the deduction of the underwriting discounts and commissions and the estimated offering expenses payable by us.
 
You should read this table in conjunction with the “Use of Proceeds,” “Selected Historical and Unaudited Pro Forma Consolidated and Combined Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this prospectus and our financial statements and related notes included in the back of this prospectus.
 
                         
    As of March 31, 2010  
                Pro Forma As
 
    Actual     Pro Forma     Adjusted  
    (In thousands)  
 
Debt Outstanding:
                       
Notes payable
  $ 221,633     $ 193,306                   
                         
Total liabilities
  $ 221,633     $ 193,306          
                         
Members’ equity:
                       
Member units — Series A preferred (500,000 authorized; 90,769 issued and outstanding, actual; 0 issued and outstanding, pro forma and pro forma as adjusted)
    4,035              
Member units — Series B preferred (50,000 authorized; 50,000 issued and outstanding, actual; 0 issued and outstanding, pro forma and pro forma as adjusted)
    5,000              
Member units — Series C preferred (75,000 authorized; 70,000 issued and outstanding, actual; 0 issued and outstanding, pro forma and pro forma as adjusted)
    7,000              
Member units — common (500,000 authorized; 450,000 issued and outstanding, actual; 0 issued and outstanding, pro forma and pro forma as adjusted)
    19,924              
Accumulated deficit
    (19,586 )            
                         
Total Members’ equity
  $ 16,373     $     $        
                         


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    As of March 31, 2010  
                Pro Forma As
 
    Actual     Pro Forma     Adjusted  
    (In thousands)  
 
Shareholders’ equity:
                       
Common stock, par value $0.01 per share; [          ] shares authorized, no shares issued and outstanding, actual; and [          ] shares issued and outstanding, pro forma
          [     ]          
Additional paid in capital
          67,223          
Accumulated deficit
          (19,586 )        
                         
Total shareholders’ equity
          47,637          
                         
Total capitalization
  $ 238,006     $ 240,943     $  
                         
 
The number of shares of common stock shown to be outstanding upon the completion of this offering excludes:
 
  •  up to [          ] shares of common stock that may be issued pursuant to the underwriters’ over-allotment option;
 
  •  [          ] shares of common stock issuable upon the exercise of stock options we intend to grant to our directors, executive officers and other employees upon completion of this offering, at an exercise price equal to the initial public offering price;
 
  •  [          ] shares of common stock issuable upon the exercise of warrants that will be issued to our existing shareholders prior to the closing of this offering; and
 
  •  [          ] additional shares available for future issuance under our 2010 Plan.

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DILUTION
 
Our net tangible book value as of March 31, 2010, on a pro forma basis, was approximately $[     ] million, or $[     ] per share of our common stock. Pro forma net tangible book value per share represents our total tangible assets reduced by our total liabilities and divided by the number of shares of common stock outstanding after giving effect to:
 
  •  the consummation of the corporate conversion, pursuant to which all of our outstanding common and preferred limited liability company units (including all accrued but unpaid dividends thereon) will be converted into [          ] shares of our common stock; and
 
  •  the conversion of $[     ] million of our promissory notes and $[     ] million of related accrued interest into [          ] shares of our common stock at an assumed initial public offering price of $[     ] per share, which is the midpoint of the price range on the cover of this prospectus, upon the closing of this offering.
 
Dilution in pro forma net tangible book value per share represents the difference between the amount per share that you will pay in this offering and the net tangible book value per share immediately after this offering.
 
After giving effect to our receipt of approximately $[     ] million of estimated net proceeds (after deducting underwriting discounts and commissions and estimated offering expenses payable by us) from our sale of common stock in this offering based on an assumed initial public offering price of $[     ] per share, which is the midpoint of the price range on the cover of this prospectus, our pro forma net tangible book value as of March 31, 2010 would have been approximately $[     ] million, or $[     ] per share of common stock. This amount represents an immediate increase in pro forma net tangible book value of $[     ] per share of our common stock to existing shareholders and an immediate dilution of $[     ] per share of our common stock to new investors purchasing shares of common stock in this offering at the assumed initial public offering price. The following table illustrates the dilution:
 
                 
Assumed initial public offering price per share
          $ [     ]  
Pro forma net tangible book value per share as of March 31, 2010
  $ [     ]          
Increase in pro forma net tangible book value per share attributable to this offering
    [     ]          
Pro forma net tangible book value per share after this offering
            [     ]  
Dilution per share to new investors
          $ [     ]  
 
If the underwriters exercise their over-allotment option in full, the pro forma net tangible book value per share after giving effect to the offering would be $[     ] per share. This represents an increase in pro forma net tangible book value of $[     ] per share to existing shareholders and dilution in pro forma net tangible book value of $[     ] per share to new investors.
 
A $1.00 increase (decrease) in the assumed initial public offering of $[     ] per share would increase (decrease) our pro forma net tangible book value per share after this offering and decrease (increase) dilution to new investors by $[     ], assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.


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The following table summarizes, as of March 31, 2010, the differences between the number of shares issued to, the total consideration paid, and the average price per share paid by existing shareholders and by new investors in this offering, after giving effect to (i) the issuance of [          ] shares of our common stock to our shareholders upon the consummation of the corporate conversion, (ii) the conversion of $[     ] million of our promissory notes and $[     ] million of related accrued interest into [          ] shares of our common stock and (iii) the issuance of [          ] shares of common stock in this offering, in the case of (ii) and (iii) at the assumed initial public offering price of $[     ] per share, and excluding underwriter discounts and commissions and estimated offering expenses payable by us. The table below assumes an initial public offering price of $[     ] per share for shares purchased in this offering and excludes underwriting discounts and commissions and estimated offering expenses payable by us:
 
                                         
    Shares Issued   Total Consideration   Average Price
    Number   Percent   Amount   Percent   per Share
 
Existing shareholders
    [     ]       [     ] %   $ [     ]       [     ] %   $ [     ]  
New investors
    [     ]       [     ]       [     ]       [     ]       [     ]  
Total
    [     ]       100.0 %   $ [     ]       100.0 %   $ [     ]  
 
This table does not give effect to:
 
  •  up to [          ] shares of common stock that may be issued pursuant to the underwriters’ over-allotment option;
 
  •  [          ] shares of common stock issuable upon the exercise of stock options we intend to grant to our directors, executive officers and other employees upon completion of this offering, at an exercise price equal to the initial public offering price;
 
  •  [          ] shares of common stock issuable upon the exercise of warrants that will be issued to our existing shareholders prior to the closing of this offering; and
 
  •  [          ] additional shares available for future issuance under our 2010 Plan.


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SELECTED HISTORICAL AND UNAUDITED
 
PRO FORMA CONSOLIDATED AND COMBINED FINANCIAL AND OPERATING DATA
 
The following table sets forth selected historical and unaudited pro forma consolidated financial and operating data of Imperial Holdings, LLC (to be converted into Imperial Holdings, Inc. in connection with this offering) as of such dates and for such periods indicated below. The selected unaudited pro forma condensed consolidated financial data for the three months ended March 31, 2010 and the twelve months ended December 31, 2009 give pro forma effect to the corporate conversion and conversion of promissory notes as if they had occurred on the first day of the periods presented. The selected unaudited pro forma financial and operating data set forth below are presented for information purposes only, should not be considered indicative or actual results of operations that would have been achieved had the corporate conversion been consummated on the dates indicated, and do not purport to be indicative of balance sheet data or income statement data as of any future date or future period. These selected historical and unaudited pro forma consolidated results are not necessarily indicative of results to be expected in any future period. You should read the following financial information together with the other information contained in this prospectus, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes.
 
We have derived the selected historical income statement data for the three months ended March 31, 2010 and 2009 and balance sheet data as of March 31, 2010 from our unaudited consolidated financial statements included elsewhere in this prospectus. Such unaudited financial statements include, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, which we consider necessary for a fair presentation of our financial position and results of operations. The selected historical income statement data for the years ended December 31, 2009, 2008 and 2007 and balance sheet data as of December 31, 2009 and 2008 were derived from our audited consolidated financial statements included elsewhere in this prospectus. The income statement data for the period from December 15, 2006 through December 31, 2006 and balance sheet data for December 31, 2007 and 2006 were derived from our audited consolidated financial statements that are not included in this prospectus.


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    Historical     Pro Forma  
                            Three Months
             
    Period from
                      Ended
          Three Months
 
    Dec. 15, 2006 -
    Years Ended December 31,     March 31,     Year Ended
    Ended
 
    Dec. 31, 2006     2007     2008     2009     2009     2010     Dec. 31, 2009     March 31, 2010  
                            (Unaudited)     (Unaudited)  
    (In thousands, except share data)  
 
Income
                                                               
Agency fee income
  $ 678     $ 24,515     $ 48,004     $ 26,114     $ 10,634     $ 5,279     $ 26,114     $ 5,279  
Interest income
    316       4,888       11,914       21,483       4,978       5,583       21,483       5,583  
Origination fee income
          526       9,399       29,853       5,694       7,299       29,853       7,299  
Gain on sale of structured settlements
                443       2,684       39             2,684        
Gain on forgiveness of debt
                      16,410       8,591       1,765       16,410       1,765  
Change in fair value of investment in life settlements
                                  (203 )           (203 )
Other income
          2       47       71       16       23       71       23  
                                                                 
Total income
    994       29,931       69,807       96,615       29,952       19,746       96,615       19,746  
                                                                 
Expenses
                                                               
Interest expense
          1,343       12,752       33,755       7,092       8,969       28,763 (1)     7,797 (1)
Provision for losses on loans receivable
          2,332       10,768       9,830       2,793       3,367       9,830       3,367  
Loss (gain) on loan payoffs and settlements, net
          (225 )     2,738       12,058       8,130       1,378       12,058       1,378  
Amortization of deferred costs
          126       7,569       18,339       3,573       5,847       18,339       5,847  
Selling, general and administrative expenses
    891       24,335       41,566       31,269       8,527       7,672       31,269       7,672  
Provision for income taxes
                                        (2)     (2)
                                                                 
Total expenses
    891       27,911       75,393       105,251       30,115       27,233       100,259       26,061  
                                                                 
Net Income (loss)
  $ 103     $ 2,020     $ (5,586 )   $ (8,636 )   $ (163 )   $ (7,487 )   $ (3,644 )   $ (6,315 )
                                                                 
Earnings per Share
                                                               
Basic
                                                               
Diluted
                                                               
Weighted Average Common Shares Outstanding
                                                               
Basic
                                                               
Diluted
                                                               
 
 
(1) Reflects reduction of interest expense of $5.0 million for the year ended December 31, 2009 and $1.2 million for the three months ended March 31, 2010, due to conversion of promissory notes payable into shares of our common stock which will occur upon the closing of this offering.
 
(2) The results of the Company being treated for the pro forma presentation as a “C” corporation resulted in no impact to the consolidated and combined balance sheet or statements of operations for the pro forma periods presented. The primary reasons for this are that the losses produce no current benefit and any net operating losses generated and other deferred assets (net of liabilities) would be fully reserved due to historical operating losses. The Company, therefore, has not recorded any pro forma tax provision.
 


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    Historical     Pro Forma  
    December 31,     March 31,     March 31,
 
    2006     2007     2008     2009     2009     2010     2010  
                            (Unaudited)     (Unaudited)  
    (In thousands, except share data)  
 
Assets:
                                                       
Cash and cash equivalents
    5,351     $ 1,495     $ 7,644     $ 15,891     $ 1,494     $ 7,490     $ 8,190 (1)
Restricted cash
          1,675       2,221                          
Certificate of deposit — restricted
          562       659       670       660       1,342       1,342  
Agency fees receivable, net of allowance for doubtful accounts
    136       5,718       8,871       2,165       2,642       407       407  
Deferred costs, net
          672       26,650       26,323       29,494       23,677       23,677  
Prepaid expenses and other assets
    30       835       4,180       887       1,246       1,244       1,244  
Deposits
    37       456       476       982       2,818       686       686  
Interest receivable, net
    244       2,972       8,604       21,034       7,609       23,350       23,350  
Loans receivable, net
    3,909       43,650       148,744       189,111       172,314       191,331       191,331  
Structured settlements receivables, net
          377       1,141       152       3,477       2,778       2,778  
Receivables from sales of structured Settlements
                      320             217       217  
Investment in life settlements, at estimated fair value
                      4,306             2,411       2,411  
Investment in life settlement fund
          1,714             542       242       1,270       1,270  
Fixed assets, net
    756       1,875       1,850       1,337       1,758       1,216       1,216  
                                                         
Total assets
  $ 10,463     $ 62,001     $ 211,040     $ 263,720     $ 223,754     $ 257,419     $ 258,119  
                                                         
Liabilities:
                                                       
Accounts payable and accrued expenses
  $ 505     $ 3,437     $ 5,533     $ 3,170     $ 3,180     $ 3,822     $ 3,822  
Interest payable
          882       5,563       12,627       10,320       15,591       13,354 (2)
Notes payable
          35,559       183,462       231,064       193,956       221,633       193,306 (2)
                                                         
Total liabilities
  $ 505     $ 39,878     $ 194,558     $ 246,861     $ 207,456     $ 241,046     $ 210,482  
                                                         
Member units — Series A preferred (500,000 authorized; 90,796 issued and outstanding, actual; 0 issued and outstanding, pro forma)
                      4,035       4,035       4,035       (1)
Member units — Series B preferred (50,000 authorized; 50,000 issued and outstanding, actual; 0 issued and outstanding, pro forma)
                      5,000       5,000       5,000       (1)
Member units — Series C preferred (75,000 authorized; 70,000 issued and outstanding, actual; 0 issued and outstanding, pro forma)
                                  7,000       (1)
Member units — Series D preferred (7,000 authorized, 7,000 issued and outstanding , actual; 0 issued and outstanding, pro forma)
                                        (1)
Member units — common (500,000 authorized; 450,000 issued and outstanding, actual; 0 issued and outstanding, pro forma)
    9,855       20,000       19,945       19,924       19,924       19,924          
Common stock
                                        [      ](1)(2)
Paid-in capital
                                        [67,223 ](1)(2)
Retained earnings (accumulated deficit)
    103       2,123       (3,463 )     (12,100 )     (12,661 )     (19,586 )     (19,586 )
                                                         
Total members’ equity
    9,958       22,123       16,482       16,859       16,298       16,373       47,637  
                                                         
Total liabilities and members’ equity
  $ 10,463     $ 62,001     $ 211,040     $ 263,720     $ 223,754     $ 257,419     $ 258,119  
                                                         
 
 
(1) Reflects the conversion of all common and preferred limited liability company units of Imperial Holdings, LLC into [          ] shares of common stock of Imperial Holdings, Inc. as a result of the corporate conversion. Also reflects the sale of 7,000 Series D preferred units in June 2010 for $700,000, which also will be converted into shares of our common stock as a result of the corporate conversion.
 
(2) Reflects conversion of $28.3 million of promissory notes payable and $2.2 million of accrued interest, which will be converted into shares of our common stock upon the closing of this offering.

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Premium Finance Segment — Selected Operating Data (dollars in thousands):
 
                                         
          Three Months Ended
 
    Year Ended December 31,     March 31,  
    2007     2008     2009     2009     2010  
 
Period Originations:
                                       
Number of loans originated
    196       499       194       72       52  
Principal balance of loans originated
  $ 44,501     $ 97,559     $ 51,573     $ 19,418     $ 10,561  
Aggregate death benefit of policies underlying loans originated
  $ 794,517     $ 2,283,223     $ 942,312     $ 364,135     $ 252,400  
Selling general and administrative expenses
  $ 15,082     $ 21,744     $ 13,742     $ 4,113     $ 2,643  
Average Per Origination During Period:
                                       
Age of insured at origination
    75.5       74.9       74.9       74.8       73.8  
Life expectancy (years)
    12.9       13.2       13.2       13.9       14.3  
Monthly premium (year after origination)
  $ 14.0     $ 14.9     $ 16.0     $ 16.8     $ 13.4  
Death benefit of policies underlying loans originated
  $ 4,053.7     $ 4,575.6     $ 4,857.3     $ 5,057.4     $ 4,853.8  
Principal balance of the loan
  $ 227.0     $ 195.5     $ 265.8     $ 269.7     $ 203.1  
Interest rate charged
    10.5 %     10.8 %     11.4 %     11.3 %     11.5 %
Agency fee
  $ 125.1     $ 96.2     $ 134.6     $ 147.7     $ 101.5  
Agency fee as % of principal balance
    55.1 %     49.2 %     50.6 %     54.8 %     50.0 %
Origination fee
  $ 45.8     $ 77.9     $ 118.9     $ 127.6     $ 83.5  
Origination fee as % of principal balance
    20.2 %     39.9 %     44.7 %     47.3 %     41.1 %
End of Period Loan Portfolio
                                       
Loans receivable, net
  $ 43,650     $ 148,744     $ 189,111     $ 172,314     $ 191,331  
Number of policies underlying loans receivable
    240       702       692       717       676  
Aggregate death benefit of policies underlying loans receivable
  $ 1,065,870     $ 2,895,780     $ 3,091,099     $ 3,086,603     $ 3,096,236  
Average Per Loan:
                                       
Age of insured in loans receivable
    76.3       75.3       75.4       75.2       75.4  
Monthly premium
  $ 7.7     $ 9.1     $ 8.5     $ 7.7     $ 6.6  
Loan receivable, net
  $ 181.9     $ 211.9     $ 273.3     $ 240.3     $ 283.0  
Interest rate
    10.2 %     10.4 %     10.9 %     10.6 %     11.1 %


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Structured Settlements Segment — Selected Operating Data (dollars in thousands):
 
                                         
          Three Months Ended
 
    Year Ended December 31,     March 31,  
    2007     2008     2009     2009     2010  
 
Period Originations:
                                       
Number of transactions
    10       276       396       79       105  
Number of transactions from repeat customers
          23       52       10       24  
Weighted average purchase effective discount rate
    11.0 %     12.0 %     16.3 %     14.2 %     17.0 %
Face value of undiscounted future payments purchased
  $ 701     $ 18,295     $ 28,877     $ 5,828     $ 7,297  
Amount paid for settlements purchased
  $ 369     $ 8,010     $ 10,947     $ 2,507     $ 2,574  
Marketing costs
  $ 2,056     $ 5,295     $ 4,460     $ 1,124     $ 1,048  
Selling, general and administrative (excluding marketing costs)
  $ 666     $ 4,475     $ 5,015     $ 995     $ 1,580  
Average Per Origination During Period:
                                       
Face value of undiscounted future payments purchased
  $ 70.1     $ 66.3     $ 72.9     $ 73.8     $ 69.5  
Amount paid for settlement purchased
  $ 36.9     $ 29.0     $ 27.6     $ 31.7     $ 24.5  
Duration (months)
    80.3       113.8       109.7       106.8       124.8  
Marketing cost per transaction
  $ 205.6     $ 19.2     $ 11.3     $ 14.2     $ 10.0  
Segment selling, general and administrative (excluding marketing costs) per transaction
  $ 66.6     $ 16.2     $ 12.7     $ 12.6     $ 15.1  
Period Sales:
                                       
Number of transactions sold (Slate)
                             
Gain on sale of structured settlements (Slate)
  $     $     $     $     $  
Average sale discount rate (Slate)
                             
Number of structured settlements (buyers other than Slate)
          226       439       11        
Gain on sale of structured settlements (buyers other than Slate)
  $     $ 443     $ 2,684     $ 39     $  
Average sale discount rate (buyers other than Slate)
          10.8 %     11.5 %     10.0 %      


42


 

 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion in conjunction with the consolidated and combined financial statements and accompanying notes and the information contained in other sections of this prospectus, particularly under the headings “Risk Factors,” “Selected Historical and Unaudited Pro Forma Consolidated and Combined Financial Information” and “Business.” This discussion and analysis is based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. The statements in this discussion and analysis concerning expectations regarding our future performance, liquidity and capital resources, as well as other non-historical statements in this discussion and analysis, are forward-looking statements. See “Forward-Looking Statements.” These forward-looking statements are subject to numerous risks and uncertainties, including those described under “Risk Factors.” Our actual results could differ materially from those suggested or implied by any forward-looking statements.
 
Business Overview
 
We are a specialty finance company with a focus on providing premium financing for individual life insurance policies and purchasing structured settlements. We manage these operations through two business segments: premium finance and structured settlements. In our premium finance business we earn revenue from interest charged on loans, loan origination fees and agency fees from referring agents. In our structured settlement business, we purchase structured settlements at a discounted rate and sell such assets to third parties.
 
Since 2007, the United States’ capital markets have experienced extensive distress and dislocation due to the global economic downturn and credit crisis. During this period of dislocation in the capital markets, our borrowing costs increased dramatically in our premium finance business and we were unable to access traditional sources of capital to finance the acquisition and sale of structured settlements. At certain points, we were unable to obtain any debt financing.
 
We expect that the net proceeds from this offering will be used to finance and grow our premium finance business. We intend to originate new premium finance loans without relying on debt financing. The proceeds from this offering will likely have less of an impact on our structured settlement business as that business is not expected to require significant additional capital to continue its growth.
 
Premium Finance Business
 
A premium finance transaction is a transaction in which a life insurance policyholder obtains a loan to pay insurance premiums for a fixed period of time, which allows a policyholder to maintain coverage without additional out-of-pocket costs. Our typical premium finance loan is approximately two years in duration and is collateralized by the underlying life insurance policy. The life insurance policies that serve as collateral for our premium finance loans are predominately universal life policies that have an average death benefit of approximately $4 million and insure persons over age 65.
 
We expect that, in the ordinary course of business, a large portion of our borrowers may default on their loans and relinquish beneficial ownership of their life insurance policy to us. Our loans are secured by the underlying life insurance policy and are usually non-recourse to the borrower. If the borrower defaults on the obligation to repay the loan, we generally have no recourse against any assets except for the life insurance policy that collateralizes the loan.
 
Dislocations in the capital markets have forced us to pay higher interest rates on borrowed capital since the beginning of 2008. Every credit facility we have entered into since December 2007 has required us to provide credit enhancement in the form of lender protection insurance for each loan originated under such credit facility. We have obtained lender protection insurance coverage from Lexington, a subsidiary of AIG. This coverage provides insurance on the value of the policy serving as collateral underlying the loan for the benefit of our lender should our borrower default. After a payment default by the borrower, Lexington takes beneficial ownership of the life insurance policy and we are paid a claim equal to the insured value of the


43


 

policy. The cost of lender protection insurance generally has ranged from 8% to 11% per annum of the principal balance of the loans. While lender protection insurance provides us with liquidity, it prevents us from realizing the appreciation, if any, of the underlying policy when a borrower relinquishes ownership of the policy upon default. As of March 31, 2010, 92.4% of our outstanding premium finance loans have collateral whose value is insured and we currently are only originating new premium finance loans with lender protection insurance.
 
We have experienced two adverse consequences from our high financing costs: reduced profitability and decreased loan originations. While the use of lender protection insurance coverage allows us to access debt financing to support our premium finance business, the high costs also substantially reduce the earnings from our premium finance segment. Additionally, the funding guidelines required by our lender protection insurance provider have reduced the number of otherwise viable premium finance transactions that we could complete. During the three months ended March 31, 2010, these funding guidelines became even stricter and further reduced the number of loans we could originate. We believe that the net proceeds from this offering will allow us to increase the profitability and number of new premium finance loans by eliminating the high cost of debt financing and lender protection insurance and the limitations on loan originations that lender protection insurance imposes.
 
The following table shows our financing costs per annum for funding premium finance loans as a percentage of the principal balance of the loans originated during the following periods:
 
                                         
    Year Ended December 31,     Three Months Ended March 31,  
    2007     2008     2009     2009     2010  
 
Lender protection insurance cost
          8.5 %     10.9 %     10.4 %     10.1 %
Interest cost and other lender funding charges under credit facilities
    14.5 %     13.7 %     18.2 %     16.7 %     20.4 %
                                         
Total financing cost
    14.5 %     22.2 %     29.1 %     27.1 %     30.5 %
 
In response to the large increase in our financing costs, in 2008 we implemented a policy to charge origination fees on all premium finance loans and we increased the origination fees that we charged.
 
We charge a referring insurance agent an agency fee for services related to premium finance loans. Agency fees and origination fee income have helped us to mitigate the cost of lender protection insurance and our credit facilities. While origination fee income and interest are earned over the life of our premium finance loans, our agency fees are earned at the time of funding. This results in our premium finance business generating significant income during periods of high loan originations but experiencing lower income during periods when there are fewer loan originations.
 
Despite the use of lender protection insurance, we found it very difficult to secure financing for our premium finance lending business segment during 2008 and 2009. Traditional capital providers such as commercial banks, investment banks, conduit programs, hedge funds and private equity funds reduced their lending commitments and raised their lending rates. There were periods during 2008 and 2009 when our premium finance segment was unable to originate loans due to our inability to access capital. We were without credit and therefore unable to originate premium finance loans for a total of 9 weeks in 2008 and for a total of 33 weeks in 2009. As a result, we experienced a significant decline in premium finance loan originations from 499 loans originated in 2008 to 194 loans originated in 2009, a decrease of 61%. This also led to a significant reduction in agency fees from $48.0 million in 2008 to $26.1 million in 2009.
 
The amount of losses on loan payoffs and settlements, net, and the amount of gains on the forgiveness of debt that we have recorded since inception within our premium finance business segment have been impacted as a result of financial difficulties experienced by one of our lenders, Acorn Capital Group (“Acorn”). Beginning in July, 2008, Acorn stopped funding under its credit facility with us without any advance notice. Therefore, we did not have access to funds necessary to pay the ongoing premiums on the policies serving as collateral for our borrower’s loans that were financed under the Acorn facility. The result was that a total of


44


 

81 policies financed under the Acorn facility lapsed due to non-payment of premiums through March 31, 2010.
 
In May 2009, we entered a settlement agreement with Acorn whereby all obligations under the credit agreement were terminated. Acorn subsequently assigned its rights under the settlement agreement to Asset Based Resource Group, LLC (“ABRG”). As part of the settlement agreement, we continue to service the original loans and ABRG determines whether or not it will continue to fund the loans. If ABRG chooses not to continue funding a loan, we have the option to fund the loan or try to sell the loan or related policy to another party. We elect to fund the loan only if we believe there is economic value in the policy serving as collateral for the loan. Regardless of whether we fund the loan or sell the loan or related policy to another party, our debt under the Acorn facility is forgiven and we record a gain on the forgiveness of debt. If we fund the loan, it remains as an asset on our balance sheet, otherwise it is written off and we record the amount written off as a loss on loan payoffs and settlements, net.
 
On the notes that were cancelled under the Acorn facility, we had debt forgiven totaling $1.8 million and $16.4 million for the three months ended March 31, 2010 and for the year ended December 31, 2009, respectively. We recorded these amounts as gain on forgiveness of debt. Partially offsetting these gains, we had loan losses totaling $1.7 million, $10.2 million and $1.9 million during the three months ended March 31, 2010 and the years ended December 31, 2009 and 2008, respectively. We recorded these amounts as loss on loan payoffs and settlements, net. As of March 31, 2010, only 38 loans out of 119 loans originally financed in the Acorn facility remained outstanding.
 
The following table highlights the impact of the Acorn settlement on our financial statements during the periods indicated below (dollars in thousands):
 
                                                 
    Acorn Capital Facility  
          Three Months
       
    Year Ended December 31,     Ended March 31,        
    2007     2008     2009     2009     2010     Total  
 
Number of policies lapsed
          11       64       23       6       81  
Gain on forgiveness of debt
  $     $     $ 16,410     $ 8,591     $ 1,765     $ 18,175  
Loss on loan payoffs and settlements, net
          (1,868 )     (10,182 )     (6,259 )     (1,700 )     (13,750 )
                                                 
Impact on net income
  $     $ (1,868 )   $ 6,228     $ 2,332     $ 65     $ 4,425  
 
Structured Settlements
 
Structured settlements refer to a contract between a plaintiff and defendant whereby the plaintiff agrees to settle a lawsuit (usually a personal injury, product liability or medical malpractice claim) in exchange for periodic payments over time. Recipients of structured settlements are permitted to sell their deferred payment streams pursuant to state statutes that require certain disclosures, notice to the obligors and state court approval. Through such sales, we purchase a certain number of fixed, scheduled future settlement payments on a discounted basis in exchange for a single lump sum payment, thereby serving the liquidity needs of structured settlement holders. During three months ended March 31, 2009 and 2010, this purchase discount produced a yield that averaged 14.2% and 17.0%, respectively. We generally sell our structured settlement assets to institutional investors for cash and recognize a gain on the sale.
 
Structured settlements are an attractive asset class for institutional investors for several reasons. The majority of the insurance companies that issue the structured settlements we purchase carry high financial strength ratings of “A−” or better from Moody’s Investors Services and/or Standard & Poor’s. The periodic payments that make up structured settlements can extend for 20 years or more. This long average life coupled with no risk of prepayment and little credit risk result in a relatively liquid financial asset that can be sold directly to institutional investors such as insurance companies and pension funds.
 
We believe that we have various funding alternatives for the purchase of structured settlements. In addition to available cash, we entered into a committed forward sale arrangement in February 2010 with Slate,


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a subsidiary of AIG, under which we are obligated to sell, and Slate is obligated to purchase, up to $250 million of structured settlements each year at pre-determined prices based on pre-determined asset criteria. Our first closing under the forward sale arrangement with Slate occurred in April 2010. This agreement terminates in May, 2013 unless otherwise terminated earlier pursuant to the terms of the agreement. We also have other parties to whom we have sold settlement assets in the past, and to whom we believe we can sell assets in the future. In the future, we will continue to evaluate alternative financing arrangements, which could include securing a warehouse line of credit that would allow us to aggregate structured settlements.
 
During the capital markets dislocation in 2008 and 2009, in order to sell portfolios of structured settlements to strategic buyers, we were required to offer discount rates as high as approximately 12.0%. During 2010, the discount rate for our sale of structured settlements has decreased. Although we did not sell any structured settlements during the first quarter of 2010, our forward sale agreement with Slate allows us to sell guaranteed (non life-contingent) structured settlements at a discount rate of 8%. During the three months ended June 30, 2010, our weighted average sale discount rate for sales made pursuant to the forward sale agreement with Slate was 9.7%, which includes the sale of both guaranteed (non life-contingent) and life-contingent structured settlements. Life-contingent structured settlements are deferred payment streams that terminate upon the death of the structured settlement recipient. Guaranteed (non life-contingent) structured settlements terminate on a pre-determined date and do not cease upon the recipient’s death. Prior to our forward sale agreement with Slate, we did not purchase life-contingent structured settlements since we did not have an outlet through which to sell them.
 
During this period of dislocation, we continued to invest in our structured settlements business. We did this with the expectation that expenses would continue to exceed revenue while we made investments in building the business and increasing our capacity to originate new transactions. We originated 396 transactions during 2009 as compared to 276 transactions in 2008, an increase of 43%. We incurred total expenses of $9.5 million during 2009 compared to $9.8 million in 2008. We believe that as a result of our investments, we currently have a structured settlements business model in place that has scalability and we expect that only minor incremental capital costs will need to be incurred as our structured settlement business continues to grow. Accordingly, the historical operating losses in our structured settlement segment reflect our investment in the start up costs and the initial growth of our structured settlement operations.
 
Our Outlook
 
Reduced or Eliminated Financing Costs
 
We intend to use the proceeds from this offering to fund new premium finance business, thereby over time reducing or eliminating our debt financing and lender protection insurance costs. We expect that the elimination of the use of lender protection insurance will result in our owning more life insurance policies as premium finance loans default.
 
Corporate Conversion
 
Immediately prior to this offering, we will convert from a Florida limited liability company to a Florida corporation. As a limited liability company, we were treated as a partnership for United States federal and state income tax purposes and, as such, we were not subject to taxation. For all periods subsequent to such conversion, we will be subject to corporate-level United States federal and state income taxes. See “Corporate Conversion.”
 
Public Company Expenses
 
Upon consummation of our initial public offering, we will become a public company. As a result, we will need to comply with laws, regulations and requirements with which we did not need to comply as a private company, including certain provisions of the Sarbanes-Oxley Act of 2002, related SEC regulations, and the requirements of the New York Stock Exchange. Compliance with the requirements of being a public company will require us to increase our general and administrative expenses in order to pay our employees, legal


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counsel, accountants, and other advisors to assist us in, among other things, external reporting, instituting and maintaining internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, and preparing and distributing periodic public reports in compliance with our obligations under the federal securities laws. In addition, being a public company will make it more expensive for us to obtain director and officer liability insurance.
 
Stock-Based and Other Executive Compensation
 
We have established a stock option plan for our current and future employees. We have reserved an aggregate of [          ] shares of common stock for issuance under our equity incentive plan, of which [          ] shares are expected to be granted in the form of stock options to our existing executive officers and other employees immediately following the pricing of this offering at an exercise price equal to the initial public offering price. In addition, prior to the completion of this offering, we expect to issue warrants that will be exercisable for up [          ] shares of our common stock subject to performance and time vesting conditions.
 
We expect to incur non-cash, stock-based compensation expenses in future periods for the issuance of the warrants in amounts that will depend on our future performance. Additionally, we expect to incur non-cash, stock-based compensation expenses for the grant of options in connection with this offering of approximately $[     ] per year over the [          ] year term of the options. See “Description of Capital Stock.”
 
Principal Revenue and Expense Items
 
Components of Revenue
 
Agency Fee Income
 
In connection with our premium finance business, we earn agency fees that are paid by the referring life insurance agents. These fees are typically charged and collected within 45 days after the loan is funded and are earned at the time the loan is funded. Agency fees as a percentage of the principal balance of loans originated during the periods below are as follows:
 
                                         
    Year Ended December 31,   Three Months Ended March 31,
    2007   2008   2009   2009   2010
 
Agency fees as a percentage of the principal balance of the loans originated
    55.1 %     49.2 %     50.6 %     54.8 %     50.0 %
 
Interest Income
 
We receive interest income that accrues over the life of the premium finance loan and is due upon the date of maturity or upon repayment of the loan. Substantially all of the interest rates we charge on our premium finance loans are floating rates that are calculated at the one-month LIBOR rate plus an applicable margin ranging between 700 to 1200 basis points. In addition, our premium finance loans have a floor interest rate ranging between 9.0% and 11.5% and are capped at 16.0% per annum. For loans with floating rates, each month the interest rate is recalculated to equal one-month LIBOR plus the applicable margin, and then, if necessary, adjusted so as to remain at or above the stated floor rate and at or below the capped rate of 16.0% per annum.
 
The weighted average per annum interest rate for premium finance loans outstanding as of the dates below is as follows:
 
                                         
    December 31,   March 31,
    2007   2008   2009   2009   2010
 
Weighted average per annum interest rate
    10.2 %     10.4 %     10.9 %     10.6 %     11.1 %


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Interest income also includes interest earned on structured settlement receivables. Until we sell our structured settlement receivables, the structured settlements are held on our balance sheet. Purchase discounts are accreted into interest income using the effective-interest method.
 
Origination Fee Income
 
We charge our borrowers an origination fee as part of the premium finance loan origination process. It is a one-time fee that is added to the loan amount and is due upon the date of maturity or upon repayment of the loan. Origination fees are recognized on an effective-interest method over the term of the loan.
 
Origination fees as a percentage of the principal balance of loans originated during the periods below are as follows:
 
                                         
    Year Ended
  Three Months Ended
    December 31,   March 31,
    2007   2008   2009   2009   2010
 
Origination fees as a percentage of the principal balance of the loans
    20.2 %     39.9 %     44.7 %     47.3 %     41.1 %
Origination fees per annum as a percentage of the principal balance of the loans
    5.2 %     15.4 %     19.2 %     16.8 %     19.5 %
 
Gain on Sale of Structured Settlements
 
We purchase a certain number of fixed, scheduled future settlement payments on a discounted basis in exchange for a single lump sum payment. We negotiate a purchase price that is calculated as the present value of the future payments to be purchased, discounted at a rate equal to our required investment yield. From time to time, we sell portfolios of structured settlements to institutional investors. Additionally, under our forward sale arrangement with Slate, we are obligated to sell, and Slate is obligated to purchase, up to $250 million of structured settlements each year at pre-determined prices based on pre-determined asset criteria. The sale price is calculated as the present value of the future payments to be sold, discounted at a negotiated yield. We record any amounts of sale proceeds in excess of our carrying value as a gain on sale. Under the Slate facility, we can contemporaneously originate and sell a structured settlement to Slate.
 
Gain on the Forgiveness of Debt
 
We entered into a settlement agreement with Acorn, as described previously, whereby our borrowings under the Acorn credit facility were cancelled, resulting in a gain on forgiveness of debt. A gain on forgiveness of debt is recorded at the time at which we are legally released from our borrowing obligations.
 
Components of Expenses
 
Interest Expense
 
Interest expense is interest accrued monthly on credit facility borrowings that are used to fund premium finance loans and promissory notes that were used to fund operations and corporate expenses. Interest is generally compounded monthly and payable as the collateralized loans mature.
 
Our weighted average interest rate for our credit facilities and promissory notes outstanding as of the dates indicated below is as follows:
 
                                         
    December 31,     March 31,  
    2007     2008     2009     2009     2010  
 
Weighted average interest rate under credit facilities
    14.5 %     13.9 %     15.6 %     14.6 %     15.6 %
Weighted average interest rate under promissory notes
    16.2 %     15.9 %     16.5 %     16.1 %     16.5 %
Total weighted average interest rate
    15.5 %     14.2 %     15.7 %     14.9 %     15.7 %


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Provision for Losses on Loans Receivable
 
We specifically evaluate all loans for impairment, on a monthly basis, based on the fair value of the underlying policies as collectability is primarily collateral dependent. For loans without lender protection insurance, the fair value of the policy is determined using our valuation model, which is a Level 3 fair value measurement. For loans with lender protection insurance, the fair value of the policy is based on the amount of the lender protection insurance coverage. The lender protection insurance provider limits the amount of coverage to an amount equal to or less than its determination of the underlying policy’s economic value, which may be equal to or less than the carrying value of the loan receivable. For all loans, the amount of loan impairment, if any, is calculated as the difference in the fair value the life insurance policy and the carrying value of the loan receivable. Loan impairments are charged to the provision for losses on loans receivable in our consolidated and combined statement of operations.
 
In some instances, we make a loan to an insured whereby we immediately record a loan impairment valuation adjustment against the principal of the loan. We only make such loans when the economics of the transaction are favorable, after considering all components of the transaction including agency fees.
 
For loans that matured during the three months ended March 31, 2010 and during the year ended December 31, 2009, 94% and 85%, respectively, of such loans were not repaid at maturity. In such events of default, the borrower typically relinquishes beneficial ownership of the policy to us in exchange for our release of the debt (or we enforce our security interests in the beneficial interests in the trust that owns the policy). For loans that have lender protection insurance coverage, we make a claim against the lender protection insurance policy and the insurer takes beneficial ownership of the policy upon payment of our claim.
 
The following table shows the percentage of the total number of loans outstanding with lender protection insurance and the percentage of our total loans receivable balance covered by lender protection insurance as of the dates indicated below:
 
                                         
    December 31,   March 31,
    2007   2008   2009   2009   2010
 
Percentage of total number of loans outstanding with lender protection insurance
          74.0 %     90.3 %     81.7 %     92.4 %
Percentage of total loans receivable balance covered by lender protection insurance
          78.6 %     93.1 %     84.1 %     93.9 %
 
We use a method to determine the loan impairment valuation adjustment which assumes a “worst case” scenario for the fair value of the collateral based on the insured coverage amount. We record impairment even though no loans are considered non-performing as no payments are due by the borrower. Loans with insured collateral represented over 90% of our loans as of December 31, 2009 and March 31, 2010. We believe that the amount of impairments recorded over the past 18 months is higher than normal due to the state of the credit markets which negatively affected the fair value of the collateral for the loans and created a situation where the insured value of the collateral is often its highest value. The higher amount of impairment experienced in the latter part of 2009 and 2010 in effect reflects the realization of less than the contractual amounts due under the terms of the loans receivable. We believe that as the market for life insurance policies improves, our realization rates for the contractual amounts of interest income and origination income should improve as well.
 
Loss on Loan Payoffs and Settlements, Net
 
When a premium finance loan matures, we record the difference between the carrying value of the loan receivable, net of loan impairment valuation, and the cash received, or the fair value of the life insurance policy that is obtained if there is a default and the policy is relinquished, as a gain or loss on loan payoffs and settlements, net. This account was significantly impacted by the Acorn settlement, as discussed above, whereby we recorded a loss on loan payoffs and settlements, net, of $1.7 million, $10.2 million and $1.9 million during the three months ended March 31, 2010 and the years ended December 31, 2009 and


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2008, respectively, under the direct write-off method, as opposed to charging our provision for losses on loan receivables.
 
Amortization of Deferred Costs
 
Deferred costs include premium payments made by us to our lender protection insurance coverage providers. These expenses are deferred and recognized over the life of the note using the effective interest method. Deferred costs also include credit facility closing costs such as legal and professional fees associated with the establishment of our credit facilities, which deferred costs are recognized over the life of the debt. We expect our deferred costs to decline over time as our portfolio of loans with lender protection insurance matures.
 
Selling, General and Administrative Expenses
 
Selling, general, and administrative expenses include salaries and benefits, professional and consulting fees, marketing, depreciation and amortization, bad debt expense, and other related expenses to support our ongoing businesses.
 
Critical Accounting Policies
 
Critical Accountings Estimates
 
The preparation of the financial statements requires us to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our judgments, estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions and conditions. We evaluate our judgments, estimates and assumptions on a regular basis and make changes accordingly. We believe that the judgments, estimates and assumptions involved in the accounting for the loan impairment valuation, allowance for doubtful accounts, and the valuation of investments in life settlements (life insurance policies) have the greatest potential impact on our financial statements and accordingly believe these to be our critical accounting estimates. Below we discuss the critical accounting policies associated with the estimates as well as selected other critical accounting policies. For further information on our critical accounting policies, see the discussion in Note 2 to our audited consolidated financial statements.
 
Premium Finance Loans Receivable
 
We report loans receivable acquired or originated by us at cost, adjusted for any deferred fees or costs in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 310-20, Receivables — Nonrefundable Fees and Other Costs, discounts, and loan impairment valuation. All loans are collateralized by life insurance policies. Interest income is accrued on the unpaid principal balance on a monthly basis based on the applicable rate of interest on the loans.
 
In accordance with ASC 310, Receivables, we specifically evaluate all loans for impairment based on the fair value of the underlying policies as collectability is primarily collateral dependent. The loans are considered to be collateral dependent as the repayment of the loans is expected to be provided by the underlying insurance policies. In the event of default, the borrower typically relinquishes beneficial ownership of the policy to us in exchange for our release of the debt (or we enforce our security interests in the beneficial interests in the trust that owns the policy). For loans that have lender protection insurance coverage, we make a claim against the lender protection insurance policy and the insurer takes beneficial ownership of the policy upon payment of our claim. For loans without lender protection insurance, we have the option of selling the policy or maintaining it on our balance sheet for investment.
 
We evaluate the loan impairment valuation on a monthly basis based on our periodic review of the estimated value of the underlying collateral. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The loan impairment


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valuation is established as losses on loans are estimated and the provision is charged to earnings. Once established, the loan impairment valuation cannot be reversed to earnings.
 
In order to originate premium finance transactions during the recent dislocation in the capital markets, we procured lender protection insurance coverage. This lender protection insurance coverage mitigates our exposure to losses which may be caused by declines in the fair value of the underlying policies. At the end of each reporting period, for loans that have lender protection insurance coverage, a loan impairment valuation is established if the carrying value of the loan receivable, origination fees, and interest receivable exceeds the amount of coverage.
 
Ownership of Life Insurance Policies
 
In the ordinary course of business, a large portion of our borrowers may default by not paying off the loan and relinquish beneficial ownership of the life insurance policy to us in exchange for our release of the obligation to pay amounts due. When this occurs, we record the difference between the carrying value of the loan receivable, net of loan impairment valuation, and the fair value of the life insurance policy that is obtained, as a gain or loss on loan payoffs and settlements, net.
 
We account for life insurance policies we acquire upon relinquishment by our borrowers as investments in life settlements (life insurance policies) in accordance with ASC 325-30, Investments in Insurance Contracts, which requires us to use either the investment method or the fair value method. The election is made on an instrument-by-instrument basis and is irrevocable. Thus far, we have elected to account for these life insurance policies as investments using the fair value method.
 
At the time we acquire the underlying life insurance policy, the fair value of the life insurance policy is re-calculated based on the current life expectancy of the policyholder. The fair value is determined on a discounted cash flow basis that incorporates current life expectancy assumptions. The discount rate incorporates current information about market interest rates, the credit exposure to the insurance company that issued the life insurance policy and our estimate of the risk premium an investor in the policy would require. The discount rate at March 31, 2010 was 15% and the fair value of our investment in life insurance policies was $2.4 million. Following this offering, we expect that our investment in life settlements (life insurance policies) will increase over time as we begin to make loans without lender protection insurance, as a result of which we expect to retain a number of the policies relinquished to us by our borrowers upon default under those loans. Since the term of our premium finance loans is typically 26 months, it will be at least 26 months from the closing of this offering before we are likely to retain any appreciable number of life settlements (life insurance policies).
 
Valuation of Insurance Policies
 
Our valuation of insurance policies is a critical component of our estimate for the loan impairment valuation and the fair value of our investments in life settlements (life insurance policies). We currently use a probabilistic method of valuing life insurance policies, which we believe to be the preferred valuation method in the industry. The most significant assumptions which we estimate are the life expectancy of the insured and the discount rate.
 
In determining the life expectancy estimate, we use medical reviews from four different medical underwriters. The health of the insured is summarized by the medical underwriters into a life assessment which is based on the review of historical and current medical records. The medical underwriting assesses the characteristics and health risks of the insured in order to quantify the health into a mortality rating that represents their life expectancy.
 
The probability of mortality for an insured is then calculated by applying the life expectancy estimate to a mortality table. The mortality table is created based on the rates of death among groups categorized by gender, age, and smoking status. By measuring how many deaths occur before the start of each year, the table allows for a calculation of the probability of death in a given year for each category of insured people. The


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probability of mortality for an insured is found by applying their mortality rating from the life expectancy assessment to the probability found in the actuarial table for the insured’s age, sex and smoking status.
 
The resulting mortality factor represents an indication as to the degree to which the given life can be considered more or less impaired than a standard life having similar characteristics (i.e. gender, age, gender, smoking, etc.). For example, a standard insured (the average life for the given mortality table) would carry a mortality rating of 100%. A similar but impaired life bearing a mortality rating of 200% would be considered to have twice the chance of dying earlier than the standard life.
 
The mortality rating is used to create a range of possible outcomes for the given life and assign a probability that each of the possible outcomes might occur. This probability represents a mathematical curve known as a mortality curve. This curve is then used to generate a series of expected cash flows over the remaining expected lifespan of the insured and the corresponding policy. An internal rate of return calculation is then used to determine the price of the policy. If the insured dies earlier than expected, the return will be higher than if the insured dies when expected or later than expected.
 
The calculation allows for the possibility that if the insured dies earlier than expected, the premiums needed to keep the policy in force will not have to be paid. Conversely, the calculation also considers the possibility that if the insured lives longer than expected, more premium payments will be necessary. Based on these considerations, each possible outcome is assigned a probability and the range of possible outcomes is then used to create a price for the policy.
 
At the end of each reporting period we re-value the life insurance policies using our valuation model in order to update our loan impairment valuation for loans receivable and our estimate of fair value for investments in policies held on our balance sheet. This includes reviewing our assumptions for discount rates and life expectancies as well as incorporating current information for premium payments and the passage of time.
 
Fair Value Measurement Guidance
 
We follow ASC 820, Fair Value Measurements and Disclosures, which defines fair value as an exit price representing the amount that would be received if an asset were sold or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions the guidance establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. Level 1 relates to quoted prices in active markets for identical assets or liabilities. Level 2 relates to observable inputs other than quoted prices included in Level 1. Level 3 relates to unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Our investments in life insurance policies are considered Level 3 assets as there is currently no active market where we are able to observe quoted prices for identical assets and our valuation model incorporates significant inputs that are not observable.
 
Revenue Recognition
 
Our primary sources of revenue are in the form of origination fee income, interest income, agency fees and gains on sales of structured settlements. Our revenue recognition policies for these sources of revenue are as follows:
 
  •  Agency Fees — Agency fees are recognized at the time a premium finance loan is funded.
 
  •  Interest Income — Interest income on premium finance loans is recognized when earned. Discounts on structured settlement receivables are accreted over life of the settlement using the effective interest method.
 
  •  Origination Fee Income — Origination fees accrue monthly and are payable in full at the maturity of the loan. In accordance with the provisions of ASC 310-20, Receivables — Nonrefundable Fees and


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  Other Costs, deferred income related to origination fees is reduced by the deferred costs that are directly related to the creation of a loan receivable. The accreted balance of originations fees are included in loans receivable on our consolidated balance sheet.
 
  •  Gains on Sales of Structured Settlements — Gains on sales of structured settlements are recorded when the structured settlements have been transferred to a third party and we no longer have continuing involvement, in accordance with ASC 860, Transfers and Servicing.
 
Income Taxes
 
We account for income taxes in accordance with ASC 740, Income Taxes (“ASC 740”). Prior to the closing of this offering, we will convert from a Florida limited liability company to a Florida corporation. See also “Corporate Conversion.” Under ASC 740, deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, we consider tax regulations of the jurisdictions in which we operate, estimates of future taxable income and available tax planning strategies. If tax regulations, operating results or the ability to implement tax-planning strategies varies adjustments to the carrying value of the deferred tax assets and liabilities may be required. Valuation allowances are based on the “more likely than not” criteria of ASC 740.
 
The accounting for uncertain tax positions guidance under ASC 740 requires that we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. We recognize interest and penalties (if any) on uncertain tax positions as a component of income tax expense.
 
Stock-Based Compensation
 
Upon completion of this offering, we will adopt ASC 718, Compensation — Stock Compensation (“ASC 718”). ASC 718 addresses accounting for share-based awards, including stock options, with compensation expense measured using fair value and recorded over the requisite service or performance period of the award. The fair value of equity instruments to be issued upon or after the closing of this offering will be determined based on a valuation using an option pricing model which takes into account various assumptions that are subjective. Key assumptions used in the valuation will include the expected term of the equity award taking into account both the contractual term of the award, the effects of expected exercise and post-vesting termination behavior, expected volatility, expected dividends and the risk-free interest rate for the expected term of the award.
 
Recent Accounting Pronouncements
 
In June 2009, the FASB issued new guidance impacting ASC 810, Consolidation. The changes relate to the guidance governing the determination of whether an enterprise is the primary beneficiary of a variable interest entity (“VIE”), and is, therefore, required to consolidate an entity. The new guidance requires a qualitative analysis rather than a quantitative analysis. The qualitative analysis will include, among other things, consideration of who has the power to direct the activities of the entity that most significantly impact the entity’s economic performance and who has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. This guidance also requires continuous reassessments of whether an enterprise is the primary beneficiary of a VIE. The guidance also requires enhanced disclosures about an enterprise’s involvement with a VIE. The guidance is effective as of the beginning of interim and annual reporting periods that begin after November 15, 2009. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.
 
In June 2009, the FASB issued new guidance impacting ASC 860, Transfers and Serving. The new guidance requires more information about transfers of financial assets, including securitization transactions,


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and where entities have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. It also enhances information reported to users of financial statements by providing greater transparency about transfers of financial assets and an entity’s continuing involvement in transferred financial assets. The guidance is effective for fiscal years beginning after November 15, 2009. The adoption of this guidance did not to have a material impact on our financial position, results of operations or cash flows.
 
Results of Operations
 
The following is our analysis of the results of operations for the periods indicated below. This analysis should be read in conjunction with our financial statements, including the related notes to the financial statements. Our results of operations are discussed below in two parts: (i) our consolidated results of operations and (ii) our results of operations by segment.
 
Consolidated Results Of Operations (in thousands)
 
                                         
    Year Ended December 31,     Three Months Ended March 31,  
    2007     2008     2009     2009     2010  
                      (Unaudited)  
 
Income
                                       
Agency fee income
  $ 24,515     $ 48,004     $ 26,114     $ 10,634     $ 5,279  
Interest income
    4,888       11,914       21,483       4,978       5,583  
Origination fee income
    526       9,399       29,853       5,694       7,299  
Gain on sale of structured settlements
          443       2,684       39        
Gain on forgiveness of debt
                16,410       8,591       1,765  
Change in fair value of investments in life settlements (life insurance policies)
                            (203 )
Other income
    2       47       71       16       23  
                                         
Total income
    29,931       69,807       96,615       29,952       19,746  
Expenses
                                       
Interest expense
    1,343       12,752       33,755       7,092       8,969  
Provision for losses on loans receivable
    2,332       10,768       9,830       2,793       3,367  
Loss (gain) on loan payoffs and settlements, net
    (225 )     2,738       12,058       8,130       1,378  
Amortization of deferred costs
    126       7,569       18,339       3,573       5,847  
Selling, general and administrative expenses
    24,335       41,566       31,269       8,527       7,672  
                                         
Total expenses
    27,911       75,393       105,251       30,115       27,233  
                                         
Net income (loss)
  $ 2,020     $ (5,586 )   $ (8,636 )   $ (163 )   $ (7,487 )
                                         
 
Premium Finance Segment Results (in thousands)
 
                                         
          Three Months Ended
 
    Year Ended December 31,     March 31,  
    2007     2008     2009     2009     2010  
                      (Unaudited)  
 
Income
  $ 29,921     $ 68,743     $ 92,648     $ 29,736     $ 19,583  
Expenses
    18,092       52,733       82,435       24,602       21,003  
                                         
Segment operating income (loss)
  $ 11,829     $ 16,010     $ 10,213     $ 5,134     $ (1,420 )
                                         


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Structured Settlement Segment Results (in thousands)
 
                                         
    Year Ended December 31,     Three Months Ended March 31,  
    2007     2008     2009     2009     2010  
                      (Unaudited)  
 
Income
  $ 10     $ 1,064     $ 3,967     $ 217     $ 164  
Expenses
    2,722       9,770       9,475       2,119       2,628  
                                         
Segment operating loss
  $ (2,712 )   $ (8,706 )   $ (5,508 )   $ (1,902 )   $ (2,464 )
                                         
 
Reconciliation of Segment Results to Consolidated Results (in thousands)
 
                                         
    Year Ended December 31,     Three Months Ended March 31,  
    2007     2008     2009     2009     2010  
                      (Unaudited)  
 
Segment operating (loss) income
  $ 9,117     $ 7,304     $ 4,705     $ 3,232     $ (3,884 )
Unallocated expenses:
                                       
SG&A expenses
    6,531       10,052       8,052       2,296       2,401  
Interest expense
    566       2,838       5,289       1,099       1,202  
                                         
Net income (loss)
  $ 2,020     $ (5,586 )   $ (8,636 )   $ (163 )   $ (7,487 )
                                         
 
Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009
 
Net loss for the three months ended March 31, 2010 was $7.5 million compared to $163,000 for the same period in 2009. $6.6 million of this $7.3 million change occurred in our premium finance segment and the remainder in structured settlements and corporate expenses. The change in the premium finance segment was primarily caused by decreased agency fee income and increased interest expense and financing costs. The decrease in income is directly related to a reduction in the number of otherwise viable premium finance transactions that we could complete as we funded only 52 loans during the three months ended March 31, 2010, a 28% decrease compared to the 72 loans funded during the same period of 2009. This reduction in the number of loans originated was caused by increased financing costs and stricter funding guidelines required by our lender protection insurance provider. As agency fee income is earned solely as a function of originating loans, we experienced a decrease in agency fee income of $5.3 million, or 50%. Our net losses were partially offset by an increase in origination fee income to $7.3 million for the three months ended March 31, 2010 compared to $5.7 million for the same period in 2009, an increase of $1.6 million, or 28%, and an increase in interest income to $5.6 million for the three months ended March 31, 2010 compared to $5.0 million for the same period in 2009, an increase of $605,000, or 12%. As the aggregate principal amount of our outstanding loans increases, our origination fee income and interest income increase because each accrete to income over time.
 
In our premium finance business, our interest rates increased on notes payable such that the weighted average interest rate for credit facilities was 15.6% per annum as of March 31, 2010 as compared to 14.6% per annum as of March 31, 2009. Interest expense was $9.0 million for the three months ended March 31, 2010 compared to $7.1 million for the same period in 2009, an increase of $1.9 million, or 26%. Interest expense increased due to higher effective interest rates and an increased notes payable balance.
 
Amortization of deferred costs increased to $5.8 million during the three months ended March 31, 2010 compared to $3.6 million for the same period in 2009, an increase of $2.2 million, or 64%. The increase in amortization of deferred costs was due to significant costs incurred in obtaining lender protection insurance coverage for loans originated in prior periods. Lender protection insurance related costs accounted for $5.1 million and $3.0 million of total amortization of deferred costs during the three months ended March 31, 2010 and 2009, respectively.


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Gain on forgiveness of debt decreased to $1.8 million during the three months ended March 31, 2010 compared to $8.6 million for the same period in 2009, a decrease of $6.8 million, or 79%. The reduced gain on forgiveness of debt was offset by the reduced loss on loan settlement and payoffs, net, as a result of our writing off of fewer loans that were originated under the Acorn facility.
 
In our structured settlements segment, we incurred an increased loss due to an eight week delay in the closing of our forward sale facility with Slate. During this delay, we continued to aggregate structured settlements on our balance sheet, but had no sales to third parties.
 
2009 Compared to 2008
 
Net loss for 2009 was $8.6 million compared to $5.6 million in 2008. We were without funding and, therefore, unable to originate premium finance loans for a total of 33 weeks in 2009 compared to a total of 9 weeks in 2008. As a result, we experienced a significant decline in premium finance loan originations from 499 loans originated in 2008 to 194 loans originated in 2009, a decrease of 61%. As agency fee income is earned solely as a function of originating loans, we also experienced a decrease in agency fee income to $26.1 million in 2009 from $48.0 million in 2008, a decrease of $21.9 million, or 46%.
 
The reduction in agency fees was largely offset by an increase in origination fee income to $29.9 million in 2009 compared to $9.4 million in 2008, an increase of $20.5 million, or 218%, primarily due to the increase in the aggregate principal amount of the loans receivable and an increase in origination fees charged. Additionally, our selling, general and administrative expenses decreased to $31.3 million in 2009 compared to $41.6 million in 2008, a decrease of $10.3 million, or 25%. Given the difficult economic environment, we made staff reductions which resulted in a $2.4 million decrease in payroll expenses. We also reduced our television and radio expenditures in our structured settlement segment which led to an $835,000 decrease in marketing expenses. Additionally, we incurred $2.6 million less in professional fees.
 
Interest income was $21.5 million in 2009 compared to $11.9 million in 2008, an increase of $9.6 million, or 81%, primarily due to the increase in the aggregate principal amount of the loans receivable and the compounding of interest on the loan receivable balance that continues to grow until the loan matures.
 
Interest expense was $33.8 million in 2009 compared to $12.8 million in 2008, an increase of $21.0 million, or 165%, primarily due to higher note payable balances as well as higher interest rates. Amortization of deferred costs was $18.3 million in 2009 compared to $7.6 million in 2008, an increase of $10.7 million, or 141%. Lender protection insurance related costs accounted for $16.1 million and $6.2 million of total amortization of deferred costs during 2009 and 2008, respectively.
 
During 2009, we continued to invest in our structured settlements business. We did this with the expectation that expenses would continue to exceed revenue while we made investments in building the business and increasing our capacity to purchase new transactions. We originated 396 transactions with an undiscounted face value of $28.9 million during 2009 as compared to 276 transactions with an undiscounted face value of $18.3 million in 2008, an increase in the number of transactions of 43% and an increase in the undiscounted face value of 58%. We incurred selling, general and administrative expenses in our structured settlements segment of $9.5 million during 2009 compared to $9.8 million in 2008, a decrease of $295,000, or 3%. Gain on sale of structured settlements was $2.7 million in 2009 compared to $443,000 in 2008, an increase of $2.3 million, or 506%. The increase in gain on sale was a result of more sales of structured settlements and a higher percentage of gain on the sales.
 
2008 Compared to 2007
 
Net loss for 2008 was $5.6 million compared to net income of $2.0 million in 2007. We experienced difficulty obtaining financing in 2008 due to the dislocations in the capital markets. In July, 2008, Acorn stopped funding under its credit facility with us. We were without funding and, therefore, unable to originate premium finance loans for a total of 9 weeks in 2008. In order to originate premium finance business during 2008, we commenced the lender protection insurance program resulting in increased financing costs. We also incurred increased overhead expenses in 2008 as we continued to invest in our businesses.


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Agency fee income was $48.0 million in 2008 compared to $24.5 million in 2007, an increase of $23.5 million, or 96%. The increase in agency fee income is due to the 155% increase in the number of loans originated compared to 2007. Additionally, in order to offset our increased financing costs, we began charging origination fees on all premium finance loans. Origination fee income was $9.4 million in 2008 compared to $526,000 in 2007, an increase of $8.9 million, or 1,692%.
 
Interest expense was $12.8 million in 2008 compared to $1.3 million in 2007, an increase of $11.5 million, or 885%, primarily due to higher note payable balances. We had a notes payable balance of $183.5 million at December 31, 2008 compared to $35.6 million at December 31, 2007, an increase of $147.9 million, or 415%, as a result of increased borrowings to fund premium finance loans. Amortization of deferred costs was $7.6 million in 2008 compared to $126,000 in 2007, an increase of $7.5 million, or 5,952%. Lender protection insurance related costs accounted for $6.2 million and $0 of total amortization of deferred costs during 2008 and 2007, respectively.
 
Selling, general and administrative expenses increased from $24.3 million in 2007 to $41.6 million in 2008, an increase of $17.3 million, or 71%. The increase was primarily due to increasing the total number of our employees in 2008 from 16 to 98 as we continued to make investments in our business which exceeded our revenue growth. We also spent an additional $3.2 million on marketing to grow our structured settlement business and $3.2 million on professional fees primarily related to our effort to obtain credit facilities. Beginning in July 2007 and continuing through the year ended December 31, 2008, we began making significant investments in our structured settlements business and increased the number of full-time employees in this business unit from 3 to 20.
 
Segment Information
 
We operate our business through two reportable segments: premium finance and structured settlements. Our segment data discussed below may not be indicative of our future operations.
 
Premium Finance Business
 
Our results of operations for our premium finance segment for the periods indicated are as follows (in thousands):
 
                                         
    Year Ended
             
    December 31,     Three Months Ended March 31,  
    2007     2008     2009     2009     2010  
                      (Unaudited)  
 
Income
                                       
Agency fee income
  $ 24,515     $ 48,004     $ 26,114     $ 10,634     $ 5,279  
Interest income
    4,880       11,340       20,271       4,817       5,434  
Origination fee income
    526       9,399       29,853       5,694       7,299  
Gain on forgiveness of debt
                16,410       8,591       1,765  
Change in fair value of investments in life settlements (life insurance policies)
                            (202 )
Other income
                            8  
                                         
      29,921       68,743       92,648       29,736       19,583  
Direct segment expenses
                                       
Interest expense
    777       9,914       28,466       5,993       7,766  
Provision for losses
    2,332       10,768       9,830       2,793       3,367  
Loss (gain) on loan payoff and settlements, net
    (225 )     2,738       12,058       8,130       1,379  
Amortization of deferred costs
    126       7,569       18,339       3,573       5,847  
SG&A expense
    15,082       21,744       13,742       4,113       2,644  
                                         
      18,092       52,733       82,435       24,602       21,003  
                                         
Segment operating income
  $ 11,829     $ 16,010     $ 10,213     $ 5,134     $ (1,420 )
                                         


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Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009
 
Income
 
Agency Fee Income.  Agency fee income was $5.3 million for the three months ended March 31, 2010 compared to $10.6 million for the same period in 2009, a decrease of $5.3 million, or 50%. Agency fee income is earned solely as a function of originating loans. We funded only 52 loans during the three months ended March 31, 2010, a 28% decrease compared to the 72 loans funded during the same period of 2009. This reduction in the number of loans originated was caused by increased financing costs and stricter funding guidelines required by our lender protection insurance provider.
 
Agency fees as a percentage of the principal balance of the loans originated during each period was as follows (dollars in thousands):
 
                 
    Three Months Ended March 31,
    2009   2010
 
Principal balance of loans originated
  $ 19,418     $ 10,561  
Number of transactions originated
    72       52  
Agency fees
  $ 10,634     $ 5,279  
Agency fees as a percentage of the principal balance of loans originated
    54.8 %     50.0 %
 
Interest Income.  Interest income was $5.4 million for the three months ended March 31, 2010 compared to $4.8 million for the same period in 2009, an increase of $618,000, or 13%. The increase in interest income is due to an increase in the aggregate principal amount of the loans receivable and the compounding of interest on the loan receivable balance that continues to grow until the loan matures. Loans receivable, net, was $191.3 million and $172.3 million as of March 31, 2010 and March 31, 2009, respectively. The weighted average per annum interest rate for premium finance loans outstanding as of March 31, 2010 and 2009 was 11.1% and 10.6%, respectively.
 
Origination Fee Income.  Origination fee income was $7.3 million for the three months ended March 31, 2010 compared to $5.7 million for the same period in 2009, an increase of $1.6 million, or 28%. The increase is attributable to an increase in the aggregate principal amount of the loans receivable. The origination fees as a percentage of the principal balance of the loans originated was 41.1% during the three months ended March 31, 2010 compared to 47.3% for the same period in 2009.
 
Gain on Forgiveness of Debt.  Gain on forgiveness of debt was $1.8 million for the three months ended March 31, 2010 compared to $8.6 million for the same period in 2009, a decrease of $6.8 million, or 79%. These gains arise out of the Acorn settlement as described previously and include $1.9 million related to loans written off in December 2008, but the corresponding gain on forgiveness of debt was not recognized until 2009 at the time the Acorn settlement was finalized. Only 38 loans out of 119 loans financed in this facility remained outstanding as of March 31, 2010. The gains were substantially offset by a loss on loan payoffs of the associated loans of $1.7 million and $8.6 million during the three months ended March 31, 2010, and 2009, respectively.
 
Expenses
 
Interest Expense.  Interest expense was $7.8 million for the three months ended March 31, 2010 compared to $6.0 million for the same period in 2009, an increase of $1.8 million, or 30%. Interest expense increased due to the increase in borrowings under credit facilities used to fund premium finance loans, which increased to $193.3 million as of March 31, 2010, as compared to $173.0 million as of March 31, 2009, an increase of $20.3 million, or 12%. The weighted average interest rate per annum under our credit facilities used to fund premium finance loans increased from 14.6% as of March 31, 2009 to 15.6% as of March 31, 2010.
 
Provision for Losses on Loans Receivable.  Provision for losses on loans receivable was $3.4 million for the three months ended March 31, 2010 compared to $2.8 million for the same period in 2009, an increase of


58


 

$574,000, or 21%. The increase in the provision during the three months ended March 31, 2010 as compared to the three months ended March 31, 2009 is due to higher additional loan impairments recorded on existing loans in order to adjust the carrying value of the loan receivable to the fair value of the underlying policy, offset by a decrease in loan impairment related to new loans originated, as there were fewer new loans originated during the three months ended March 31, 2010 as compared to the same period in 2009. The loan impairment valuation was 6.4% and 6.2% of the carrying value of the loan receivables as of March 31, 2010 and 2009, respectively.
 
Amortization of Deferred Costs.  Amortization of deferred costs was $5.8 million for the three months ended March 31, 2010 compared to $3.6 million for the same period in 2009, an increase of $2.2 million, or 64%. The increase is due to an increase in the balance of the costs that are being amortized, particularly costs related to obtaining lender protection insurance coverage which comprises the majority of this balance. Lender protection insurance related costs accounted for $5.1 million and $3.0 million of total amortization of deferred costs during the three months ended March 31, 2010 and 2009, respectively. Additionally, as these costs are amortized using the effective interest method over the term of the loan, the amortization of deferred costs is accelerating as the loans get closer to maturity.
 
Loss on Loan Payoffs and Settlements, Net.  Loss on loan payoffs and settlements, net, was $1.4 million for the three months ended March 31, 2010 compared to $8.1 million for the same period in 2009, a decrease of $6.7 million, or 83%. The decline in loss on loan payoffs is due to the reduction of loans written off in the first quarter of 2010 as a result of the Acorn settlement. In the first quarter of 2010, we wrote off only 6 loans compared to 23 loans written off in the first quarter of 2009. Excluding the impact of the Acorn settlements, we had a gain on loan payoffs and settlements, net, of $321,000 and a loss on loan payoffs and settlements, net, of $1.8 million for the three months ended March 31, 2010, and 2009, respectively. The $1.8 million loss for the three months ended March 31, 2009 was primarily due to policies which we let lapse rather than continue to fund future premiums based on our assessment of the lack of economic value of the policies.
 
Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $2.6 million for the three months ended March 31, 2010 compared to $4.1 million for the same period in 2009, a decrease of $1.5 million, or 36%. Bad debt decreased by $374,000, legal fees decreased by $200,000, payroll decreased by $418,000, and other operating expenses decreased by $323,000.
 
Adjustments to our allowance for doubtful accounts for past due agency fees are charged to bad debt expense. Our determination of the allowance is based on an evaluation of the agency fee receivable, prior collection history, current economic conditions and other inherent risks. We review agency fees receivable aging on a regular basis to determine if any of the receivables are past due. We write off all uncollectible agency fee receivable balances against our allowance. The aging of our agency fees receivable as of the dates below is as follows (in thousands):
 
                 
    Three Months Ended
 
    March 31,  
    2009     2010  
 
30 days or less from loan funding
  $ 996     $ 388  
31 — 60 days from loan funding
    730        
61 — 90 days from loan funding
    741        
91 — 120 days from loan funding
    517       168  
Over 120 days from loan funding
    845       27  
                 
Total
  $ 3,829     $ 583  
Allowance for doubtful accounts
    (1,187 )     (176 )
                 
Agency fees receivable, net
  $ 2,642     $ 407  


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2009 Compared to 2008
 
Income
 
Agency Fee Income.  Agency fee income was $26.1 million in 2009 compared to $48.0 in 2008, a decrease of $21.9 million, or 46%. Agency fee income is earned solely as a function of originating loans. Due to the increases in our financing costs and our inability to access financing during periods in 2009, we experienced a significant decline in premium finance loan originations from 499 loans originated in 2008 to 194 loans originated in 2009, a decrease of 61%.
 
Agency fees as a percentage of the principal balance of the loans originated during each period was as follows (dollars in thousands):
 
                 
    Year Ended December 31,
    2008   2009
 
Principal balance of loans originated
  $ 97,559     $ 51,573  
Number of transactions originated
    499       194  
Agency fees
  $ 48,004     $ 26,114  
Agency fees as a percentage of the principal balance of loans originated
    49.2 %     50.6 %
 
Interest Income.  Interest income was $20.3 million in 2009 compared to $11.3 million in 2008, an increase of $9.0 million, or 79%. The increase in interest is due to an increase in the aggregate principal amount of the loans receivable and the compounding of interest on the loan receivable balance that continues to grow until the loan matures. Loans receivable, net, net was $189.l million in 2009 compared to $148.7 million in 2008. The weighted average per annum interest rate for premium finance loans outstanding as of December 31, 2009 and 2008 was 10.9% and 10.4%, respectively.
 
Origination Fee Income.  Origination fee income was $29.9 million in 2009 compared to $9.4 million in 2008, an increase of $20.5 million, or 218%. The increase is attributable to an increase in the aggregate principal amount of the loans receivable and an increase in the origination fee charged. Origination fees as a percentage of the principal balance of the loans originated was 44.7% during 2009 compared to 39.9% in 2008.
 
Gain on Forgiveness of Debt.  Gain on forgiveness of debt was $16.4 million in 2009 compared to $0 in 2008. The gain on forgiveness of debt is attributable to the Acorn settlement. We wrote off 81 loans in 2009 when Acorn stopped funding premiums and the underlying life insurance policies lapsed. This resulted in an offsetting loss on loan payoffs and settlements, net, of $10.2 million during 2009. In turn, we were released from the corresponding loans payable to Acorn and we recorded a gain on the forgiveness of debt of $16.4 million, which included $1.9 million related to loans written off in December 2008, but the corresponding gain on forgiveness of debt was not recognized until 2009 at the time the Acorn settlement was finalized.
 
Expenses
 
Interest Expense.  Interest expense was $28.5 million in 2009 compared to $9.9 million in 2008, an increase of $18.6 million, or 187%. Interest expense increased due to the increase in borrowings under credit facilities used to fund premium finance loans during the period. Borrowings under credit facilities used to fund premium finance loans were $193.5 million and $154.6 million as of December 31, 2009 and 2008, respectively. The weighted average interest rate per annum under our credit facilities used to fund premium finance loans increased from 13.9% as of December 31, 2008 to 15.6% as of December 31, 2009.
 
Provision for Losses on Loans Receivable.  Provision for losses on loans receivable was $9.8 million in 2009 compared to $10.8 million in 2008, a decrease of $1.0 million, or 9%. The decrease in the provision is due to lower loan impairments related to new loans as there were fewer new loans originated during the period, partially offset by higher additional loan impairments recorded on existing loans in order to adjust the carrying value of the loan receivable to the fair value of the underlying policy. The loan impairment valuation


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was 6.0% and 6.1% of the carrying value of the loan receivables, as of December 31, 2009 and 2008, respectively.
 
Amortization of Deferred Costs.  Amortization of deferred costs was $18.3 million in 2009 compared to $7.6 million in 2008, an increase of $10.7 million, or 141%. The increase is due to an increase in the balance of the costs that are being amortized, particularly costs related to obtaining lender protection insurance coverage, which comprise the majority of this balance. Lender protection insurance related costs accounted for $16.1 million and $6.2 million of total amortization of deferred costs during the year ended December 31, 2009 and 2008, respectively. Additionally, as these costs are amortized using the effective interest method over the term of the loan, the amortization of deferred costs is accelerating as the loans get closer to maturity.
 
Loss on Loan Payoffs and Settlements, Net.  Loss on loan payoffs and settlements, net, was $12.1 million in 2009 compared to $2.7 million in 2008, an increase of $9.4 million, or 349%. The increase in 2009 is largely due to the 64 loans written off as part of the settlement with Acorn, resulting in losses of $10.2 million during 2009, compared to 11 loans written off resulting in losses of $1.9 million during 2008. Excluding the impact of the Acorn settlement, loss on loan payoffs and settlements, net, was $1.8 million and $870,000 in 2009 and 2008, respectively. The increased loss during 2009 was primarily due to policies that we let lapse rather than continue to fund future premiums based on our assessment of the lack of economic value of these policies.
 
Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $13.7 million in 2009 compared to $21.7 million in 2008, a decrease of $8.0 million, or 37%. Given the decline in new originations resulting from our inability to access adequate capital, we made significant reductions in costs. We reduced payroll from $7.8 million in 2008 to $4.7 million in 2009, a decrease of $3.1 million, or 39%. Legal and professional fees were reduced from $4.0 million in 2008 to $3.0 million in 2009, a decrease of $1.0 million. Our bad debt expense was $1.3 million in 2009 compared to $1.0 million in 2008, an increase of $243,000, or 23%.
 
The aging of our agency fees receivable as of the dates below are as follows (in thousands):
 
                 
    Year Ended December 31,  
    2008     2009  
 
30 days or less from loan funding
  $ 6,946     $ 2,018  
31 — 60 days from loan funding
    1,338        
61 — 90 days from loan funding
    592       32  
91 — 120 days from loan funding
    251       214  
Over 120 days from loan funding
    513       21  
                 
Total
  $ 9,640     $ 2,285  
Allowance for doubtful accounts
    (769 )     (120 )
                 
Agency fees receivable, net
  $ 8,871     $ 2,165  
 
2008 Compared to 2007
 
Income
 
Agency Fee Income.  Agency fee income was $48.0 million in 2008 compared to $24.5 million in 2007, an increase of $23.5 million, or 96%. Agency fee income is earned solely as a function of originating loans. Accordingly, in 2008, the increase in agency fee income is due to the 155% increase in the number of loans originated compared to 2007.


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Agency fees as a percentage of the principal balance of the loans originated during each period was as follows (dollars in thousands):
 
                 
    Year Ended December 31,  
    2007     2008  
 
Principal balance of loans originated
  $ 44,501     $ 97,559  
Number of transactions originated
    196       499  
Agency fees
  $ 24,515     $ 48,004  
Agency fees as a percentage of the principal balance of loans originated
    55.1 %     49.2 %
 
Interest Income.  Interest income was $11.3 million in 2008 compared to $4.9 million in 2007, an increase of $6.4 million, or 132%. The increase in interest is due to an increase in the aggregate principal amount of the loans receivable and the accretion of origination fee income on the loan receivable balance that continues to grow until the loan matures. Loans receivable, net, net was $148.7 million and $43.7 million as of December 31, 2008 and 2007, respectively. The weighted average per annum interest rate for premium finance loans outstanding as of December 31, 2008 and 2007 was 10.4% and 10.2%, respectively.
 
Origination Fee Income.  Origination fee income was $9.4 million in 2008 compared to $526,000 in 2007, an increase of $8.9 million, or 1687%. The increase is due to an increase in the aggregate principal amount of the loans receivable and an increase in the origination fee charged. We charged an origination fee on all of the 499 loans originated in 2008. The origination fee as a percentage of the principal balance of the loans originated was 39.9% in 2008 compared to 20.2% in 2007.
 
Expenses
 
Interest Expense.  Interest expense was $9.9 million in 2008 compared to $777,000 in 2007, an increase of $9.1 million, or 1176%. In 2008, we drew down $137.0 million under our credit facilities in order to originate 499 loans. We had borrowings under credit facilities used to fund premium finance loans of $159.1 million at December 31, 2008 compared to $15.8 million at December 31, 2007, an increase of $143.3 million, or 905%. The weighted average interest rate per annum under our credit facilities used to fund premium finance loans was 13.9% as of December 31, 2008 as compared to 14.5% as of December 31, 2007.
 
Provision for Losses on Loans Receivable.  Provision for losses on loans receivable was $10.8 million in 2008 compared to $2.3 million in 2007, an increase of $8.5 million, or 362%. The increase in the provision is due to the significant number of new loans originated during 2008, whereby we recorded loan impairments at the inception of the loan in order to adjust the carrying value of the loan receivable to the fair value of the underlying policy. The loan impairment valuation was 6.1% and 4.8% of the carrying value of the loan receivables as of December 31, 2008 and 2007, respectively.
 
Amortization of Deferred Costs.  Amortization of deferred costs was $7.6 million in 2008 compared to $126,000 in 2007, an increase of $7.5 million. The increase is due to an increase in the balance of the costs that are being amortized, particularly costs related to obtaining lender protection insurance coverage which comprise the majority of this balance. Lender protection insurance related costs accounted for $6.2 million and $0 of total amortization of deferred costs during 2008 and 2007, respectively.
 
Loss (Gain) on Loan Payoffs and Settlements, Net.  Loss on loan payoffs and settlements, net, was $2.7 million in 2008 compared to a gain of $225,000 in 2007. During 2008, we let 18 life insurance policies lapse rather than continue to fund future premiums based on our assessment of the lack of economic value in the policies. We recorded a loss of $1.2 million on the loans receivable related to these 18 policies. We also recorded a loss of $1.9 million in 2008 on 9 loans financed under the Acorn facility when the underlying policies lapsed.
 
Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $21.7 million in 2008 compared to $15.1 million in 2007, an increase of $6.6 million, or 44%. We increased payroll by $3.5 million in 2008 as we hired additional employees to grow our business. Legal and professional fees increased by $3.0 million as we completed work on various credit facilities, secured lender protection


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insurance coverage for our lenders and pursued legal action against Acorn, as described previously. Our bad debt expense was $1.0 million in 2008 compared to $288,000 in 2007, an increase of $758,000, or 263%.
 
The aging of our agency fees receivable as of the dates below are as follows (in thousands):
 
                 
    Year Ended December 31,  
    2007     2008  
 
30 days or less from loan funding
  $ 3,542     $ 6,946  
31 — 60 days from loan funding
    1,910       1,338  
61 — 90 days from loan funding
    248       592  
91 — 120 days from loan funding
    12       251  
Over 120 days from loan funding
    293       513  
                 
Total
  $ 6,005     $ 9,640  
Allowance for doubtful accounts
    (287 )     (769 )
                 
Agency fees receivable, net
  $ 5,718     $ 8,871  
 
Structured Settlements
 
Our results of operations for our structured settlement business segment for the periods indicated are as follows (in thousands):
 
                                         
    Year Ended December 31,     Three Months Ended March 31,  
    2007     2008     2009     2009     2010  
                      (Unaudited)  
 
Income
                                       
Gain on sale of structured settlements
  $     $ 443     $ 2,684     $ 39     $  
Interest income
    8       574       1,212       163       149  
Other income
    2       47       71       15       15  
                                         
      10       1,064       3,967       217       164  
Direct segment expenses
                                       
SG&A expenses
    2,722       9,770       9,475       2,119       2,628  
                                         
Segment operating loss
  $ (2,712 )   $ (8,706 )   $ (5,508 )   $ (1,902 )   $ (2,464 )
                                         
 
Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009
 
Income
 
Interest Income.  Interest income was $149,000 for the three months ended March 31, 2010 compared to $163,000 for the same period in 2009, a decrease of $14,000, or 9%. The decrease is due to a lower average balance of structured settlements held on our balance sheet during the three months ended March 31, 2010.
 
Gain on sale of structured settlements.  We had no sales of structured settlements during the three months ended March, 31, 2010 due to the delay in closing the forward purchase agreement with Slate. During the three months ended March 31, 2009, we sold 11 structured settlements to an institutional investor for a gain of $39,000, a 10% gain as a percentage of the purchase price.
 
Expenses
 
Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $2.6 million for the period ending March 31, 2010 compared to $2.1 million for the same period of 2009, an increase of $509,000, or 24%. This increase is due primarily to increased legal fees by $306,000 attributable


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to securing the Slate facility and an increase in originations during the period, which increased to 105 in the quarter ended March 31, 2010 from 79 during the same period in 2009. Additionally, payroll increased by $129,000 due to hiring additional employees.
 
2009 Compared to 2008
 
Income
 
Interest Income.  Interest income was $1.2 million in 2009 compared to $574,000 in 2008, an increase of $637,000, or 111%. The increase is due to a higher number of structured settlements purchased and a higher average balance of structured settlements held on our balance sheet. In 2009 we originated 396 transactions as compared to 276 transactions during the same period in 2008.
 
Gain on Sale of Structured Settlements.  Gain on sale of structured settlements was $2.7 million in 2009 compared to $443,000 in 2008, an increase of $2.3 million, or 506%. The gain on sale in 2009 represents a 21% gain as a percentage of the purchase price compared to a 7% gain as a percentage of the purchase price in 2008. The increase in gain on sale was due to more sales of structured settlements and a higher percentage of gain on the sales. During 2009 we sold 439 structured settlements as compared to 226 during 2008.
 
Expenses
 
Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $9.5 million for the year ending December 31, 2009 compared to $9.8 million for the same period of 2008, a decrease of $295,000, or 3%. This decrease is primarily due to a decrease in television and radio marketing expenses of $835,000. This was partially offset by an increase in payroll of $108,000 and an increase in allocated corporate expenses due to growth in this segment, such as an increase in rent of $102,000, an increase in insurance costs of $143,000, and an increase in depreciation expense of $161,000.
 
2008 Compared to 2007
 
Income
 
Interest Income.  Interest income was $574,000 in 2008 compared to $8,000 in 2007, an increase of $566,000, or 709%. The increase is due to a higher number of structured settlements purchased. We originated 276 transactions in 2008 compared to 10 in 2007.
 
Gain on Sale of Structured Settlements.  Gain on sale of structured settlements was $443,000 in 2008, a 7% gain as a percentage of the purchase price, compared to $0 in 2007. In December 2008, we sold a portfolio of 226 structured settlements to an institutional investor. We sold no structured settlements in 2007.
 
Expenses
 
Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $9.8 million in 2008 compared to $2.7 million in 2007, an increase of $7.1 million, or 260%. The increase is due primarily to an increase in marketing expense of $3.2 million, an increase in payroll of $2.4 million, and an increase of $1.5 million in other operating expenses due to growth in our structured settlements business.
 
Liquidity and Capital Resources
 
Historically, we have funded operations primarily from cash flows from operations and various forms of debt financing. Currently, we fund new premium finance loans through a credit facility with Cedar Lane Capital, LLC (“Cedar Lane”) and new structured settlements through a forward sale agreement with Slate.
 
We are required to procure lender protection insurance coverage as additional credit support for our premium finance loans funded under the Cedar Lane facility. We originated our first loan with proceeds from this credit facility in December 2009. As of March 31, 2010, we have borrowed $23.5 million with a weighted average interest rate payable of 15.6%. As of March 31, 2010, we believe we have approximately $40.0 million of additional borrowing capacity under this credit facility as Cedar Lane has obtained additional subscriptions


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from its investors. We plan to replace this source of capital with the proceeds from this offering to fund our premium finance loans. This will significantly reduce our cost of financing and help to generate higher returns for our shareholders.
 
We have a three year agreement with Slate to purchase up to $250 million of structured settlements per year. Included in this agreement are both guaranteed (non life-contingent) structured settlements and life-contingent structured settlements. During the three months ended June 30, 2010, our weighted average sale discount rate for sales made pursuant to the forward sale agreement with Slate was 9.7%, which includes the sale of both guaranteed and life-contingent structured settlements. We believe that the forward sale agreement with Slate provides adequate financing to support growth in the structured settlements segment through January 2013. A minority of structured settlements that we purchase do not meet the eligibility criteria of the forward sale agreement with Slate. In such cases, we will fund these purchases with cash and aggregate the assets on our balance sheet. From time to time, we will sell these assets directly to banks and other financial institutions. The purchase price is negotiated by agreeing to a yield rate. This fixed rate is then used to discount the future periodic payments to determine the exact sale price.
 
Our liquidity needs for the next two years are expected to be met primarily through cash flows from operations as well as the net proceeds from this offering and our forward sale agreement with Slate, as described previously. See further discussion of cash flows below. Capital expenditures have historically not been material and we do not anticipate making material capital expenditures in 2010 or 2011.
 
Debt Financings Summary
 
We had the following debt outstanding as of March 31, 2010, which includes both the credit facilities used in our premium finance business as well as the promissory notes which are general corporate debt (in thousands):
 
                         
    Outstanding
    Accrued
    Total Principal
 
    Principal     Interest     and Interest  
 
Credit Facilities:
                       
Acorn
  $ 7,918     $ 2,131     $ 10,049  
CTL*
    43,665       3,708       47,373  
Ableco
    91,632       1,313       92,945  
White Oak
    26,595       5,358       31,953  
Cedar Lane
    23,496       844       24,340  
                         
      193,306       13,354       206,660  
                         
Promissory Notes:
                       
Amalgamated
    1,902       566       2,468  
Skarbonka
    16,101       641       16,742  
IMPEX
    10,324       1,030       11,354  
                         
      28,327       2,237       30,564  
                         
Total
  $ 221,633     $ 15,591     $ 237,224  
                         
 
 
* Represents both the CTL credit facility and our $30 million grid promissory note in favor of CTL Holdings. See “Description of Certain Indebtedness”.
 
As of March 31, 2010, we had total debt outstanding of $221.6 million of which $185.4 million, or 83.6%, is owed by our special purpose entities which were established for the purpose of obtaining debt financing to fund our premium finance loans. Debt owed by these special purpose entities is generally non-recourse to us and our other subsidiaries. This debt is collateralized by life insurance policies with lender protection insurance underlying premium finance loans that we have assigned, or in which we have sold participations rights, to our special purpose entities. One exception is the Cedar Lane facility where we have guaranteed 5% of the applicable special purpose entity’s obligations, which amounted to $1.3 million as of


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March 31, 2010. Messrs. Mitchell and Neuman made certain guaranties to lenders for the benefit of the special purpose entities for matters other than financial performance. These guaranties are not unconditional sources of credit support but are intended to protect the lenders against acts of fraud, willful misconduct or a borrower commencing a bankruptcy filing. To the extent lenders sought recourse against Messrs. Mitchell and Neuman for such non-financial performance reasons, then our indemnification obligations to Messrs. Mitchell and Neuman may require us to indemnify them for losses they may incur under these guaranties.
 
With the exception of the Acorn facility, the credit facilities are expected to be repaid with the proceeds from loan maturities. The lender protection insurance coverage ensures liquidity at the time of loan maturity and, therefore, we do not anticipate significant, if any, additional cash outflows at the time of debt maturities in excess of the amounts to be received by the loan payoffs or lender protection insurance coverage claims. If loans remaining under the Acorn credit facility do not payoff at the time of maturity, Asset Based Resource Group, LLC will assume possession of the insurance policies that collateralize the premium finance loans and the related debt will be forgiven.
 
As of March 31, 2010, promissory notes that will be converted into shares of our common stock upon the closing of this offering had an outstanding balance of $[     ]million or [     ]% of our total outstanding debt.
 
The following table summarizes the maturities of principal and interest outstanding as of March 31, 2010 for our credit facilities used to fund premium finance loans (dollars in thousands):
 
                                                 
    Weighted
    Principal
    Principal and Interest Payable  
    Average
    and Interest
    Nine Months
                   
Credit
  Interest
    Outstanding
    Ending
    Year Ending
    Year Ending
    Year Ending
 
Facilities
  Rate     at 3/31/2010     12/31/2010     12/31/2011     12/31/2012     12/31/2013  
 
Acorn
    14.3 %   $ 10,049     $ 10,049     $     $     $  
CTL*
    10.3 %     47,373       15,601       25,463       6,309        
Ableco
    16.5 %     92,945             92,945              
White Oak
    20.1 %     31,953       8,403       23,550              
Cedar Lane
    15.6 %     24,340       2,738       18,055       3,547