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)
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Florida
(State or other jurisdiction
of
Incorporation or organization)
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6199
(Primary Standard
Industrial
Classification Code Number)
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77-0666377
(I.R.S. Employer
Identification No.)
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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
registrants 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:
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Michael B. Kirwan
John J. Wolfel, Jr.
Foley & Lardner LLP
One Independent Drive, Suite 1300
Jacksonville, Florida 32202
(904) 359-2000
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J. Brett Pritchard
Melissa M. Choe
Locke Lord Bissell & Liddell LLP
111 South Wacker Drive
Chicago, Illinois 60606
(312) 443-0700
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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):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller reporting
company o
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(Do not check if a smaller
reporting company)
CALCULATION
OF REGISTRATION FEE
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Proposed Maximum
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Amount of
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Title of Each Class of
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Aggregate
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Registration
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Securities to be Registered
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Offering Price(1)(2)
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Fee
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Common Stock, par value $0.01 per share
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$
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287,500,000
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$
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20,498.75
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(1)
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Includes amount attributable to
shares of common stock issuable upon the exercise of the
underwriters over-allotment option.
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(2)
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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.
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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.
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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 $[ ]
per share.
Prior to this offering, there has been no public market for our
common stock, and our common stock is not currently listed on
any national exchange or market system. We intend to apply to
list our common stock on the New York Stock Exchange under the
symbol IFT.
Investing in our common stock involves risks. See Risk
Factors beginning on page 13 of this prospectus to
read about the risks you should consider before buying our
common stock.
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Per Share
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Total
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Price to public
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$
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$
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Discounts and commissions to underwriters
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$
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$
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Net proceeds (before expenses) to us
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$
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$
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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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Page
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ii
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1
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13
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30
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31
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32
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33
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34
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36
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38
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43
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71
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87
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91
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102
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107
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108
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112
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117
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119
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122
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122
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122
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F-1
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II-7
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i
CERTAIN
IMPORTANT INFORMATION
For your convenience we have included below definitions of
terms used in this prospectus.
In this prospectus references to:
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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.
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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.
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principal balance of the loan refer to the principal
amount loaned by us in a premium finance transaction without
including origination fees or interest.
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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.
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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.
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Unless otherwise stated, in this prospectus all references to
the number of shares of our common stock outstanding before and
after this offering assume:
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no exercise of the underwriters over-allotment option;
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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
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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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ii
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 & Poors 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
1
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 defendants 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.
2
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):
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Three Months Ended
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Year Ended December 31,
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March 31,
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2007
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2008
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2009
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2009
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2010
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Number of transactions
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10
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276
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396
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79
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105
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Face value of undiscounted future payments purchased
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$
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701
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$
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18,295
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$
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28,877
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$
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5,828
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$
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7,297
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Weighted average purchase effective discount rate
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11.0
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%
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12.0
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%
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16.3
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%
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14.2
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%
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17.0
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%
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Number of transactions sold
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226
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439
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11
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Weighted average sale discount rate
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10.8
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%
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11.5
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10.0
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%
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Average marketing cost per transaction
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$
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205.6
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$
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19.2
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$
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11.3
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$
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14.2
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$
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10.0
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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:
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Year Ended
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December 31,
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Three Months Ended March 31,
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2007
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2008
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2009
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2009
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2010
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Lender protection insurance cost
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8.5
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%
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10.9
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%
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10.4
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%
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10.1
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%
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Interest cost and other lender funding charges under credit
facilities
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14.5
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%
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13.7
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%
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18.2
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%
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16.7
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%
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20.4
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%
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Total financing cost
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14.5
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%
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22.2
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%
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29.1
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%
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27.1
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%
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30.5
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%
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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:
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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.
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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.
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|
|
|
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
|
4
|
|
|
|
|
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.
5
The principal subsidiaries that comprise our corporate
structure, giving effect to the corporate conversion, are as
follows:
|
|
|
|
|
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.
|
6
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).
|
7
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, Managements 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.
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. |
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
10
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
|
%
|
11
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
|
%
|
|
|
|
|
12
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 policys 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.
13
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 insureds 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 individuals 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
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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 individuals 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 Counsels opinion
in 2006 concluding that arrangements intended to facilitate the
procurement of life insurance policies for resale violated New
Yorks insurable interest statute and may also constitute a
violation of New York states 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 regulators or carriers
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 policyholders net worth or the
insureds 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 carriers 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
carriers 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 companys 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 applicants 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
17
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
18
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 companys 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
companys 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:
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training and educating our employees regarding our obligations
relating to confidential information;
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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
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limiting access to electronic information.
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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.
21
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:
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require that premium finance lenders be licensed by the
applicable jurisdiction;
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require certain disclosure agreements and strictly govern the
content thereof;
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regulate the amount of late fees and finance charges that may be
charged if a borrower is delinquent on its payments; and/or
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allow imposition of potentially significant penalties on lenders
for violations of such jurisdictions applicable insurance
premium finance laws.
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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 publics
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
23
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:
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our results of operations;
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changes in expectations as to our future results of operations,
including financial estimates and projections by securities
analysts and investors;
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changes in laws and regulations applicable to structured
settlements or premium finance transactions;
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increased competition for premium finance lending or the
acquisition of structured settlements;
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our ability to secure credit facilities on favorable terms or at
all;
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results of operations that vary from those expected by
securities analysts and investors;
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future sales of our common stock;
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24
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fluctuations in interest rates, inflationary pressures and other
changes in the investment environment that affect returns on
invested assets; and
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volatile and unpredictable developments, including man-made,
weather-related and other natural catastrophes or terrorist
attacks.
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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:
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pay a price per share that substantially exceeds the pro forma
net tangible book value of our assets after subtracting
liabilities; and
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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.
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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
25
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.
26
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.
27
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:
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the board of directors approves the control share
acquisition; or
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the holders of a majority of the corporations 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.
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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:
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1/5 or more but less than 1/3;
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1/3 or more but less than a majority; and
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a majority or more.
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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
28
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,
LLCs 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, Managements
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:
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our results of operations;
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our ability to continue to grow our businesses;
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our ability to obtain financing on favorable terms or at all;
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changes in laws and regulations applicable to premium finance
transactions or structured settlements;
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changes in mortality rates and the accuracy of our assumptions
about life expectancies;
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increased competition for premium finance lending or for the
acquisition of structured settlements;
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adverse developments in capital markets;
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loss of the services of any of our executive officers;
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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
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changes in general economic conditions, including inflation,
changes in interest rates and other factors.
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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.
31
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.
32
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.
33
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
Managements 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
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
35
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.
36
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.
|
37
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
Managements 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.
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. |
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
40
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
|
%
|
41
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
MANAGEMENTS
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 borrowers 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 Moodys Investors
Services
and/or
Standard & Poors. 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,
45
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
recipients 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
46
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:
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Year Ended December 31,
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Three Months Ended March 31,
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2007
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2008
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2009
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2009
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2010
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Agency fees as a percentage of the principal balance of the
loans originated
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55.1
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%
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49.2
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%
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50.6
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%
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54.8
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%
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50.0
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%
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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:
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December 31,
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March 31,
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2007
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2008
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2009
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2009
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2010
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Weighted average per annum interest rate
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10.2
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%
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10.4
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%
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10.9
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%
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10.6
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%
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11.1
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%
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47
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:
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Year Ended
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Three Months Ended
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December 31,
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March 31,
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2007
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2008
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2009
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2009
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2010
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|
Origination fees as a percentage of the principal balance of the
loans
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20.2
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%
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39.9
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%
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44.7
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%
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47.3
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%
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41.1
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%
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Origination fees per annum as a percentage of the principal
balance of the loans
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5.2
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%
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15.4
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%
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19.2
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%
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16.8
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%
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19.5
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%
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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:
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December 31,
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March 31,
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2007
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2008
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2009
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2009
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2010
|
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|
Weighted average interest rate under credit facilities
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14.5
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%
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13.9
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%
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|
15.6
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%
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|
14.6
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%
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15.6
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%
|
Weighted average interest rate under promissory notes
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16.2
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%
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15.9
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%
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|
16.5
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%
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16.1
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%
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|
16.5
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%
|
Total weighted average interest rate
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15.5
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%
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14.2
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%
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15.7
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%
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14.9
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%
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15.7
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%
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48
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 policys 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:
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December 31,
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March 31,
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2007
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2008
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2009
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2009
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2010
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|
Percentage of total number of loans outstanding with lender
protection insurance
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74.0
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%
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90.3
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%
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81.7
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%
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92.4
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%
|
Percentage of total loans receivable balance covered by lender
protection insurance
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78.6
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%
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93.1
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%
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|
84.1
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%
|
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|
93.9
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%
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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
49
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
50
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
51
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
insureds 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:
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Agency Fees Agency fees are recognized at the
time a premium finance loan is funded.
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|
|
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.
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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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52
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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.
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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.
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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 entitys 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 enterprises
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,
53
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 entitys
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
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.
55
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.
56
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
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
|
|
59
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
60
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.
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,
|
|
|
|
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
62
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
63
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
64
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 entitys obligations, which amounted to
$1.3 million as of
65
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
|
|