As filed with
the Securities and Exchange Commission on December 28,
2010
Registration
No. 333-168785
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 6
to
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
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6199
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77-0666377
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(State or other jurisdiction
of
Incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(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
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(3)
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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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(3)
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The registration fee was previously
paid on August 11, 2010.
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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
DECEMBER 28, 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 between
$[ ] and
$[ ] per share.
Prior to this offering, there has been no public market for our
common stock, and our common stock is not currently listed on
any national exchange or market system. We have been approved to
list our common stock on the New York Stock Exchange, subject to
official notice of issuance, under the symbol IFT.
Investing in our common stock involves risks. See Risk
Factors beginning on page 13 of this prospectus to
read about the risks you should consider before buying our
common stock.
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Per Share
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Total
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Price to public
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$
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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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* |
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See Underwriting on page 136 of this prospectus
for a description of the underwriters compensation. |
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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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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45
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78
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98
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104
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117
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118
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124
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128
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134
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136
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140
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140
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140
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F-1
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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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borrower refer to the entity or individual executing
the note in a premium finance transaction. In nearly all
instances, the borrower is an irrevocable life insurance trust
established for estate planning purposes by the insured which is
both the legal owner and beneficiary of a life insurance policy
serving as collateral for a premium finance loan.
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carrying value of the loan refer to the loan
principal balance, accrued interest and accreted origination
fees excluding any impairment valuation adjustment.
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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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net carrying value of the loan refer to the loan
principal balance, accrued interest and accreted origination
fees, net of any impairment valuation adjustment.
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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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an initial public offering price that is the midpoint of the
price range on the cover of this prospectus;
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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 and
unpaid dividends thereon) and all principal and accrued and
unpaid interest outstanding under our promissory note in favor
of IMPEX Enterprises, Ltd. will be converted
into shares of our common
stock;
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the issuance of shares of
common stock to two employees pursuant to the terms of each of
their respective phantom stock agreements; and
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the conversion, immediately prior to the closing of this
offering, of a $30.0 million debenture into shares of our
common stock as described under Corporate Conversion.
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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 insurance
companies or their affiliates generally rated A1 or
better by Moodys Investors Services or
A− or better by Standard &
Poors.
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 2007, the United States capital
markets have experienced extensive distress and dislocation due
to the global economic downturn and credit crisis. Lenders in
the premium finance market generally exited the market or
increased their lending rates and required more assurances such
as additional collateral support and third-party guarantees. As
a result, our financing cost for a premium finance transaction
increased significantly. For the nine months ended
September 30, 2010, our financing cost was approximately
31.1% 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. Over time we expect that this will
significantly reduce our cost of financing and help to generate
higher returns for our shareholders.
In our structured settlement business we purchase structured
settlements at a discounted rate and sell such assets to, or
finance such assets with, third parties. For the nine months
ended September 30, 2010 and the year ended
December 31, 2009, we purchased structured settlements at
weighted average discount rates of 19.3% and 16.3%,
respectively. We plan to use a portion of the net proceeds of
this offering to purchase structured settlements and retain such
amounts on our balance sheet.
During the nine months ended September 30, 2010 and the
year ended December 31, 2009, we had revenue of
$60.4 million and $96.6 million, respectively, and a
net loss of $16.4 million and $8.6 million,
respectively. During the nine months ended September 30,
2010 and the year ended December 31, 2009, 88.8% and 95.9%,
respectively, of our revenue was generated from our premium
finance segment and 11.2% and 4.1%, respectively, of our revenue
was generated from our structured settlement segment. As of
September 30, 2010, we had total assets of
$181.0 million.
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 September 30, 2010, the average principal balance of
the loans we have originated since inception is approximately
$213,000. The life insurance policies that serve as collateral
for our premium finance loans
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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 as follows:
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Agency 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 nine months ended September 30,
2010 and year ended December 31, 2009 were 49.9% and 50.6%,
respectively. These agency fees are charged when the loan is
funded and collected on average within 47 days thereafter.
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Interest Income 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. In addition, our premium finance
loans have a floor interest rate 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
September 30, 2010 and December 31, 2009 was 11.3% and
10.9%, respectively.
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Origination Fees 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 nine ended September 30, 2010
and the year ended December 31, 2009 were 41.7% and 44.7%,
respectively.
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The policyholder is not required to make any payment on the loan
until maturity. 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, subject to policy terms and conditions, 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 September 30, 2010, 94.6% of our
outstanding loans have collateral whose value is insured. With
the net proceeds from this offering, we expect to have the
option 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. There is a great
deal of variation among the life insurance policies that
collateralize our loans, especially with regard to premiums
which range from fixed level premiums to premiums that typically
increase over time. We have developed proprietary systems and
processes that, among other things, determine the minimum
monthly premium outlay required to maintain each life insurance
policy in force. These required minimum premium payments
typically increase over time as the insured ages. The specific
premium payment schedule varies by insurance carrier and product
type. These systems and processes enhance our liquidity since we
pay only the minimum premium at the latest date to keep the
policies in force.
To help protect against fraud and to seek profitable
transactions, we perform extensive underwriting before entering
into a transaction. We believe that our underwriting guidelines
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
2
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 September 30, 2010,
we had a database of over 30,000 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.
The following table shows the number of structured settlement
transactions, the face value of undiscounted payments purchased,
the weighted average purchase 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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Nine Months
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Ended
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Year Ended December 31,
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September 30,
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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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275
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385
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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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20,460
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$
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33,713
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Weighted average purchase 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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16.1
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%
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19.3
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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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96
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291
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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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%
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11.1
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%
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9.1
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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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12.7
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$
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9.3
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We believe that we have various funding alternatives for the
purchase of structured settlements. In addition to available
cash, on September 24, 2010 we entered into an arrangement
to provide us up to $50 million to finance the purchase of
structured settlements. 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 selling pools of structured settlements to
third parties and 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. As a result of the
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. Market conditions have forced
us, and we believe many of our competitors, 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
for our premium finance business has required us to obtain
lender protection insurance for each loan originated under such
credit facility. We have obtained lender protection insurance
from Lexington Insurance Company (Lexington), whom
we also refer to as our lender protection insurer, a subsidiary
of American International Group, Inc. (AIG). This
coverage provides insurance on the value of the life insurance
policy serving as collateral underlying the loan. This insured
value is not directly correlated to any portion of the loan. The
lender protection insurer limits the insured value to an amount
equal to or less than its determination of the value of the life
insurance policy underlying our premium finance loan based on
its own models and assumptions, which may be equal to or less
than the carrying value of the loan receivable. The insured
value is determined at the time the premium finance loan is made
and is not subject to change or adjustment during the term of
the loan.
3
Subject to the terms and conditions of the lender protection
insurance policy, after a payment default by the borrower, our
lender protection insurer has the right to direct control or
take beneficial ownership of the life insurance policy serving
as collateral underlying the loan and we are paid a claim equal
to the insured value of such life insurance policy. For loans
that matured during the nine months ended September 30,
2010 and during the year ended December 31, 2009, 97% and
85%, respectively, of such loans were not repaid in cash from
the borrower at maturity and 92.5% and 48.3% of the defaulting
loans during the nine months ended September 30, 2010 and
during the year ended December 31, 2009, had lender
protection insurance. In instances where the loan was not repaid
in cash from the borrower, we typically have received the right
to take control of the policy from the borrower. In order to
make a claim under the lender protection insurance, the lender
protection insurance policy required that we must demonstrate to
Lexington that we have received the right to the life insurance
policy. We have typically been able to do so within 30 days
of loan maturity on all loans with lender protection insurance
that have matured to date.
Since 2008, the cost of our lender protection insurance has
ranged from 8.5% 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. Currently, we are only
originating premium finance loans with lender protection
insurance. After December 31, 2010, we do not expect to
originate 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
allows us to access debt financing to support our premium
finance business, the cost of lender protection insurance
substantially reduces our profitability. Additionally, there are
coverage limitations related to our use of lender protection
insurance that 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 cost of debt financing and lender
protection insurance and the limitations on loan originations
that our lender protection insurance imposes.
The following table shows our total financing cost per annum for
funding our premium finance loans as a percentage of the
principal balance of the loans originated during the following
periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
Lender protection insurance cost
|
|
|
|
|
|
|
8.5
|
%
|
|
|
10.9
|
%
|
|
|
11.0
|
%
|
|
|
10.4
|
%
|
Interest cost and other lender funding charges under credit
facilities
|
|
|
14.5
|
%
|
|
|
13.7
|
%
|
|
|
18.2
|
%
|
|
|
18.5
|
%
|
|
|
20.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financing cost
|
|
|
14.5
|
%
|
|
|
22.2
|
%
|
|
|
29.1
|
%
|
|
|
29.5
|
%
|
|
|
31.1
|
%
|
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.
Competitive
Strengths
We believe our competitive strengths are:
|
|
|
|
|
Complementary mix of business lines. Unlike
many of our competitors who are focused on either structured
settlements or premium financings, we operate in both lines of
business. This diversification provides us with a complementary
mix of business lines as the revenues generated by our
structured
|
4
|
|
|
|
|
settlement business are generally short-term cash receipts in
comparison to the revenue from our premium financing business
which is collected over time.
|
|
|
|
|
|
Scalable and cost-effective infrastructure. We
have created an efficient, cost-effective, scalable
infrastructure that complements our businesses. We have
developed proprietary systems and models that allow for
cost-effective review of both premium finance and structured
settlement transactions that utilize our underwriting standards
and guidelines. Our systems allow us to efficiently process
transactions while maintaining our underwriting standards. As a
result of our investments in our infrastructure, we have
developed a structured settlement business model that we believe
has sufficient scalability to permit our structured settlement
business to continue to grow efficiently.
|
|
|
|
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 personnel from our premium
finance and structured settlement businesses are experienced in
these specialized businesses and, in many cases, have more than
half 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 Group
Inc., 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 and generate 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
provide us with the option to retain 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 originate more premium finance loans
because we will not be subject to coverage limitations imposed
by our lender protection insurer that have reduced the number of
loans that we can originate.
|
|
|
|
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, we expect that our sales staff
will be able to increase our transaction volume due in part to
repeat transactions from our existing customers.
|
5
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 and unpaid dividends thereon) of Imperial Holdings, LLC
and all principal and accrued and unpaid interest outstanding
under our promissory note in favor of IMPEX Enterprises, Ltd.
will be converted into shares of common stock of Imperial
Holdings, Inc. Following the corporate conversion and
immediately prior to the closing of this offering, a $30.0
million debenture will be converted into shares of our common
stock. See Corporate Conversion on page 34 for
further information regarding the corporate conversion.
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 approximately $[ ] of
the net proceeds to support our premium finance transactions,
approximately $[ ] of the net
proceeds to support our structured settlement activities and any
remaining proceeds 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 have been approved to list our common stock on the New York
Stock Exchange, subject to official notice of issuance, 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 and unpaid dividends
thereon) and all principal and accrued and unpaid interest
outstanding under our promissory note in favor of IMPEX
Enterprises, Ltd. will be converted
into shares
of our common stock;
|
|
|
|
reflects the conversion, immediately prior to the closing of
this offering, of a $30.0 million debenture
into shares of our common
stock at the midpoint of the price range on the cover of this
prospectus as described under Corporate Conversion;
|
|
|
|
reflects the issuance
of shares
of common stock to two of our employees pursuant to the terms of
each of their respective phantom stock agreements;
|
|
|
|
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 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 Omnibus
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 nine-month period ended
September 30, 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 nine-month periods
ended September 30, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
Months
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
Years Ended December 31,
|
|
|
September 30,
|
|
|
Dec. 31,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except share data)
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency fee income
|
|
$
|
24,515
|
|
|
$
|
48,004
|
|
|
$
|
26,114
|
|
|
$
|
20,216
|
|
|
$
|
9,099
|
|
|
$
|
26,114
|
|
|
$
|
9,099
|
|
Interest income
|
|
|
4,888
|
|
|
|
11,914
|
|
|
|
21,483
|
|
|
|
15,843
|
|
|
|
15,795
|
|
|
|
21,483
|
|
|
|
15,795
|
|
Origination fee income
|
|
|
526
|
|
|
|
9,399
|
|
|
|
29,853
|
|
|
|
21,865
|
|
|
|
16,728
|
|
|
|
29,853
|
|
|
|
16,728
|
|
Gain on sale of structured settlements
|
|
|
|
|
|
|
443
|
|
|
|
2,684
|
|
|
|
499
|
|
|
|
4,848
|
|
|
|
2,684
|
|
|
|
4,848
|
|
Gain on forgiveness of debt
|
|
|
|
|
|
|
|
|
|
|
16,410
|
|
|
|
14,886
|
|
|
|
6,968
|
|
|
|
16,410
|
|
|
|
6,968
|
|
Gain on sale of life settlements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,954
|
|
|
|
|
|
|
|
1,954
|
|
Change in fair value of life settlements and structured
settlement receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,805
|
|
|
|
|
|
|
|
4,805
|
|
Other income
|
|
|
2
|
|
|
|
47
|
|
|
|
71
|
|
|
|
53
|
|
|
|
195
|
|
|
|
71
|
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income
|
|
|
29,931
|
|
|
|
69,807
|
|
|
|
96,615
|
|
|
|
73,362
|
|
|
|
60,392
|
|
|
|
96,615
|
|
|
|
60,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense(3)
|
|
|
1,343
|
|
|
|
12,752
|
|
|
|
33,755
|
|
|
|
24,710
|
|
|
|
24,244
|
|
|
|
30,793
|
(1)
|
|
|
22,022
|
(1)
|
Provision for losses on loans receivable
|
|
|
2,332
|
|
|
|
10,768
|
|
|
|
9,830
|
|
|
|
6,705
|
|
|
|
3,514
|
|
|
|
9,830
|
|
|
|
3,514
|
|
Loss (gain) on loan payoffs and settlements, net
|
|
|
(225
|
)
|
|
|
2,738
|
|
|
|
12,058
|
|
|
|
11,279
|
|
|
|
4,320
|
|
|
|
12,058
|
|
|
|
4,320
|
|
Amortization of deferred costs
|
|
|
126
|
|
|
|
7,569
|
|
|
|
18,339
|
|
|
|
13,101
|
|
|
|
22,601
|
|
|
|
18,339
|
|
|
|
22,601
|
|
Selling, general and administrative expenses(3)
|
|
|
24,335
|
|
|
|
41,566
|
|
|
|
31,269
|
|
|
|
22,997
|
|
|
|
22,118
|
|
|
|
31,269
|
|
|
|
22,118
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
|
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
27,911
|
|
|
|
75,393
|
|
|
|
105,251
|
|
|
|
78,792
|
|
|
|
76,797
|
|
|
|
102,289
|
|
|
|
74,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,020
|
|
|
$
|
(5,586
|
)
|
|
$
|
(8,636
|
)
|
|
$
|
(5,430
|
)
|
|
$
|
(16,405
|
)
|
|
$
|
(5,674
|
)
|
|
$
|
(14,183
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects a reduction of interest expense of $3.0 million
for the year ended December 31, 2009 and $2.2 million
for the nine months ended September 30, 2010, due to the
conversion of our promissory note in favor of IMPEX Enterprises,
Ltd. into shares of our common stock, which will occur prior to
the closing of this offering, and the conversion of our
promissory note in favor of Branch Office of Skarbonka Sp. z o.o
into a $30.0 million debenture, and the conversion of that
$30.0 million debenture into shares of our common stock,
which will occur immediately prior to 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. |
|
(3) |
|
Includes amounts for related parties. Refer to our consolidated
and combined financial statements for detail. |
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
December 31, 2009
|
|
|
As of September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma As
|
|
|
|
Actual
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
Adjusted(3)
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(In thousands, except share data)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,891
|
|
|
$
|
3,685
|
|
|
$
|
8,685
|
(1)
|
|
$
|
|
|
Restricted cash
|
|
|
|
|
|
|
643
|
|
|
|
643
|
|
|
|
|
|
Certificate of deposit restricted
|
|
|
670
|
|
|
|
877
|
|
|
|
877
|
|
|
|
|
|
Agency fees receivable, net of allowance for doubtful accounts
|
|
|
2,165
|
|
|
|
736
|
|
|
|
736
|
|
|
|
|
|
Deferred costs, net
|
|
|
26,323
|
|
|
|
11,455
|
|
|
|
11,455
|
|
|
|
|
|
Interest receivable, net
|
|
|
21,034
|
|
|
|
17,175
|
|
|
|
17,175
|
|
|
|
|
|
Loans receivable, net
|
|
|
189,111
|
|
|
|
121,564
|
|
|
|
121,564
|
|
|
|
|
|
Structured settlements receivables, net
|
|
|
152
|
|
|
|
10,554
|
|
|
|
10,554
|
|
|
|
|
|
Investment in life settlements, at estimated fair value
|
|
|
4,306
|
|
|
|
8,846
|
|
|
|
8,846
|
|
|
|
|
|
Investment in life settlement fund
|
|
|
542
|
|
|
|
1,270
|
|
|
|
1,270
|
|
|
|
|
|
Prepaid expenses and other assets
|
|
|
3,526
|
|
|
|
4,163
|
|
|
|
4,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
263,720
|
|
|
$
|
180,968
|
|
|
$
|
185,968
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses(4)
|
|
$
|
3,170
|
|
|
$
|
4,210
|
|
|
$
|
4,210
|
|
|
|
|
|
Payable for purchase of structured settlements
|
|
|
|
|
|
|
7,094
|
|
|
|
7,094
|
|
|
|
|
|
Lender protection insurance claim received in advance
|
|
|
|
|
|
|
60,645
|
|
|
|
60,645
|
|
|
$
|
|
|
Interest payable(4)
|
|
|
12,627
|
|
|
|
16,172
|
|
|
|
12,811
|
(2)
|
|
|
|
|
Notes payable(4)
|
|
|
231,064
|
|
|
|
82,393
|
|
|
|
62,539
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
246,861
|
|
|
$
|
170,514
|
|
|
$
|
147,299
|
|
|
$
|
|
|
Member units preferred (500,000 authorized in the
aggregate)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member units Series A preferred (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 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 (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 issued
and outstanding, actual; 0 issued and outstanding, pro forma and
pro forma as adjusted)
|
|
|
|
|
|
|
700
|
|
|
|
|
(1)
|
|
|
|
|
Member units Series E preferred (73,000 issued
and outstanding, actual; 0 issued and outstanding, pro forma and
pro forma as adjusted)
|
|
|
|
|
|
|
7,300
|
|
|
|
|
(1)
|
|
|
|
|
Subscription receivable
|
|
|
|
|
|
|
(5,000
|
)
|
|
|
|
(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
|
|
|
|
|
|
|
|
|
|
|
[67,174]
|
(1)(2)
|
|
|
|
|
Retained earnings (accumulated deficit)
|
|
|
(12,100
|
)
|
|
|
(28,505
|
)
|
|
|
(28,505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total members/stockholders equity
|
|
|
16,859
|
|
|
|
10,454
|
|
|
|
38,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members/stockholders equity
|
|
$
|
263,720
|
|
|
$
|
180,968
|
|
|
$
|
185,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Reflects the conversion of all
common and preferred limited liability company units of Imperial
Holdings, LLC into shares of our common stock. Also reflects the
cash received in October, 2010 of $5.0 million related to a
subscription receivable for the September 2010 sale of 50,000
Series E preferred units, which will also be converted into
shares of our common stock as a result of the corporate
conversion.
|
|
(2)
|
|
Reflects the issuance and
conversion of a $30.0 million debenture into shares of our
common stock immediately prior to the closing of this offering.
Also reflects the conversion of all principal and accrued
interest outstanding under our promissory note in favor of IMPEX
Enterprises, Ltd. into shares of common stock of Imperial
Holdings, Inc. as a result of the corporate conversion.
|
|
(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.
|
|
(4)
|
|
Includes amounts payable to related
parties. Refer to our consolidated and combined financial
statements for detail.
|
10
Premium
Finance Segment Selected Operating Data (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
Year Ended December 31,
|
|
September 30,
|
|
September 30,
|
|
|
2007
|
|
2008
|
|
2009
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
Period Originations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of loans originated
|
|
|
196
|
|
|
|
499
|
|
|
|
194
|
|
|
|
23
|
|
|
|
15
|
|
|
|
145
|
|
|
|
86
|
|
Principal balance of loans originated
|
|
$
|
44,501
|
|
|
$
|
97,559
|
|
|
$
|
51,573
|
|
|
$
|
7,385
|
|
|
$
|
2,788
|
|
|
$
|
39,030
|
|
|
$
|
18,245
|
|
Aggregate death benefit of policies underlying loans originated
|
|
$
|
794,517
|
|
|
$
|
2,283,223
|
|
|
$
|
942,312
|
|
|
$
|
130,600
|
|
|
$
|
62,500
|
|
|
$
|
708,910
|
|
|
$
|
417,275
|
|
Selling general and administrative expenses
|
|
$
|
15,082
|
|
|
$
|
21,744
|
|
|
$
|
13,742
|
|
|
$
|
2,623
|
|
|
$
|
2,495
|
|
|
$
|
11,165
|
|
|
$
|
7,234
|
|
Average Per Origination During Period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Age of insured at origination
|
|
|
75.5
|
|
|
|
74.9
|
|
|
|
74.9
|
|
|
|
74.1
|
|
|
|
75.0
|
|
|
|
74.7
|
|
|
|
74.0
|
|
Life expectancy of insured (years)
|
|
|
12.9
|
|
|
|
13.2
|
|
|
|
13.2
|
|
|
|
13.2
|
|
|
|
14.1
|
|
|
|
13.4
|
|
|
|
14.1
|
|
Monthly premium (year after origination)
|
|
$
|
14.0
|
|
|
$
|
14.9
|
|
|
$
|
16.0
|
|
|
$
|
18.8
|
|
|
$
|
13.1
|
|
|
$
|
16.3
|
|
|
$
|
13.9
|
|
Death benefit of policies underlying loans originated
|
|
$
|
4,053.7
|
|
|
$
|
4,575.6
|
|
|
$
|
4,857.3
|
|
|
$
|
5,678.3
|
|
|
$
|
4,166.7
|
|
|
$
|
4,889.0
|
|
|
$
|
4,852.0
|
|
Principal balance of the loan
|
|
$
|
227.0
|
|
|
$
|
195.5
|
|
|
$
|
265.8
|
|
|
$
|
321.1
|
|
|
$
|
185.8
|
|
|
$
|
269.2
|
|
|
$
|
212.1
|
|
Interest rate charged
|
|
|
10.5
|
%
|
|
|
10.8
|
%
|
|
|
11.4
|
%
|
|
|
11.5
|
%
|
|
|
11.5
|
%
|
|
|
11.5
|
%
|
|
|
11.5
|
%
|
Agency fee
|
|
$
|
125.1
|
|
|
$
|
96.2
|
|
|
$
|
134.6
|
|
|
$
|
153.4
|
|
|
$
|
92.1
|
|
|
$
|
139.4
|
|
|
$
|
105.8
|
|
Agency fee as % of principal balance
|
|
|
55.1
|
%
|
|
|
49.2
|
%
|
|
|
50.6
|
%
|
|
|
47.8
|
%
|
|
|
49.6
|
%
|
|
|
51.8
|
%
|
|
|
49.9
|
%
|
Origination fee
|
|
$
|
45.8
|
|
|
$
|
77.9
|
|
|
$
|
118.9
|
|
|
$
|
138.4
|
|
|
$
|
76.5
|
|
|
$
|
114.7
|
|
|
$
|
88.5
|
|
Origination fee as % of principal balance
|
|
|
20.2
|
%
|
|
|
39.9
|
%
|
|
|
44.7
|
%
|
|
|
43.1
|
%
|
|
|
41.1
|
%
|
|
|
42.6
|
%
|
|
|
41.7
|
%
|
End of Period Loan Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net
|
|
$
|
43,650
|
|
|
$
|
148,744
|
|
|
$
|
189,111
|
|
|
$
|
187,330
|
|
|
$
|
121,564
|
|
|
$
|
187,330
|
|
|
$
|
121,564
|
|
Number of policies underlying loans receivable
|
|
|
265
|
|
|
|
702
|
|
|
|
692
|
|
|
|
706
|
|
|
|
426
|
|
|
|
706
|
|
|
|
426
|
|
Aggregate death benefit of policies underlying loans receivable
|
|
$
|
1,065,870
|
|
|
$
|
2,895,780
|
|
|
$
|
3,091,099
|
|
|
$
|
3,296,937
|
|
|
$
|
2,120,587
|
|
|
$
|
3,296,937
|
|
|
$
|
2,120,587
|
|
Number of loans with insurance protection
|
|
|
|
|
|
|
494
|
|
|
|
631
|
|
|
|
613
|
|
|
|
399
|
|
|
|
613
|
|
|
|
399
|
|
Loans receivable, net (insured loans only)
|
|
$
|
|
|
|
$
|
118,864
|
|
|
$
|
179,137
|
|
|
$
|
169,455
|
|
|
$
|
116,115
|
|
|
$
|
169,455
|
|
|
$
|
116,115
|
|
Average Per Loan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Age of insured in loans receivable
|
|
|
76.3
|
|
|
|
75.3
|
|
|
|
75.4
|
|
|
|
75.5
|
|
|
|
74.3
|
|
|
|
75.5
|
|
|
|
74.3
|
|
Life expectancy of insured (years)
|
|
|
12.4
|
|
|
|
13.9
|
|
|
|
14.5
|
|
|
|
14.2
|
|
|
|
15.1
|
|
|
|
14.2
|
|
|
|
15.1
|
|
Monthly premium
|
|
$
|
7.7
|
|
|
$
|
9.1
|
|
|
$
|
8.5
|
|
|
$
|
8.3
|
|
|
$
|
6.7
|
|
|
$
|
8.3
|
|
|
$
|
6.7
|
|
Loan receivable, net
|
|
$
|
181.9
|
|
|
$
|
211.9
|
|
|
$
|
273.3
|
|
|
$
|
265.3
|
|
|
$
|
285.4
|
|
|
$
|
265.3
|
|
|
$
|
285.4
|
|
Interest rate
|
|
|
10.2
|
%
|
|
|
10.4
|
%
|
|
|
10.9
|
%
|
|
|
10.7
|
%
|
|
|
11.3
|
%
|
|
|
11.2
|
%
|
|
|
11.3
|
%
|
End of Period Policies Owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of policies owned
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
20
|
|
|
|
31
|
|
|
|
20
|
|
|
|
31
|
|
Aggregate fair value
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,306
|
|
|
$
|
1,711
|
|
|
$
|
8,846
|
|
|
$
|
1,711
|
|
|
$
|
8,846
|
|
Monthly premium average per policy
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2.8
|
|
|
$
|
2.2
|
|
|
$
|
5.2
|
|
|
$
|
2.2
|
|
|
$
|
5.2
|
|
11
Structured
Settlements Segment Selected Operating Data (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
Period Originations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of transactions
|
|
|
10
|
|
|
|
276
|
|
|
|
396
|
|
|
|
102
|
|
|
|
138
|
|
|
|
275
|
|
|
|
385
|
|
Number of transactions from repeat customers
|
|
|
|
|
|
|
23
|
|
|
|
52
|
|
|
|
10
|
|
|
|
48
|
|
|
|
32
|
|
|
|
96
|
|
Weighted average purchase discount rate
|
|
|
11.0
|
%
|
|
|
12.0
|
%
|
|
|
16.3
|
%
|
|
|
17.1
|
%
|
|
|
20.1
|
%
|
|
|
16.1
|
%
|
|
|
19.3
|
%
|
Face value of undiscounted future payments purchased
|
|
$
|
701
|
|
|
$
|
18,295
|
|
|
$
|
28,877
|
|
|
$
|
8,094
|
|
|
$
|
13,458
|
|
|
$
|
20,460
|
|
|
$
|
33,713
|
|
Amount paid for settlements purchased
|
|
$
|
369
|
|
|
$
|
8,010
|
|
|
$
|
10,947
|
|
|
$
|
2,908
|
|
|
$
|
2,959
|
|
|
$
|
7,894
|
|
|
$
|
9,099
|
|
Marketing costs
|
|
$
|
2,056
|
|
|
$
|
5,295
|
|
|
$
|
4,460
|
|
|
$
|
1,087
|
|
|
$
|
1,168
|
|
|
$
|
3,479
|
|
|
$
|
3,561
|
|
Selling, general and administrative (excluding marketing costs)
|
|
$
|
666
|
|
|
$
|
4,475
|
|
|
$
|
5,015
|
|
|
$
|
1,298
|
|
|
$
|
1,957
|
|
|
$
|
3,257
|
|
|
$
|
5,294
|
|
Average Per Origination During Period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Face value of undiscounted future payments purchased
|
|
$
|
70.1
|
|
|
$
|
66.3
|
|
|
$
|
72.9
|
|
|
$
|
79.4
|
|
|
$
|
97.5
|
|
|
$
|
74.4
|
|
|
$
|
87.6
|
|
Amount paid for settlement purchased
|
|
$
|
36.9
|
|
|
$
|
29.0
|
|
|
$
|
27.6
|
|
|
$
|
28.5
|
|
|
$
|
21.4
|
|
|
$
|
28.7
|
|
|
$
|
23.6
|
|
Time from funding to maturity (months)
|
|
|
80.3
|
|
|
|
113.8
|
|
|
|
109.7
|
|
|
|
113.4
|
|
|
|
147.3
|
|
|
|
109.2
|
|
|
|
134.3
|
|
Marketing cost per transaction
|
|
$
|
205.6
|
|
|
$
|
19.2
|
|
|
$
|
11.3
|
|
|
$
|
10.7
|
|
|
$
|
8.5
|
|
|
$
|
12.7
|
|
|
$
|
9.2
|
|
Segment selling, general and administrative (excluding marketing
costs) per transaction
|
|
$
|
66.6
|
|
|
$
|
16.2
|
|
|
$
|
12.7
|
|
|
$
|
12.7
|
|
|
$
|
14.2
|
|
|
$
|
11.8
|
|
|
$
|
13.8
|
|
Period Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of transactions sold
|
|
|
|
|
|
|
226
|
|
|
|
439
|
|
|
|
|
|
|
|
72
|
|
|
|
96
|
|
|
|
291
|
|
Gain on sale of structured settlements
|
|
$
|
|
|
|
$
|
443
|
|
|
$
|
2,684
|
|
|
$
|
24
|
|
|
$
|
1,585
|
|
|
$
|
499
|
|
|
$
|
4,848
|
|
Average sale discount rate
|
|
|
|
|
|
|
10.8
|
%
|
|
|
11.5
|
%
|
|
|
|
|
|
|
9.6
|
%
|
|
|
11.1
|
%
|
|
|
9.1
|
%
|
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. As a result of this
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 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 31.1% per annum of the principal balance of the
loans as of September 30, 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. In addition, the future availability of
lender protection insurance may affect our ability to obtain
debt financing for our premium finance business should
additional debt financing be needed. Our current provider of
lender protection insurance has informed us that it will cease
providing us with lender protection insurance upon the earlier
of (i) the completion of this offering or
(ii) December 31, 2010. This decision by our current
provider of lender protection insurance only addresses future
loans and does not impact our existing premium finance loans.
Lender protection insurance on our existing loans will continue
for the life of such loans. 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. See Managements
Discussion and Analysis Critical Accounting
Policies Fair Value Measurement Guidance. For
loans with lender protection insurance, the insured value is
also considered when determining the fair value of the life
insurance policy. The lender protection insurer limits the
amount of coverage to an amount equal to or less than its
determination of the value of the life insurance policy
underlying our premium finance loan based on the lender
protection insurers own models and assumptions. For all
loans, the amount of impairment, if any, is calculated as the
difference in the fair value of 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.
13
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 fair value. At
the end of each reporting period, we re-value the life insurance
policies we own. If the calculation results in an adjustment to
the fair value of the policy, we record this as a change in fair
value of our investment in life insurance policies.
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.
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.
If the calculation of fair value results in a decrease in value,
we record this reduction as a loss. 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 will be
dependent upon using equity financing rather than debt financing
and lender protection insurance, and making accurate assumptions
about life expectancies so that we may maintain adequate cash
balances to pay premiums.
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 on our loans, we expect to
have the option to retain a number of life insurance policies
that we expect borrowers will relinquish to us in the event of
default, instead of taking the direction of our lender
protection insurer with respect to the disposition of such life
insurance policies. If we retain a life insurance policy, we
will be responsible for paying all premiums necessary to keep
the policy in force. Therefore, our cash flows and the required
amount of our cash reserves to pay premiums will become
dependent on our assumptions about life expectancies being
accurate. By using cash reserves to pay premiums for retained
life insurance policies, we will have less cash available for
making new premium finance loans as well as less cash available
for other business purposes. Adverse changes in fair value of
retained life insurance policies will negatively impact our
financial statements.
Life expectancies are estimates of the expected longevity or
mortality of an insured and are inherently uncertain. A life
expectancy obtained on an insured for a life insurance policy
may not 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
14
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 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.
The
premium finance business is highly regulated; changes in
regulation could materially adversely affect our ability to
conduct our business.
The making, enforcement and collection of premium finance loans
is extensively regulated by the laws and regulations of many
states and other applicable jurisdictions. These laws and
regulations vary widely, but often:
|
|
|
|
|
require that premium finance lenders be licensed by the
applicable jurisdiction;
|
|
|
|
require certain disclosure agreements and strictly govern the
content thereof;
|
|
|
|
regulate the amount of late fees and finance charges that may be
charged if a borrower is delinquent on its payments; and/or
|
|
|
|
allow imposition of potentially significant penalties on lenders
for violations of such jurisdictions applicable insurance
premium finance laws.
|
In addition, our premium finance transactions are subject to
state usury laws, which limit the interest rate that can be
charged. While we attempt to structure these transactions to
avoid being deemed in violation of usury laws, we cannot assure
you that we will be successful in doing so. Loans found to be at
usurious interest rates may be voided, which would mean the loss
of our principal and interest.
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. There is
additional regulatory risk with respect to the acquisition of a
life insurance policy in the event of a payment default when we
are otherwise unable to sell the policy collateralizing our
premium finance loan. 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.
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 of the
services we provide. For the nine months ended
September 30, 2010, our top ten agents and brokers referred
to us approximately 33.9% and 50.1%, 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.
15
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 have 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 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 2005 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
16
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 on the basis of a misrepresentation regarding premium
financing, as part of STOLI practices or was not supported by a
valid insurable interest. As of September 30, 2010, 10.4%,
52.5%, 80.7%, 96.2%, and 99.6%, respectively, of our premium
finance loans outstanding were originated within one month,
three months, six months, one year and two years, respectively,
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. In addition,
in this arena, regulatory action for statutory or regulatory
infractions could involve fines or license suspension or
revocation. We may be unable to obtain or maintain the licenses
necessary for us to conduct our premium finance business.
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. Misrepresentations, fraud, omissions or lack of insurable
interest can, in some instances, 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
17
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. From time to time, an insurance carrier has
challenged the validity of a policy securing one of our premium
finance loans, but the impact on our business from these
challenges has not been significant to date. Future challenges
to the policies that we own or hold as collateral for our
premium finance loans may 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, premiums paid to the carrier
(including those paid during the pendency of a contest or
rescission action) may not 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 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. Changes in the
value of the United States dollar as well as changes to the
ratings of United States life insurers can cause foreign
investors to suffer a reduction in the value of their United
States dollar denominated investments and reduce their demand
for such products. Any
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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 insures us 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 insurer, subject to the lender
protection insurance policys terms and conditions, has the
right to direct control or take beneficial ownership of the
underlying life insurance policy and we are paid a claim equal
to the insured value of the 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 default under the premium finance loan, additional
premium payments will need 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:
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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;
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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;
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any loss caused by our fraudulent, illegal, criminal, malicious
or grossly negligent acts;
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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;
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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;
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our failure to timely submit a properly completed proof of loss
certificate to the lender protection insurance policy insurer;
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our failure to timely notify the lender protection insurance
policy insurer of:
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the occurrence of certain prohibited acts, as described in the
lender protection insurance policy, or
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material non-compliance of the related loan with applicable
laws, in each case after obtaining actual knowledge of such
events;
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our making of a claim under the lender protection insurance
policy knowing the same to be fraudulent; or
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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.
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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 that 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 that issue the policies that serve as
collateral for our premium finance loans. Over 50% of our
premium finance loans outstanding as of September 30, 2010
are secured by life insurance policies issued by four 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 lives beyond that age, 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 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. Third
party purchasers or other financing may not be available to us
in the future on favorable terms or at all. If such other third
party purchasers or other financing are 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.
We may not be able to continue to sell our structured
settlements to third parties at favorable discount rates or
obtain financing through borrowings or other means on acceptable
terms to satisfy our cash requirements, either of which could
have a material adverse effect on our ability 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
1979, the Internal Revenue Service issued revenue rulings 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 in 1982, 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 discount rates or 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. We may not
be able to continue to purchase structured settlements at
current or historical discount rates. Structured settlements are
purchased at effective yields which are fixed, while rates at
which structured settlements are sold, with the exception of
forward purchase arrangements, are generally a function of the
prevailing market rates for short-term borrowings. As a result,
decreases in the discount rate at which we purchase structured
settlements or increases in prevailing market interest
rates after structured settlements are acquired could have a
material adverse effect on our yield on structured settlement
transactions, which could have a material adverse effect on our
business, financial condition and results of operations.
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The
insolvency of a holder of a structured settlement could have an
adverse effect on our business, financial condition and results
of operations.
Our rights to scheduled payments in structured settlement
transactions will be adversely affected if any holder of a
structured settlement, the special purpose vehicle to which an
insurance company assigns its obligations to make payments under
the settlement (the Assumption Party) or the annuity
provider becomes insolvent
and/or
becomes a debtor in a case under the Bankruptcy Code.
If a holder of a structured settlement were to become a debtor
in a case under the Bankruptcy Code, a court could hold that the
scheduled payments transferred by the holder under the
applicable settlement purchase agreement would not constitute
property of the estate of the claimant under the Bankruptcy
Code. If, however, a trustee in bankruptcy or other receiver
were to assert a contrary position, such as by requiring us (or
any securitization vehicle) to establish our right to those
payments under federal bankruptcy law or by persuading courts to
recharacterize the transaction as secured loans, such result
could have a material adverse effect on our business. If the
rights to receive the scheduled payments are deemed to be
property of the bankruptcy estate of the claimant, the trustee
may be able to avoid assignment of the receivable to us.
Furthermore, a general creditor or representative of the
creditors (such as a trustee in bankruptcy) of an Assumption
Party could make the argument that the payments due from the
annuity provider are the property of the estate of such
Assumption Party (as the named owner thereof). To the extent
that a court would accept this argument, the resulting delays or
reductions in payments on our receivables could have a material
adverse effect on our business, financial condition and results
of operations.
If the
identities of structured settlement holders become readily
available, it could have an adverse effect on our structured
settlement business, financial condition and results of
operations.
We do not believe that there are any readily available lists of
holders of structured settlements, which makes brand awareness
critical to growing market share. We use national television
marketing to generate
in-bound
telephone and internet inquiries and we have built a proprietary
database of clients and prospective clients. As of
September 30, 2010, we had a database of over 30,000
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. For
example, in the 2008 case of 321 Henderson Receivables,
LLC v. Tomahawk, the California County Superior Court
(Fresno County, Case No. 08CECG00797 July 2008
Order (unreported)) ruled that (i) certain structured
settlement sales were barred by anti-assignment provisions in
the settlement documents, (ii) the transfers were loans,
not sales, that violated Californias usury laws and
(iii) for similar reasons numerous other court-approved
structured settlement sales may be void. Although the
Tomahawk decision was subsequently reversed by the
California Court of Appeal, the Superior Court decision had a
negative effect on the structured settlement industry by casting
doubt on the ability of a structured settlement recipient to
sell portions of the payment streams. Any similar adverse
judicial developments calling into doubt such laws and
regulations could materially and adversely affect our
investments in structured settlements
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Risk
Factors Relating to Our General Business
Changes
to statutory, licensing and regulatory regimes governing premium
financing or structured settlements, including the means by
which we conduct such business, 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.
Traditionally, the U.S. federal government has not directly
regulated the insurance business. Congress recently passed and
the President signed into law the Dodd-Frank Wall Street Reform
and Consumer Protection Act, which we refer to in this
prospectus as the Dodd-Frank Act, providing for the
enhanced federal supervision of financial institutions,
including insurance companies in certain circumstances, and
financial activities that represent a systemic risk to financial
stability or the U.S. economy. Under the Dodd-Frank Act,
the Federal Insurance Office will be established within the
U.S. Treasury Department to monitor all aspects of the
insurance industry. Notwithstanding the creation of the Federal
Insurance Office, the Dodd-Frank Act provides that state
insurance regulators will remain the primary regulatory
authority over insurance and expressly withholds from the
Federal Insurance Office and the U.S. Treasury Department
general supervisory or regulatory authority over the business of
insurance. At this time, we cannot assess whether any other
proposed legislation or regulatory changes will be adopted, or
what impact, if any, the Dodd-Frank Act or any other legislation
or changes could have on our results of operations, financial
condition or liquidity.
In addition, we are subject to various federal and state
regulations regarding the solicitation of customers. The Federal
Communications Commission and Federal Trade Commission have
issued rules that provide for a national do not call
registry. Under these rules, companies are prohibited from
contacting any individual who requests to have his or her phone
number added to the registry, except in certain limited
instances. We are required to continually review the national
do not call registry to ensure that we do not
contact anyone on that registry. In February 2009, we received a
citation for violating these rules. In the event we violate
these rules in the future, we could be subject to a fine of up
to $16,000 per violation or each day of a continuing violation,
which could have a material adverse effect on our business,
financial condition and results of operations.
Regulation
of life settlement transactions as securities under the federal
securities laws could lead to increased compliance costs and
could adversely affect our ability to acquire or sell life
insurance policies.
The Securities and Exchange Commission, or the SEC, 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. Although
to date we have never purchased a policy directly from a policy
owner, any legislation implementing such regulatory change or a
change in the transactions that are characterized as life
settlement transactions could lead to increased compliance costs
and adversely affect our ability to acquire or sell life
insurance policies in the future, which could have an adverse
effect on our business, financial condition and results of
operations.
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. We also have received negative press from
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competitors. Any such negative press 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. With
the net proceeds of this offering, we expect to have the option
to retain a number of life insurance policies that we expect
borrowers will relinquish to us in the event of default, instead
of taking the direction of our lender protection insurer with
respect to the disposition of such life insurance policies.
However, since our inception, we have had limited experience
managing and dealing in life insurance policies owned by us.
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 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, he may not satisfy the requirements to have the
conditions removed, or his application to do so may not 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
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decline below the initial public offering price. We have been
approved to list our common stock on the New York Stock
Exchange, subject to official notice of issuance, 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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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
26
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 and
unpaid dividends thereon) and all principal and accrued and
unpaid interest outstanding under our promissory note in favor
of IMPEX Enterprises, Ltd. will be converted
into shares
of our common stock; (ii) the issuance
of shares
of common stock to two of our employees pursuant to the terms of
each of their respective phantom stock agreements;
(iii) the conversion of a $30.0 million debenture
into shares of our common
stock at the midpoint of the price range on the cover of this
prospectus as described under Corporate Conversion;
and (iv) 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 available for future
issuance under our Omnibus Plan. Following completion of this
offering, we intend to register all of
the shares
issuable or reserved for issuance under the Omnibus Plan. See
Description of Capital Stock and Executive
Compensation. We and our current directors, executive
officers, shareholders and debenture holder 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 Act, and related rules of 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.
27
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.
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.
28
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 % 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.
We
have agreed to indemnify Slate Capital LLC and Lexington for any
liability incurred in connection with the registration statement
of which this prospectus is a part.
In connection with our arrangements with Slate Capital LLC
(Slate) and Lexington as described in the
registration statement of which this prospectus is a part, we
have agreed to indemnify Slate and Lexington and each of their
respective affiliates against any and all liability, loss,
damage or expense incurred by such entities in connection with
any investigation, inquiry, action, suit, demand or claim for
sums of money brought or made against any such entity relating
to the registration statement or any amendment or supplement
thereto, for any actual or alleged violations of state or
federal securities laws with respect to any untrue statement or
alleged untrue statement of a material fact contained in the
registration statement or any supplement or amendment thereto or
any omission or alleged omission to state therein a material
fact necessary in order to make the statements made therein, in
the light of the circumstances under which they were made, not
misleading. Any indemnification claim that we are required to
pay to such entities could have a material adverse effect on our
business, financial condition and results of operations.
Provisions
in our executive officers employment agreements 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 titled 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
or upon a material diminution of their base salaries or
responsibilities. For Messrs. Mitchell and Neuman, these
payments are equal to three times the sum of base salary and the
average of the three years annual cash bonus, unless the
triggering event occurs during the first three years of their
respective employment agreements, in which case the payments are
equal to six times base salary. These payments may deter any
transaction that would result in a change in control, which
could diminish the price of our common stock.
We
have received a claim by our former general
counsel.
Our former general counsel has notified us, in accordance with a
mediation and arbitration agreement entered into at the time of
her employment, that, pursuant to an offer letter entered into
at the time of her employment, she believes she is entitled to
an option to purchase up to 8% of our total options pool and
that she is entitled to pursue civil causes of action against us
and Messrs. Mitchell and Neuman. She alleges that she, among
other reasons, suffered harm because a lower paid male employee
was provided an employment agreement with a greater severance
benefit and that she never received an option award as
referenced in her offer letter. See Business
Legal Proceedings. Although we have reviewed the claim and
believe that it is without merit we are currently unable to
estimate the amount of potential damages, if any, we could incur
as a result of this claim. Despite our beliefs about the merit
of the claim, if an arbitrator or court were to find for the
former employee we could be required to pay damages or issue
stock options which could diminish our available cash or
diminish the amount of stock options that are expected to be
available for current employees following this offering.
Provisions
in our articles of incorporation and bylaws 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.
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,
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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.
Certain
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.
As a Florida corporation, we are subject to the Florida Business
Corporation Act, which provides that a person who acquires
shares in an issuing public corporation, as defined
in the statute, in excess of certain specified thresholds
generally will not have any voting rights with respect to such
shares unless such voting rights are approved by the holders of
a majority of the votes of each class of securities entitled to
vote separately, excluding shares held or controlled by the
acquiring person. The Florida Business Corporation Act also
contains a statute which provides that an affiliated transaction
with an interested shareholder generally must be approved by
(i) the affirmative vote of the holders of two-thirds of
our voting shares, other than the shares beneficially owned by
the interested shareholder, or (ii) a majority of the
disinterested directors.
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, 10% or more 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 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. 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.
30
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 use approximately $[ ]
of the net proceeds in our premium financing lending activities
and approximately $[ ] in our
structured settlement activities. We intend to use any remaining
proceeds for general corporate purposes.
Pending the use of the net proceeds from this offering, we may
invest some of the proceeds in short-term investment-grade
instruments.
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DIVIDEND
POLICY
We do not expect to pay any cash dividends on our common stock
for the foreseeable future. We currently intend to retain any
future earnings to finance our operations and growth. Any future
determination to pay cash dividends on our common stock will be
at the discretion of our board of directors and will be
dependent on our earnings, financial condition, operating
results, capital requirements, any contractual, regulatory and
other restrictions on the payment of dividends by us or by our
subsidiaries to us, and other factors that our board of
directors deems relevant.
Imperial is a holding company and has no direct operations. Our
ability to pay dividends in the future depends on the ability of
our operating subsidiaries to pay dividends to us. Our existing
debt facilities restrict the ability of certain of our special
purpose subsidiaries to pay dividends. In addition, future debt
arrangements may contain certain prohibitions or limitations on
the payment of dividends.
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CORPORATE
CONVERSION
In connection with this offering, we 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 shares of common stock of Imperial Holdings, Inc.
The plan of conversion which describes the corporate conversion
as well as other transactions and agreements by the parties with
an interest in our equity reflects an agreement among our
shareholders. Thus, there is no formula that may be used to
describe the conversion of a common unit or a Series A, B,
C, D and E preferred unit into common stock.
On November 1, 2010, Premium Funding, Inc. and Branch
Office of Skarbonka Sp. z o.o. (Skarbonka) agreed to
exchange the 112,500 common units and the 25,000 preferred units
owned by Premium Funding, Inc. and the promissory note issued to
Skarbonka for a $30.0 million debenture that matures
October 4, 2011. The debenture was issued to Skarbonka as
holder and agent for Premium Funding. Premium Funding and
Skarbonka are related parties. The debenture is automatically
convertible into shares of our common stock immediately prior to
the closing of this offering.
We valued the components of the $30 million debenture as
follows:
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$8.0 million of the debenture was attributed to the
repurchase of 112,500 shares of common units. These common
units were originally issued on December 15, 2006 for
$5.0 million in cash. The value attributed to the common
units reflects an agreement between us and our shareholders and
equates to a return on investment of approximately 15% per annum
for the period they have been outstanding (approximately
4 years).
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$19.0 million of the debenture was attributed to
(i) the repayment of $18.3 million ($16.1 million
of principal and $2.2 million of accrued interest) due as
of November 1, 2010 on the promissory note in favor of
Skarbonka and (ii) an agreement between us and our
shareholders to contribute an additional $700,000 in value to
imputed interest on the debenture until the expected repayment
date.
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$3.0 million of value was attributed to the repurchase of
25,000 shares of Series B preferred units. The
Series B preferred units were originally issued on
December 31, 2009 for $2.5 million. As of
November 1, 2010 (issuance of debenture), these units had
an unpaid preferred return of $333,000.
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Pursuant to the plan of conversion, all of our outstanding
common units and preferred units and all principal and accrued
and unpaid interest outstanding under our promissory note in
favor of IMPEX Enterprises, Ltd. will be converted
into shares
of our common stock at an assumed initial public offering price
equal to the midpoint of the price range on the cover of this
prospectus.
Immediately after the corporate conversion and prior to the
conversion of the Skarbonka debenture and the closing of this
offering, our shareholders will consist of two Florida
corporations and one Florida limited liability company. These
three shareholders will reorganize so that their beneficial
owners who are listed under Principal Shareholders,
including Messrs. Mitchell and Neuman, will receive the
same number of 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 immediately prior to the
closing of this offering, Skarbonkas $30.0 million
debenture will convert into the number of shares of our common
stock determined by dividing the principal amount of the
debenture by the greater of (i) the midpoint of the price
range on the cover of this prospectus or (ii) the initial
public offering price per share. In the event the initial public
offering price per share is greater than the midpoint of the
price range on the cover of this prospectus, Skarbonka will
receive fewer shares (the share differential) than
it would have if the initial public offering price had been
equal to
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the midpoint of the price range, and a number of additional
shares of our common stock equal to the share differential will
be issued to Messrs. Mitchell and Neuman, with each
receiving half of such additional shares. In such event, the
number of additional shares to be issued will be determined
pursuant to the following formula:
Q = (R * (IPO Price Midpoint)) / IPO Price
where,
Q equals the total number of additional shares to be issued;
R equals the number of shares of common issuable to Skarbonka
based on the midpoint of the price range on the cover of this
prospectus;
IPO Price means the initial public offering price per share at
which the common stock is sold in this offering; and
Midpoint means the midpoint of the price range on the cover of
this prospectus.
For example, if the initial public offering price per share is
$ per share so that the difference
between that price and the midpoint of the price range on the
cover of this prospectus is [$ ],
[ ]
additional shares will be issued to each of
Messrs. Mitchell and Neuman.
If the initial public offering price is less than or equal to
the midpoint of the price range on the cover of this prospectus,
no additional shares will be issued to Messrs. Mitchell and
Neuman.
In addition, in the event that the initial public offering price
per share is greater than the midpoint of the price range on the
cover of this prospectus, a portion of the shares of common
stock issued to Pine Trading, Ltd. shall be proportionately
re-allocated to Messrs. Mitchell and Neuman, with each
receiving one-half of such re-allocated shares. In such event,
the number of shares to be re-allocated will be determined
pursuant to the following formula:
Z = (X * (IPO Price Midpoint)) / IPO Price
where,
Z equals the total number of shares to be re-allocated;
X equals the number of shares of common stock initially owned by
Pine Trading, Ltd. immediately after the corporate conversion;
and
IPO Price and Midpoint have the meaning set forth above.
For example, if the initial public offering price per share is
$ per share so that the difference
between that price and the mid-point of the price range on the
cover of this prospectus is [$ ],
[ ] shares
will be re-allocated from Pine Trading, Ltd. and each of
Messrs. Mitchell and Neuman will receive
[ ]
of such re-allocated shares.
If the initial public offering price is less than or equal to
the midpoint of the price range on the cover of this prospectus,
no re-allocation of shares will occur.
In the event the corporate conversion results in a reallocation
whereby it is deemed that a shareholder has contributed an
economic interest to an employee, we will incur stock
compensation expense.
We have phantom stock agreements with two employees. After the
corporate conversion and prior to the closing of this offering,
these phantom stock agreements will terminate and the two
employees will receive an aggregate
of shares
of common stock. We expect to incur stock compensation expense
related to the issuance of common stock to our two employees
with phantom stock agreements.
In addition, following the corporate conversion and upon the
closing of this offering, our three 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.
35
CAPITALIZATION
The following table sets forth our capitalization as of
September 30, 2010:
|
|
|
|
|
on an actual basis;
|
|
|
|
on a pro forma basis to give effect to (i) the consummation
of the corporate conversion, pursuant to which all outstanding
common and preferred limited liability company units (including
all accrued and unpaid dividends thereon) and all principal and
accrued and unpaid interest outstanding under our promissory
note in favor of IMPEX Enterprises, Ltd. will be converted
into shares
of our common stock; (ii) the issuance
of shares
of common stock to two of our employees pursuant to the terms of
each of their respective phantom stock agreements; and
(iii) the issuance and conversion of a $30.0 million
debenture into
[ ] shares
of our common stock 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,
as described under Corporate Conversion; and
|
|
|
|
on a pro forma as adjusted basis to give effect to the above and
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 September 30, 2010
|
|
|
|
|
|
|
|
|
|
Pro Forma As
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
Adjusted
|
|
|
|
(In thousands)
|
|
|
Debt Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
82,393
|
|
|
$
|
62,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
82,393
|
|
|
$
|
62,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Member units preferred (500,000 authorized in the
aggregate)
|
|
|
|
|
|
|
|
|
|
|
|
|
Member units Series A preferred (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 issued
and outstanding, actual; 0 issued and outstanding, pro forma and
pro forma as adjusted)
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
Member units Series C preferred (70,000 issued
and outstanding, actual; 0 issued and outstanding, pro forma and
pro forma as adjusted)
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
Member units Series D preferred (7,000 issued
and outstanding, actual; 0 issued and outstanding, pro forma and
pro forma as adjusted)
|
|
|
700
|
|
|
|
|
|
|
|
|
|
Member units Series E preferred (73,000 issued
and outstanding, actual; 0 issued and outstanding, pro forma and
pro forma as adjusted)
|
|
|
7,300
|
|
|
|
|
|
|
|
|
|
Subscription receivable
|
|
|
(5,000
|
)
|
|
|
|
|
|
|
|
|
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
|
|
|
(28,505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Members equity
|
|
$
|
10,454
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010
|
|
|
|
|
|
|
|
|
|
Pro Forma As
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
Adjusted
|
|
|
|
(In thousands)
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, par value $0.01 per share; 80,000,000 shares
authorized, no shares issued and outstanding, actual; and
[ ] shares
issued and outstanding, pro forma
|
|
|
|
|
|
|
[]
|
|
|
|
|
|
Additional paid in capital
|
|
|
|
|
|
|
[67,174]
|
|
|
|
|
|
Accumulated deficit
|
|
|
|
|
|
|
(28,505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
|
|
|
|
38,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
92,847
|
|
|
$
|
101,208
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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
Omnibus Plan.
|
37
DILUTION
Our net tangible book value as of September 30, 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 and unpaid dividends
thereon) and all principal and accrued and unpaid interest
outstanding under our promissory note in favor of IMPEX
Enterprises, Ltd. will be converted
into shares
of our common stock;
|
|
|
|
the issuance
of shares
of common stock to two of our employees pursuant to the terms of
each of their respective phantom stock agreements; and
|
|
|
|
the issuance and conversion of a $30.0 million debenture
into
[ ] shares
of our common stock 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,
as described under Corporate Conversion.
|
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
September 30, 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
September 30, 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.
38
The following table summarizes, as of September 30, 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 issuance
of shares
of common stock to two of our employees pursuant to the terms of
each of their respective phantom stock agreements;
(iii) the conversion of a $30.0 million debenture
into shares
of our common stock based on the assumed initial public offering
price of $[ ] per share, which is
the midpoint of the price range on the cover of this prospectus,
as described under Corporate Conversion; and
(iv) the issuance of
[ ] shares
of common stock in this offering at the assumed initial public
offering price of $[ ] per share,
which is the midpoint of the price range on the cover of this
prospectus, 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, which is the
midpoint of the price range on the cover of this prospectus, 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 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
Omnibus Plan.
|
39
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 nine months ended
September 30, 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 nine months ended September 30, 2010 and 2009 and
balance sheet data as of September 30, 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.
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
Nine Months
|
|
|
|
Dec. 15, 2006 -
|
|
|
Years Ended December 31,
|
|
|
September 30,
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
Dec. 31, 2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
Dec. 31, 2009
|
|
|
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except share data)
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency fee income
|
|
$
|
678
|
|
|
$
|
24,515
|
|
|
$
|
48,004
|
|
|
$
|
26,114
|
|
|
$
|
20,216
|
|
|
$
|
9,099
|
|
|
$
|
26,114
|
|
|
$
|
9,099
|
|
Interest income
|
|
|
316
|
|
|
|
4,888
|
|
|
|
11,914
|
|
|
|
21,483
|
|
|
|
15,843
|
|
|
|
15,795
|
|
|
|
21,483
|
|
|
|
15,795
|
|
Origination fee income
|
|
|
|
|
|
|
526
|
|
|
|
9,399
|
|
|
|
29,853
|
|
|
|
21,865
|
|
|
|
16,728
|
|
|
|
29,853
|
|
|
|
16,728
|
|
Gain on sale of structured settlements
|
|
|
|
|
|
|
|
|
|
|
443
|
|
|
|
2,684
|
|
|
|
499
|
|
|
|
4,848
|
|
|
|
2,684
|
|
|
|
4,848
|
|
Gain on forgiveness of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,410
|
|
|
|
14,886
|
|
|
|
6,968
|
|
|
|
16,410
|
|
|
|
6,968
|
|
Gain on sale of life settlements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,954
|
|
|
|
|
|
|
|
1,954
|
|
Change in fair value of life settlements and structured
settlement receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,805
|
|
|
|
|
|
|
|
4,805
|
|
Other income
|
|
|
|
|
|
|
2
|
|
|
|
47
|
|
|
|
71
|
|
|
|
53
|
|
|
|
195
|
|
|
|
71
|
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income
|
|
|
994
|
|
|
|
29,931
|
|
|
|
69,807
|
|
|
|
96,615
|
|
|
|
73,362
|
|
|
|
60,392
|
|
|
|
96,615
|
|
|
|
60,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense (3)
|
|
|
|
|
|
|
1,343
|
|
|
|
12,752
|
|
|
|
33,755
|
|
|
|
24,710
|
|
|
|
24,244
|
|
|
|
30,793
|
(1)
|
|
|
22,022
|
(1)
|
Provision for losses on loans receivable
|
|
|
|
|
|
|
2,332
|
|
|
|
10,768
|
|
|
|
9,830
|
|
|
|
6,705
|
|
|
|
3,514
|
|
|
|
9,830
|
|
|
|
3,514
|
|
Loss (gain) on loan payoffs and settlements, net
|
|
|
|
|
|
|
(225
|
)
|
|
|
2,738
|
|
|
|
12,058
|
|
|
|
11,279
|
|
|
|
4,320
|
|
|
|
12,058
|
|
|
|
4,320
|
|
Amortization of deferred costs
|
|
|
|
|
|
|
126
|
|
|
|
7,569
|
|
|
|
18,339
|
|
|
|
13,101
|
|
|
|
22,601
|
|
|
|
18,339
|
|
|
|
22,601
|
|
Selling, general and administrative expenses (3)
|
|
|
891
|
|
|
|
24,335
|
|
|
|
41,566
|
|
|
|
31,269
|
|
|
|
22,997
|
|
|
|
22,118
|
|
|
|
31,269
|
|
|
|
22,118
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
|
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
891
|
|
|
|
27,911
|
|
|
|
75,393
|
|
|
|
105,251
|
|
|
|
78,792
|
|
|
|
76,797
|
|
|
|
102,289
|
|
|
|
74,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
$
|
103
|
|
|
$
|
2,020
|
|
|
$
|
(5,586
|
)
|
|
$
|
(8,636
|
)
|
|
$
|
(5,430
|
)
|
|
$
|
(16,405
|
)
|
|
$
|
(5,674
|
)
|
|
$
|
(14,183
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
Common
Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects a reduction of interest expense of $3.0 million
for the year ended December 31, 2009 and $2.2 million
for the nine months ended September 30, 2010, due to
the conversion of our promissory note in favor of IMPEX
Enterprises, Ltd. into shares of our common stock which will
occur prior to the closing of this offering, and the conversion
of our promissory note in favor of Branch Office of Skarbonka
Sp. z o.o into a $30.0 million debenture, and the
conversion of that $30.0 million debenture into shares of
our common stock, which will occur immediately prior to 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. |
|
(3) |
|
Includes amounts for related parties. Refer to our consolidated
and combined financial statements for detail. |
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
Pro Forma
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
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
|
|
|
$
|
466
|
|
|
$
|
3,685
|
|
|
$
|
8,685
|
(1)
|
Restricted cash
|
|
|
|
|
|
|
1,675
|
|
|
|
2,221
|
|
|
|
|
|
|
|
|
|
|
|
643
|
|
|
|
643
|
|
Certificate of deposit restricted
|
|
|
|
|
|
|
562
|
|
|
|
659
|
|
|
|
670
|
|
|
|
666
|
|
|
|
877
|
|
|
|
877
|
|
Agency fees receivable, net of allowance for doubtful accounts
|
|
|
136
|
|
|
|
5,718
|
|
|
|
8,871
|
|
|
|
2,165
|
|
|
|
1,816
|
|
|
|
736
|
|
|
|
736
|
|
Deferred costs, net
|
|
|
|
|
|
|
672
|
|
|
|
26,650
|
|
|
|
26,323
|
|
|
|
26,963
|
|
|
|
11,455
|
|
|
|
11,455
|
|
Interest receivable, net
|
|
|
244
|
|
|
|
2,972
|
|
|
|
8,604
|
|
|
|
21,034
|
|
|
|
18,909
|
|
|
|
17,175
|
|
|
|
17,175
|
|
Loans receivable, net
|
|
|
3,909
|
|
|
|
43,650
|
|
|
|
148,744
|
|
|
|
189,111
|
|
|
|
187,330
|
|
|
|
121,564
|
|
|
|
121,564
|
|
Structured settlements receivables, net
|
|
|
|
|
|
|
377
|
|
|
|
1,141
|
|
|
|
152
|
|
|
|
6,969
|
|
|
|
10,554
|
|
|
|
10,554
|
|
Receivables from sales of structured Settlements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
320
|
|
|
|
|
|
|
|
528
|
|
|
|
528
|
|
Investment in life settlements, at estimated fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,306
|
|
|
|
1,711
|
|
|
|
8,846
|
|
|
|
8,846
|
|
Investment in life settlement fund
|
|
|
|
|
|
|
1,714
|
|
|
|
|
|
|
|
542
|
|
|
|
|
|
|
|
1,270
|
|
|
|
1,270
|
|
Fixed assets, net
|
|
|
756
|
|
|
|
1,875
|
|
|
|
1,850
|
|
|
|
1,337
|
|
|
|
1,514
|
|
|
|
919
|
|
|
|
919
|
|
Prepaid expenses and other assets
|
|
|
30
|
|
|
|
835
|
|
|
|
4,180
|
|
|
|
887
|
|
|
|
503
|
|
|
|
2,017
|
|
|
|
2,017
|
|
Deposits
|
|
|
37
|
|
|
|
456
|
|
|
|
476
|
|
|
|
982
|
|
|
|
487
|
|
|
|
699
|
|
|
|
699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
10,463
|
|
|
$
|
62,001
|
|
|
$
|
211,040
|
|
|
$
|
263,720
|
|
|
$
|
247,334
|
|
|
$
|
180,968
|
|
|
$
|
185,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses (3)
|
|
$
|
505
|
|
|
$
|
3,437
|
|
|
$
|
5,533
|
|
|
$
|
3,170
|
|
|
$
|
2,981
|
|
|
$
|
4,210
|
|
|
$
|
4,210
|
|
Payable for purchase of structured settlements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,094
|
|
|
|
7,094
|
|
Lender protection insurance claims received in advance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,645
|
|
|
|
60,645
|
|
Interest payable (3)
|
|
|
|
|
|
|
882
|
|
|
|
5,563
|
|
|
|
12,627
|
|
|
|
14,552
|
|
|
|
16,172
|
|
|
|
12,811
|
(2)
|
Notes payable (3)
|
|
|
|
|
|
|
35,559
|
|
|
|
183,462
|
|
|
|
231,064
|
|
|
|
214,737
|
|
|
|
82,393
|
|
|
|
62,539
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
505
|
|
|
$
|
39,878
|
|
|
$
|
194,558
|
|
|
$
|
246,861
|
|
|
$
|
232,270
|
|
|
$
|
170,514
|
|
|
$
|
147,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member units preferred (500,000 authorized in the
aggregate)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member units Series A preferred (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 issued
and outstanding, actual; 0 issued and outstanding, pro forma)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
|
|
|
|
|
|
5,000
|
|
|
|
|
(1)
|
Member units Series C preferred (70,000 issued
and outstanding, actual; 0 issued and outstanding, pro forma)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,000
|
|
|
|
|
(1)
|
Member units Series D preferred (7,000 issued
and outstanding, actual; 0 issued and outstanding, pro forma)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
700
|
|
|
|
|
(1)
|
Member units Series E preferred (73,000 issued
and outstanding, actual; 0 issued and outstanding, pro forma and
pro forma as adjusted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,300
|
|
|
|
|
(1)
|
Subscription receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,000
|
)
|
|
|
|
|
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
|
|
|
|
|
(1)
|
Common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[ ]
|
(1)(2)
|
Paid-in capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[67,174]
|
(1)(2)
|
Retained earnings (accumulated deficit)
|
|
|
103
|
|
|
|
2,123
|
|
|
|
(3,463
|
)
|
|
|
(12,100
|
)
|
|
|
(8,895
|
)
|
|
|
(28,505
|
)
|
|
|
(28,505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total members equity
|
|
|
9,958
|
|
|
|
22,123
|
|
|
|
16,482
|
|
|
|
16,859
|
|
|
|
15,064
|
|
|
|
10,454
|
|
|
|
38,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity
|
|
$
|
10,463
|
|
|
$
|
62,001
|
|
|
$
|
211,040
|
|
|
$
|
263,720
|
|
|
$
|
247,334
|
|
|
$
|
180,968
|
|
|
$
|
185,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Reflects the conversion of all
common and preferred limited liability company units of Imperial
Holdings, LLC into shares of our common stock. Also reflects the
cash received in October, 2010 of $5.0 million related to a
subscription receivable for the September 2010 sale of 50,000
Series E preferred units, which will also be converted into
shares of our common stock as a result of the corporate
conversion.
|
|
(2)
|
|
Reflects the issuance and
conversion of a $30.0 million debenture into shares of our
common stock immediately prior to the closing of this offering.
Also reflects the conversion of all principal and accrued
interest outstanding under our promissory note in favor of IMPEX
Enterprises, Ltd. into shares of common stock of Imperial
Holdings, Inc. as a result of the corporate conversion.
|
|
(3)
|
|
Includes amounts payable to related
parties. Refer to our consolidated and combined financial
statements for details.
|
42
Premium
Finance Segment Selected Operating Data (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
Year Ended December 31,
|
|
September 30,
|
|
September 30,
|
|
|
2007
|
|
2008
|
|
2009
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
Period Originations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of loans originated
|
|
|
196
|
|
|
|
499
|
|
|
|
194
|
|
|
|
23
|
|
|
|
15
|
|
|
|
145
|
|
|
|
86
|
|
Principal balance of loans originated
|
|
$
|
44,501
|
|
|
$
|
97,559
|
|
|
$
|
51,573
|
|
|
$
|
7,385
|
|
|
$
|
2,788
|
|
|
$
|
39,030
|
|
|
$
|
18,245
|
|
Aggregate death benefit of policies underlying loans originated
|
|
$
|
794,517
|
|
|
$
|
2,283,223
|
|
|
$
|
942,312
|
|
|
$
|
130,600
|
|
|
$
|
62,500
|
|
|
$
|
708,910
|
|
|
$
|
417,275
|
|
Selling general and administrative expenses
|
|
$
|
15,082
|
|
|
$
|
21,744
|
|
|
$
|
13,742
|
|
|
$
|
2,623
|
|
|
$
|
2,495
|
|
|
$
|
11,165
|
|
|
$
|
7,234
|
|
Average Per Origination During Period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Age of insured at origination
|
|
|
75.5
|
|
|
|
74.9
|
|
|
|
74.9
|
|
|
|
74.1
|
|
|
|
75.0
|
|
|
|
74.7
|
|
|
|
74.0
|
|
Life expectancy of insured (years)
|
|
|
12.9
|
|
|
|
13.2
|
|
|
|
13.2
|
|
|
|
13.2
|
|
|
|
14.1
|
|
|
|
13.4
|
|
|
|
14.1
|
|
Monthly premium (year after origination)
|
|
$
|
14.0
|
|
|
$
|
14.9
|
|
|
$
|
16.0
|
|
|
$
|
18.8
|
|
|
$
|
13.1
|
|
|
$
|
16.3
|
|
|
$
|
13.9
|
|
Death benefit of policies underlying loans originated
|
|
$
|
4,053.7
|
|
|
$
|
4,575.6
|
|
|
$
|
4,857.3
|
|
|
$
|
5,678.3
|
|
|
$
|
4,166.7
|
|
|
$
|
4,889.0
|
|
|
$
|
4,852.0
|
|
Principal balance of the loan
|
|
$
|
227.0
|
|
|
$
|
195.5
|
|
|
$
|
265.8
|
|
|
$
|
321.1
|
|
|
$
|
185.8
|
|
|
$
|
269.2
|
|
|
$
|
212.1
|
|
Interest rate charged
|
|
|
10.5
|
%
|
|
|
10.8
|
%
|
|
|
11.4
|
%
|
|
|
11.5
|
%
|
|
|
11.5
|
%
|
|
|
11.5
|
%
|
|
|
11.5
|
%
|
Agency fee
|
|
$
|
125.1
|
|
|
$
|
96.2
|
|
|
$
|
134.6
|
|
|
$
|
153.4
|
|
|
$
|
92.1
|
|
|
$
|
139.4
|
|
|
$
|
105.8
|
|
Agency fee as % of principal balance
|
|
|
55.1
|
%
|
|
|
49.2
|
%
|
|
|
50.6
|
%
|
|
|
47.8
|
%
|
|
|
49.6
|
%
|
|
|
51.8
|
%
|
|
|
49.9
|
%
|
Origination fee
|
|
$
|
45.8
|
|
|
$
|
77.9
|
|
|
$
|
118.9
|
|
|
$
|
138.4
|
|
|
$
|
76.5
|
|
|
$
|
114.7
|
|
|
$
|
88.5
|
|
Origination fee as % of principal balance
|
|
|
20.2
|
%
|
|
|
39.9
|
%
|
|
|
44.7
|
%
|
|
|
43.1
|
%
|
|
|
41.1
|
%
|
|
|
42.6
|
%
|
|
|
41.7
|
%
|
End of Period Loan Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net
|
|
$
|
43,650
|
|
|
$
|
148,744
|
|
|
$
|
189,111
|
|
|
$
|
187,330
|
|
|
$
|
121,564
|
|
|
$
|
187,330
|
|
|
$
|
121,564
|
|
Number of policies underlying loans receivable
|
|
|
265
|
|
|
|
702
|
|
|
|
692
|
|
|
|
706
|
|
|
|
426
|
|
|
|
706
|
|
|
|
426
|
|
Aggregate death benefit of policies underlying loans receivable
|
|
$
|
1,065,870
|
|
|
$
|
2,895,780
|
|
|
$
|
3,091,099
|
|
|
$
|
3,296,937
|
|
|
$
|
2,120,587
|
|
|
$
|
3,296,937
|
|
|
$
|
2,120,587
|
|
Number of loans with insurance protection
|
|
|
|
|
|
|
494
|
|
|
|
631
|
|
|
|
613
|
|
|
|
399
|
|
|
|
613
|
|
|
|
399
|
|
Loans receivable, net (insured loans only)
|
|
$
|
|
|
|
$
|
118,864
|
|
|
$
|
179,137
|
|
|
$
|
169,455
|
|
|
$
|
116,115
|
|
|
$
|
169,455
|
|
|
$
|
116,115
|
|
Average Per Loan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Age of insured in loans receivable
|
|
|
76.3
|
|
|
|
75.3
|
|
|
|
75.4
|
|
|
|
75.5
|
|
|
|
74.3
|
|
|
|
75.5
|
|
|
|
74.3
|
|
Life expectancy of insured (years)
|
|
|
12.4
|
|
|
|
13.9
|
|
|
|
14.5
|
|
|
|
14.2
|
|
|
|
15.1
|
|
|
|
14.2
|
|
|
|
15.1
|
|
Monthly premium
|
|
$
|
7.7
|
|
|
$
|
9.1
|
|
|
$
|
8.5
|
|
|
$
|
8.3
|
|
|
$
|
6.7
|
|
|
$
|
8.3
|
|
|
$
|
6.7
|
|
Loan receivable, net
|
|
$
|
181.9
|
|
|
$
|
211.9
|
|
|
$
|
273.3
|
|
|
$
|
265.3
|
|
|
$
|
285.4
|
|
|
$
|
265.3
|
|
|
$
|
285.4
|
|
Interest rate
|
|
|
10.2
|
%
|
|
|
10.4
|
%
|
|
|
10.9
|
%
|
|
|
10.7
|
%
|
|
|
11.3
|
%
|
|
|
11.2
|
%
|
|
|
11.3
|
%
|
End of Period Policies Owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of policies owned
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
20
|
|
|
|
31
|
|
|
|
20
|
|
|
|
31
|
|
Aggregate fair value
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,306
|
|
|
$
|
1,711
|
|
|
$
|
8,846
|
|
|
$
|
1,711
|
|
|
$
|
8,846
|
|
Monthly premium average per policy
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2.8
|
|
|
$
|
2.2
|
|
|
$
|
5.2
|
|
|
$
|
2.2
|
|
|
$
|
5.2
|
|
43
Structured
Settlements Segment Selected Operating Data (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
Year Ended December 31,
|
|
September 30,
|
|
September 30,
|
|
|
2007
|
|
2008
|
|
2009
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
Period Originations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of transactions
|
|
|
10
|
|
|
|
276
|
|
|
|
396
|
|
|
|
102
|
|
|
|
138
|
|
|
|
275
|
|
|
|
385
|
|
Number of transactions from repeat customers
|
|
|
|
|
|
|
23
|
|
|
|
52
|
|
|
|
10
|
|
|
|
48
|
|
|
|
32
|
|
|
|
96
|
|
Weighted average purchase discount rate
|
|
|
11.0
|
%
|
|
|
12.0
|
%
|
|
|
16.3
|
%
|
|
|
17.1
|
%
|
|
|
20.1
|
%
|
|
|
16.1
|
%
|
|
|
19.3
|
%
|
Face value of undiscounted future payments purchased
|
|
$
|
701
|
|
|
$
|
18,295
|
|
|
$
|
28,877
|
|
|
$
|
8,094
|
|
|
$
|
13,458
|
|
|
$
|
20,460
|
|
|
$
|
33,713
|
|
Amount paid for settlements purchased
|
|
$
|
369
|
|
|
$
|
8,010
|
|
|
$
|
10,947
|
|
|
$
|
2,908
|
|
|
$
|
2,959
|
|
|
$
|
7,894
|
|
|
$
|
9,099
|
|
Marketing costs
|
|
$
|
2,056
|
|
|
$
|
5,295
|
|
|
$
|
4,460
|
|
|
$
|
1,087
|
|
|
$
|
1,168
|
|
|
$
|
3,479
|
|
|
$
|
3,561
|
|
Selling, general and administrative (excluding marketing costs)
|
|
$
|
666
|
|
|
$
|
4,475
|
|
|
$
|
5,015
|
|
|
$
|
1,298
|
|
|
$
|
1,957
|
|
|
$
|
3,257
|
|
|
$
|
5,294
|
|
Average Per Origination During Period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Face value of undiscounted future payments purchased
|
|
$
|
70.1
|
|
|
$
|
66.3
|
|
|
$
|
72.9
|
|
|
$
|
79.4
|
|
|
$
|
97.5
|
|
|
$
|
74.4
|
|
|
$
|
87.6
|
|
Amount paid for settlement purchased
|
|
$
|
36.9
|
|
|
$
|
29.0
|
|
|
$
|
27.6
|
|
|
$
|
28.5
|
|
|
$
|
21.4
|
|
|
$
|
28.7
|
|
|
$
|
23.6
|
|
Time from funding to maturity (months)
|
|
|
80.3
|
|
|
|
113.8
|
|
|
|
109.7
|
|
|
|
113.4
|
|
|
|
147.3
|
|
|
|
109.2
|
|
|
|
134.3
|
|
Marketing cost per transaction
|
|
$
|
205.6
|
|
|
$
|
19.2
|
|
|
$
|
11.3
|
|
|
$
|
10.7
|
|
|
$
|
8.5
|
|
|
$
|
12.7
|
|
|
$
|
9.2
|
|
Segment selling, general and administrative (excluding marketing
costs) per transaction
|
|
$
|
66.6
|
|
|
$
|
16.2
|
|
|
$
|
12.7
|
|
|
$
|
12.7
|
|
|
$
|
14.2
|
|
|
$
|
11.8
|
|
|
$
|
13.8
|
|
Period Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of transactions sold
|
|
|
|
|
|
|
226
|
|
|
|
439
|
|
|
|
|
|
|
|
72
|
|
|
|
96
|
|
|
|
291
|
|
Gain on sale of structured settlements
|
|
$
|
|
|
|
$
|
443
|
|
|
$
|
2,684
|
|
|
$
|
24
|
|
|
$
|
1,585
|
|
|
$
|
499
|
|
|
$
|
4,848
|
|
Average sale discount rate
|
|
|
|
|
|
|
10.8
|
%
|
|
|
11.5
|
%
|
|
|
|
|
|
|
9.6
|
%
|
|
|
11.1
|
%
|
|
|
9.1
|
%
|
44
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, or finance such assets with, third
parties.
Since 2007, the United States capital markets have
experienced extensive distress and dislocation due to the global
economic downturn and credit crisis. As a result of the
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 and structured
settlement businesses. We intend to originate new premium
finance loans without relying on debt financing. We intend to
use a portion of the net proceeds from this offering, together
with debt financing, to continue to finance the acquisition and
sale of structured settlements.
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
for our premium finance business has required us to obtain
lender protection insurance for each loan originated under such
credit facility. This coverage provides insurance on the value
of the life insurance policy serving as collateral underlying
the loan should our borrower default. After a payment default by
the borrower, subject to the terms and conditions of the lender
protection insurance policy, our lender protection insurer has
the right to direct control or take beneficial ownership of the
life insurance policy, and we are paid a claim equal to the
insured
45
value of the policy. 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
September 30, 2010, 94.6% of our outstanding premium
finance loans have collateral whose value is insured. Currently,
we are only originating new premium finance loans with lender
protection insurance. Following the earlier of the completion of
this offering or December 31, 2010, we do not expect to
originate 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
allows us to access debt financing to support our premium
finance business, the cost of lender protection insurance
substantially reduces the earnings from our premium finance
segment. Additionally, there are coverage limitations related to
our use of lender protection insurance that have reduced the
number of otherwise viable premium finance transactions that we
could complete. During the nine months ended September 30,
2010, these coverage limitations 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 cost of debt financing and lender
protection insurance and the limitations on loan originations
that our lender protection insurance imposes.
The following table shows our total financing cost per annum for
funding premium finance loans as a percentage of the principal
balance of the loans originated during the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Year Ended December 31,
|
|
|
Ended September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
Lender protection insurance cost
|
|
|
|
|
|
|
8.5
|
%
|
|
|
10.9
|
%
|
|
|
11.0
|
%
|
|
|
10.4
|
%
|
Interest cost and other lender funding charges under credit
facilities
|
|
|
14.5
|
%
|
|
|
13.7
|
%
|
|
|
18.2
|
%
|
|
|
18.5
|
%
|
|
|
20.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financing cost
|
|
|
14.5
|
%
|
|
|
22.2
|
%
|
|
|
29.1
|
%
|
|
|
29.5
|
%
|
|
|
31.1
|
%
|
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 35 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. We did not incur liability with our borrowers because
the terms of the Acorn loans provide that we are only required
to fund future premiums
46
if our lender provides us with funds. Through September 30,
2010, a total of 101 policies financed under the Acorn facility
incurred losses primarily due to non-payment of premiums.
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), an entity that is not related to us. 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. We believe that ABRG will elect to fund the loan
only if it believes there is value in the policy serving as
collateral for the loan. 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 value in the policy serving as
collateral for the loan after considering the costs of keeping
the policy in force. 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 $7.0 million and
$16.4 million for the nine months ended September 30,
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 $5.2 million, $10.2 million and
$1.9 million during the nine months ended
September 30, 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 September 30,
2010, only 18 loans out of 119 loans originally financed in the
Acorn facility remained outstanding.
The following table highlights the number of loans impacted by
the Acorn settlement during the periods indicated below (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acorn Capital Facility
|
|
|
|
|
Nine Months
|
|
|
|
|
Year Ended December 31,
|
|
Ended September 30,
|
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
2009
|
|
2010
|
|
Total
|
|
Number of loans held at end of period
|
|
|
90
|
|
|
|
112
|
|
|
|
49
|
|
|
|
60
|
|
|
|
18
|
|
|
|
N/A
|
|
Loans receivable, net, balance at end of period
|
|
$
|
15,468
|
|
|
$
|
21,073
|
|
|
$
|
9,601
|
|
|
$
|
12,330
|
|
|
$
|
4,416
|
|
|
|
N/A
|
|
Number of loans impacted during period
|
|
|
|
|
|
|
7
|
|
|
|
63
|
|
|
|
52
|
|
|
|
31
|
|
|
|
101
|
|
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
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Ended September 30,
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
Total
|
|
|
Gain on forgiveness of debt
|
|
$
|
|
|
|
$
|
|
|
|
$
|
16,410
|
|
|
$
|
14,886
|
|
|
$
|
6,968
|
|
|
$
|
23,378
|
|
Loss on loan payoffs and settlements, net
|
|
|
|
|
|
|
(1,868
|
)
|
|
|
(10,182
|
)
|
|
|
(8,442
|
)
|
|
|
(5,181
|
)
|
|
|
(17,231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on net income
|
|
$
|
|
|
|
$
|
(1,868
|
)
|
|
$
|
6,228
|
|
|
$
|
6,444
|
|
|
$
|
1,787
|
|
|
$
|
6,147
|
*
|
|
|
|
* |
|
The $6.1 million impact on net income is due to 26 policies
on which we decided to continue to fund the premiums after ABRG
elected not to continue to fund the premiums. With respect to
the associated loans, we received a gain on forgiveness of debt
with no offsetting loss on loan payoffs and settlements, net. |
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
47
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 nine
months ended September 30, 2009 and 2010, this purchase
discount produced a yield that averaged 16.1% and 19.3%,
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 financial strength ratings of A1 or
better by Moodys Investors Services or
A− or better by 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, on September 24, 2010, we entered into an arrangement
to provide us up to $50 million to finance the purchase of
structured settlements. 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. We will continue to evaluate
alternative financing arrangements, which could include selling
pools of structured settlements to third parties and 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. During the nine months
ended September 30, 2010, our weighted average sale
discount rate for sales of structured settlements was 9.1%,
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.
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 385
transactions during the nine months ended September 30,
2010 as compared to 275 transactions during the same period in
2009, an increase of 40%, and 396 transactions during 2009 as
compared to 276 transactions in 2008, an increase of 43%. We
incurred total expenses of $8.9 million during the nine
months ended September 30, 2010 as compared to
$6.7 million during the same period in 2009 and
$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 sufficient scalability to permit our structured
settlement business to continue to grow efficiently.
Accordingly, the historical operating 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; Option to Retain
Policies
We intend to use the net 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 net proceeds of this offering and the
elimination of the use of lender protection insurance will
provide us the option to retain for investment a number of
policies relinquished to us upon default. If we retain a life
insurance policy that is relinquished to us upon default, we
will be responsible for paying all premiums necessary to keep
the policy in force.
48
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 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
In connection with the corporate conversion, in the event the
corporate conversion results in a reallocation whereby it is
deemed that a shareholder has contributed an economic interest
to an employee, we will incur stock compensation expense. We
also expect to incur stock compensation expense related to the
issuance of common stock to our two employees with phantom stock
agreements.
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 Omnibus 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. 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.
Because agency fees are not paid by the borrower, such fees do
not accrue over the term of the loan. We typically charge and
receive agency fees from the referring agent within
approximately 47 days of our funding the loan. Referring
insurance agents pay the agency fees to our subsidiary, Imperial
Life and Annuity Services, LLC, a licensed insurance agency, for
the due diligence performed in underwriting the premium finance
transaction. The amount of the agency fee paid by a referring
life insurance agent is negotiated with the referring agents
based on a number of factors, including the size of the policy
and the amount of premiums on the policy. Agency fees as a
percentage of the principal balance of loans originated during
the periods below are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Nine Months Ended September 30,
|
|
|
2007
|
|
2008
|
|
2009
|
|
2009
|
|
2010
|
|
Agency fees as a percentage of the principal balance of the
loans originated
|
|
|
55.1
|
%
|
|
|
49.2
|
%
|
|
|
50.6
|
%
|
|
|
51.8
|
%
|
|
|
49.9
|
%
|
49
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. In addition, our premium finance loans have a
floor interest rate and are capped at 16.0% per annum. For loans
with floating rates, each month the interest rate is
recalculated to equal one-month LIBOR plus the applicable
margin, and then, if necessary, adjusted so as to remain at or
above the stated floor rate and at or below the capped rate of
16.0% per annum.
The weighted average per annum interest rate for premium finance
loans outstanding as of the dates below is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
September 30,
|
|
|
2007
|
|
2008
|
|
2009
|
|
2009
|
|
2010
|
|
Weighted average per annum interest rate
|
|
|
10.2
|
%
|
|
|
10.4
|
%
|
|
|
10.9
|
%
|
|
|
11.2
|
%
|
|
|
11.3
|
%
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Nine Months Ended September 30,
|
|
|
2007
|
|
2008
|
|
2009
|
|
2009
|
|
2010
|
|
Origination fees as a percentage of the principal balance of the
loans
|
|
|
20.2
|
%
|
|
|
39.9
|
%
|
|
|
44.7
|
%
|
|
|
42.6
|
%
|
|
|
41.7
|
%
|
Origination fees per annum as a percentage of the principal
balance of the loans
|
|
|
5.2
|
%
|
|
|
15.4
|
%
|
|
|
19.2
|
%
|
|
|
18.5
|
%
|
|
|
21.0
|
%
|
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. 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.
50
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.
Change in
Fair Value of Life Settlements and Structured Settlement
Receivables.
We have elected to carry our investments in life settlements at
fair value. As of July 1, 2010, we elected to adopt the
fair value option, in accordance with ASC 825, Financial
Instruments, to record certain newly-acquired structured
settlement receivables at fair value. Any change in fair value
upon re-measurement of these investments is recorded through our
change in fair value of life settlement and structured
settlement receivables.
Gain on
Sale of Life Settlements
Gain on sale of life settlements includes gain from
company-owned life settlements and gains from sales on behalf of
third parties.
Components
of Expenses
Interest
Expense
Interest expense is interest accrued monthly on credit facility
borrowings that are used to fund premium finance loans and
promissory notes that were used to fund operations and corporate
expenses. Interest is generally compounded monthly and payable
as the collateralized loans mature.
Our weighted average interest rate for our credit facilities and
promissory notes outstanding as of the dates indicated below is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
September 30,
|
|
|
2007
|
|
2008
|
|
2009
|
|
2009
|
|
2010
|
|
Weighted average interest rate under credit facilities
|
|
|
14.5
|
%
|
|
|
13.9
|
%
|
|
|
15.6
|
%
|
|
|
15.5
|
%
|
|
|
18.0
|
%
|
Weighted average interest rate under promissory notes
|
|
|
16.2
|
%
|
|
|
15.9
|
%
|
|
|
16.5
|
%
|
|
|
16.5
|
%
|
|
|
16.5
|
%
|
Total weighted average interest rate
|
|
|
15.5
|
%
|
|
|
14.2
|
%
|
|
|
15.7
|
%
|
|
|
14.9
|
%
|
|
|
17.6
|
%
|
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 life insurance
policies as collectability is primarily collateral dependent.
The fair value of the life insurance policy is determined using
our valuation model, which is a Level 3 fair value
measurement. For loans with lender protection insurance, the
insured value is also considered when determining the fair value
of the life insurance policy. The insured value is not directly
correlated to any portion of the loan, such as principal,
accrued interest, accreted origination income, or other fees
which may be charged or incurred on these types of loans. The
insured value is the amount we would receive in the event that
we filed a lender protection insurance claim. The lender
protection insurer limits the insured value to an amount equal
to or less than its determination of the value of the life
insurance policy underlying our premium finance loan based on
its own models and assumptions, 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 of 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. Loans that experience an
immediate impairment are made when the transaction components
that are not included in the loan, such as agency fees, offset
or exceed the amount of the impairment.
51
For loans that matured during the nine months ended
September 30, 2010 and during the year ended
December 31, 2009, 97% 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, we make a claim against the lender
protection insurance policy and, subject to policy terms and
conditions, the insurer has the right to direct control or take
beneficial ownership of the policy upon payment of our claim.
For loans that had lender protection insurance and matured
during the nine months ended September 30, 2010 and during
the year ended December 31, 2009, 320 and 56 loans were not
repaid at maturity, respectively. Of these loans, 320 and 56
were submitted to our lender protection insurer. The net
carrying value of the loans (which includes principal, accrued
interest income, and accrued origination fees, net of
impairment) at the time of payoff during the nine months ended
September 30, 2010 and the year ended December 31,
2009 was $111.8 million and $23.8 million,
respectively. The amount of cash received by us for those loans
was $112.8 million and $24.6 million, respectively.
This resulted in a gain during the nine months ended
September 30, 2010 and the year ended December 31,
2009 of $741,000 and $955,000, respectively. This gain was
primarily attributable to the insurance amount at the time of
payoff exceeding the contractual amounts due under the terms of
the loan agreement. Therefore, the amount of claims paid by the
lender protection insurer was in excess of 100% of the net
carrying value of the loans. The following table provides
information on the insured loans that were not repaid at
maturity for the periods indicated below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31, 2009
|
|
|
September 30, 2010
|
|
|
Number of loans impaired at maturity
|
|
|
32
|
|
|
|
179
|
|
Loans not repaid at maturity
|
|
|
56
|
|
|
|
320
|
|
Claims submitted to lender protection insurer
|
|
|
56
|
|
|
|
320
|
|
Claims paid by lender protection insurer
|
|
|
56
|
|
|
|
320
|
|
Amount of claims paid
|
|
$
|
24,555
|
|
|
$
|
112,784
|
|
Net carrying value of loans at payoffs
|
|
$
|
23,814
|
|
|
$
|
111,829
|
|
Gain on LPIC payoffs (all loans)
|
|
$
|
741
|
|
|
$
|
955
|
|
Gain on LPIC payoffs (impaired loans)
|
|
$
|
304
|
|
|
$
|
(54
|
)
|
Percent of claims paid by lender protection insurer
|
|
|
100
|
%
|
|
|
100
|
%
|
The following table shows the percentage of the total number of
loans outstanding with lender protection insurance and the
percentage of our total loans receivable balance covered by
lender protection insurance as of the dates indicated below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
September 30,
|
|
|
2007
|
|
2008
|
|
2009
|
|
2009
|
|
2010
|
|
Percentage of total number of loans outstanding with lender
protection insurance
|
|
|
|
|
|
|
74.6
|
%
|
|
|
91.2
|
%
|
|
|
86.8
|
%
|
|
|
94.6
|
%
|
Percentage of total loans receivable balance covered by lender
protection insurance
|
|
|
|
|
|
|
78.6
|
%
|
|
|
93.1
|
%
|
|
|
90.0
|
%
|
|
|
95.2
|
%
|
We use a method to determine the loan impairment valuation
adjustment which assumes the worst case scenario for
the fair value of the collateral based on the insured coverage
amount. At the time of loan origination, we will record
impairment even though no loans are considered non-performing as
no payments are due by the borrower. Loans with insured
collateral represented 91.2% and 94.6% of our loans as of
December 31, 2009 and September 30, 2010,
respectively. 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. During the past
18 months, the insured value of the collateral has often
been its highest value. The higher amount of impairment
experienced in the latter part of 2009 and during 2010 reflects
the realization of less than the contractual amounts due under
the terms of the
52
loans receivable. We believe that if the market for life
insurance policies improves, our realization rates for the
contractual amounts of interest income and origination income
should improve as well.
The following table shows the amount of impairment recorded on
loans outstanding with and without lender protection insurance
during each period (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Nine Months Ended
|
|
|
|
2009
|
|
|
September 30, 2010
|
|
|
Provision for losses on loans receivable with lender protection
insurance
|
|
$
|
7,008
|
|
|
$
|
4,026
|
|
Provision (recoveries) for losses on loans receivable without
lender protection insurance
|
|
|
2,822
|
|
|
|
(512
|
)
|
|
|
|
|
|
|
|
|
|
Total provision for losses on loans receivable
|
|
$
|
9,830
|
|
|
$
|
3,514
|
|
Loss on
Loan Payoffs and Settlements, Net
When a premium finance loan matures, we record the difference
between the net carrying value of the loan receivable (which
includes the loan principal balance, accrued interest and
accreted origination fees, net of any impairment valuation
adjustment) 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 $5.2 million,
$10.2 million and $1.9 million during the nine months
ended September 30, 2010 and the years ended
December 31, 2009 and 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 insurer. 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.
53
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, we make a claim against the
lender protection insurance policy and, subject to terms and
conditions of the lender protection insurance policy, our lender
protection insurer has the right to direct control or take
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 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. This lender protection insurance 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, a loan impairment valuation is established if the
carrying value of the loan 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.
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.
We initially record investments in life settlements at the
transaction price. For policies acquired upon relinquishment by
our borrowers, we determine the transaction price based on fair
value of the acquired policies at the date of relinquishment.
The difference between the net carrying value of the loan and
the transaction price is recorded as a gain (loss) on loan
payoffs and settlement. For policies acquired for cash, the
transaction price is the amount paid.
The fair value of the investment in insurance policies is
evaluated at the end of each reporting period. Changes in the
fair value of the investment based on evaluations are recorded
as change in fair value of life settlements in our consolidated
and combined statement of operations. 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
September 30, 2010 was 15% and the fair value of our
investment in life insurance policies was $8.8 million.
54
Following this offering, our investment in life settlements
(life insurance policies) may increase over time as we begin to
make loans without lender protection insurance, as a result of
which we expect to have the option to retain a number of the
life insurance 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 policies relinquished
to us by our borrowers upon default.
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
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, 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
55
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 and structured settlements 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.
Our impaired loans are measured at fair value on a non-recurring
basis, as the carrying value is based on the fair value of the
underlying collateral. The method used to estimate the fair
value of impaired collateral-dependent loans depends on the
nature of the collateral. For collateral that has lender
protection insurance coverage, the fair value measurement is
considered to be Level 2 as the insured value is an
observable input and there are no material unobservable inputs.
For collateral that does not have lender protection insurance
coverage, the fair value measurement is considered to be
Level 3 as the estimated fair value is based on a model
whose significant inputs are the life expectancy of the insured
and the discount rate, which are not observable. Although
collateral without lender protection insurance is a Level 3
asset, we believe that the fair value is predictable based on
the fixed contractual terms of the life insurance policy and its
premium schedule and death benefit, as well as the ability to
predict the insureds age at the time of loan maturity,
which are some of the key factors in determining the fair market
value of a life insurance policy.
Fair
Value Option
As of July 1, 2010, we elected to adopt the fair value
option, in accordance with ASC 825, Financial
Instruments, to record certain newly-acquired structured
settlements at fair value. We have the option to measure
eligible financial assets, financial liabilities, and
commitments at fair value on an instrument-by-instrument basis.
This option is available when we first recognize a financial
asset or financial liability or enter into a firm commitment.
Subsequent changes in the fair value of assets, liabilities, and
commitments where we have elected the fair value option are
recorded in our consolidated and combined statement of
operations. We have made this election because it is our
intention to sell these assets within the next twelve months,
and we believe it significantly reduces the disparity that
exists between the GAAP carrying value of these structured
settlements and our estimate of their economic value.
Revenue
Recognition
Our primary sources of revenue are in the form of agency fees,
interest income, origination fee income and gains on sales of
structured settlements. Our revenue recognition policies for
these sources of revenue are as follows:
|
|
|
|
|
Agency Fees Agency fees are paid by the
referring life insurance agents based on negotiations between
the parties and are recognized at the time a premium finance
loan is funded. Because agency fees are not paid by the
borrower, such fees do not accrue over the term of the loan. We
typically charge and receive agency fees from the referring
agent within approximately 47 days of our funding the loan.
A separate origination fee is charged to the borrower which is
amortized into income over the life of the loan.
|
|
|
|
Interest Income Interest income on premium
finance loans is recognized when it is realizable and earned, in
accordance with ASC 605, Revenue Recognition.
Discounts on structured settlement receivables are accreted over
the life of the settlement using the effective interest method.
|
|
|
|
Origination Fee Income Loans often include
origination fees which are fees payable to us on the date the
loan matures. The fees are negotiated at the inception of the
loan on a transaction by transaction basis. The fees are
accreted into income over the term of the loan using the
effective interest method.
|
|
|
|
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.
|
56
Interest and origination income on impaired loans is recognized
when it is realizable and earned in accordance with
ASC 605, Revenue Recognition. Persuasive evidence of
an arrangement exists through a loan agreement which is signed
by a borrower prior to funding and sets forth the agreed upon
terms of the interest and origination fees. Interest income and
origination income are earned over the term of the loan and are
accreted using the effective interest method. The interest and
origination fees are fixed and determinable based on the loan
agreement. For impaired loans, we do not recognize interest and
origination income which we believe is uncollectible. At the end
of the reporting period, we review the accrued interest and
accrued origination fees in conjunction with our loan impairment
analysis to determine our best estimate of uncollectible income
that is then reversed. We continually reassess whether the
interest and origination income are collectible as the fair
value of the collateral typically increases over the term of the
loan. Since our loans are due upon maturity, we cannot determine
whether a loan is performing or non-performing until maturity.
For impaired loans, our estimate of proceeds to be received upon
maturity of the loan is generally correlated to our current
estimate of fair value of the collateral, but also incorporates
expected increases in fair value of the collateral over the term
of the loan, trends in the market, sales activity for life
insurance policies, and our experience with loans payoffs.
Deferred
Costs
Deferred costs include costs incurred in connection with
acquiring and maintaining credit facilities and costs incurred
in connection with securing lender protection insurance. These
costs are amortized over the life of the related loan using the
effective interest method and are classified as amortization of
deferred costs in the accompanying consolidated and combined
statement of operations.
Loss
in Loan Payoffs and Settlements, Net
When a premium finance loan matures, we record the difference
between the net carrying value of the loan and the cash
received, or the fair value of the life insurance policy that is
obtained in the event of payment default, 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 $5.2 million, $10.2 million and
$1.9 million during the nine months ended
September 30, 2010 and the years ended December 31,
2009 and 2008, respectively, under the direct write-off method,
as opposed to charging our provision for losses on loan
receivables.
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
We have adopted 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
57
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 July 2010, the FASB issued ASU
No. 2010-20,
Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses
(ASU
2010-20).
This guidance will require companies to provide additional
disclosures relating to the credit quality of their financing
receivables and the credit reserves held against them, including
the aging of past-due receivables, credit quality indicators,
and modifications of financing receivables. For public
companies, the disclosure requirements as of the end of a
reporting period are effective for periods ending on or after
December 15, 2010. The disclosure requirements for activity
occurring during a reporting period are effective for periods
beginning on or after December 15, 2010. We are currently
evaluating the possible effects of this guidance on our
financial statement disclosures.
58
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,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency fee income
|
|
$
|
24,515
|
|
|
$
|
48,004
|
|
|
$
|
26,114
|
|
|
$
|
20,216
|
|
|
$
|
9,099
|
|
Interest income
|
|
|
4,888
|
|
|
|
11,914
|
|
|
|
21,483
|
|
|
|
15,843
|
|
|
|
15,795
|
|
Origination fee income
|
|
|
526
|
|
|
|
9,399
|
|
|
|
29,853
|
|
|
|
21,865
|
|
|
|
16,728
|
|
Gain on sale of structured settlements
|
|
|
|
|
|
|
443
|
|
|
|
2,684
|
|
|
|
499
|
|
|
|
4,848
|
|
Gain on forgiveness of debt
|
|
|
|
|
|
|
|
|
|
|
16,410
|
|
|
|
14,886
|
|
|
|
6,968
|
|
Gain on sale of life settlements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,954
|
|
Change in fair value of life settlements and structured
receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,805
|
|
Other income
|
|
|
2
|
|
|
|
47
|
|
|
|
71
|
|
|
|
53
|
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income
|
|
|
29,931
|
|
|
|
69,807
|
|
|
|
96,615
|
|
|
|
73,362
|
|
|
|
60,392
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
1,343
|
|
|
|
12,752
|
|
|
|
33,755
|
|
|
|
24,710
|
|
|
|
24,244
|
|
Provision for losses on loans receivable
|
|
|
2,332
|
|
|
|
10,768
|
|
|
|
9,830
|
|
|
|
6,705
|
|
|
|
3,514
|
|
Loss (gain) on loan payoffs and settlements, net
|
|
|
(225
|
)
|
|
|
2,738
|
|
|
|
12,058
|
|
|
|
11,279
|
|
|
|
4,320
|
|
Amortization of deferred costs
|
|
|
126
|
|
|
|
7,569
|
|
|
|
18,339
|
|
|
|
13,101
|
|
|
|
22,601
|
|
Selling, general and administrative expenses
|
|
|
24,335
|
|
|
|
41,566
|
|
|
|
31,269
|
|
|
|
22,997
|
|
|
|
22,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
27,911
|
|
|
|
75,393
|
|
|
|
105,251
|
|
|
|
78,792
|
|
|
|
76,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,020
|
|
|
$
|
(5,586
|
)
|
|
$
|
(8,636
|
)
|
|
$
|
(5,430
|
)
|
|
$
|
(16,405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium
Finance Segment Results (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Income
|
|
$
|
29,921
|
|
|
$
|
68,743
|
|
|
$
|
92,648
|
|
|
$
|
72,393
|
|
|
$
|
53,643
|
|
Expenses
|
|
|
18,092
|
|
|
|
52,733
|
|
|
|
82,435
|
|
|
|
63,118
|
|
|
|
59,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
$
|
11,829
|
|
|
$
|
16,010
|
|
|
$
|
10,213
|
|
|
$
|
9,275
|
|
|
$
|
(5,455
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
Structured
Settlement Segment Results (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Income
|
|
$
|
10
|
|
|
$
|
1,064
|
|
|
$
|
3,967
|
|
|
$
|
969
|
|
|
$
|
6,749
|
|
Expenses
|
|
|
2,722
|
|
|
|
9,770
|
|
|
|
9,475
|
|
|
|
6,736
|
|
|
|
8,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating loss
|
|
$
|
(2,712
|
)
|
|
$
|
(8,706
|
)
|
|
$
|
(5,508
|
)
|
|
$
|
(5,767
|
)
|
|
$
|
(2,106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of Segment Results to Consolidated Results (in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Segment operating (loss) income
|
|
$
|
9,117
|
|
|
$
|
7,304
|
|
|
$
|
4,705
|
|
|
$
|
3,508
|
|
|
$
|
(7,561
|
)
|
Unallocated expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A expenses
|
|
|
6,531
|
|
|
|
10,052
|
|
|
|
8,052
|
|
|
|
5,097
|
|
|
|
5,950
|
|
Interest expense
|
|
|
566
|
|
|
|
2,838
|
|
|
|
5,289
|
|
|
|
3,841
|
|
|
|
2,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,020
|
|
|
$
|
(5,586
|
)
|
|
$
|
(8,636
|
)
|
|
$
|
(5,430
|
)
|
|
$
|
(16,405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2010 Compared to Nine Months
Ended September 30, 2009
Our results of operations for the nine months ended
September 30, 2010 have been impacted by the execution of a
settlement claims agreement. On September 8, 2010, the
lender protection insurance related to our credit facility with
Ableco Finance, LLC (Ableco) was terminated and
settled pursuant to a claims settlement agreement, resulting in
our receipt of an insurance claims settlement of approximately
$96.9 million. We used approximately $64.0 million of
the settlement proceeds to pay off the credit facility with
Ableco in full and the remainder was used to pay off almost all
of the amounts borrowed under the grid promissory note in favor
of CTL Holdings, LLC. As a result of this settlement
transaction, our subsidiary, Imperial PFC Financing, LLC, a
special purpose entity, agreed to reimburse the lender
protection insurer for certain loss payments and related
expenses by remitting to the lender protection insurer all
amounts received in the future in connection with the related
premium finance loans issued through the Ableco credit facility
and the life insurance policies collateralizing those loans
until such time as the lender protection insurer has been
reimbursed in full in respect of its loss payments and related
expenses. Those loss payments and related expenses include the
$96.9 million insurance claims settlement described above,
$77.0 million for loss payments previously made, any
additional advances made by the lender protection insurer to or
for the benefit of Imperial PFC Financing, LLC and interest on
such amounts. The reimbursement obligation is generally
non-recourse to us and our other subsidiaries except to the
extent of our equity interest in Imperial PFC Financing, LLC.
Messrs. Mitchell and Neuman each guaranteed the obligations
of Imperial PFC Financing, LLC for matters other than financial
performance. These guaranties are not unconditional sources of
credit support but are intended to protect against acts of
fraud, willful misconduct or a bankruptcy filing by Imperial PFC
Financing, LLC or Imperial Premium Finance, LLC. To the extent
recourse is sought 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.
Under the lender protection program, we pay lender protection
insurance premiums at or about the time the coverage for a
particular loan becomes effective. We record this amount as a
deferred cost on our balance sheet, and then expense the
premiums over the life of the underlying premium finance loans
using the effective interest method. As of September 8,
2010, the deferred premium costs associated with the Ableco
facility totaled $5.4 million. Since these insurance claims
have been prepaid and Ableco has been repaid in full, we have
accelerated the expensing of these deferred costs and recorded
this $5.4 million expense as Amortization of Deferred
Costs. Also in connection with the termination of the Ableco
facility, we have accelerated the expensing of approximately
$980,000 of deferred costs which resulted from professional fees
related to the
60
creation of the Ableco facility. We recorded these charges as
Amortized Deferred Costs. In the aggregate, we accelerated the
expensing of $6.4 million in deferred costs as a result of
this one-time transaction.
The insurance claims settlement of $96.9 million was
recorded as lender protection insurance claims paid in advance
on our consolidated and combined balance sheet. As the premium
finance loans mature and in the event of default, the insurance
claim is applied against the premium finance loan. As of
September 30, 2010, we have approximately
$60.6 million remaining of lender protection insurance
claims paid in advance related to premium finance loans which
have not yet matured. The remaining premium finance loans will
mature by August 5, 2011.
Net loss for the nine months ended September 30, 2010 was
$16.4 million as compared to $5.4 million for the same
period in 2009. Of this $11.0 million net change,
$14.7 million occurred in our premium finance segment,
offset by improvements in our structured settlements segment of
$3.7 million. The change in the premium finance segment was
primarily caused by decreased agency fee income and origination
fee income. These declines were directly related to a reduction
in the number of otherwise viable premium finance transactions
that we could complete as we funded only 86 loans during the
nine months ended September 30, 2010, a 41% decrease
compared to the 145 funded during the same period of 2009. This
reduction in the number of loans originated was caused by
increased financing costs and stricter coverage limitations
provided by our lender protection insurer. As a result, we
experienced a decrease in agency fee income of
$11.1 million, or 55% and a decrease in origination fee
income of $5.1 million, or 23%. These decreases were
partially offset by an increase in gain on sale of structured
settlements of $4.3 million and an increase in the change
in fair value of investments of $4.8 million.
Amortization of deferred costs increased to $22.6 million
during the nine months ended September 30, 2010 as compared
to $13.1 million for the same period in 2009, an increase
of $9.5 million, or 73%. In connection with the full payoff
of the Ableco credit facility, we accelerated the expensing of
the remaining $5.4 million of associated deferred lender
protection insurance costs. We also accelerated the expensing of
approximately $980,000 of deferred costs related to fees
incurred in connection with the creation of the Ableco facility.
In total, lender protection insurance related costs accounted
for $19.4 million and $10.9 million of total
amortization of deferred costs during the nine months ended
September 30, 2010 and 2009, respectively.
Gain on forgiveness of debt decreased to $7.0 million
during the nine months ended September 30, 2010 compared to
$14.9 million for the same period in 2009, a decrease of
$7.9 million, or 53%. The reduced gain on forgiveness of
debt was offset by a reduction in loss on loan settlement and
payoffs, net of $7.0 million as a result of our writing off
of fewer loans that were originated under the Acorn facility.
Gain on sale of structured settlements was $4.8 million
during the nine months ended September 30, 2010 compared to
$499,000 for the same period in 2009.
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 35 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
61
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.
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 was 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 106 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.
62
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,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency fee income
|
|
$
|
24,515
|
|
|
$
|
48,004
|
|
|
$
|
26,114
|
|
|
$
|
20,216
|
|
|
$
|
9,099
|
|
Interest income
|
|
|
4,880
|
|
|
|
11,340
|
|
|
|
20,271
|
|
|
|
15,426
|
|
|
|
15,482
|
|
Origination fee income
|
|
|
526
|
|
|
|
9,399
|
|
|
|
29,853
|
|
|
|
21,865
|
|
|
|
16,728
|
|
Gain on forgiveness of debt
|
|
|
|
|
|
|
|
|
|
|
16,410
|
|
|
|
14,886
|
|
|
|
6,968
|
|
Change in fair value of life settlements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,300
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,921
|
|
|
|
68,743
|
|
|
|
92,648
|
|
|
|
72,393
|
|
|
|
53,643
|
|
Direct segment expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
777
|
|
|
|
9,914
|
|
|
|
28,466
|
|
|
|
20,869
|
|
|
|
21,350
|
|
Provision for losses
|
|
|
2,332
|
|
|
|
10,768
|
|
|
|
9,830
|
|
|
|
6,705
|
|
|
|
3,514
|
|
Loss (gain) on loan payoff and settlements, net
|
|
|
(225
|
)
|
|
|
2,738
|
|
|
|
12,058
|
|
|
|
11,278
|
|
|
|
4,320
|
|
Amortization of deferred costs
|
|
|
126
|
|
|
|
7,569
|
|
|
|
18,339
|
|
|
|
13,101
|
|
|
|
22,601
|
|
SG&A expense
|
|
|
15,082
|
|
|
|
21,744
|
|
|
|
13,742
|
|
|
|
11,165
|
|
|
|
7,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,092
|
|
|
|
52,733
|
|
|
|
82,435
|
|
|
|
63,118
|
|
|
|
59,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
$
|
11,829
|
|
|
$
|
16,010
|
|
|
$
|
10,213
|
|
|
$
|
9,275
|
|
|
$
|
(5,455
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2010 Compared to Nine Months
Ended September 30, 2009
Income
Agency Fee Income. Agency fee income was
$9.1 million for the nine months ended September 30,
2010 compared to $20.2 million for the same period in 2009,
a decrease of $11.1 million, or 55%. Agency fee income is
earned solely as a function of originating loans. We funded only
86 loans during the nine months ended September 30, 2010, a
41% decrease compared to the 145 loans funded during the same
period of 2009. This reduction in the number of loans originated
was caused by increased financing costs and stricter coverage
limitations provided by our lender protection insurer.
Agency fees as a percentage of the principal balance of the
loans originated during each period was as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2009
|
|
2010
|
|
Principal balance of loans originated
|
|
|
39,030
|
|
|
|
18,245
|
|
Number of transactions originated
|
|
|
145
|
|
|
|
86
|
|
Agency fees
|
|
|
20,216
|
|
|
|
9,099
|
|
Agency fees as a percentage of the principal balance of loans
originated
|
|
|
51.8
|
%
|
|
|
49.9
|
%
|
63
Interest Income. Interest income was
$15.5 million for the nine months ended September 30,
2010 compared to $15.4 million for the same period in 2009,
an increase of $56,000 or 0.3%. Interest income was comparable
due to a decline in interest income as the average balance of
loans receivable, net decreased, partially offset by additional
interest received on loans that matured during the period but
continued to accrue interest past the maturity date until the
lender protection insurance claim was received. The balance of
loans receivable, net, increased from $148.7 million to
$187.3 million during the nine months ended
September 30, 2009, as we originated a significant number
of new loans. The balance of loans receivable, net, decreased
from $189.1 million to $121.6 million during the nine
months ended September 30, 2010 due to significant loan
maturities. There were no significant changes in interest rates.
The weighted average per annum interest rate for premium finance
loans outstanding as of September 30, 2010 and 2009 was
11.3% and 11.2%, respectively.
Origination Fee Income. Origination fee income
was $16.7 million for the nine months ended
September 30, 2010 compared to $21.9 million for the
same period in 2009, a decrease of $5.2 million, or 23%.
Origination fee income decreased due to a decline in the average
balance of loans receivable, net, as noted above. Origination
fees as a percentage of the principal balance of the loans
originated was 41.7% during the nine months ended
September 30, 2010 compared to 42.6% for the same period in
2009.
Gain on Forgiveness of Debt. Gain on
forgiveness of debt was $7.0 million for the nine months
ended September 30, 2010 compared to $14.9 million for
the same period in 2009, a decrease of $7.9 million, or
53%. 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 18 loans out of 119
loans financed in this facility remained outstanding as of
September 30, 2010. The gains were substantially offset by
a loss on loan payoffs of the associated loans of
$5.2 million and $8.4 million during the nine months
ended September 30, 2010, and 2009, respectively.
Change in Fair Value of Life
Settlements. Change in fair value of life
settlements was $3.3 million for the nine months ended
September 30, 2010 compared to $0 for the same period in
2009. During the period, we acquired life insurance policies
that were relinquished to us upon default of loans secured by
such policies. We also acquired life insurance policies directly
from third parties. We initially record these investments at the
transaction price, which is the fair value of the policy for
those acquired upon relinquishment or the amount paid for
policies acquired for cash. We recorded change in fair value
gains of approximately $3.3 million during the nine months
ended September 30, 2010 due primarily to the evaluation of
the fair value of these policies at the end of the reporting
period. In several instances there were increases in fair value
due to declines in life expectancies of the insured.
Other. Other income was $2.1 million for
the nine months ended September 30, 2010 compared to $0 for
the same period in 2009. Other income arose primarily from gain
on sales of life settlements. This included sales of life
settlements for our own account as well as fees earned on life
settlements sold on behalf of others. We had no such sales of
life settlements during the nine months ended September 30,
2009.
Expenses
Interest Expense. Interest expense was
$21.3 million for the nine months ended September 30,
2010 compared to $20.9 million for the same period in 2009,
an increase of $481,000, or 2%. The increase in interest expense
is due to the accruing of interest on the loans payable balance
that continues to grow until the loans mature.
Provision for Losses on Loans
Receivable. Provision for losses on loans
receivable was $3.5 million for the nine months ended
September 30, 2010 compared to $6.7 million for the
same period in 2009, a decrease of $3.2 million, or 48%.
The decrease in the provision during the nine months ended
September 30, 2010 as compared to the nine months ended
September 30, 2009 was due to less 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 and a decrease in loan impairment related to new loans
originated, as there were fewer new loans originated during the
nine months ended September 30, 2010 as compared to
the same period in 2009. The loan impairment valuation was 5.8%
and 5.3% of the carrying value of the loan receivables as of
September 30, 2010 and 2009, respectively.
64
Loss on Loan Payoffs and Settlements,
Net. Loss on loan payoffs and settlements, net,
was $4.3 million for the nine months ended
September 30, 2010 compared to $11.3 million for the
same period in 2009, a decrease of $7.0 million, or 62%.
The decline in loss on loan payoffs and settlements, net, was
due to the reduction of loans written off in the first half of
2010 as a result of the Acorn settlement. In the first nine
months of 2010, we wrote off only 31 loans compared to 52 loans
written off in the first nine months of 2009. Excluding the
impact of the Acorn settlements, we had a gain on loan payoffs
and settlements, net, of $2.5 million and gain on loan
payoffs and settlements, net, of $1.7 million for the nine
months ended September 30, 2010, and 2009, respectively.
Amortization of Deferred Costs. Amortization
of deferred costs was $22.6 million during the nine months
ended September 30, 2010 as compared to $13.1 million
for the same period in 2009, an increase of $9.5 million,
or 73%. In connection with the full payoff of the Ableco credit
facility, we accelerated the expensing of the remaining
$5.4 million of associated deferred lender protection
insurance costs. We also accelerated the expensing of
approximately $980,000 of deferred costs related to fees
incurred in connection with the creation of the Ableco facility.
In total, lender protection insurance related costs accounted
for $19.4 million and $10.9 million of total
amortization of deferred costs during the nine months ended
September 30, 2010 and 2009, respectively.
Selling, General and Administrative
Expenses. Selling, general and administrative
expenses were $7.3 million for the nine months ended
September 30, 2010 compared to $11.2 million for the
same period in 2009, a decrease of $3.9 million, or 35%.
Bad debt decreased by $890,000, legal fees decreased by
$780,000, life expectancy evaluation expenses decreased by
$533,000 and other operating expenses decreased by $479,000.
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):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
30 days or less from loan funding
|
|
$
|
1,671
|
|
|
$
|
635
|
|
31 60 days from loan funding
|
|
|
|
|
|
|
85
|
|
61 90 days from loan funding
|
|
|
|
|
|
|
|
|
91 120 days from loan funding
|
|
|
|
|
|
|
|
|
Over 120 days from loan funding
|
|
|
1,851
|
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,522
|
|
|
$
|
922
|
|
Allowance for doubtful accounts
|
|
|
(1,706
|
)
|
|
|
(186
|
)
|
|
|
|
|
|
|
|
|
|
Agency fees receivable, net
|
|
$
|
1,816
|
|
|
$
|
736
|
|
An analysis of the changes in the allowance for doubtful
accounts for past due agency fees during the nine months ended
September 30, 2009 and 2010 is as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
Balance at beginning of period
|
|
$
|
769
|
|
|
$
|
120
|
|
Bad debt expense
|
|
|
957
|
|
|
|
66
|
|
Write-offs
|
|
|
(20
|
)
|
|
|
|
|
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
1,706
|
|
|
$
|
186
|
|
65
The allowance for doubtful accounts for past due agency fees as
of September 30, 2010 was $186,000 as compared to
$1.7 million as of September 30, 2009. The decrease
was primarily attributable to approximately $1.9 million of
write-offs recorded during the fourth quarter of 2009.
Throughout 2009, we continued to evaluate the collectability of
agency fee receivables and recorded approximately $957,000 in
bad debt expense during the nine months ended September 30,
2009. We made improvements to our collection process and in our
selection of agents which we work with and our allowance and bad
debt expense have returned to what we consider normal levels in
2010.
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 was 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 $189.1 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
was 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 was attributable to
the Acorn settlement. We wrote off 63 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,
66
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 was 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
was 5.5% and 5.6% of the carrying value of the loan receivables,
as of December 31, 2009 and 2008, respectively.
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 was largely due to the 63 loans written off as part of the
settlement with Acorn, resulting in losses of $10.2 million
during 2009, compared to 7 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
$1.9 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 value of these policies.
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 was due to an increase in the balance of the
costs that are being amortized, particularly costs related to
obtaining lender protection insurance, 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.
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
|
|
67
An analysis of the changes in the allowance for doubtful
accounts for past due agency fees during the years ended
December 31, 2008 and 2009 is as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
Balance at beginning of period
|
|
$
|
288
|
|
|
$
|
769
|
|
Bad debt expense
|
|
|
536
|
|
|
|
1,290
|
|
Write-offs
|
|
|
(55
|
)
|
|
|
(1,939
|
)
|
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
769
|
|
|
$
|
120
|
|
The decrease in the allowance for doubtful accounts for past due
agency fees is due to approximately $1.9 million of
write-offs during the fourth quarter of 2009. Throughout 2009,
we continued to evaluate the collectability of agency fee
receivables and recorded approximately $1.3 million in bad
debt expense during 2009. We made improvements to our collection
process and in our selection of agents which we work with and
our allowance returned to what we considered a normal level as
of December 31, 2009.
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 was due
to the 155% increase in the number of loans originated compared
to 2007.
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 was 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 was 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
$131.8 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
68
$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 was 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 5.6%
and 4.8% of the carrying value of the loan receivables as of
December 31, 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 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 $1.8 million
in 2008 on 7 loans financed under the Acorn facility when the
underlying policies lapsed.
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
was due to an increase in the balance of the costs that are
being amortized, particularly costs related to obtaining lender
protection insurance 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.
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
insurance 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
|
|
An analysis of the changes in the allowance for doubtful
accounts for past due agency fees during the years ended
December 31, 2007 and 2008 is as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Balance at beginning of period
|
|
|
|
|
|
$
|
288
|
|
Bad debt expense
|
|
$
|
288
|
|
|
|
536
|
|
Write-offs
|
|
|
|
|
|
|
(55
|
)
|
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
288
|
|
|
$
|
769
|
|
69
The increase in the allowance for doubtful accounts for past due
agency fees was due to significant increase in agency fee
revenue from approximately $24.5 million in 2007 to
$48.0 million in 2008 as a result of an increase in the
number of loans originated in 2008 as compared to 2007.
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,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of structured settlements
|
|
$
|
|
|
|
$
|
443
|
|
|
$
|
2,684
|
|
|
$
|
499
|
|
|
$
|
4,848
|
|
Interest income
|
|
|
8
|
|
|
|
574
|
|
|
|
1,212
|
|
|
|
417
|
|
|
|
313
|
|
Change in fair value of structured settlement receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,505
|
|
Other income
|
|
|
2
|
|
|
|
47
|
|
|
|
71
|
|
|
|
53
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
1,064
|
|
|
|
3,967
|
|
|
|
969
|
|
|
|
6,749
|
|
Direct segment expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A expenses
|
|
|
2,722
|
|
|
|
9,770
|
|
|
|
9,475
|
|
|
|
6,736
|
|
|
|
8,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating loss
|
|
$
|
(2,712
|
)
|
|
$
|
(8,706
|
)
|
|
$
|
(5,508
|
)
|
|
$
|
(5,767
|
)
|
|
$
|
(2,106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2010 Compared to Nine Months
Ended September 30, 2009
Income
Interest Income. Interest income was $313,000
for the nine months ended September 30, 2010 compared to
$417,000 for the same period in 2009, a decrease of $104,000, or
25%. The decrease was due to a lower average balance of
structured settlements held on our balance sheet during the nine
months ended September 30, 2010.
Gain on Sale of Structured Settlements. Gain
on sale of structured settlements was $4.8 million for the
nine months ended September 30, 2010 compared to $499,000
for the same period of 2009, an increase of $4.3 million or
860%. The increase was primarily due to sales of structured
settlements under our sale arrangement with Slate during the
second quarter of 2010. During the nine-month period ending
September 30, 2010, we sold 291 structured settlements for
a gain of $4.8 million, a 40% gain as a percentage of the
purchase price of $12.1 million.
Change in Fair Value of Structured Settlement
Receivables. Change in fair value of investments
and structured receivables was $1.5 million for the nine
months ended September 30, 2010 compared to $0 for the same
period in 2009. As of July 1, 2010, we elected to adopt the
fair value option, in accordance with ASC 825, Financial
Instruments, to record certain newly-acquired structured
settlements at fair value. For the three months ended
September 30, 2010, changes in the fair value of structured
settlements resulted in income of $1.5 million.
Expenses
Selling, General and Administrative
Expenses. Selling, general and administrative
expenses were $8.9 million for the nine months ended
September 30, 2010 compared to $6.7 million for the
same period of 2009, an increase of $2.1 million, or 31%.
This increase was due primarily to increased legal fees of
$679,000, which are largely attributable to securing a sale
arrangement and an increase in transaction expenses resulting
from increased originations during the period, which increased
to 385 in the nine months ended
70
September 30, 2010 from 275 during the same period in 2009.
Additionally, payroll increased by $800,000 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 was 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 25% gain as a
percentage of the purchase price compared to a 6% 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 was 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 was 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 was 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).
We believe that we have various funding alternatives for the
purchase of structured settlements. In addition to available
cash, on September 24, 2010 we entered into an arrangement
to provide us up to $50 million to finance the purchase of
structured settlements.
We are required to procure lender protection insurance 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 September 30, 2010, we
have borrowed $32.1 million with a weighted average
interest rate payable of
71
15.6%. As of September 30, 2010, we believe we have
approximately $31.3 million of additional borrowing
capacity under this credit facility based upon Cedar Lanes
subscriptions from its investors, however, our lender protection
insurer has informed us that it will cease providing us with
lender protection insurance under this credit facility upon the
earlier of (i) the completion of this offering or
(ii) December 31, 2010. As a result, we do not expect
to borrow under the Cedar Lane facility after the earlier of
(i) the completion of this offering or
(ii) December 31, 2010. This decision by our current
provider of lender protection insurance only addresses future
loans and does not impact our existing premium finance loans.
Lender protection insurance on our existing loans will continue
for the life of such loans. We plan to replace this source of
capital with the net proceeds from this offering to fund our
premium finance loans. Over time we expect that this will
significantly reduce our cost of financing and help to generate
higher returns for our shareholders.
We recently formed Imperial Settlements Financing 2010, LLC
(ISF 2010) as a subsidiary of Washington Square
Financial, LLC (Washington Square) to serve as a new
special purpose financing entity to allow us to borrow against
certain of our structured settlements and assignable annuities,
which we refer to as receivables, to provide us liquidity. On
September 24, 2010, we entered into an arrangement to
provide us up to $50 million in financing. Under this
arrangement, a subsidiary of Partner Re, Ltd. (the
noteholder) became the initial holder of ISF
2010s 8.39% Fixed Rate Asset Backed Variable Funding Note
issued under a master trust indenture and related indenture
supplement (collectively, the indenture) pursuant to
which the noteholder has committed to advance up to
$50 million upon the terms and conditions set forth in the
indenture. The note is secured by the receivables that ISF 2010
acquires from Washington Square from time to time. The note is
due and payable on or before January 1, 2057, but principal
and interest must be repaid pursuant to a schedule of fixed
payments from the receivables that secure the notes. The
arrangement generally has a concentration limit of 15% for the
providers of the receivables that secure the notes. As of
November 1, 2010, $0 was outstanding under this
arrangement. Wilmington Trust is the collateral trustee.
Our liquidity needs for the next two years are expected to be
met primarily through cash flows from operations, the net
proceeds from this offering and our $50 million commitment
to finance the purchase of structured settlements. 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 September 30,
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
|
|
$
|
4,215
|
|
|
$
|
1,258
|
|
|
$
|
5,473
|
|
CTL*
|
|
|
24
|
|
|
|
|
|
|
|
24
|
|
White Oak
|
|
|
26,179
|
|
|
|
8,539
|
|
|
|
34,718
|
|
Cedar Lane
|
|
|
32,121
|
|
|
|
3,014
|
|
|
|
35,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,539
|
|
|
|
12,811
|
|
|
|
75,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Promissory Notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Skarbonka
|
|
|
16,102
|
|
|
|
2,012
|
|
|
|
18,114
|
|
IMPEX
|
|
|
3,752
|
|
|
|
1,349
|
|
|
|
5,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,854
|
|
|
|
3,361
|
|
|
|
23,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
82,393
|
|
|
$
|
16,172
|
|
|
$
|
98,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Represents the balance remaining under our $30 million grid
promissory note in favor of CTL Holdings. See Description
of Certain Indebtedness. |
72
As of September 30, 2010, we had total debt outstanding of
$82.4 million of which $62.5 million, or 75.8%, 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. 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. We expect the lender protection insurance, subject
to its terms and conditions, to ensure 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 claims. If loans remaining under the
Acorn credit facility do not payoff at the time of maturity,
ABRG will assume possession of the insurance policies that
collateralize the premium finance loans and the related debt
will be forgiven.
The following table summarizes the maturities of principal and
interest outstanding as of September 30, 2010 for our
credit facilities used to fund premium finance loans (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Principal
|
|
|
Principal and Interest Payable
|
|
|
|
Average
|
|
|
and Interest
|
|
|
Three Months
|
|
|
Year
|
|
|
|
|
|
|
|
Credit
|
|
Interest
|
|
|
Outstanding
|
|
|
Ending
|
|
|
Ending
|
|
|
Year Ending
|
|
|
Year Ending
|
|
Facilities
|
|
Rate
|
|
|
at 9/30/2010
|
|
|
12/31/2010
|
|
|
12/31/2011
|
|
|
12/31/2012
|
|
|
12/31/2013
|
|
|
Acorn
|
|
|
14.5
|
%
|
|
$
|
5,473
|
|
|
$
|
5,473
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
CTL*
|
|
|
10.5
|
%
|
|
|
24
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
White Oak
|
|
|
21.5
|
%
|
|
|
34,718
|
|
|
|
8,106
|
|
|
|
26,612
|
|
|
|
|
|
|
|
|
|
Cedar Lane
|
|
|
15.6
|
%
|
|
|
35,135
|
|
|
|
2,675
|
|
|
|
17,657
|
|
|
|
14,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
|
|
$
|
75,350
|
|
|
$
|
16,278
|
|
|
$
|
44,269
|
|
|
$
|
14,803
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average interest rate
|
|
|
|
|
|
|
18.00
|
%
|
|
|
18.60
|
%
|
|
|
21.50
|
%
|
|
|
15.60
|
%
|
|
|
|
|
|
|
|
* |
|
Represents the balance remaining under our $30 million grid
promissory note in favor of CTL Holdings. See Description
of Certain Indebtedness. |
As of September 30, 2010, we also had promissory notes
payable, which have been used to fund corporate expenses and
operations, with principal outstanding of $19.9 million and
accrued interest of $3.4 million. These notes are
structured as revolving credit facilities and the amount
outstanding will rise and fall over time as we draw and repay.
The promissory notes carry an interest rate of 16.5% and mature
in August 2011. Unlike the credit facilities described in the
table above, borrowings under these revolving facilities are
with full recourse to us. These promissory notes will be
converted into shares of our common stock in connection with our
corporate conversion prior to this offering so they will not be
a source of liquidity for us after our corporate conversion. See
Corporate Conversion.
See Description of Certain Indebtedness for a
description of the principal terms of our outstanding credit
facilities and promissory notes.
73
Premium
Finance Loan Maturities
The following table summarizes the maturities of our premium
finance loans outstanding as of September 30, 2010 (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal and Origination Fee Maturity
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
Total at
|
|
Ending
|
|
Year Ending
|
|
Year Ending
|
|
Year Ending
|
|
|
9/30/2010
|
|
12/31/2010
|
|
12/31/2011
|
|
12/31/2012
|
|
12/31/2013
|
|
Carrying value (loan principal balance, accreted origination
fees, and accrued interest receivable)
|
|
$
|
149,222
|
|
|
$
|
51,418
|
|
|
$
|
76,733
|
|
|
$
|
20,524
|
|
|
$
|
547
|
|
Weighted average per annum interest rate
|
|
|
11.50
|
%
|
|
|
11.20
|
%
|
|
|
11.00
|
%
|
|
|
10.30
|
%
|
|
|
10.90
|
%
|
Per annum origination fee as a percentage of the principal
balance of the loan at origination
|
|
|
17.90
|
%
|
|
|
16.30
|
%
|
|
|
18.50
|
%
|
|
|
17.60
|
%
|
|
|
8.30
|
%
|
Cash
Flows
The following table summarizes our cash flows from operating,
investing and financing activities for the years ended
December 31, 2007, 2008, and 2009 and the nine months ended
September 30, 2009 and 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
Statement of Cash Flows Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(4,804
|
)
|
|
$
|
(2,157
|
)
|
|
$
|
(12,631
|
)
|
|
$
|
(12,037
|
)
|
|
$
|
(31,763
|
)
|
Investing activities
|
|
|
(39,410
|
)
|
|
|
(102,814
|
)
|
|
|
(29,315
|
)
|
|
|
(28,857
|
)
|
|
|
96,720
|
|
Financing activities
|
|
|
40,358
|
|
|
|
111,119
|
|
|
|
50,193
|
|
|
|
33,716
|
|
|
|
(77,163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
$
|
(3,856
|
)
|
|
$
|
6,148
|
|
|
$
|
8,247
|
|
|
$
|
(7,178
|
)
|
|
$
|
(12,206
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities
Net cash used in operating activities for the nine months ended
September 30, 2010 was $31.8 million, an increase of
$19.7 million from $12.0 million of cash used in
operating activities for the same period in 2009. This increase
was primarily due to an $11.1 million decrease in agency
fee income and a decrease of $4.7 million in the change in
agency fees receivable due to lower collections of receivables
during the period.
Net cash used in operating activities in 2009 was
$12.6 million, an increase of $10.4 million from
$2.2 million of cash used in operating activities in 2008.
This increase was primarily due to a $21.9 million decrease
in agency fee income due to our origination of fewer premium
finance loans, and a $12.3 million increase in cash paid
for interest during the period due to an increase in loan
maturities during the period. These increases were partially
offset by a decrease in selling, general and administrative
expenses of $10.3 million due primarily to efforts to
reduce operating expenses, and certain changes in assets on our
balance sheet due to timing of cash receipts including a
decrease in the change in agency fees receivable of
$9.6 million and a decrease in the change in structured
settlement receivables of $5.4 million.
Net cash used in operating activities in 2008 was
$2.2 million, a decrease of $2.6 million from
$4.8 million of cash used in operating activities in 2007.
This decrease was primarily due to a $23.5 million increase
in agency fee income as we originated more loans. This increase
was partially offset by a
74
$17.2 million increase in selling, general and
administrative expenses as we grew our business, as discussed
further above, and excluding increases of $1.1 million
related non-cash charges for depreciation and provision for
doubtful accounts, and an increase of $7.5 million in cash
paid for interest.
Investing
Activities
Net cash provided by investing activities for the nine months
ended September 30, 2010 was $96.7 million, an
increase of $125.6 million from $28.9 million of cash
used in investing activities for the same period in 2009. The
increase was primarily due to a $96.5 million increase in
proceeds from loan payoffs, offset by a $27.6 million
decrease in cash used to purchase notes receivables.
Net cash used in investing activities in 2009 was
$29.3 million, a decrease of $73.5 million from
$102.8 million of cash used in investing activities in
2008. The decrease was primarily due to a $43.2 million decrease
in cash used for origination of loans receivable and a
$32.6 million increase in proceeds from loan payoffs.
Net cash used in investing activities in 2008 was
$102.8 million, an increase of $63.4 million from
$39.4 million of cash used in investing activities in 2007.
The increase was primarily due to a $69.8 million increase
in cash used for origination of loans receivable.
Financing
Activities
Net cash used in financing activities for the nine months ended
September 30, 2010 was $77.2 million, an increase of
$110.9 million from $33.7 million of cash provided by
investing activities for the same period in 2009. The increase
was primarily due to an increase of $129.4 million in
repayments of borrowings from credit facilities and affiliates,
net of additional borrowings, partially offset by a decrease of
$10.7 million in payment of financing fees and an increase
of $10.0 million in member contributions.
Net cash provided by financing activities in 2009 was
$50.2 million, a decrease of $60.9 million from
$111.1 million of cash provided by financing activities in
2008. The decrease was primarily due to a decrease of
$73.1 million in borrowing from credit facilities and
affiliates, net of repayments, partially offset by a decrease of
$5.4 million in payment of financing fees and an increase
of $4.7 million in member contributions.
Net cash provided by financing activities in 2008 was
$111.1 million, an increase of $70.7 million from
$40.4 million of cash provided by financing activities in
2007. The increase was primarily due to a increase of
$98.4 million in borrowing from credit facilities and
affiliates, net of repayments, partially offset by an increase
of $21.9 million in payment of financing fees and a
decrease of $6.8 million in member contributions.
Contractual
Obligations
The following table summarizes our contractual obligations as of
December 31, 2009 (in thousands):
Contractual
Obligations
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Due in Less
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Due
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Due
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More than
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Total
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than 1 Year
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1-3 Years
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3-5 Years
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|
|
5 Years
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|
|
Credit facilities(1)
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$
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193,498
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|
$
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40,152
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|
|
$
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153,346
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|
$
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|
$
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|
|
Expected interest payments(2)
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37,389
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27,874
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9,515
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|
|
|
|
|
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Operating leases
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1,222
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|
|
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550
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|
|
|
672
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Total
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$
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232,109
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$
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68,576
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$
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163,533
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$
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$
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(1) |
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Credit facilities include principal outstanding related to
facilities that were used to fund premium finance loans. This
excludes promissory notes, which had principal of
$37.6 million outstanding as of |
75
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|
December 31, 2009, and which will be converted to shares of
our common stock upon the closing of this offering. |
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(2) |
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Expected interest payments are calculated based on outstanding
balances of our credit facilities as of December 31, 2009
and assumes repayment of principal and interest at the maturity
date of the related premium finance loan, which may be prior to
the final maturity of the credit facility. |
Inflation
Our assets and liabilities are, and will be in the future,
interest-rate sensitive in nature. As a result, interest rates
may influence our performance far more than does inflation.
Changes in interest rates do not necessarily correlate with
inflation or changes in inflation rates. We do not believe that
inflation had any material impact on our results of operations
in the periods presented in our financial statements.
Off-Balance
Sheet Arrangements
There are no off-balance sheet arrangements between us and any
other entity that have, or are reasonably likely to have, a
current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources
that is material to stockholders.
Quantitative
and Qualitative Disclosure about Market Risk
Market risk is the risk of potential economic loss principally
arising from adverse changes in the fair value of financial
instruments. The major components of market risk are credit
risk, interest rate risk and foreign currency risk. We have no
exposure in our operations to foreign currency risk.
Credit
Risk
In our premium finance business segment, with respect to life
insurance policies collateralizing our loans or that we acquire
upon relinquishment, credit risk consists primarily of the
potential loss arising from adverse changes in the fair value of
the policy and, to a lesser extent, the financial condition of
the issuers of the life insurance policies. We manage our credit
risk related to these life insurance policy issuers by generally
only funding premium finance loans for policies issued by
companies that have a credit rating of at least A+
by Standard & Poors, at least A3 by
Moodys, at least A by A.M. Best Company
or at least A+ by Fitch. At September 30, 2010,
95.6% of our loan collateral was for policies issued by
companies rated investment grade (credit ratings of
AAA to BBB-) by Standard &
Poors.
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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September 30,
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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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74.6
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%
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91.2
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%
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|
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86.8
|
%
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|
|
94.6
|
%
|
Percentage of total loans receivable balance covered by lender
protection insurance
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|
|
|
|
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78.6
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%
|
|
|
93.1
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%
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90.0
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%
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95.2
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%
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For the loans that had lender protection insurance and that
matured during the nine months ended September 30, 2010 and
the year ended December 31, 2009, the lender protection
insurance claims paid to us were 94.6% and 93.5%, respectively,
of the carrying value of the insured loans.
Our premium finance loans are originated with borrowers residing
throughout the United States. We do not believe there are any
geographic concentrations of loans that would cause them to be
similarly impacted by economic or other conditions. However,
there is concentration in the life insurance carriers that
issued these life insurance policies that serve as our loan
collateral. The following table provides information about the
life
76
insurance issuer concentrations that exceed 10% of total death
benefit and 10% of outstanding loan balance as of
September 30, 2010:
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Percentage of
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Percentage of
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Total Outstanding
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Total Death
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Moodys
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S&P
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Carrier
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Loan Balance
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Benefit
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Rating
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Rating
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Lincoln National Life Insurance Company
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25.7
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%
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29.1
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%
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A2
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AA-
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Lincoln Benefit Life Company
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10.5
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%
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A1
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AA-
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Principal Life Insurance Company
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10.4
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%
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Aa3
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A
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As of September 1, 2010, our lender protection insurer,
Lexington, had a financial strength rating of A+
with a negative outlook by Standard & Poors.
In our structured settlements segment, credit risk consists of
the potential loss arising principally from adverse changes in
the financial condition of the issuers of the annuities that
arise from a structured settlement. Although certain purchasers
of structured settlements may require higher credit ratings, we
manage our credit risk related to the obligors of our structured
settlements by generally requiring that they have a credit
rating of A− or better by Standard &
Poors. The risk of default in our structured settlement
portfolio is mitigated by the relatively short period of time
that we hold structured settlements as investments. We have not
experienced any credit losses in this segment and we believe
such risk is minimal.
Interest
Rate Risk
In our premium finance segment, most of our credit facilities
and promissory notes provide us with fixed-rate financing.
Therefore, fluctuations in interest rates currently have minimal
impact, if any, on our interest expense under these facilities.
However, increases in interest rates may impact the rates at
which we are able to obtain financing in the future.
We earn revenue from interest charged on loans, loan origination
fees and fees from referring agents. We receive interest income
that accrues over the life of the premium finance loan and is
due at maturity. 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. In addition, our premium finance loans have a floor
interest rate 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. While
the floor and cap interest rates mitigate our exposure to
changes in interest rates, our interest income may nonetheless
be impacted by changes in interest rates. Origination fees are
fixed and are therefore not subject to changes based on
movements in interest rates, although we do charge interest on
origination fees.
As of September 30, 2010, we owned investments in life
settlements (life insurance policies) in the amount of
$8.8 million. A rise in interest rates could potentially
have an adverse impact on the sale price if we were to sell some
or all of these assets. There are several factors that affect
the market value of life settlements (life insurance policies),
including the age and health of the insured, investors
demand, available liquidity in the marketplace, duration and
longevity of the policy, and interest rates. We currently do not
view the risk of a decline in the sale price of life settlements
(life insurance policies) due to normal changes in interest
rates as a material risk.
In our structured settlements segment, our profitability is
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
forward purchase arrangements, 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 an adverse effect on our
yield on structured settlement transactions.
77
BUSINESS
Overview
We are a specialty finance company 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 at the time of the financing and
purchasing structured settlements backed by annuities issued by
insurance companies or their affiliates generally rated
A1 or better by Moodys Investors Services or
A− or better by Standard & Poors.
We were founded in December 2006 as a Florida limited liability
company.
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 2007, the United States capital
markets have experienced extensive distress and dislocation due
to the global economic downturn and credit crisis. Lenders in
the premium finance market generally exited the market or
increased their lending rates and required more assurances such
as additional collateral support and third-party guarantees. As
a result, our financing cost for a premium finance transaction
increased significantly. For the nine months ended
September 30, 2010, our financing cost was approximately
31.1% per annum of the principal balance of the loans compared
to 14.5% per annum for the twelve months ended December 31,
2007. Following this offering, we intend to fund our future
premium finance transactions with the proceeds of this offering
instead of debt financing. This will reduce or eliminate our
debt financing and lender protection insurance costs over time.
We expect that the elimination of the use of lender protection
insurance will provide us with the option to retain for
investment a number of policies relinquished to us upon default
as well as the opportunity to fund more loans due to the
elimination of the coverage limitations imposed by the lender
protection insurer that reduced the number of otherwise viable
premium finance transactions that we could complete. When we
retain for investment life insurance policies relinquished to us
upon default, we will ultimately receive the death benefit of
the policy upon the death of the insured provided that we
continue to pay the premiums required to keep the policy in
force and the policy is not contested. When we retain a life
insurance policy that is relinquished to us upon default, we are
responsible for paying all premiums necessary to keep the policy
in force. As a result, the management of our future cash flows
is vital to our future success.
We underwrite premium finance loans with the view that we may
eventually own the underlying insurance policy. Following this
offering, this underwriting practice will be reflected in our
cash management practices since we anticipate loans that do not
have lender protection insurance may require us to fund premiums
after a loan matures.
Consequently, not all of the proceeds directed to our premium
finance business will be used to make new premium finance loans.
A portion of the proceeds will be used to pay premiums on
policies that are relinquished to us upon default and a portion
of the proceeds will be maintained as a reserve in case our
assumptions about life expectancies and ongoing premium
obligations are inaccurate. Until our operating performance,
including our receipt of death benefits from life insurance
policies that we own, indicates a different allocation of our
available cash is appropriate, we expect to use approximately
50% to 70% of cash available for our premium finance business to
fund new loans in the fiscal year of this offering and then
lesser percentages in the years thereafter, and expect to use
the remainder of such available cash to fund future premiums and
maintain reserves. In order to maintain sufficient liquidity to
make ongoing premium payments that could exceed the premiums
expected prior to death of the insureds, we plan to stagger the
funding of new loans. We expect to have the ability to curtail
new loan origination activity to preserve cash in the event we
did not experience the mortality of our insureds at the expected
frequency. We also perform stochastic modeling to further assess
the probability that mortality expectations are consistent with
cash reserves.
We will continue to calculate the value of the loans based on
the fair value of the life insurance policies underlying the
loans in accordance with our fair value methodology. See
Managements Discussion and Analysis
Critical Accounting Policies Ownership of Life
Insurance Policies.
In our structured settlement business, we purchase structured
settlements at a discounted rate and sell such assets to, or
finance such assets with, third parties. For the nine months
ended September 30, 2010 and
78
year ended December 31, 2009, we purchased structured
settlements at weighted average discount rates of 19.3% and
16.3%, respectively.
During the nine months ended September 30, 2010 and the
year ended December 31, 2009, we had revenue of
$60.4 million and $96.6 million, respectively, and a
net loss of $16.4 million and $8.6 million,
respectively. During the nine months ended September 30,
2010 and the year ended December 31, 2009, 88.8% and 95.9%,
respectively, of our revenue was generated from our premium
finance segment and 11.2% and 4.1%, respectively, of our revenue
was generated from our structured settlement segment. As of
September 30, 2010, we had total assets of
$181.0 million. For our financial results by segment, see
Managements Discussion and Analysis of Financial Condition
and Results of Operations Segment Information,
Note 15 in the Notes to the Consolidated and Combined
Audited Financial Statements and Note 9 in the Notes to the
Consolidated and Combined Unaudited Financial Statements.
Premium
Finance Business
Overview
A premium finance transaction is a transaction in which a life
insurance policyholder obtains a loan, predominately through an
irrevocable life insurance trust established by the insured, to
pay insurance premiums for a fixed period of time, allowing a
policyholder to maintain coverage under the policy without
having to make premium payments during the term of the loan. A
premium finance transaction also benefits life insurance agents
by preventing a life insurance policy from lapsing, which could
require the agent to repay a portion of the commission earned in
connection with the issuance of the policy. 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 September 30, 2010, the average principal balance of
the loans we have originated since inception is approximately
$213,000. 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. We
currently make loans to borrowers in 9 states with the
insureds residing in any of the 50 states.
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 as follows:
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Agency 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 nine months ended September 30,
2010 and year ended December 31, 2009 were 49.9% and 50.6%,
respectively. These agency fees are charged when the loan is
funded and collected on average within 47 days thereafter.
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Interest Income 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. In addition, our premium finance
loans have a floor interest rate 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
September 30, 2010 and December 31, 2009 was 11.3% and
10.9%, respectively.
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Origination Fees 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 nine ended September 30, 2010
and the year ended December 31, 2009 were 41.7% and 44.7%,
respectively.
|
79
The policyholder is not required to make any payment on the loan
until maturity. At the end of the loan term, the policyholder
either repays the loan in full (including all interest and fees)
or, defaults under the loan. In the event of default, subject to
policy terms and conditions, 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
September 30, 2010, 94.6% of our outstanding loans have
collateral whose value is insured. With the net proceeds from
this offering, we expect to have the option 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.
Our premium finance borrowers are currently referred to us
through independent insurance agents and brokers licensed under
state law. Prior to January 2009, we originated premium finance
loans that were sold by life insurance agents that we employed.
Once a potential borrower has been referred to us, we assess the
borrowers creditworthiness and the fair value of the life
insurance policy to serve as collateral. We further support our
loan origination efforts with specialized sales teams that guide
agents and brokers through the lending process. Our transaction
processing and servicing processes and systems allow us to
process a high volume of applications while maintaining the
ability to structure complex negotiated transactions and apply
our strict underwriting standards. Our existing technology
infrastructure allows us to service our current loan volume
efficiently, and is designed to permit us to service the
increased loan volume that we expect to generate with the net
proceeds of this offering.
To help protect against fraud and to seek profitable
transactions, we perform extensive underwriting before entering
into a transaction. We use strict loan underwriting guidelines
that, among other things, require:
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the use of third party medical underwriters to evaluate the
medical condition and life expectancy of each insured;
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the use of actuarial tables published by the American Society of
Actuaries;
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the subject policy be issued by an insurance company with a high
financial strength rating from A.M. Best,
Standard & Poors or other recognized rating
agencies;
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a review of each loan for compliance with our internal
guidelines as well as applicable laws and regulations; and
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the use of a personal guaranty to further support our
underwriting efforts to protect against losses resulting from
the issuing insurance company voiding a policy due to fraud or
misrepresentations in the application process to obtain the life
insurance policy.
|
We believe that our underwriting guidelines have been effective
in mitigating fraud-related risks.
We require the borrower to have at least one independent
professional trustee to insure that the trust follows its
obligation with respect to administration of the trusts
activities as set forth in the trust instrument as well as the
premium finance loan agreement and related documents. If the
borrower does not have such a trustee, we require the borrower
to amend the trust documentation and appoint an independent
professional trustee that will be responsible for ensuring the
life insurance premiums are paid to the life insurance company.
The professional trustee administers the process of making the
premium payments to the life insurance company as they come due
from funds the trust holds in escrow for payment of such
premiums. We also work with the trustee to monitor the status of
the life insurance policy in order to ensure that it remains in
force, alert the trustee when premium payments are due and to
help ensure that premiums paid are correctly applied by the
issuing life insurance company.
When we approve a premium finance loan, the borrower executes a
loan agreement and other related documents, which contain
representations, warranties and guaranties from the insured and
representations and warranties from the referring agent or
broker in regard to the accuracy of the information provided to
us and the issuing life insurance company. The funds required to
cover all of the premiums due during the term of a
80
premium finance loan are wired up front directly to the
borrower. We do not fund loans that are in excess of the
premiums previously paid and future premiums that are scheduled
to come due on the policy during the term of the loan. In order
to determine the amount of premiums previously paid by the
borrower so as to be certain we are not advancing more then
future and past premiums, we require a statement from the
issuing life insurance company showing the amount of prior
payments.
Sources
of Revenue
During the nine months ended September 30, 2010 and the
year ended December 31, 2009, 88.8% and 95.9%,
respectively, of our revenue was generated from our premium
finance segment. We generate revenue from our premium finance
business in the form of agency fees from the referring insurance
agent, interest income and origination fees as follows:
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|
Agency fees. For each premium finance loan,
Imperial Life and Annuity Services, LLC (Imperial Life and
Annuity), a licensed insurance agency and our wholly-owned
subsidiary, receives an agency fee from the referring insurance
agent. Imperial Life and Annuity typically charges and receives
agency fees from the referring agent within approximately
47 days of our funding the loan. Referring insurance agents
pay the agency fees to Imperial Life and Annuity for the due
diligence performed in underwriting the premium finance
transaction. The amount of the agency fee paid by a referring
life insurance agent is negotiated with the referring agents
based on a number of factors, including the size of the policy
and the amount of premiums on the policy. Agency fees as a
percentage of the principal balance of the loans originated
during the nine months ended September 30, 2010 and
year ended December 31, 2009 were 49.9% and 50.6%,
respectively. During the nine months ended September 30,
2010 and the year ended December 31, 2009, 17.0% and 28.2%,
respectively, of our revenue from our premium finance segment
was from agency fees.
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Interest income. We receive interest income
that accrues over the life of the loan and is due upon the date
of maturity or upon repayment of the loan. The interest rates
are typically floating rates that are calculated at the
one-month LIBOR rate plus an applicable margin. In addition, our
premium finance loans have a floor interest rate 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
September 30, 2010 and December 31, 2009 were 11.3%
and 10.9%, respectively. During the nine months ended
September 30, 2010 and the year ended December 31,
2009, 28.9% and 21.9%, respectively, of our revenue from our
premium finance segment was from interest income.
|
|
|
|
Origination fees. We charge a loan origination
fee on each premium finance loan we fund. The origination fee
accrues over the term of the loan and is due upon the date of
maturity or upon repayment of the loan. For the nine months
ended September 30, 2010 and for the twelve months ended
December 31, 2009, origination fees as a percentage of the
principal balance of the loans originated during such periods
were 41.7% and 44.7%, respectively. During the nine months ended
September 30, 2010 and the year ended December 31,
2009, the per annum origination fee as a percentage of the
principal balance of the loans originated was 21.0% and 19.2%,
respectively. During the nine months ended September 30,
2010 and the year ended December 31, 2009, 31.2% and 32.2%,
respectively, of our revenue from our premium finance segment
was from origination fees.
|
We are repaid our principal as well as our origination fees and
interest income in one of the following three ways:
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|
|
|
|
the borrower or family member of the insured repays the loan
upon maturity;
|
|
|
|
the insured passes away prior to the loan maturity and the death
benefit is used to repay the loan, with the remainder being paid
to the borrower for the benefit of its beneficiaries; or
|
81
|
|
|
|
|
upon default, we typically enter into an agreement with the
borrower and the life insurance policy beneficiaries whereby
they relinquish ownership of the life insurance policy and all
interests therein to us in exchange for a release of the
obligation to pay amounts due. Following relinquishment, if the
loan is insured pursuant to lender protection insurance, then,
subject to terms and conditions of the lender protection
insurance policy, our lender protection insurer has the right to
direct control or take beneficial ownership of the life
insurance policy and we are paid a claim equal to the insured
value of the life insurance policy serving as collateral
underlying the loan. If the loan is not insured, we seek to sell
the life insurance policy in the secondary market. In the
future, with the net proceeds from this offering, we expect to
have the option to retain for investment a number of the
policies relinquished to us upon a default. When we retain for
investment policies relinquished to us upon default, we will
receive the death benefit of the policy upon the death of the
insured as long as we continue to pay the premiums required to
keep the policy in force and the policy is not contested.
|
Since we were founded in December 2006, nearly all of our loan
maturities have occurred during a time of dislocations in the
capital markets and, as a result, our historical methods of
repayment may not be indicative of future performance. The
following table shows the method of repayment for loans maturing
during the following periods:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
Repaid by the borrower
|
|
|
0
|
|
|
|
2
|
|
|
|
12
|
|
|
|
12
|
|
|
|
3
|
|
Repaid from death benefit during term of loan
|
|
|
0
|
|
|
|
3
|
|
|
|
2
|
|
|
|
1
|
|
|
|
1
|
|
Repaid from lender protection insurance claim
|
|
|
0
|
|
|
|
4
|
|
|
|
56
|
|
|
|
25
|
|
|
|
320
|
|
Cost
of Financing
In our premium finance business, we have historically relied
heavily on debt financing. Debt financing has become
prohibitively expensive for our business. Every credit facility
we have entered into since December 2007 for our premium finance
business has required us to obtain lender protection insurance
for each loan originated under such credit facility. This
coverage provides insurance on the value of the underlying life
insurance policy serving as collateral underlying the loan
should our borrower default. Subject to the terms and conditions
of the lender protection insurance policy, in the event of a
payment default by the borrower, our lender protection insurer
has the right to direct control or take beneficial ownership of
the life insurance policy and we are paid a claim equal to the
insured value of the life insurance policy serving as collateral
underlying the loan. We also pay a premium to a contingent
lender protection insurer for each of our loans originated under
our White Oak and Cedar Lane credit facilities. Our cost for
contingent lender protection insurance has been included as part
of our cost for lender protection insurance. The cost for lender
protection insurance has ranged from 8.5% to 11% per annum of
the principal balance of the loan. While lender protection
insurance provides us with liquidity, it prevents us from
realizing the appreciation, if any, of the underlying life
insurance policy when a borrower relinquishes ownership of such
life insurance policy upon default. As of September 30,
2010, 94.6% of our outstanding premium finance loans have
collateral whose value is insured. By procuring lender
protection insurance, we have been able to borrow at interest
rates ranging from 14% to 22%.
The following table shows our total financing cost per annum as
a percentage of the principal balance of the loans originated
during the following periods:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
Lender protection insurance cost
|
|
|
|
|
|
|
8.5
|
%
|
|
|
10.9
|
%
|
|
|
11.0
|
%
|
|
|
10.4
|
%
|
Interest cost and other lender funding charges under credit
facilities
|
|
|
14.5
|
%
|
|
|
13.7
|
%
|
|
|
18.2
|
%
|
|
|
18.5
|
%
|
|
|
20.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total financing cost
|
|
|
14.5
|
%
|
|
|
22.2
|
%
|
|
|
29.1
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%
|
|
|
29.5
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%
|
|
|
31.1
|
%
|
82
With the net proceeds of this offering, we intend to change our
premium finance business model to rely on equity financing
instead of debt financing for new premium finance loans.
As of September 30, 2010, we had total debt outstanding of
$82.4 million of which $58.3 million, or 70.8%, is
owed by our special purpose entities which were established for
the purpose of obtaining debt financing to fund premium finance
loans. This debt is collateralized by life insurance policies
underlying premium finance loans that we have assigned, or in
which we have sold participation rights, to our special purpose
entities. We have obtained lender protection insurance for
nearly all of these premium finance loans. Debt owned by these
special purpose entities is generally non-recourse to us and our
other subsidiaries except to the extent of our equity interest
in these special purpose entities. One exception is the Cedar
Lane facility where we have guaranteed 5% of the applicable
special purpose entitys obligations. 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.
As of September 30, 2010, our promissory notes had an
outstanding principal balance of $19.9 million or 24.1% of
our total outstanding debt and $3.4 million of related
accrued interest. These promissory notes will be converted into
shares of our common stock upon the closing of this offering.
The following table shows our total outstanding debt by facility
as well as the portion of the outstanding debt that is secured
by life insurance policies and for which we have purchased
lender protection insurance in dollars and that is non-recourse
beyond our special purpose entities (dollars in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Credit Facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acorn
|
|
$
|
22,440
|
|
|
$
|
9,179
|
|
|
$
|
4,215
|
|
CTL*
|
|
|
60,581
|
|
|
|
49,744
|
|
|
|
24
|
|
White Oak
|
|
|
|
|
|
|
26,595
|
|
|
|
26,179
|
|
Cedar Lane
|
|
|
|
|
|
|
11,806
|
|
|
|
32,121
|
|
Ableco
|
|
|
71,594
|
|
|
|
96,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total credit facilities
|
|
|
154,615
|
|
|
|
193,498
|
|
|
|
62,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Promissory Notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amalgamated
|
|
|
9,060
|
|
|
|
9,627
|
|
|
|
|
|
Skarbonka
|
|
|
|
|
|
|
17,615
|
|
|
|
16,102
|
|
IMPEX
|
|
|
|
|
|
|
10,324
|
|
|
|
3,752
|
|
Jasmund LTD.
|
|
|
6,600
|
|
|
|
|
|
|
|
|
|
Cedarmount Trading
|
|
|
8,900
|
|
|
|
|
|
|
|
|
|
Red Oak
|
|
|
2,512
|
|
|
|
|
|
|
|
|
|
IFS Holdings
|
|
|
1,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total promissory notes
|
|
|
28,847
|
|
|
|
37,566
|
|
|
|
19,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt
|
|
$
|
183,462
|
|
|
$
|
231,064
|
|
|
$
|
82,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Total Debt secured by loans with lender protection
insurance that are non-recourse to Imperial
|
|
$
|
132,175
|
|
|
$
|
184,319
|
|
|
$
|
58,324
|
|
% of Total Debt secured by loans with lender protection
insurance that are non-recourse to Imperial
|
|
|
72.0
|
%
|
|
|
79.8
|
%
|
|
|
70.8
|
%
|
83
|
|
|
* |
|
Represents the balance remaining under our $30 million grid
promissory note in favor of CTL Holdings. See Description
of Certain Indebtedness. |
In 2009 and 2008, we financed subsequent premiums to keep the
underlying insurance policies in force on 485 and 284 loans
receivable with aggregate principal balances of approximately
$15.7 million and $8.4 million, respectively. These
balances included approximately $6.2 million and
$3.4 million of loans financed from our credit facilities
and approximately $9.5 million and $5.0 million of
loans financed with cash received from affiliated companies,
respectively. During 2009 and 2008, 110 and 10 of our loans were
paid off with proceeds totaling approximately $36.1 million
and $3.5 million, respectively, of which approximately
$27.9 million and $3.0 million was for the principal
of the loans and approximately $3.8 million and $476,000
was for accrued interest, respectively. The loans had aggregate
discount balances at the time of repayment totaling
approximately $60,000 and $391,000, respectively. We recognized
losses of approximately $73,000 and $441,000 on these
transactions, respectively.
Premium
Finance Transaction Process
A typical premium finance transaction is generally completed in
accordance with the steps outlined below:
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|
|
Step 1: Borrower Independently Obtains a Life Insurance Policy
|
|
An individual, who desires to obtain
life insurance, forms an irrevocable trust, generally for estate
planning purposes.
|
|
|
An application to obtain a life
insurance policy is submitted to an insurance company by the
individual so that, when issued, the policy will be owned by the
irrevocable trust whose beneficiaries have insurable interests
in the life of the insured (primarily family members of the
insured).
|
|
|
A life insurance policy is issued to the
irrevocable trust and the life insurance agent/broker involved
in the issuance of the policy receives a commission from the
issuing life insurance agency.
|
|
|
|
Step 2: Sales
|
|
An independent insurance agent/broker
contacts us regarding potentially obtaining a premium finance
loan on behalf of a borrower.
|
|
|
We work with referring agents/brokers to
obtain necessary information regarding the life insurance
policy, such as life expectancy reports, medical evaluations and
other information relevant to the valuation of the life
insurance policy.
|
|
|
Our sales team manages the process and
is the point of contact for the referring agent/broker.
|
|
|
|
Step 3: Loan Underwriting
|
|
We analyze the information we obtain
regarding the life insurance policy using our proprietary models
to determine its fair value.
|
|
|
We review all potential transactions
for adherence to our internal guidelines, such as proof of
payment of prior premiums from the borrowers own funds and
rating of the issuing life insurance company and other items.
|
|
|
If the loan is to be insured with lender
protection insurance, we consult with our lender protection
insurer to determine the insured value of the loan, which is the
amount we would receive in the event that we filed a lender
protection insurance claim, and to provide the insurer with any
information necessary for their own underwriting process.
|
84
|
|
|
Step 4: Legal/Compliance
|
|
We conduct an independent review of
each file and verify that compliance, legal and fair value
assessment processes have been completed in order to approve a
loan.
|
|
|
We complete a compliance checklist of
over 200 items by multiple departments.
|
|
|
We maintain and distribute documents
necessary for compliance with HIPAA, legal and internal
standards.
|
|
|
We confirm that the borrower has at
least one independent professional trustee to ensure all future
premiums will be paid. If there is no independent professional
trustee, we require the borrower to amend the trust
documentation to appoint one.
|
Step 5: Funding
|
|
When we approve a premium finance loan,
the borrower executes a loan agreement and other related
documents, which contain representations, warranties and
guaranties from the insured and representations and warranties
from the referring agent/broker in regard to the accuracy of the
information provided to us and the issuing life insurance
company.
|
|
|
Once the loan documentation is properly
executed, we fund all funds directly to the borrower in one
initial wire transfer. Loan proceeds advanced are never in
excess of the premiums previously paid and future premiums that
are scheduled to come due on the policy during the term of the
loan nor do we pay any fees or other compensation to the
borrower.
|
|
|
Upon funding, we charge the referring
agent/broker an agency fee that is collected on average within
47 days thereafter. The agency fee is charged to the
referring agent/broker and is not part of the premium finance
loan.
|
|
|
The borrower is not required to make any
payment on the loan until maturity. At the end of the loan term,
the borrower is required to repay the loan in full (including
all interest and origination fees that accrue over the life of
the loan).
|
|
|
We update our files with completed
documentation.
|
|
|
Prior to this offering, we relied upon
debt financing to fund our loans. Using debt financing, we
would receive funds under a credit facility prior to our wiring
funds to the borrower. If the loan had lender protection
insurance, we would pay the cost of the lender protection
insurance premium to the lender protection insurer
contemporaneously with the funding of the loan. With the net
proceeds of this offering, we intend to fund new premium finance
loans without relying on debt financing.
|
|
|
|
Step 6: Servicing
|
|
We prepare and monitor internal and
external reporting to accounting, lenders and others.
|
|
|
We verify premiums are paid and
correctly applied.
|
|
|
We update files for medical history and
ongoing premium payments.
|
85
|
|
|
Step 7: Loan Maturity
|
|
We send a notice to the borrower and
trustee 60 days and 30 days prior to the maturity of a
loan to provide advance notice that the premium finance loan is
coming due.
|
|
|
Upon maturity of a loan, we are either
(i) repaid our principal as well as our origination fees and
interest income or (ii) the loan goes into default due to
nonpayment by the borrower.
|
|
|
If the loan goes into default, we ask
the borrower to liquidate the policy. To assist a borrower with
its liquidation of a policy, we will introduce the borrower to
potential buyers as well as to life settlement brokers. We
receive no commission or fee for these introductions or any sale
of the policy by the borrower. The liquidation proceeds are
used to pay off our loan, including accrued interest and
origination fees, and the balance is retained by the borrower.
If the liquidation proceeds of a policy are less than the amount
to pay off the loan, the borrower seeks our consent in order to
liquidate the policy. We may either approve the sale of the
policy for less than the amount due on the loan or may decide to
take control of the policy. If the loan is covered by lender
protection insurance, then the lender protection insurer, rather
than us, must consent to the liquidation of the policy if the
liquidation proceeds are going to be less than the loans
insured value.
|
|
|
If the borrower is unable to liquidate
the policy, we obtain all rights to the policy as lender.
|
|
|
If the loan has lender protection
insurance, then, subject to the terms and conditions of the
lender protection insurance policy, our lender protection
insurer has the right to direct control or take beneficial
ownership of the life insurance policy and we are paid a claim
equal to the insured value of the life insurance policy serving
as collateral underlying the loan. Following the payment of the
insurance claim, we have no further economic or beneficial
interest in the policy.
|
|
|
If the loan is not insured, we seek to
sell the life insurance policy in the secondary market. In the
future, with the net proceeds from this offering, we expect to
have the option to retain for investment a number of the
policies relinquished to us upon a default. When we retain for
investment life insurance policies relinquished to us upon
default, we will receive the death benefit of the policy upon
the death of the insured as long as we continue to pay the
premiums required to keep the policy in force and the policy is
not contested.
|
Underwriting
Procedures
We consider and analyze a variety of factors in evaluating each
potential premium financing transaction. Our underwriting
procedures require that the policyholder provide documentation
confirming that the policyholder has a bona fide insurable
interest in the life of the insured. We will not finance
premiums for a policyholder if we determine that the
policyholder has been paid or promised an inducement at any
time. Since June 2008, our guidelines have required that every
borrower have an existing, in-force, life insurance policy and
provide proof of at least one prior premium payments from their
own funds prior to our funding of a loan. With respect to our
premium finance transactions in which we loan money for premiums
previously paid by the policyholder, we do not fund loans with
proceeds to the policyholder that are in excess of the premiums
previously paid and future premiums due on the policy.
Typically,
15-20% of
the principal balance of the loan is for premiums already paid
by the policyholder and
80-85% is
for future premiums. Each applicant is required to sign an
unconditional personal guaranty as to various matters related to
the funding of the loan, including as to
86
the accuracy of the information provided in the life insurance
policy application, as further support for our underwriting
procedures, including our assessment of whether the applicant is
engaged in a STOLI transaction. In the event of a default under
the guaranty, the guarantor guarantees the payment of all
outstanding principal and accrued and unpaid interest under the
premium finance loan, any early termination fees, costs and
expenses payable (including, but not limited to, reasonable
attorneys fees) as well as any and all costs and expenses
to enforce the guaranty (including, but not limited to,
reasonable attorneys fees). To date, we have never
collected on a personal guaranty. Our in-house staff attorneys
review every application and assess the validity of the
applicants insurable interest in the life of the insured
before a loan is funded. We believe our business practices are
designed to minimize the risk of our financing any STOLI policy.
Our underwriting procedures require that we use third-party
medical underwriters to evaluate the medical condition and life
expectancy of each insured. We only enter into transactions
which meet certain credit and financial standards, including
concentration limits for carrier credit, medical impairment and
expected mortality. We use medical reviews from at least two and
as many as four different medical underwriters and then we
select a conservative view of the insureds health
the healthiest outlook. These procedures reduce our
risk that the insureds life span is longer than expected.
Since our inception in December 2006, we have received over
24,000 life expectancy evaluations. These evaluations have
provided us with an extensive exposure to each of the major life
expectancy underwriters. Using those evaluations for comparative
analysis, we assess which underwriters are generally the most
conservative and which are most aggressive, and what biases each
underwriter employs in their analysis. In our experience,
certain underwriters trend more conservatively for certain
sexes, some more for certain ages, and different underwriters
have different levels of risk assigned to different medical
conditions. We record this data for every underwriting
evaluation we receive. We identify not only underwriter biases
and sensitivities, strengths and weaknesses but also trends over
time, which allows us to better identify the fair value of life
insurance policies using our proprietary models.
We review potential premium finance transactions for the
creditworthiness and ratings of each insurance carrier. In
addition to our internal review of the creditworthiness of an
insurance carrier, our general guideline for approval of an
insurance carrier is a rating of at least A+ by
Standard & Poors, at least A3 by
Moodys, at least A by A.M. Best Company
or at least A+ by Fitch. The issuing insurance
carriers claims paying ability generally must satisfy the
applicable ratings of at least two of the foregoing rating
agencies as a condition to our funding a premium finance loan.
However, based upon our own credit determination, we may provide
financing for life insurance policies issued by domestic
insurers that are unrated but have a highly-rated parent or
affiliate as well as unrated foreign insurers. As of the date of
this prospectus, we have not experienced any insurer default.
Servicing
Our servicing department administers all necessary premium
payments, loan satisfaction and policy relinquishment processes.
They maintain contact with insureds, trustees and referring
agents or brokers to obtain current information on policy
status. Our servicing department also updates the medical
histories of insureds. They request updated medical records from
physicians and also contact each insured to obtain updated
health information. During the term of a loan, when our
servicing department learns of a material health impairment, key
personnel in our sales team and management are alerted and our
records are updated accordingly.
With respect to the administration of the policy relinquishment
processes, our servicing department sends notices approximately
sixty and thirty days prior to the loan maturity date alerting
the borrower that the loan is maturing. In the event of a
default, our servicing department will send an agreement to the
borrower and its beneficiaries requesting that they agree to
relinquish ownership of the policy and all interests therein to
us in exchange for a release of the obligation to pay amounts
due. If the loan goes into default, we ask the borrower to
liquidate the policy. To assist a borrower with its liquidation
of a policy, we will introduce the borrower to potential buyers
as well as to life settlement brokers. We receive no commission
or fee for these introductions or any sale of the policy by the
borrower. The liquidation proceeds are used to pay off our loan,
including
87
accrued interest and origination fees, and the balance is
retained by the borrower. If the liquidation proceeds of a
policy are less than the amount to pay off the loan, the
borrower seeks our consent in order to liquidate the policy. We
may either approve the sale of the policy for less than the
amount due on the loan or may decide to take control of the
policy. If the loan is covered by lender protection insurance,
then the lender protection insurer, rather than us, must consent
to the liquidation of the policy if the liquidation proceeds are
going to be less than the loans insured value. If we are
unable to come to an agreement with the borrower regarding the
relinquishment of the policy, we may enforce our security
interests in the beneficial interests in the trust that owns the
policy pursuant to which we can exercise control over the trust
holding the policy in order to direct disposition of the policy.
Our
Proprietary Systems and Processes
We have developed proprietary systems and processes that allow
us to, among other things:
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Store all of our data electronically, including policy
information, premium schedules, past mortality experience,
underwriting information, mortality probabilities and other data;
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Use our electronic data to generate financial models and
analysis for an individual or group of life insurance policies;
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Create internal and external reports of our underwriting and
policy valuation;
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Perform a comparative analysis of life insurance products based
on a particular insureds age, gender, health information
and life expectancy; and
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Identify the fair value of the life insurance policies that
underlie our premium finance loans.
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We use a customized application service provider to capture data
and manage process flow that is frequently updated by the vendor
and avoids the restraints of legacy systems. This system
captures all the information necessary to manage, document,
report and analyze the sales, underwriting, compliance, funding
and servicing components of the premium finance business without
the need for a large information technology staff. Compliance
reviews have been implemented into our system enabling us to
quickly verify the compliance status of every transaction we
process.
There are numerous insurance companies that meet our ratings
guidelines that offer life insurance to high net worth seniors.
Each of these companies offers a variety of different life
insurance policies with different features and limitations for
the insured. New policy types are introduced regularly and
existing policy types are modified for new applicants. We have
developed proprietary models to assist us in analyzing the fair
value of a life insurance policy. In order to determine which
policies we believe are the most valuable, we analyze the legal
and financial terms of each policy and product type, as well as
the health, sex and age of the insured. Based on these and other
inputs, we calculate loan balances, policy values and summaries
of the cash flows and yields of a potential transaction.
Furthermore, we are able to run these models based on life
expectancies from a number of different medical underwriters,
which allows us to determine the collateral value we believe
exists in a policy. Furthermore, the life expectancy evaluations
we receive allow us to assess which underwriters are generally
the most conservative and which are most aggressive, as well as
the biases each underwriter employs in their analysis. These
models allow us to evaluate and immediately rank and score the
policies based on value and volatility, which, in turn, allows
us to determine which premium finance transactions provide us
with the best value.
Our proprietary models also allow us to enter data to produce
the minimum premium schedule that is required to keep the death
benefit in force
year-over-year
until policy maturity. This minimizes the cash outflows required
to pay premiums on a policy. Our premium optimizer model takes
into account the complex aspects of the individual product
structure, such as no-lapse guarantees, policy endorsements,
sub-accounts
and shadow accounts.
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Structured
Settlements Business
Overview
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 to a structured settlement purchaser
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.
According to Standard & Poors, the structured
settlement industry has been in existence for more than
20 years. In 2008, Standard & Poors
estimated that there were more than 500,000 structured
settlement contracts outstanding in the United States with an
average maturity of 15 years. However, Standard &
Poors has estimated that only one quarter of these
settlements are likely available for purchase.
We use national television marketing to generate in-bound
telephone and internet inquiries. As of September 30, 2010,
we had a database of over 30,000 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, which is one of our key expense metrics,
has decreased.
As of September 30, 2010, we had approximately
50 employees dedicated to the purchase or underwriting of
structured settlements. Our purchasing team is trained to work
with a prospective client to review the transaction
documentation and to assess a clients needs. Our
underwriting group is responsible for reviewing all proposed
purchases and performing a detailed analysis of the associated
documentation. We have also developed a cost-effective
nationwide network of law firms to represent us in the required
court approval process for structured settlements. As of
September 30, 2010, the average cycle time starting from
submission of the paper work to funding the transaction was
70 days. This cycle includes the evaluation and structuring
of the transaction, an economic review, pricing and coordination
of the court process. Our underwriting procedures and process
timeline for structured settlement transactions are described
below.
We believe that we have various funding alternatives for the
purchase of structured settlements. On September 24, 2010,
we entered into an arrangement to provide us up to
$50 million to finance the purchase of structured
settlements. 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. We will continue to evaluate
alternative financing arrangements, which could include securing
a warehouse line of credit that would allow us to purchase
structured settlements.
Marketing
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 have a primary target
market consisting of individuals 18 to 49 years of age with
middle class income or lower.
Our primary marketing medium, which has been developed and
refined by our experienced management team, is nationwide direct
response television marketing to solicit inbound calls to our
call center. Our direct response television campaign consists of
nationally placed 15 or 30 second commercials that air during
our call center hours on several syndicated and cable networks.
Each advertisement campaign is assigned a unique toll free
number so we can track the effectiveness of each marketing slot.
Typically, we experience a high volume of calls immediately
after we air a television advertisement. Therefore, we attempt
to space our
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advertisements to maintain a steady stream of inbound calls that
our purchasing team is able to process. In addition to our
direct response television campaign, we buy marketing on
Internet search engines such as Google and Yahoo. These
advertisements produce leads with contact information that are
quickly routed to our purchasing staff for
follow-up.
We also send letters monthly to most of the leads in our
database containing information about us and our services.
We use our software to efficiently capture all inbound calls. We
have built a proprietary database of clients and prospective
clients. As of September 30, 2010, we had a database of
over 30,000 structured settlement leads. Since inception, we
have purchased a total of 171 structured settlements from
existing customers in repeat transactions. The percentage of
repeat transactions has grown from 5% in the three months ended
March 31, 2008 to 34% in the three months ended
September 30, 2010. Therefore, we believe our database
provides us with a strong pipeline of potential purchasing
opportunities with low incremental acquisition cost. When our
call center staff is not answering inbound calls, they call
contacts in the database to generate business. As our database
and pool of customers grow, we expect to complete more
transactions and our cost of marketing per transaction should
decrease. We have made a significant investment to obtain the
information for our database and believe it would be
time-consuming and expensive for a competitor to replicate.
The following table shows the number of transactions we have
completed and our average marketing cost per transaction
(dollars in thousands):
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Nine Months Ended
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Year Ended December 31,
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September 30,
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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 originated
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10
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276
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396
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275
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385
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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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12.7
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$
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9.2
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We believe this cost per transaction will continue to trend down
over time. Additionally, our transactions with repeat customers
are more profitable than with new customers due to the reduction
in transaction costs. As our database grows, it provides more
purchasing opportunities. The following table shows the number
and percentage of our total structured settlement transactions
completed with repeat customers for the three-month periods
indicated:
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Three Months Ended
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Mar 31,
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June 30,
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Sep 30,
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Dec 31,
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Mar 31,
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June 30,
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Sep 30,
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Dec 31,
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Mar 31,
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June 30,
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Sep 30,
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2008
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2008
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2008
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2008
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2009
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2009
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2009
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2009
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2010
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2010
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2010
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Number of transactions with repeat customers
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2
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4
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5
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12
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10
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12
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10
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20
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23
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25
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48
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Percentage of total transactions
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5
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%
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7
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%
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7
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%
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11
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%
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13
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%
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13
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%
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10
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%
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17
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%
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22
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%
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18
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%
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34
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%
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As we grow our experienced sales staff, we intend to air more
television advertisements to increase our volume of inbound
calls. We believe that there are a substantial number of
broadcasts viewed by our primary target market, which presents
an opportunity to expand our marketing efforts. We also plan to
expand our Internet marketing.
Funding
We believe that we have various funding options for the purchase
of structured settlements.
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Strategic sale. We have sold pools of
structured settlements we acquired in the past. We recently
entered into an arrangement to provide us up to $50 million
to finance the purchase of structured settlements. We also have
other parties to whom we have sold structured settlement assets
in the past and to whom we believe we can sell such assets in
the future.
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Balance sheet. We may purchase structured
settlements and we may hold them for investment, servicing the
asset and collecting the periodic payments or we may finance
such assets through our $50 million arrangement described
above. Although we have not used debt financing to fund the cost
of acquisition of structured settlements as of the date of this
offering, we will continue to evaluate alternative financing
arrangements such as a warehouse line of credit.
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Sources
of Revenue
During the nine months ended September 30, 2010 and the
year ended December 31, 2009, 11.2% and 4.1%, respectively,
of our revenue was generated from our structured settlement
segment. Most of our revenue from structured settlements
currently is earned from the sale of structured settlements that
we originate. When we sell assets, the revenue consists of the
difference between the sale proceeds and our purchase price. If
we retain structured settlements on our balance sheet, we earn
interest income over the life of the asset based on the discount
rate used to determine the purchase price. During the nine
months ended September 30, 2010 and the year ended
December 31, 2009, 94.1% and 67.7%, respectively, of our
revenue from our structured settlement segment was generated
from the sale of structured settlements and mark-to-market
adjustments and 4.6% and 30.6%, respectively, was generated from
interest income. The following table shows the number of
transactions we have originated, the face value of undiscounted
future payments purchased, the weighted average purchase
discount rate, the number of transactions sold and the weighted
average discount rate at which the assets were sold (dollars in
thousands):
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Nine Months
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Ended
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Year Ended December 31,
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September 30,
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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 originated
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10
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276
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396
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275
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385
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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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20,460
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$
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33,713
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Weighted average purchase 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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16.1
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%
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19.3
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Number of transactions sold
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226
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439
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96
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291
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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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%
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11.1
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%
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9.1
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%
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The discount rate at which we acquire structured settlements
payment has increased from 2007 to 2010. As our purchasing team
gains experience, we are able to improve duration and yield
objectives. Furthermore, as we complete more transactions with
repeat customers who are familiar with members of our purchasing
team, these transactions are driven more by relationship than
price.
Underwriting
Procedures, Transaction Timeline and Process
Our underwriting team is responsible for reviewing all proposed
structured settlement transactions and performing a detailed
analysis of the transaction documentation. The team identifies
any statutory requirements, as well as any issues that could
affect the structured settlement receivables, such as liens,
judgments or bankruptcy filings. The team confirms the existence
and value of the structured settlement receivables, that the
purchase will conform to our established internal credit
guidelines, that all applicable statutory requirements are
complied with and confirms that the asset is free from
encumbrances. In addition, the underwriting team administers the
transaction from the creation of the transaction documentation
through the court approval process, and then approves a
transaction for funding.
Each structured settlement transaction requires a court order
approving the transaction. The individual court hearings are
administered by a team of outside attorneys that we have
selected and developed relationships with. Outside counsel are
able to access our origination systems via a secure portal to
update records, creating process efficiencies.
91
As of September 30, 2010, our typical structured settlement
transaction was completed in an average of 70 days from the
date of initial contact by the client, as illustrated by the
sample timeline below:
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Day 1
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The individual who has a structured settlement contacts us
seeking a lump-sum payment based on the settlement.
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Day 14
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After analyzing the settlement structure, we offer to provide a
lump-sum amount to the individual in exchange for a set number
of payments.
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Day 40
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We complete our underwriting process. Upon satisfactory review,
our counsel secures a court date and notifies interested
parties, including any beneficiaries, owners and issuers of the
pending transaction.
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Day 69
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A court hearing is held and the judge approves or denies the
motion to sell and assign to us the agreed-upon portion of the
individuals structured settlement.
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Day 70
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Final review of the court-approved transaction takes place and
we fund the payment to the individual.
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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. As a result of the
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. Market conditions have forced
us, and we believe many of our competitors, 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 many of our competitors experienced financial
distress.
Every credit facility we have entered into since December 2007
for our premium finance business required us to obtain lender
protection insurance for each loan originated under such credit
facility. This coverage provides insurance on the value of the
life insurance policy serving as collateral underlying the loan
should our borrower default. After a payment default by the
borrower, subject to the terms and conditions of the lender
protection insurance policy, our lender protection insurer has
the right to direct control or take beneficial ownership of the
life insurance policy and we are paid a claim equal to the
insured value of such policy. 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
September 30, 2010, 94.6% of our outstanding premium
finance loans have collateral whose value is insured. Currently,
we are only originating premium finance loans with lender
protection insurance. Following the earlier of the completion of
this offering or December 31, 2010, we do not expect to
originate 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
allows us to access debt financing to support our premium
finance business, the costs substantially reduced our
profitability. Additionally, there are coverage limitations
related to our use of lender protection insurance that 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 cost of debt financing and lender protection
insurance and the limitations on loan origination that our
lender protection insurance imposes.
Structured Settlements. During 2008 and 2009,
market conditions required us to offer discount rates as high as
12% in order to complete sales of portfolios 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
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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.
Our
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 significant scalability to permit our structured settlement
business to continue to grow efficiently.
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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 personnel from our premium
finance and structured settlement businesses are experienced in
these specialized businesses and, in many cases, have more than
half a decade of experience working together at Imperial and at
prior employers. Our management team has significant experience
operating in this highly regulated industry.
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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 Group
Inc., 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.
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Business
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 and generate net profits:
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Reduce or eliminate the use of debt financing in our premium
finance business. The capital generated by this
offering will enable us to fund our premium finance loans and
provide us with the option to retain our 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
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debt financing for our premium finance transactions and
structured settlement purchases only if such financing is
available on attractive terms.
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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 originate more premium finance loans
because we will not be subject to coverage limitations imposed
by our lender protection insurer that have reduced the number of
loans that we can originate.
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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, we expect that our sales staff
will be able to increase our transaction volume due in part to
repeat transactions from our existing customers.
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Regulation
Premium
Financing Transactions
The making, enforcement and collection of premium finance loans
is subject to extensive regulation. These 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 disclosures to insureds;
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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; or
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allow imposition of potentially significant penalties on lenders
for violations of that jurisdictions insurance premium
finance laws.
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Furthermore, the enforcement and collection of premium finance
loans may be directly or indirectly affected by the laws and
regulations applicable to the life insurance policies that
collateralize the premium finance loans. We are also subject to
various state and federal regulations governing lending,
including usury laws. In addition, our premium financing
programs must comply with insurable interest, usury, life
settlement, life finance, rebating, or other insurance and
consumer protection laws.
The sale and solicitation of life insurance is highly regulated
by the laws and regulations of individual states and other
applicable jurisdictions. The purchase of a policy directly from
a policy owner, which is referred to as a life settlement, is a
business we are currently able to conduct in 36 states;
however, as of the date of this offering, we have not engaged in
the business of purchasing policies directly from policy owners.
Regulation of life settlements (life insurance policies) is done
on a state-by-state basis. We currently maintain licenses to
transact life settlements (life insurance policies) in 24 of the
38 states that currently require a license. A majority of
the state laws and regulations concerning life settlements (life
insurance policies) are based on the Model Act and Model
Regulation adopted by the National Association of Insurance
Commissioners (NAIC) and the Model Act adopted by the National
Conference of Insurance Legislators (NCOIL). The NAIC and NCOIL
models include provisions which relate to: (i) provider and
broker licensing requirements; (ii) reporting requirements;
(iii) required contract provisions and disclosures;
(iv) privacy requirements; (v) fraud prevention
measures such as STOLI; (vi) criminal and civil remedies;
(vii) marketing requirements; (viii) the time period
in which policies cannot be sold in life settlement
transactions; and (viii) other rules governing the
relationship between policy owners, insured persons, insurer,
and others.
Traditionally, the U.S. federal government has not directly
regulated the insurance business. Congress recently passed and
the President signed into law the Dodd-Frank Act, providing for
the enhanced federal supervision of financial institutions,
including insurance companies in certain circumstances, and
financial activities that represent a systemic risk to financial
stability of the U.S. economy. Under the Dodd-Frank Act,
the Federal Insurance Office will be established within the
U.S. Treasury Department to monitor all aspects of the
insurance industry. The
94
director of the Federal Insurance Office will have the ability
to recommend that an insurance company or insurance holding
company be subject to heightened prudential standards by the
Federal Reserve, if it is determined that financial distress at
the company could pose a threat to the financial stability of
the U.S. economy. Notwithstanding the creation of the
Federal Insurance Office, the Dodd-Frank Act provides that state
insurance regulators will remain the primary regulatory
authority over insurance and expressly withholds from the
Federal Insurance Office and the U.S. Treasury Department
general supervisory or regulatory authority over the business of
insurance.
Structured
Settlements
Each structured settlement transaction requires a court order
approving the transaction. These transfer petitions,
as they are known, are brought pursuant to specific, state
structured settlement protection acts (SSPAs). These SSPAs
vary somewhat but generally require (i) that the seller
receive detailed disclosure statements regarding all key
transaction terms; (ii) a three to ten day
cooling-off period before which the seller cannot
sign an agreement to sell their structured settlement payments;
and (iii) a requirement that the entire transaction be
reviewed and approved by a state court judge. The parties to the
transaction must satisfy the court that the proposed transfer is
in the best interests of the seller, taking into consideration
the welfare and support of his dependants. Once an order
approving the sale is issued, the payments from the annuity
provider are made directly to the purchaser of the structured
settlement pursuant to the terms of the order.
The National Association of Settlement Purchasers and the
National Structured Settlements Trade Association are the
principal structured settlement trade organizations which have
developed and promoted model legislation regarding transfers of
settlements, referred to as the Structured Settlement Model Act.
While most SSPAs are similar to the Structured Settlement Model
Act, any SSPA may place fewer or additional affirmative
obligations (such as notice or additional disclosure
requirements) on the purchaser, require more extensive or less
extensive findings on the part of the court issuing the transfer
order, contain additional prohibitions on the actions of the
purchaser or the provisions of a settlement purchase agreement,
have different effective dates, require shorter or longer notice
periods and otherwise vary in substance from the Model Act.
Competition
Premium
Finance
The market for premium finance is very competitive. A
policyholder has a number of ways to pay insurance premiums
which include using available cash, borrowing from traditional
lenders such as banks, credit unions and finance companies, as
well as more specialized premium finance companies like us.
Competition among premium finance companies is based upon many
factors, including price, valuation of the underlying insurance
policy, underwriting practices, marketing and referrals. Our
principal competitors within the premium finance industry are
CMS, Inc., Insurative Premium Finance Ltd. and Madison One as
well as smaller, less well known companies. Life settlement
companies that compete with our premium finance business by
providing liquidity to policyholders through the sale of life
insurance policies include Coventry First LLC, Life Partners
Holdings, Inc. and ViaSource Funding Group, LLC, as well as
smaller, less well known companies. It is possible that a number
of our competitors may be substantially larger and may have
greater market share and capital resources than we have.
Structured
Settlements
There are a number of competitors in the structured settlement
market. Competition in the structured settlement market is
primarily based upon marketing, referrals and quality of
customer service. Based on our industry knowledge, we believe
that we are one of the larger acquirers of structured
settlements in the United States. Our main competitors are
J.G. Wentworth & Company, Inc., Peachtree Settlement
Funding, Novation Capital LLC (a subsidiary of Encore Financial
Services), Settlement Capital and Stone Street Capital.
Pre-Settlement
Funding Business
As a result of our marketing for structured settlements, we
receive a number of inquiries from plaintiffs, whose cases have
not yet settled or otherwise been disposed of, seeking
pre-settlement funding. Pre-settlement
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funding provides personal injury plaintiffs with a payment in
exchange for an assignment of a portion of the proceeds of their
pending case. Accident victims often are unable to work for a
prolonged period of time and therefore incur high expenses which
they find difficult to meet. As a result, accident victims often
look to obtain prompt settlements. The pre-settlement funding
payment provides a victim and their attorney with the
flexibility to continue litigating a case by satisfying the
victims immediate need for funds.
In May 2010, we entered an agreement with Plaintiff Funding
Holding, Inc., doing business under the name LawCash. Pursuant
to this agreement, we are required to exclusively forward all
pre-settlement leads to LawCash, which will screen leads,
provide underwriting, funding, servicing and collection
services. At funding for a transaction generated from one of our
leads, we receive commission of 5% of the actual funded amount.
Upon repayment by the plaintiff, we receive 25% of the net
profit, which is the difference between (a) the funding
advance and LawCashs costs and (b) the payoff amount,
from LawCash. The typical transaction size is approximately
$2,500. The agreement with LawCash is terminable by either party
for convenience upon 30 days prior written notice.
Employees
As of September 30, 2010, we had 118 employees, each
of which are employed by Imperial Finance & Trading,
LLC. None of our employees is subject to any collective
bargaining agreement. We believe that our employee relations are
good.
Properties
Our principal executive offices are located at 701 Park of
Commerce Boulevard, Boca Raton, Florida 33487 and consist of
approximately 21,000 square feet of leased office space. We
also lease office space in Atlanta, Georgia and Chicago,
Illinois, which consist of approximately 176 and 150 square
feet, respectively. We consider our facilities to be adequate
for our current operations.
Legal
Proceedings
We are party to various legal proceedings which arise in the
ordinary course of business. We are not currently a party to any
litigation nor, to our knowledge, is any litigation threatened
against us, the outcome of which would, in our judgment based on
information currently available to us, have a material adverse
effect on our financial position or results of operations.
However, we are also involved in a dispute with our former
general counsel whom we terminated on November 8, 2010.
This former general counsel has notified us, in accordance with
a mediation and arbitration agreement entered into at the time
of her employment, that, pursuant to an offer letter entered
into at the time of her employment, she believes she is entitled
to an option to purchase up to 8% of our total options pool and
that she is entitled to pursue civil causes of action against us
and Messrs. Mitchell and Neuman for: (i) fraudulent
inducement; (ii) promissory estoppel/detrimental reliance;
(iii) fraudulent misrepresentation; (iv) negligent
misrepresentation; (v) breach of contract; (vi) breach
of the covenant of good faith and fair dealing;
(vii) wrongful termination; (viii) violation of the
Equal Pay Act; (ix) violation of the Whistle Blower
Statute; and (x) various claims before the Equal Employment
Opportunity Commission. She alleges that she suffered harm,
among other reasons, because a lower paid male employee was
provided an employment agreement with a greater severance
benefit and that she never received an option award as
referenced in her offer letter. We have reviewed the claim and
believe that it is without merit. We intend to vigorously defend
against any action that the employee may initiate. We are
currently unable to estimate the amount of potential damages, if
any, we could incur as a result of this claim and have not
established a reserve for this litigation.
Change of
Control and Stock Ownership Restrictions
One of our subsidiaries, Imperial Life Settlements, LLC, a
Delaware limited liability company, is licensed as a viatical
settlement provider and 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
acquire, directly or indirectly, 10% or more of the voting
securities of a viatical settlement provider or its controlling
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company, including Imperial Holdings, Inc., without the written
approval of the Florida Office of Insurance Regulation.
Accordingly, any person who acquires, directly or indirectly,
10% or more of our common stock, must first file an application
to acquire control of a specialty insurer or its controlling
company, and obtain the prior written approval of the Florida
Office of Insurance Regulation.
The Florida Office of Insurance Regulation may disapprove an
acquisition of beneficial ownership 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 regulatory approval, it may order that person to cease
the acquisition and divest itself of any shares of such voting
securities which may have been acquired in violation of the
applicable Florida law. 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 stock is made in violation of the
applicable Florida law would render the further transaction of
its business hazardous to its customers, creditors, shareholders
or the public.
97
MANAGEMENT
Directors
and Executive Officers
The table below provides information about our directors,
director nominees and executive officers. Each director serves
for a one-year term and until their successors are elected and
qualified. Executive officers serve at the request of our board
of directors.
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Name
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Age
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Position
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Executive Officers and Directors
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Antony Mitchell
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45
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Chief Executive Officer and Chair of the Board
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Jonathan Neuman
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37
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President, Chief Operating Officer and Director
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Richard S. OConnell, Jr.
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53
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Chief Financial Officer and Chief Credit Officer
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Deborah Benaim
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54
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Senior Vice President
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David A. Buzen
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51
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Director Nominee
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Michael A. Crow
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48
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Director Nominee
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Walter M. Higgins III
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66
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Director Nominee
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Robert Rosenberg
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65
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Director Nominee
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A. Penn Hill Wyrough
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52
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Director Nominee
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Our chief executive officer, Antony Mitchell, will be the chair
of the board. Our board will designate an independent director
as our lead director who will preside at meetings of the
independent directors.
Set forth below is a brief description of the business
experience of each of our directors, director nominees and
executive officers, as well as certain specific experiences,
qualifications and skills that led to the board of
directors conclusion that each of the directors and
director nominees set forth below is qualified to serve as a
director.
Antony
Mitchell
Antony Mitchell has served as our Chief Executive Officer since
February of 2007. He is also one of our equity members. He has
16 years of experience in the financial industry. From 2001
to January 2007, Mr. Mitchell was Chief Operating Officer
and Executive Director of Peach Holdings, Inc., a holding
company which, through its subsidiaries, was a provider of
specialty factoring services. Peach Holdings completed its
initial public offering in March 2006 and was subsequently
acquired by an affiliate of Credit Suisse in November 2006.
Mr. Mitchell was also a co-founder of Singer Asset Finance
Company, LLC (a subsidiary of Enhance Financial Services Group
Inc.) in 1993, which was involved in acquiring insurance
policies, structured settlements and other types of receivables.
From June 2009 to November 2009, Mr. Mitchell was the Chair
of the Board of Polaris Geothermal, Inc., which focuses on the
generation of renewable energy projects. Since 2007,
Mr. Mitchell has served as a director (being appointed
Executive Chair of the Board of Directors in 2010) of Ram Power,
a renewable energy company listed on the Toronto Stock Exchange.
Mr. Mitchells qualifications to serve on our board
include his knowledge of our company and the specialty finance
industry and his years of leadership at our company.
Jonathan
Neuman
Jonathan Neuman has been our President and Chief Operating
Officer since our inception in December 2006. He is also one of
our equity members. From June 2004 to December 2006,
Mr. Neuman was a director of the Life Finance business unit
of Peach Holdings, Inc. From 2000 to June 2004, he was President
of CY Financial, a premium finance company. From 2001 to
2004 he acted as a consultant for Tandem Management Group, Inc.,
a management consulting firm. From 1999 to 2000, Mr. Neuman
was the head of lottery receivables originations for Singer
Asset Finance Company, LLC (a subsidiary of Enhance Financial
Services Group Inc.). From 1997 to 1999, he was Chief Operating
Officer of Peoples Lottery, a purchaser of
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lottery prize receivables. Mr. Neumans qualifications
to serve on our board include his knowledge of our company and
the specialty finance industry and his years of leadership at
our company.
Richard
OConnell, Jr.
Richard OConnell has served as our Chief Financial Officer
since April 2010 and Chief Credit Officer since January 2010.
Prior to joining us, from January 2006 through December 2009,
Mr. OConnell was Chief Financial Officer of
RapidAdvance, LLC, a specialty finance company. From January
2002 through September 2005 he served as Chief Operating Officer
of Insurent Agency Corporation, a provider of tenant rent
guaranties to apartment REITs. From March 2000 to December 2001,
Mr. OConnell acted as Securitization Consultant to
the Industrial Bank of Japan. From January 1999 to January 2000,
Mr. OConnell served as president of Telomere Capital,
LLC, a life settlement company. From December 1988 through 1998
he served in various senior capacities for Enhance Financial
Services Group Inc., including as President and Chief Operating
Officer of Singer Asset Finance Company (a subsidiary of Enhance
Financial Services Group Inc.) from
1995-1998
and Senior Vice President and Treasurer of Enhance Financial
Services Group Inc. from 1989 through 1996.
Deborah
Benaim
Deborah Benaim has been our Senior Vice President since July
2007. Since September 2009, she has headed our structured
settlement division. From 2003 to March 2007, Ms. Benaim
was a Managing Director of the Structured Settlement Division of
Peach Holdings, Inc. From 1991 to 2002, she was a Senior Vice
President of Grand Court Lifestyles, Inc., which was involved in
the servicing, acquisition, development, and management of
senior living communities. Ms. Benaim is also a former vice
president of the energy futures trading division at
Prudential-Bache Securities NYC and former Executive Board
member of the American Senior Housing Association.
David
A. Buzen
David A. Buzen is expected to become a member of our board of
directors upon the consummation of this offering. Mr. Buzen
is the President and Chief Financial Officer of CIFG Holding
Inc., an international financial guaranty insurance group, which
he joined in August 2009. From April 2007 through August 2009,
prior to joining CIFG Holding Inc., Mr. Buzen was the Chief
Financial Officer of Churchill Financial LLC, a commercial
finance and asset management company which provides senior and
subordinate financing to middle market companies. From April
2005 through April 2007, he was a Managing Director of the New
York branch of Depfa Bank plc., a public finance bank which in
October 2007 became a wholly-owned subsidiary of Hypo Real
Estate Bank. Mr. Buzen serves as Chairman of the Business
School Deans Advisory Board and a member of the Advisory
Council for the Center for Financial Markets Regulation at the
University of Albany. We believe that Mr. Buzen is
qualified to serve on our board of directors because of his
long-term experience in the financial guaranty insurance
industry.
Michael
A. Crow
Michael A. Crow is expected to become a member of our board of
directors upon the consummation of this offering. Mr. Crow
is President and Chief Executive Officer of Ability Reinsurance
(Bermuda) Limited, a life reinsurance company he founded in 2007
concentrating on long-term care and disability reinsurance.
Since June 2008, Mr. Crow has also served as Vice President
of Proverian Capital which underwrites life settlements. From
June 1998 to March 2003, Mr. Crow served as Vice President
and Senior Vice President at Centre Group in Hamilton, Bermuda,
with respect to its life reinsurance and life settlement
business and continued until May 2005 as an actuarial consultant
advising Centre Group. We believe that Mr. Crow is
qualified to serve on our board of directors because of his
experience in the life insurance and life settlement industry as
well as his prior work as an actuarial consultant.
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Walter
M. Higgins III
Walter M. Higgins III is expected to become a member of our
board of directors upon the consummation of this offering. In
2008, Mr. Higgins retired from NV Energy, Inc. (formerly
Sierra Pacific Resources), an energy and gas company listed on
the New York Stock Exchange, where he served as Chairman of the
Board, President and Chief Executive Officer from 1993 until
January 1998 and from August 2000 until July 2007 (Chairman of
the Board until July 2008). Prior to rejoining Sierra Pacific
Resources in August 2000, he served as Chairman, President and
Chief Executive Officer of AGL Resources, Inc. in Atlanta,
Georgia, a natural gas utility and energy services holding
company listed on the New York Stock Exchange and the holding
company of Atlanta Gas Light Company. Mr. Higgins currently
serves as a director of South Jersey Industries, a public
utility holding company listed on the New York Stock Exchange,
where he serves as a member of the audit and compensation
committees (a former member of the governance committee), Ram
Power Corporation, a geothermal power company listed on the
Toronto Stock Exchange, where he is chair of the compensation
committee, Aegis Insurance Services, an insurance company
servicing the energy industry, Landis+Gyr, LLC, an energy
management company where he serves on the executive advisory
board, and TAS Energy, a manufacturer of industrial
refrigeration equipment where he serves as a member of the audit
committee and is the chair of the governance committee. We
believe that Mr. Higgins is qualified to serve on our board
of directors because of his prior public company experience both
as a chief executive officer and director.
Robert
Rosenberg
Mr. Robert Rosenberg is expected to become a member of our
board of directors upon the consummation of this offering. From
April 2003 to the present, Mr. Rosenberg has been
President, Chief Executive Officer, Chief Financial Officer and
a director of Insurent Agency Corporation and President and a
director of its sister company, RS Reinsurance, both of which
are subsidiaries of RS Holdings Corp., a Bahamas-based holding
company in which Mr. Rosenberg is a shareholder and
director. From March 2001 to March 2003, prior to his
involvement with RS Holdings Corp., Mr. Rosenberg was Chief
Financial Officer and Executive Vice President of Firebrand
Financial Group, Inc., a company listed on the
Over-the-Counter
Bulletin Board, which provides investment banking, merchant
banking, securities brokerage and asset services. From 1986 to
1997, Mr. Rosenberg served as Executive Vice President
(Senior Vice President until 1990) and Chief Financial Officer
of Enhance Financial Services Group Inc., a New York Stock
Exchange listed company providing financial guaranty insurance
and reinsurance. We believe that Mr. Rosenberg is qualified
to serve on our board of directors because of his prior business
experience, including his experience as a chief financial
officer of a public company.
A.
Penn Hill Wyrough
A. Penn Hill Wyrough is expected to become a member of our
board of directors upon consummation of this offering.
Mr. Wyrough is currently self employed as a consultant
providing strategic financial advice to international companies
with respect to business and investment transactions in the
United States and elsewhere. From 2008 to 2009,
Mr. Wyrough was Managing Director, equity capital markets,
for JPMorgan Chase. From 1987 to 2008, Mr. Wyrough was
Senior Managing Director, investment banking for Bear,
Stearns & Co., Inc. Mr. Wyrough is a trustee and
treasurer of The Masters School, Dobbs Ferry, New York. We
believe that Mr. Wyrough is qualified to serve on our board
of directors because of his extensive experience in finance and
the capital markets.
Board
Composition
After the corporate conversion, we will be managed under the
direction of our board of directors. We expect that our board
will consist of 7 directors upon completion of this
offering, 5 of whom will not be current or former employees of
our company and will not have any other relations with us that
would result in their being considered other than independent
under applicable federal securities laws and the current listing
requirements of the New York Stock Exchange. We have determined
that Messrs. Buzen, Crow, Higgins, Rosenberg and Wyrough
are independent directors under the applicable rules of the New
York Stock Exchange
100
and as such term is defined in
Rule 10A-3(b)(1)
under the Exchange Act. There are no family relationships among
any of our current directors, director nominees or executive
officers.
Following the completion of this offering, copies of our
Corporate Governance Guidelines and Code of Business Conduct and
Ethics for all of our directors, officers and employees will be
available on our website (www.imprl.com) and upon written
request by our shareholders at no cost.
Number of
Directors; Removal; Vacancies
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. Each director will
serve a one-year term. Pursuant to our bylaws, each director
will serve until such directors successor is elected and
qualified or until such directors earlier death,
resignation, disqualification or removal. Our bylaws also
provide that any director may be removed with or without cause,
at any meeting of shareholders called for that purpose, by the
affirmative vote of the holders entitled to vote for the
election of directors.
Our bylaws further provide that vacancies and newly created
directorships in our board may be filled by an affirmative vote
of the majority of the directors then in office, although less
than a quorum, or by the shareholders at a special meeting.
Majority
Voting Policy
Directors will be elected by a plurality of votes cast by shares
entitled to vote at each annual meeting. However, we expect that
our board will adopt a majority vote policy. Under
this policy, any nominee for director in an uncontested election
who receives a greater number of votes withheld from
his or her election than votes for such election, is
required to tender his or her resignation following
certification of the shareholder vote. The corporate governance
and nominating committee will promptly consider the tendered
resignation and make a recommendation to the board whether to
accept or reject the resignation. The board will act on the
committees recommendation within 60 days following
certification of the shareholder vote.
Factors that the committee and board will consider under this
policy include:
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the stated reasons why votes were withheld from the director and
whether those reasons can be cured;
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the directors length of service, qualifications and
contributions as a director;
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New York Stock Exchange listing requirements, and
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our corporate governance guidelines.
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Any director who tenders his or her resignation under this
policy will not participate in the committee recommendation or
board action regarding whether to accept the resignation offer.
If all of the members of the corporate governance and nominating
committee receive a majority withheld vote at the same election,
then the independent directors who do not receive a majority
withheld vote will appoint a committee from among themselves to
consider the resignation offers and recommend to the board
whether to accept such resignations.
Board
Committees
Prior to the completion of this offering, our board of directors
will establish an audit committee, a compensation committee and
a nominating and corporate governance committee.
Audit Committee. The audit committee, which
will be established in accordance with Section 3(a)(58)(A)
of the Securities Exchange Act, will oversee our accounting and
financial reporting processes and the audits of our financial
statements. The functions and responsibilities of the audit
committee will be established in the audit committee charter and
include:
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establishing, monitoring and assessing our policies and
procedures with respect to business practices, including the
adequacy of our internal controls over accounting and financial
reporting;
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retaining our independent auditors and conducting an annual
review of the independence of our independent auditors;
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pre-approving any non-audit services to be performed by our
independent auditors;
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reviewing the annual audited financial statements and quarterly
financial information with management and the independent
auditors;
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reviewing with the independent auditors the scope and the
planning of the annual audit;
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reviewing the findings and recommendations of the independent
auditors and managements response to the recommendations
of the independent auditors;
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overseeing compliance with applicable legal and regulatory
requirements, including ethical business standards;
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approving related party transactions;
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discussing policies with respect to risk assessment and risk
management;
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preparing the audit committee report to be included in our
annual proxy statement;
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establishing procedures for the receipt, retention and treatment
of complaints received by us regarding accounting, internal
accounting controls or auditing matters;
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establishing procedures for the confidential, anonymous
submission by our employees of concerns regarding questionable
accounting or auditing matters; and
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reviewing the committees performance and the adequacy of
the audit committee charter on an annual basis.
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Our independent auditors will report directly to the audit
committee. Each member of the audit committee will have the
ability to read and understand fundamental financial statements.
We will provide for appropriate funding, as determined by the
audit committee, for payment of compensation to our independent
auditors, any independent counsel or other advisors engaged by
the audit committee and for administrative expenses of the audit
committee that are necessary or appropriate in carrying out its
duties.
Compensation Committee. The compensation
committee will establish, administer and review our policies,
programs and procedures for compensating our executive officers
and directors. The functions and responsibilities of the
compensation committee will be established in the compensation
committee charter and include:
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evaluating the performance of and determining the compensation
for our executive officers, including our chief executive
officer;
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administering and making recommendations to our board with
respect to our equity incentive plans;
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overseeing regulatory compliance with respect to compensation
matters;
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reviewing and approving employment or severance arrangements
with senior management;
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reviewing our director compensation policies and making
recommendations to our board;
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taking the required actions with respect to the compensation
discussion and analysis to be included in our annual proxy
statement;
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reviewing and approving the compensation committee report to be
included in our annual proxy statement; and
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reviewing the committees performance and the adequacy of
the compensation committee charter on an annual basis.
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102
Corporate Governance and Nominating
Committee. The functions and responsibilities of
the corporate governance and nominating committee will be
established in the corporate governance and nominating committee
charter and include:
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developing and recommending corporate governance principles and
procedures applicable to our board and employees;
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recommending committee composition and assignments;
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overseeing periodic self-evaluations by the board, its
committees, individual directors and management with respect to
their respective performance;
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identifying individuals qualified to become directors;
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recommending director nominees;
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assisting in succession planning;
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recommending whether incumbent directors should be nominated for
re-election to our board; and
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reviewing the committees performance and the adequacy of
the corporate governance and nominating committee charter on an
annual basis.
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Compensation
Committee Interlocks and Insider Participation
None of the members of our compensation committee will be, or
will have been, employed by us. None of our executive officers
currently serves, or in the past three years has served, as a
member of the board of directors, compensation committee or
other board committee performing equivalent functions of another
entity that has one or more executive officers serving on our
board or compensation committee.
103
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
Overview
This compensation discussion and analysis describes the key
elements of our executive compensation program for 2009. For our
2009 fiscal year, our named executive officers were:
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Antony Mitchell, our chief executive officer;
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Robert Grobstein, our former chief financial and accounting
officer;
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Jonathan Neuman, our president and chief operating officer;
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Deborah Benaim, our senior vice president; and
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Anne Dufour Zuckerman, our former general counsel.
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Mr. Grobstein left the Company on May 4, 2010 and has
been replaced by Richard OConnell. Ms. Zuckerman left
the Company on November 8, 2010.
This compensation discussion and analysis, as well as the
compensation tables and accompanying narratives below, contain
forward-looking statements that are based on our current plans
and expectations regarding our future compensation. Actual
compensation programs that we adopt may differ materially from
the programs summarized below.
Compensation
Objective
The primary objective of our compensation programs and policies
is to attract, retain and motivate executives whose knowledge,
skills and performance are critical to our success. We believe
that compensation is unique to each individual and should be
determined based on discretionary and subjective factors
relevant to the particular named executive officer based on the
objectives listed above.
Compensation
Determination Process
Prior to this offering, we have been a private company with a
relatively small number of shareholders. We have not been
subject to exchange listing requirements requiring us to have a
majority independent board or to exchange or SEC rules relating
to the formation and functioning of board committees, including
audit, nominating, and compensation committees. As such, most,
if not all, of our compensation policies, and determinations
applicable to our named executive officers, have been the
product of negotiation between our named executive officers, our
chief executive officer and chief operating officer, subject to
the input of our board of managers, when requested. Each of
Antony Mitchell, our chief executive officer, and Jonathan
Neuman, our chief operating officer, had input in setting each
of the named executive officers compensation, including
their own, as their compensation was a product of negotiation
with our board of managers. None of the other named executive
officers had input in setting any other named executive
officers compensation. During 2009, we did not retain the
services of a compensation consultant. Following this offering,
we will have a compensation committee comprised entirely of
independent directors that will be responsible for making all
such compensation determinations.
In the past, we took into account a number of variables, both
quantitative and qualitative, in making determinations regarding
the appropriate level of compensation. Generally, our named
executive officers compensation was determined based on
our chief executive officers and chief operating
officers assessment of our overall performance and the
individual performance of the named executive officer, as well
as our chief executive officers and chief operating
officers experience and general market knowledge regarding
compensation of executive officers in comparable positions.
These quantitative and qualitative variables were also
considered by our board of managers when negotiating the
compensation for our chief executive officer and chief operating
officer.
104
Antony Mitchell, our chief executive officer, is the owner of
Warburg Investment Corporation (Warburg).
Mr. Mitchell is currently not an employee of the Company.
Pursuant to an oral arrangement between us and Warburg,
Mr. Mitchell serves as our chief executive officer and we
provide Warburg with (i) office space; (ii) office
equipment; and (iii) personnel. We pay Warburg for
Mr. Mitchells service and Mr. Mitchell is paid
by Warburg. Mr. Mitchell is a citizen of the United Kingdom
and, prior to his status as a lawful permanent resident of the
United States on a conditional basis, was a lawful resident of
the United States under an
E-2 visa.
Pursuant to the
E-2 visa
requirements, Mr. Mitchell was restricted to being a
Warburg employee. Mr. Mitchell is now authorized to be
employed by the Company and has entered into a written
employment agreement with us that will become effective upon the
closing of this offering. At that time, the arrangement with
Warburg will terminate. This agreement is described elsewhere in
this prospectus under Certain Relationships and Related
Transactions Related Party Transaction Policy and
Procedure Other Transactions.
Following the completion of this offering, we expect our
compensation committee to review, and potentially engage a
compensation consultant to assist it in evaluating, all aspects
of our executive compensation program. In addition, we intend to
make awards of stock options to our employees, including our
named executive officers, under the Omnibus Plan. We have
reserved an aggregate
of shares
of common stock under our Omnibus Plan of which an aggregate of
[ ] shares
of common stock will remain available for future awards after
giving effect to the issuance of options to purchase an
aggregate of
[ ] shares
of common stock which we expect to grant to our existing
employees and named executive officers immediately following the
pricing of this offering at an exercise price equal to the
initial public offering price. These options will be subject to
vesting over
[ ] years.
See Omnibus Plan.
Compensation
Elements
We provide different elements of compensation to our named
executive officers in a way that we believe best promotes our
compensation objectives. Accordingly, we provide compensation to
our named executive officers through a combination of base
salary, annual discretionary bonus and other various benefits.
Prior to this offering, we have not issued equity-based
incentives and have compensated our chief executive officer
pursuant to the Warburg agreement. Each element of compensation
is discussed in detail below.
Base Salaries. Annual base salaries reflect
the compensation for an executives ongoing contribution to
the performance of his or her functional area of responsibility
with us. We believe that base salaries must be competitive based
upon the executive officers scope of responsibilities and
the market compensation of similarly situated executives. Other
factors such as internal consistency and comparability are
considered when establishing a base salary for a given
executive. Prior salaries paid by former employers are also
considered for new hires. Our chief executive officer and chief
operating officer used their experience, market knowledge and
insight in evaluating the competitiveness of current salary
levels. Historically, executives have been entitled to annual
reviews and raises at the discretion of our chief executive
officer and chief operating officer.
Annual Discretionary Cash Bonus
Compensation. In the discretion of our chief
executive officer and chief operating officer, our named
executive officers are eligible for an annual discretionary cash
bonus. We currently do not follow a formal bonus plan tied to
specific financial and non-financial objectives. The
determination of the bonus payment amounts, if any, is subject
to the discretion of our chief executive officer and chief
operating officer after considering the individual executive
officers individual performance, as well as our chief
executive officers and chief operating officers
assessment of our past and future performance, including, but
not limited to, subjective assessments of our operational
performance during the year and our position for the achievement
of acceptable financial performance in the subsequent year. Our
chief executive officer and chief operating officer also
consider market practices in determining whether our annual
discretionary bonus compensation is competitive. Due to our
operating performance in 2009, none of our executive officers
received a discretionary bonus except Deborah Benaim.
Ms. Benaim received $200,000 in recognition of her
dedication to improving results in our premium finance business
segment.
Retirement Benefits. Substantially all of the
salaried employees, including our named executive officers, are
eligible to participate in our 401(k) savings plan. We have
historically not made any contributions or otherwise matched any
employee contributions.
105
Other Benefits and Executive Perquisites. We
also provide certain other customary benefits to our employees,
including the named executive officers, which are intended to be
part of a competitive compensation program. These benefits which
are offered to all full-time employees include medical, dental,
life and disability insurance as well as paid leave during the
year.
Employment Agreement. We do not have any
general policies regarding the use of employment agreements, but
may, from time to time, enter into such a written agreement to
reflect the terms and conditions of employment of a particular
named executive officer, whether at the time of hire or
thereafter. We have entered into written employment agreements
with each of our named executive officers that will become
effective upon the closing of this offering.
Accounting
and Tax Implications
The accounting and tax treatment of particular forms of
compensation have not, to date, materially affected our
compensation decisions. However, following this offering, we
plan to evaluate the effect of such accounting and tax treatment
on an ongoing basis and will make appropriate modifications to
compensation policies where appropriate. For instance,
Section 162(m) of the Internal Revenue Code of 1986, as
amended (the Code), generally disallows a tax
deduction to public companies for certain compensation in excess
of $1.0 million paid in any taxable year to our chief
executive officer or any of our three other most highly
compensated executive officers other than the chief financial
officer. However, certain compensation, including qualified
performance-based compensation, is not subject to the deduction
limitation if certain requirements are met. In addition, under a
transition rule for new public companies, the deduction limits
under Section 162(m) do not apply to any compensation paid
pursuant to a compensation plan or agreement that existed during
the period in which the securities of the corporation were not
publicly held, to the extent that the prospectus relating to the
initial public offering disclosed information concerning these
plans or agreements that satisfied all applicable securities
laws then in effect. We believe that we can rely on this
transition rule to exempt awards made under our Omnibus Plan
until our 2013 annual meeting of shareholders. We intend to
review the potential effect of Section 162(m) of the Code
periodically and use our judgment to authorize compensation
payments that may be subject to the limit when we believe such
payments are appropriate and in our best interests after taking
into consideration changing business conditions and the
performance of our executive officers.
Hiring
of New Chief Financial Officer
On January 4, 2010, we hired Richard S. OConnell to
serve as our chief credit officer. Mr. OConnell began
transitioning into the chief financial officer role in February
2010 and became our chief financial officer in April 2010. We
have entered into an employment agreement with
Mr. OConnell that will become effective upon the
closing of this offering.
106
Executive
Compensation
The following table summarizes the compensation of our chief
executive officer, our former chief financial officer and each
of our other named executive officers for the year ended
December 31, 2009.
Summary
Compensation Table for 2009
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Change in
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Pension Value
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and Non-
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Non-Equity
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Qualified
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Incentive
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Deferred
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Name and Principal
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Stock
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Option
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Plan
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Compensation
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All Other
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Position
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Year
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Salary
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Bonus
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Awards
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Awards
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Compensation
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Earnings
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Compensation(1)
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Total
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Antony Mitchell
Chief Executive Officer
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2009
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$
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$
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$
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$
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$
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$
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$
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926,000
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(1)
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$
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926,000
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Jonathan Neuman
President and Chief Operating Officer
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2009
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$
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725,341
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$
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$
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$
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$
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$
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$
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$
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725,341
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Deborah Benaim
Senior Vice President
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2009
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$
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312,184
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$
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200,000
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$
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$
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$
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$
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$
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$
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512,184
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Anne Dufour Zuckerman(2)
General Counsel
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2009
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$
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347,757
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$
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$
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$
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$
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$
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$
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$
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347,757
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Robert Grobstein(3)
Former Chief Financial Officer
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2009
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$
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249,001
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$
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$
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$
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$
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$
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$
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$
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249,001
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(1) |
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In 2009, Mr. Mitchell did not serve as a company employee
and did not receive a salary. Mr. Mitchell provided
services to the Company pursuant to the consulting arrangement
with Warburg. Mr. Mitchell was paid these amounts by
Warburg as described in more detail in our Compensation
Discussion and Analysis. $76,000 of the $926,000 paid to Warburg
was for expense reimbursements. |
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(2) |
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Ms. Zuckerman served as our general counsel until her
departure from Imperial on November 8, 2010. |
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(3) |
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Mr. Grobstein served as our chief financial officer until
his departure from Imperial on May 4, 2010. |
Employment
Agreements and Potential Payments Upon Termination or
Change-in-Control
In September and November, 2010, we entered into employment
agreements with each of our named executive officers that become
effective upon the closing of this offering. These employment
agreements establish key employment terms (including reporting
responsibilities, base salary, target performance bonus
opportunity and other benefits), provide for severance benefits
in certain situations, and contain non-competition,
non-solicitation and confidentiality covenants.
Mr. Mitchell and Mr. Neumans employment
agreements also include indemnification provisions. The
employment agreements modified certain elements of compensation
of some of our executive officers. Under his employment
agreement, Mr. Mitchells base salary was set at
$525,000, a $325,000 reduction, excluding expense
reimbursements, over the aggregate 2009 fee that was paid to
Mr. Mitchells corporation, Warburg, because we now
pay Mr. Mitchell directly. With respect to our other named
executive officers, the base salaries of Mr. Neuman,
Mr. OConnell and Ms. Benaim were set at
$525,000, $310,000 and $325,000, respectively. Other than
Mr. Neuman, whose base salary reflects a $200,000 reduction
from his salary in 2009, the other named executive
officers salaries are comparable to their 2009 salaries.
In determining the base salaries, our chief executive officer
and chief operating officer considered the increased
responsibilities in growing the company and the work involved in
transitioning it to a publicly-held company. The employment
agreements for our named executive officers provide that they
will participate in the annual and long-term incentive plans
established by us from time to time, although the agreements for
Mr. Mitchell and Mr. Neuman also provide that in each
of our 2011, 2012 and 2013 fiscal years, the named executive
officer will receive an annual bonus equal to 0.6% of our
pre-tax income for such year, provided specified thresholds are
met and provided further that the maximum annual bonus payable
for any year to Mr. Mitchell or Mr. Neuman shall not
exceed three times his base salary on the last day of such year.
During these three years, Mr. Mitchell and Mr. Neuman
will not otherwise participate in any annual
107
bonus plan we establish for our executive officers.
Mr. OConnells employment agreement also
provides for a one time success fee of $100,000
payable to Mr. OConnell upon the successful
conclusion of this offering.
All of the employment agreements provide that if a named
executive officers employment is terminated for any reason
other than cause, then we will pay the named executive officer,
in addition to his or her accrued base salary and other earned
amounts to which the officer is otherwise entitled, a pro rata
portion of the annual incentive bonus, if any, payable with
respect to the year in which the termination occurs. In
addition, the employment agreements provide for severance
payments to our named executive officers upon the termination of
their employment by us without cause. The employment agreements
for each of Messrs. Mitchell and Neuman also provide for
severance payments if such name executive officer terminates his
employment for good reason. Payment and benefit levels were
determined based on a variety of factors including the position
held by the individual receiving the termination benefits and
current trends in the marketplace regarding such benefits.
The employment agreements for the named executive officers
permit us to terminate them for cause if the named
executive officer (i) commits a willful, intentional or
grossly negligent act having the effect of materially injuring
our business, or (ii) is convicted of or pleads no
contest to a felony involving moral turpitude, fraud,
theft or dishonesty, or (iii) misappropriates or embezzles
any of our or our affiliates property. The employment
agreements for the named executive officers, other than
Messrs. Mitchell and Neuman, also permit us to terminate
them for cause if the named executive officer: (i) fails,
neglects or refuses to perform his or her employment duties; or
(ii) commits a willful, intentional or grossly negligent
act having the effect of materially injuring our reputation or
interests; or (iii) violates or fails to comply with our
rules, regulations or policies; or (iv) commits a felony or
misdemeanor involving moral turpitude, fraud, theft or
dishonesty; or (v) breaches any material provision of the
employment agreement or any other applicable confidentiality,
non-compete, non-solicit, general release, covenant-not-to-sue
or other agreement in effect with us. The employment agreements
for Messrs. Mitchell and Neuman permit such named executive
officer to terminate employment for good reason if we:
(i) materially diminish such named executive officers
base salary; or (ii) materially diminish the named
executive officers authority, duty or responsibilities or
the authority, duties or responsibilities of the supervisor to
whom the named executive officer is required to report; or
(iii) require the named executive officer to relocate a
material distance from his primary work location; or
(iv) breach any our material obligations under the
employment agreement.
If Messrs. Mitchell and Neuman become entitled to severance
payments, we will pay such named executive officer a severance
payment equal to three times the sum of his base salary and the
average of the prior three years annual cash bonus,
provided, however, that if such named executive officer is
terminated from employment prior to the first three years his
Employment Agreement is in effect, then the severance payment
will be equal to six times his base salary. The severance
payment shall be paid over a twenty-four month period. If
Mr. OConnell becomes entitled to severance payments,
we will continue to pay his base salary for a period equal to
four months, plus one month for each complete three months of
service completed with us, subject to a maximum of twelve months
of severance payments. If Ms. Benaim becomes entitled to
severance payments, we will continue to pay her base salary for
a period of eighteen weeks. Each named executive officer is
required to execute a release of all claims he or she may have
against us as a condition to the receipt of the severance
payments. All of the named executive officers are subject to
non-competition, confidentiality and non-solicitation covenants
that expire eighteen to twenty-four months after termination of
employment. Messrs. Mitchell and Neuman, however, are only
subject to such covenants if they receive severance payments.
However, with respect to Messrs. Mitchell and Neuman, if
the severance payments are not otherwise payable, we can elect
to pay such severance payments in exchange for the named
executive officers agreement to comply with the
non-competition, confidentiality and non-solicitation covenants
contained in his Employment Agreement.
The employment agreements for Messrs. Mitchell and Neuman
also provide that we will reimburse them for any legal costs
they incur in enforcing their rights under the employment
agreement, regardless of the outcome of such legal contest, as
well as interest at the prime rate on any payments under the
employment agreements that are determined to be past due, unless
prohibited by law.
108
All of the employment agreements for the named executive
officers include a provision that allows us to reduce their
severance payments and any other payments to which the executive
becomes entitled as a result of our change in control to the
extent needed for the executive to avoid paying an excise tax
under Internal Revenue Code Section 280G, unless, with
respect to Messrs. Mitchell and Neuman, the named executive
officer is better off, on an after-tax basis, receiving such
payments and paying the excise taxes due.
Risk
Considerations in our Compensation Program
We believe that our compensation policies and practices for our
employees are reasonable and properly align our employees
interests with those of our shareholders. We believe that risks
arising from our compensation policies and practices for our
employees are not reasonably likely to have a material adverse
effect on the company. Although certain of our employees who are
not executive officers are compensated by the number of
transactions they complete, our extensive underwriting process
is designed to prevent us from entering into transactions that
deviate from our underwriting standards. Furthermore, following
this offering, we intend to incentivize our employees and
executive officers with stock options, thereby aligning the
interests of our employees with those of our shareholders.
Omnibus
Plan
Imperial
Holdings 2010 Omnibus Incentive Plan
Our board of managers has adopted, and our members have
approved, the Imperial Holdings 2010 Omnibus Incentive Plan (the
Omnibus Plan). The following description of the
Omnibus Plan is qualified in its entirety by the full text of
the Omnibus Plan, which has been filed with the SEC as an
exhibit to the registration statement of which this prospectus
is a part.
Purpose of the Plan. The purpose of the
Omnibus Plan is to attract, retain and motivate participating
employees and to attract and retain well-qualified individuals
to serve as members of the board of directors, consultants and
advisors through the use of incentives based upon the value of
our common stock. The Omnibus Plan provides a direct link
between shareholder value and compensation awards by authorizing
awards of shares of our common stock, monetary payments based on
the value of our common stock and other incentive compensation
awards that are based on our financial performance and
individual performance. Awards under the Omnibus Plan will be
determined by the compensation committee of the board of
directors, and may be made to our or our affiliates
employees, consultants and advisors and our non-employee
directors.
Administration and Eligibility. The Omnibus
Plan will be administered by our compensation committee, which
will have the authority to interpret the provisions of the
Omnibus Plan; make, change and rescind rules and regulations
relating to the Omnibus Plan; and make changes to, or reconcile
any inconsistency in the Omnibus Plan, any award or any award
agreement. The compensation committee may designate any of the
following as a participant under the Omnibus Plan: any officer
or other of our employees or employees of our affiliates,
consultants who provide services to us or our affiliates and our
non-employee directors.
Types of Awards. Awards under the Omnibus Plan
may consist of incentive awards, stock options, stock
appreciation rights, performance shares, performance units,
shares of common stock, restricted stock, restricted stock units
or other stock-based awards as determined by the compensation
committee. The compensation committee may grant any type of
award to any participant it selects, but only our employees or
employees of our subsidiaries may receive grants of incentive
stock options. Awards may be granted alone or in addition to, in
tandem with, or in substitution for any other award (or any
other award granted under another plan of ours or our
affiliates). In addition, the compensation committee is
authorized to provide or make awards in a manner that complies
with the requirements of Section 409A of the Internal
Revenue Code of 1986, as amended (the Code), so that
the awards will avoid a plan failure as described in
Section 409A(a)(1). The compensation committees
authorization includes the authority to defer payments or wait
for specified distribution events, as provided in
Section 409A(a)(2).
109
Shares Reserved under the Omnibus
Plan. The Omnibus Plan provides that an aggregate
of shares
of common stock are reserved for issuance under the Omnibus
Plan, subject to adjustment as described below. The number of
shares reserved for issuance will be depleted on the grant date
of an award by the maximum number of shares of common stock, if
any, with respect to which such award is granted.
We expect that our board of directors will approve grants of
options to our executive officers, certain employees and certain
directors to purchase an aggregate of
[ ] shares
of our common stock subject to completion of this offering. The
following table sets forth certain information regarding these
stock options:
In general, (a) if an award granted under the Omnibus Plan
lapses, expires, terminates or is cancelled without the issuance
of shares under, or the payment of other compensation with
respect to shares covered by, the award, (b) if it is
determined during or at the conclusion of the term of an award
that all or some portion of the shares with respect to which the
award was granted will not be issuable, or that other
compensation with respect to shares covered by the award will
not be payable, (c) if shares are forfeited under an award,
(d) if shares are issued under any award and we reacquire
them pursuant to rights reserved by us upon the issuance of the
shares, or (e) if shares are tendered or withheld to
satisfy federal, state or local tax withholding obligations,
then such shares may again be used for new awards under the
Omnibus Plan. Shares that are purchased by us using proceeds
from option exercises, or shares tendered or withheld in payment
of the exercise price of options or as a result of the net
settlement of stock appreciation rights may never be made
available for issuance under the Omnibus Plan.
No participant may be granted awards under the Omnibus Plan that
could result in such participant:
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receiving options
and/or stock
appreciations rights for more than 120,000 shares of common
stock during any fiscal year;
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receiving awards of restricted stock
and/or
restricted stock units relating to more than 120,000 shares
of common stock during any fiscal year;
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receiving, with respect to an award of performance shares
and/or an
award of performance units the value of which is based on the
fair market value of a share of common stock, payment of more
than 120,000 shares of common stock in respect of any
fiscal year;
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receiving, with respect to an annual incentive award in respect
of any of single fiscal year, a cash payment of more than
$2,000,000;
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receiving, with respect to a long-term incentive award
and/or an
award of performance units the value of which is not based on
the fair market value of a share of common stock, a cash payment
of more than $3,000,000 in respect of any period of two
consecutive fiscal years or of more than $4,000,000 in respect
of any period of three consecutive fiscal years; or
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receiving other stock-based awards relating to more than
120,000 shares of common stock during any of our fiscal
years.
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Each of these limitations is subject to adjustment as described
below.
Options and Stock Appreciation Rights
(SARs). The compensation committee has the
authority to grant stock options or SARs and to determine all
terms and conditions of each such award. Stock options and SARs
will be granted to participants at such time as the compensation
committee will determine. The compensation committee will also
determine the number of options or SARs granted, whether an
option is to be an incentive stock option or non-qualified stock
option and the grant date for the option or SAR, which may not
be any date prior to the date that the compensation committee
approves the grant. The compensation committee will
110
fix the option price per share of common stock and the grant
price per SAR, which may never be less than the fair market
value of a share of common stock on the date of grant. The
compensation committee will determine the expiration date of
each option and SAR except that the expiration date may not be
later than ten years after the date of grant. Options and SARs
will be exercisable at such times and be subject to such
restrictions and conditions as the compensation committee deems
necessary or advisable. Under the Omnibus Plan, participants do
not have a right to receive dividend payments or dividend
equivalent payments with respect to shares of common stock
subject to an outstanding stock option or SAR award. Subject to
adjustment as described below, no more
than shares
may be issued pursuant to the exercise of incentive stock
options under the Omnibus Plan.
Performance and Stock Awards. The compensation
committee has the authority to grant awards of shares of common
stock, restricted stock, restricted stock units, performance
shares or performance units. Restricted stock means shares of
common stock that are subject to a risk of forfeiture
and/or
restrictions on transfer, which may lapse upon the achievement
or partial achievement of corporate, subsidiary or business unit
performance goals established by the compensation committee
and/or upon
the completion of a period of service
and/or upon
the occurrence of specified events. Restricted stock unit means
the right to receive cash
and/or
shares of common stock the value of which is equal to the fair
market value of one share to the extent corporate, subsidiary or
business unit performance goals established by the compensation
committee are achieved
and/or upon
the completion of a period of service
and/or upon
the occurrence of specified events. Performance shares means the
right to receive shares of common stock to the extent corporate,
subsidiary or business unit performance goals established by the
compensation committee are achieved. Performance units means the
right to receive cash
and/or
shares of common stock valued in relation to a unit that has a
designated dollar value or the value of which is equal to the
fair market value of one or more shares of common stock, to the
extent corporate, subsidiary or business unit performance goals
established by the compensation committee are achieved.
The compensation committee will determine all terms and
conditions of the awards including (i) the number of shares
of common stock
and/or units
to which such award relates, (ii) whether performance goals
must be achieved for the participant to realize any portion of
the benefit provided under the award, (iii) the length of
the vesting
and/or
performance period and, if different, the date that payment of
the benefit will be made, (iv) with respect to performance
units, whether to measure the value of each unit in relation to
a designated dollar value or the fair market value of one or
more shares of common stock, and (v) with respect to
performance units and restricted stock units, whether the awards
will settle in cash, in shares of common stock, or in a
combination of the two. Under the Omnibus Plan, participants do
not have a right to receive dividend payments or dividend
equivalent payments with respect to unearned shares of common
stock under a performance share, performance unit or restricted
stock unit award.
Other Stock-Based Awards. The compensation
committee has the authority to grant other types of awards,
which may be denominated or payable in, valued in whole or in
part by reference to, or otherwise based on, shares of common
stock, either alone or in addition to or in conjunction with
other awards, and payable in shares of common stock or cash.
Such awards may include shares of unrestricted common stock,
which may be awarded as a bonus, in payment of director fees, in
lieu of cash compensation, in exchange for cancellation of a
compensation right, or upon the attainment of performance goals
or otherwise, or rights to acquire shares of common stock from
us. The compensation committee will determine all terms and
conditions of the award, including the time or times at which
such award will be made and the number of shares of common stock
to be granted pursuant to such award or to which such award will
relate. Any award that provides for purchase rights must be
priced at 100% of the fair market value of a share of common
stock on the date of the award.
Incentive Awards. The compensation committee
has the authority to grant annual and long-term incentive
awards. An incentive award is the right to receive a cash
payment to the extent performance goals are achieved. The
compensation committee will determine all terms and conditions
of an annual or long-term incentive award, including the
performance goals, performance period, the potential amount
payable, the type of payment and the timing of payment. The
compensation committee must require that payment of all or any
portion of the amount subject to the incentive award is
contingent on the achievement or partial achievement
111
of one or more performance goals during the period the
compensation committee specifies. The compensation committee may
specify that performance goals subject to an award are deemed
achieved upon a participants death, disability or change
in control, or, in the case of awards that the compensation
committee determines will not be considered performance-based
compensation under Code Section 162(m), retirement or such
other circumstances as the compensation committee may specify.
The performance period for an annual incentive award must relate
to a period of at least one of our fiscal years, and the
performance period for a long-term incentive award must relate
to a period of more than one of our fiscal years, except in each
case, if the award is made at the time of commencement of
employment with us or on the occasion of a promotion, then the
award may relate to a shorter period. Payment of an incentive
award will be in cash except to the extent the compensation
committee determines that payment will be in shares of common
stock or restricted stock, either on a mandatory basis or at the
election of the participant receiving the award, having a fair
market value at the time of the payment equal to the amount
payable according to the terms of the incentive award.
Performance Goals. For purposes of the Omnibus
Plan, performance goals mean any goals the compensation
committee establishes that relate to one or more of the
following with respect to us or any one or more of our
subsidiaries, affiliates or other business units: net income;
operating income; income from continuing operations; net sales;
cost of sales; revenue; gross income; earnings (including before
taxes,
and/or
interest
and/or
depreciation and amortization); net earnings per share
(including diluted earnings per share); Fair Market Value; cash
flow; net cash provided by operating activities; net cash
provided by operating activities less net cash used in investing
activities; net operating profit; pre-tax profit; ratio of debt
to debt plus equity; return on shareholder equity; total
shareholder return; return on capital; return on assets; return
on equity; return on investment; return on revenues; operating
working capital; working capital as a percentage of net sales;
cost of capital; average accounts receivable; economic value
added; performance value added; customer satisfaction; customer
loyalty
and/or
retention; market share; cost structure reduction; cost savings;
operating goals; operating margin; profit margin; sales
performance; and internal revenue growth. In addition, in the
case of awards that the compensation committee determines will
not be considered performance-based compensation
under Code Section 162(m), the compensation committee may
establish other performance goals not listed in the Omnibus Plan.
As to each performance goal, the relevant measurement of
performance shall be computed in accordance with generally
accepted accounting principles, but, unless otherwise determined
by the compensation committee and to the extent consistent with
Code Section 162(m), will exclude the effects of the
following: (i) charges for reorganizing and restructuring;
(ii) discontinued operations; (iii) asset write-downs;
(iv) gains or losses on the disposition of an asset;
(v) mergers, acquisitions or dispositions; and
(vi) extraordinary, unusual
and/or
non-recurring items of gain or loss, that in all of the
foregoing we identify in our audited financial statements,
including notes to the financial statements, or the
Managements Discussion and Analysis section of our annual
report. In addition, to the extent consistent with Code
Section 162(m), the compensation committee may also adjust
performance to exclude the effects of (i) litigation,
claims, judgments or settlements; (ii) change in laws or
regulations affecting reported results; and (iii) accruals
for payments to be made under the Omnibus Plan or other
specified compensation arrangements.
Amendment of Minimum Vesting and Performance
Periods. Notwithstanding the requirements for
minimum vesting
and/or
performance period for an award included in the Omnibus Plan,
the Omnibus Plan provides that the compensation committee may
impose, at the time an award is granted or any later date, a
shorter vesting
and/or
performance period to take into account a participants
hire or promotion, or may accelerate the vesting or deem an
award earned, in whole or in part, on a participants
termination of employment, to the extent consistent with Code
Section 162(m) or a change in control.
Change in Control. The compensation committee
may specify in an award agreement the effect of our change in
control on such award. In the absence of such a provision, in
the event of our change in control, the compensation committee
may determine that all outstanding awards are vested in full or
deemed earned in full (as if the maximum performance goals had
been met). If, with respect to any particular outstanding award,
the successor in the change in control transaction does not
agree to assume the award or grant a substitute award, then the
compensation committee may cancel such award in exchange for a
cash payment to the award holder
112
on the date of the change in control. Under the Omnibus Plan, a
change in control is generally deemed to have
occurred if:
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any person is or becomes the beneficial owner of securities
representing 50% or more of the combined voting power of our
outstanding voting securities;
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during any twelve month period, the majority of our board of
directors are replaced by persons whose appointment or election
is not endorsed by a majority of the board; or
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during any twelve month period, there is a change in the
ownership of a substantial portion of our assets (other than
certain transfers to shareholders or controlling groups)
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Transferability. Awards are not transferable
other than by will or the laws of descent and distribution,
unless the compensation committee allows a participant to
(i) designate a beneficiary to exercise the award or
receive payment under the award after the participants
death, (ii) transfer an award to the former spouse of the
participant as required by a domestic relations order incident
to a divorce, or (iii) transfer an award without receiving
consideration for such a transfer.
Adjustments. If (i) we are involved in a
merger or other transaction in which shares of common stock are
changed or exchanged, (ii) we subdivide or combine shares
of common stock or declare a dividend payable in shares of
common stock, other securities or other property, (iii) we
effect a cash dividend that exceeds 10% of the trading price of
the shares of common stock or any other dividend or distribution
in the form of cash or a repurchase of shares of common stock
that the board determines is special or extraordinary or that is
in connection with a recapitalization or reorganization, or
(iv) any other event shall occur that in the judgment of
the compensation committee requires an adjustment to prevent
dilution or enlargement of the benefits intended to be made
available under the Omnibus Plan, then the compensation
committee will, in a manner it deems equitable, adjust any or
all of (A) the number and type of shares of common stock
subject to the Omnibus Plan and which may, after the event, be
made the subject of awards; (B) the number and type of
shares of common stock subject to outstanding awards;
(C) the grant, purchase or exercise price with respect to
any award; and (D) to the extent such discretion does not
cause an award that is intended to qualify as performance-based
compensation under Code Section 162(m) to lose its status
as such, the performance goals of an award. In any such case,
the compensation committee may also provide for a cash payment
to the holder of an outstanding award in exchange for the
cancellation of all or a portion of the award.
The compensation committee may, in connection with any merger,
consolidation, acquisition of property or stock, or
reorganization, and without affecting the number of shares of
common stock otherwise reserved or available under the Omnibus
Plan, authorize the issuance or assumption of awards upon terms
it deems appropriate.
Term of Plan. Unless earlier terminated by the
board of directors, the Omnibus Plan will remain in effect until
the earlier of (i) the tenth anniversary of the effective
date of the plan or (ii) the date all shares reserved for
issuance have been issued.
Termination and Amendment. The board of
directors or the compensation committee may amend, alter,
suspend, discontinue or terminate the Omnibus Plan at any time,
subject to the following limitations:
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the board must approve any amendment to the Omnibus Plan if we
determine such approval is required by prior action of the
board, applicable corporate law or any other applicable law;
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shareholders must approve any amendment to the Omnibus Plan if
we determine that such approval is required by Section 16
of the Securities Exchange Act of 1934, the Code, the listing
requirements of any principal securities exchange or market on
which the shares are then traded or any other applicable
law; and
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shareholders must approve any amendment to the Omnibus Plan that
materially increases the number of shares of common stock
reserved under the Omnibus Plan or the limitations stated in the
Omnibus Plan on the number of shares of common stock that
participants may receive through an award or that amends the
provisions relating to the prohibition on repricing of
outstanding options or SARs.
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113
The compensation committee may modify or amend any award, or
waive any restrictions or conditions applicable to any award or
the exercise of the award, or amend, modify or cancel any terms
and conditions applicable to any award, in each case by mutual
agreement of the compensation committee and the award holder.
The compensation committee need not obtain the award
holders consent for any such action that is permitted by
the adjustment or change in control provisions of the Omnibus
Plan or for any such action to the extent the compensation
committee (i) deems such action necessary to comply with
any applicable law or the listing requirements of any principal
securities exchange or market on which the common stock is then
traded or to preserve favorable accounting or tax treatment of
any award for us; or (ii) determines that such action does
not materially and adversely affect the value of an award or
that such action is in the best interest of the award holder.
The authority of the board and the compensation committee to
modify the Omnibus Plan or awards, and to otherwise administer
the Omnibus Plan, will extend beyond the termination date of the
Omnibus Plan, although no new awards may be granted after the
date of the termination of the Omnibus Plan. In addition,
termination of the Omnibus Plan will not affect the rights of
participants with respect to awards previously granted to them,
and all unexpired awards will continue in force and effect after
termination of the Omnibus Plan except as they may lapse or be
terminated by their own terms and conditions.
Repricing Prohibited. Except for the
adjustments provided for in the Omnibus Plan, neither the
compensation committee nor any other person may decrease the
exercise price for any outstanding stock option or decrease the
grant price for any SAR after the date of grant, cancel an
outstanding stock option or SAR in exchange for cash (other than
cash equal to the excess of the fair market value of the shares
subject to such stock option or SAR at the time of cancellation
over the exercise or grant price for such shares), or allow a
participant to surrender an outstanding stock option or SAR to
us as consideration for the grant of a new stock option or SAR
with a lower exercise price or grant price.
Certain United States Federal Income Tax
Consequences. The following summarizes certain
United States federal income tax consequences relating to the
Omnibus Plan under current tax law.
Stock Options. The grant of a stock option
will create no income tax consequences to us or the participant.
A participant who is granted a non-qualified stock option will
generally recognize ordinary compensation income at the time of
exercise in an amount equal to the excess of the fair market
value of the common stock at such time over the exercise price.
We will generally be entitled to a deduction in the same amount
and at the same time as ordinary income is recognized by the
participant. Upon the participants subsequent disposition
of the shares of common stock received with respect to such
stock option, the participant will recognize a capital gain or
loss (long-term or short-term, depending on the holding period)
to the extent the amount realized from the sale differs from the
tax basis, i.e., the fair market value of the common stock on
the exercise date.
In general, a participant will recognize no income or gain as a
result of exercise of an incentive stock option, except that the
alternative minimum tax may apply. Except as described below,
the participant will recognize a long-term capital gain or loss
on the disposition of the common stock acquired pursuant to the
exercise of an incentive stock option and we will not be allowed
a deduction. If the participant fails to hold the shares of
common stock acquired pursuant to the exercise of an incentive
stock option for at least two years from the grant date of the
incentive stock option and one year from the exercise date, then
the participant will recognize ordinary compensation income at
the time of the disposition equal to the lesser of (a) the
gain realized on the disposition, or (b) the excess of the
fair market value of the shares of common stock on the exercise
date over the exercise price. We will generally be entitled to a
deduction in the same amount and at the same time as ordinary
income is recognized by the participant. Any additional gain
realized by the participant over the fair market value at the
time of exercise will be treated as a capital gain.
Stock Appreciation Rights (SARs). The grant of
an SAR will create no income tax consequences to us or the
recipient. A participant will generally recognize ordinary
compensation income at the time of exercise of the SAR in an
amount equal to the excess of the fair market value of the
common stock at such time over the grant price. We will
generally be entitled to a deduction in the same amount and at
the same time as ordinary income is recognized by the
participant. If the SAR is settled in whole or part in shares,
upon the participants
114
subsequent disposition of the shares of common stock received
with respect to such SAR, the participant will recognize a
capital gain or loss (long-term or short-term, depending on the
holding period) to the extent the amount realized from the sale
differs from the tax basis, i.e., the fair market value of the
common stock on the exercise date.
Restricted Stock. Generally, a participant
will not recognize income and we will not be entitled to a
deduction at the time an award of restricted stock is made,
unless the participant makes the election described below. A
participant who has not made such an election will recognize
ordinary income at the time the restrictions on the stock lapse
in an amount equal to the fair market value of the restricted
stock at such time (less the amount, if any, the participant
paid for such restricted stock). We will generally be entitled
to a corresponding deduction in the same amount and at the same
time as the participant recognizes income. Any otherwise taxable
disposition of the restricted stock after the time the
restrictions lapse will result in a capital gain or loss
(long-term or short-term, depending on the holding period) to
the extent the amount realized from the sale differs from the
tax basis, i.e., the fair market value of the common stock on
the date the restrictions lapse. Dividends paid in cash and
received by a participant prior to the time the restrictions
lapse will constitute ordinary income to the participant in the
year paid and we will generally be entitled to a corresponding
deduction for such dividends. Any dividends paid in stock will
be treated as an award of additional restricted stock subject to
the tax treatment described herein.
A participant may, within 30 days after the date of the
award of restricted stock, elect to recognize ordinary income as
of the date of the award in an amount equal to the fair market
value of such restricted stock on the date of the award (less
the amount, if any, the participant paid for such restricted
stock). If the participant makes such an election, then we will
generally be entitled to a corresponding deduction in the same
amount and at the same time as the participant recognizes
income. If the participant makes the election, then any cash
dividends the participant receives with respect to the
restricted stock will be treated as dividend income to the
participant in the year of payment and will not be deductible by
us. Any otherwise taxable disposition of the restricted stock
(other than by forfeiture) will result in a capital gain or
loss. If the participant who has made an election subsequently
forfeits the restricted stock, then the participant will not be
entitled to deduct any loss. In addition, we would then be
required to include as ordinary income the amount of any
deduction we originally claimed with respect to such shares.
Performance Shares. The grant of performance
shares will create no income tax consequences for us or the
participant. Upon the participants receipt of shares at
the end of the applicable performance period, the participant
will recognize ordinary income equal to the fair market value of
the shares received, except that if the participant receives
shares of restricted stock in payment of performance shares,
recognition of income may be deferred in accordance with the
rules applicable to restricted stock as described above. We will
generally be entitled to a deduction in the same amount and at
the same time as income is recognized by the participant. Upon
the participants subsequent disposition of the shares, the
participant will recognize capital gain or loss (long-term or
short-term, depending on the holding period) to the extent the
amount realized from the disposition differs from the
shares tax basis, i.e., the fair market value of the
shares on the date the participant received the shares.
Performance Units and Restricted Stock
Units. The grant of a performance unit or
restricted stock unit will create no income tax consequences to
us or the participant. Upon the participants receipt of
cash and/or
shares at the end of the applicable performance or vesting
period, the participant will recognize ordinary income equal to
the amount of cash
and/or the
fair market value of the shares received, and we will be
entitled to a corresponding deduction in the same amount and at
the same time. If performance units are settled in whole or in
part in shares, upon the participants subsequent
disposition of the shares the participant will recognize a
capital gain or loss (long-term or short-term, depending on the
holding period) to the extent the amount realized upon
disposition differs from the shares tax basis, i.e., the
fair market value of the shares on the date the employee
received the shares.
Incentive Awards. A participant who is paid an
incentive award will recognize ordinary income equal to the
amount of cash paid
and/or the
fair market value of the shares issued, and we will be entitled
to a corresponding deduction in the same amount and at the same
time.
115
Withholding. In the event we are required to
withhold any federal, state or local taxes or other amounts in
respect of any income recognized by a participant as a result of
the grant, vesting, payment or settlement of an award or
disposition of any shares of common stock acquired under an
award, we may deduct from any payments of any kind otherwise due
the participant cash, or with the consent of the compensation
committee, shares of common stock otherwise deliverable or
vesting under an award, to satisfy such tax obligations.
Alternatively, we may require such participant to pay to us or
make other arrangements satisfactory to us regarding the payment
to us of the aggregate amount of any such taxes and other
amounts. If shares of common stock are deliverable on exercise
or payment of an award, then the compensation committee may
permit a participant to satisfy all or a portion of the federal,
state and local withholding tax obligations arising in
connection with such award by electing to (i) have us
withhold shares otherwise issuable under the award,
(ii) tender back shares received in connection with such
award, or (iii) deliver other previously owned shares, in
each case having a fair market value equal to the amount to be
withheld. However, the amount to be withheld may not exceed the
total minimum tax withholding obligations associated with the
transaction to the extent needed for us to avoid an accounting
charge.
Additional Taxes Under Section 409A. If
an award under the Omnibus Plan is considered non-qualified
deferred compensation and such award is neither exempt from nor
compliant with the requirements of Code Section 409A, then
the participant will be subject to an additional 20% income tax
on the value of the award when it is no longer subject to a
substantial risk of forfeiture, as well as interest on the
income taxes that were owed from the date of vesting to the date
such taxes are paid.
No Guarantee of Tax Treatment. Notwithstanding
any provision of the Omnibus Plan, we do not guarantee that
(i) any award intended to be exempt from Code
Section 409A is so exempt, (ii) any award intended to
comply with Code Section 409A or intended to qualify as an
incentive stock option under Code Section 422 does so
comply, or (iii) any award will otherwise receive a
specific tax treatment under any other applicable tax law, nor
in any such case will we or any of our affiliates indemnify,
defend or hold harmless any individual with respect to the tax
consequences of any award.
Section 162(m) Limit on Deductibility of
Compensation. Code Section 162(m) limits the
deduction we can take for compensation we pay to our chief
executive officer and the three other highest paid officers
other than the chief financial officer (determined as of the end
of each year) to $1 million per year per individual.
However, certain performance-based compensation that meets the
requirements of Code Section 162(m) does not have to be
included when determining whether the $1 million limit has
been met. The Omnibus Plan is designed so that awards granted to
the covered individuals may meet the Code Section 162(m)
requirements for performance-based compensation.
Director
Compensation
Prior to this offering, we have never provided compensation to
our non-employee members of our board of managers for their
services on our board. Following this offering, we intend to
compensate our non-employee directors with an annual cash
payment of $40,000. In addition, we plan to pay an additional
annual retainer of $5,000 for service on the audit committee and
an additional annual retainer of $2,000 for service on the
compensation committee or the corporate governance and
nominating committee. We also plan to pay our audit committee
chair an annual retainer of $30,000 and the chairs of the
compensation committee and the corporate governance and
nominating committee an annual retainer of $5,000. We also
intend to provide our non-employee directors with equity
incentives in amounts to be determined.
116
PRINCIPAL
SHAREHOLDERS
The table below contains information about the beneficial
ownership of our outstanding common stock before and after the
offering (after giving effect to the corporate conversion) by:
(i) each of our directors and director nominees,
(ii) each of our named executive officers, (iii) all
of our directors, director nominees and executive officers as a
group, and (iv) each beneficial owner of more than five
percent of our common stock. As of November 2, 2010, our
outstanding securities consisted of 337,500 common units and
265,796 preferred units and, after giving effect to the
corporate conversion, the issuance of shares upon termination of
the phantom stock agreements and the conversion of the $30.0
million debenture based on an assumed initial public offering
price per share of $[ ], which is
the midpoint of the price range on the cover of this prospectus,
we would have had
outstanding shares
of common stock.
Beneficial ownership of our common stock is determined in
accordance with the rules of the SEC, and generally includes
voting power or investment power with respect to securities held
and also includes options and warrants to purchase shares
currently exercisable or exercisable within 60 days after
November 2, 2010. Except as indicated and subject to
applicable community property laws, to our knowledge the persons
named in the table below have sole voting and investment power
with respect to all shares of common stock shown as beneficially
owned by them.
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Shares of Common Stock
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Shares of Common Stock
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Shares of
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Beneficially Owned
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Beneficially Owned
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Common Stock
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Following Offering
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Following Offering Assuming
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Beneficially Owned
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Assuming No Exercise of
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Exercise of Underwriters
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Prior to Offering
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Underwriters Option
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Option in Full
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Amount
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Percent
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Amount
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Percent
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Amount
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Percent
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Branch Office of Skarbonka
Sp. z o.o.(1)
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Pine Trading, Ltd.(2)
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Antony Mitchell(1)(2)
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Jonathan Neuman(1)(2)
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Deborah Benaim
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Richard S. OConnell, Jr.
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David A. Buzen
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Michael A. Crow
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Walter M. Higgins III
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Robert Rosenberg
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A. Penn Hill Wyrough
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All directors, director nominees and executive officers as a
group (9 individuals)
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1,276,736
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30.6
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%
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1,276,736
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1,276,736
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(1) |
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Branch Office of Skarbonka Sp. z o.o. is a company organized in
Poland whose business address is 58, rue Charles Martel, L-2134
Luxembourg. Branch Office of Skarbonka Sp. z o.o. is controlled
by Joseph Lewis. To the extent that the initial public
offering price is in excess of the midpoint of the price range
on the cover of this prospectus, Messrs. Mitchell and
Neuman will each receive 50% of the additional shares that would
have been paid to Skarbonka had the initial public offering
price actually been the midpoint of the price range on the cover
of this prospectus. See Corporate Conversion for
additional details. |
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(2) |
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Pine Trading, Ltd. is a Bahamas international business
corporation whose business address is Charlotte House, Shirley
Street 1st floor, P.O. Box N-7529,
Nassau, Bahamas. Pine Trading, Ltd. is controlled by David
Haring. Pine Trading, Ltd. has agreed that in the event that the
initial public offering price per share is greater than the
midpoint of the price range on the cover of this prospectus, a
portion of the shares of common stock owned by Pine Trading,
Ltd. shall be proportionately re-allocated to
Messrs. Mitchell and Neuman, with each receiving one-half
of such re-allocated shares. See Corporate
Conversion for additional details. |
117
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Related
Party Transactions Policy and Procedure
The audit committee will adopt written policies and procedures
for the committee to review and approve or ratify related party
transactions involving us, any of our executive officers,
directors or 5% or more shareholders or any of their family
members. These transactions will include:
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transactions that must be disclosed in proxy statements under
SEC rules; and
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transactions that could potentially cause a non-employee
director to cease to qualify as independent under New York Stock
Exchange listing requirements.
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Certain transactions will generally be deemed pre-approved under
these written policies and procedures, including transactions
with a company with which the sole relationship with the other
company is as a non-employee director and the total amount
involved does not exceed 1% of the other companys total
annual revenues.
Criteria for audit committee approval or ratification of related
party transactions will include:
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whether the transaction is on terms no less favorable to us than
terms generally available from an unrelated third party;
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the extent of the related partys interest in the
transaction;
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whether the transaction would interfere with the performance of
the officers or directors duties to us;
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in the case of a transaction involving a non-employee director,
whether the transaction would disqualify the director from being
deemed independent under New York Stock Exchange listing
requirements; and
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such other factors that the audit committee deems appropriate
under the circumstances.
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Since January 1, 2007, there have been no transactions of
more than $120,000 between us and any 5% or more shareholder,
director or executive officer or any of their family members
other than the transactions listed in this section. Prior to
this offering, as a private company we did not have separate
procedures or criteria for approving related party transactions.
However, following this offering, we will follow the procedures
described above in reviewing the related party transactions
described below as the agreements for such transactions come up
for renewal.
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The following table describes the entities involved in these
transactions and how they are owned or controlled by a related
party.
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Entity
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Relationship
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Branch Office of Skarbonka Sp. z o.o.
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Controlled by Joseph Lewis, beneficial owner of more than 5% of
our common stock.
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Cedarmount Trading, Ltd.
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Controlled by Joseph Lewis and David Haring, beneficial owner of
more than 5% of our common stock.
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CTL Holdings, LLC
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Controlled by Joseph Lewis and David Haring.
Antony Mitchell, our chief executive officer, chair of the board
and a beneficial owner of more than 5% of our common stock, is
the manager of CTL Holdings, LLC.
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CTL Holdings II, LLC
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Controlled by Antony Mitchell.
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CY Financial, Inc.
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Controlled by Jonathan Neuman, our president and chief operating
officer, as well as, a director and beneficial owner of more
than 5% of our common stock.
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IFS Holdings, Inc.
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Controlled by Antony Mitchell.
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Imex Settlement Corporation
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Controlled by Antony Mitchell and David Haring.
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Imperial Life Financing, LLC
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Controlled by Antony Mitchell and Jonathan Neuman.
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IMPEX Enterprises, Ltd.
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Controlled by David Haring.
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Jasmund, Ltd.
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Controlled by Joseph Lewis. Christopher Mangum, president and
sole director of Premium Funding, Inc., a former member of our
board of managers, is sole director, president and secretary of
Jasmund, Ltd.
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Londo Ventures, Inc.
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Controlled by David Haring.
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Monte Carlo Securities, Ltd.
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Controlled by Joseph Lewis and David Haring.
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Premium Funding, Inc.
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Controlled by Christopher Mangum and Joseph Lewis.
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Red Oak Finance, LLC
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Controlled by Jonathan Neuman.
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Stone Brook Partners
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Antony Mitchell is a general partner of Stone Brook Partners.
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Warburg Investment Corporation
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Controlled by Antony Mitchell.
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Wertheim Group
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Controlled by Carl Neuman, the father of Jonathan Neuman (as to
50%).
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Certain
Indebtedness
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On January 1, 2008, we entered into a Consolidated, Amended
and Restated Revolving Balloon Promissory Note in the amount of
$25.0 million with Amalgamated International Holdings, S.A.
(Amalgamated), at an interest rate of 16.5%, which
note consolidated seven notes previously executed by us in favor
of Amalgamated in the aggregate amount of $19.5 million. This
note was later cancelled and replaced effective as of
August 31, 2009 with a new $25.0 million revolving
note in favor of Amalgamated (the Amalgamated Note).
The Amalgamated Note matures on August 1, 2011 and bears an
interest rate of 16.5% per annum. The Amalgamated Note is
cross-defaulted with our other indebtedness and indebtedness of
certain of our related parties Monte Carlo
Securities, Ltd., CTL Holdings, LLC (CTL
Holdings) and Imperial Life Financing, LLC. The largest
aggregate amount of principal outstanding on the Amalgamated
Note since its issuance was $19.5 million. As of
September 30, 2010 and December 31, 2009, the
outstanding principal balance on the Amalgamated Note was
$0 million and $9.6 million, respectively, with
accrued interest of $0 and $469,000, respectively. The amount of
principal paid under the Amalgamated Note during the nine months
ended September 30, 2010 and year ended December 31,
2009 was $10.3 million and $49.8 million, respectively
and the amount of interest paid during the nine months ended
September 30, 2010 and year ended December 31, 2009
was $566,000 and $0, respectively. During the year ended 2009,
$8.4 million of principal and $1.2 million of accrued
interest of the Amalgamated Note was sold by
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Amalgamated to one of our related parties Branch
Office of Skarbonka Sp. z o.o (Skarbonka). The
entire principal and interest balances under the Amalgamated
Note have been paid in full.
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On June 5, 2008 and on August 8, 2008, we executed two
balloon promissory notes in favor of Jasmund, Ltd., in the
original principal amount of $5.0 million and
$1.6 million, respectively, and each at an interest rate of
16.5% per annum. On December 3, 2008 and February 5,
2009, the notes were replaced by notes in the amount of
$5.4 million and $1.7 million, respectively, each in
favor of Jasmund, Ltd. These notes were then consolidated,
amended, restated and replaced by a May 22, 2009 note in
favor Skarbonka, in the principal amount of $7.6 million at
an interest rate of 16.5%. The May 22, 2009 note and
$8.4 million of principal and $1.2 million of accrued
interest of the Amalgamated Note sold to Skarbonka were
subsequently consolidated into an August 31, 2009 revolving
promissory note in favor of Skarbonka in the principal amount of
$17.6 million, together with interest on the principal
balance from time to time outstanding at a rate of 16.5% per
annum. The August 31, 2009 note matures on August 1,
2011. The note is cross-defaulted with our other indebtedness
and indebtedness of Monte Carlo Securities, Ltd., CTL Holdings
and Imperial Life Financing, LLC. The largest aggregate amount
of principal outstanding on the August 31, 2009 note since
its issuance was $17.6 million. As of September 30,
2010 and December 31, 2009, respectively, the outstanding
principal balance on the August 31, 2009 note was
$16.1 million and $17.6 million, respectively, with
accrued interest of $2.0 million and $940,000,
respectively. The amount of principal paid under the note during
the nine months ended September 30, 2010 and year ended
December 31, 2009 was $1.5 million and $0,
respectively, and the amount of interest paid was $985,000 and
$0, respectively. On November 1, 2010, the note was
exchanged along with the common units and Series B
preferred units owned by Premium Funding, Inc. for a
$30.0 million debenture that matures October 4, 2011.
The debenture will have an interest rate of 0%. Immediately
prior to the closing of this offering, the debenture will be
converted into shares of our common stock as described under
Corporate Conversion.
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On October 3 and October 8, 2008, we executed two balloon
promissory notes in favor of Cedarmount Trading, Ltd.
(Cedarmount), each in the original principal amount
of $4,450,000 at an interest rate of 16.5% per annum. On
August 31, 2009, the notes were assigned by Cedarmount to
IMPEX Enterprises, Ltd. (IMPEX). Also effective as
of August 31, 2009, the notes were consolidated, amended,
restated and replaced by a new revolving promissory note which
we executed in favor of IMPEX for a principal amount of
$10.3 million with interest on the principal balance from
time to time outstanding at a rate of 16.5% per annum. The
August 31, 2009 note matures on August 1, 2011. The
note is cross-defaulted with our other indebtedness and
indebtedness of Monte Carlo Securities, Ltd., CTL Holdings and
Imperial Life Financing, LLC. The largest aggregate amount of
principal outstanding on the August 31, 2009 note since
issuance was $10.3 million. As of September 30, 2010
and December 31, 2009 the outstanding principal balance was
$3.8 million and $10.3 million, respectively, with
accrued interest of $1.3 million and $569,000,
respectively. The amount of principal paid under the note during
the nine months ended September 30, 2010 and year ended
December 31, 2009 was $14.4 million and $0,
respectively. As of September 30, 2010, we have not paid
any interest on the note. As part of the corporate conversion,
the note as well as the common units and Series B, C, D and
E preferred units owned by Imex Settlement Corporation will be
converted into 880,000 shares of common stock.
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On December 27, 2007, Imperial Life Financing, LLC
(Life Financing), entered into a $50.0 million
loan agreement with CTL Holdings. The proceeds of this loan were
used by Life Financing to fund our origination of premium
finance loans in exchange for participation interests in such
loans. In April 2008, CTL Holdings entered into a participation
agreement with Perella Weinberg Partners Asset Based Value
Master Fund II, L.P. (Perella), in connection with
which we executed a guaranty, whereby Perella contributed
$10.0 million for a participation interest in CTL
Holdings loans to Life Financing. In connection with
Perellas purchase of the participation interest, we agreed
to reimburse CTL Holdings sole owner, Cedarmount, for any
amounts paid or allocated to Perella under the participation
agreement which cause Cedarmounts rate of return paid by
Life Financing to be less than 10.0% per annum on the funds
Cedarmount advanced to CTL Holdings to make loans to us or cause
Cedarmount
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not to recover its invested capital. In April 2008, the CTL
Holdings loan agreement was amended and the authorized
borrowings were increased from $50.0 million to
$100.0 million. The first $50.0 million tranche
(Tranche A) was restricted such that no further
advances could be made with the exception of funding second year
premiums. All new advances are made under the second
$50.0 million tranche (Tranche B). The loans are
payable as the corresponding premium finance loans mature and as
of June 30, 2010, bear a weighted average annual interest
rate of 10.3%. The agreement requires that each loan originated
under the facility be covered by lender protection insurance.
The agreement does not include any financial covenants but does
contain certain nonfinancial covenants and restrictions. All of
the assets of Life Financing serve as collateral under the
credit facility. The largest aggregate amount of principal
outstanding on the facility since issuance was
$61.2 million. As of September 30, 2010 and
December 31, 2009, the outstanding principal balance on the
facility was $0 million and $21.9 million,
respectively, with accrued interest of $0 and $46,000,
respectively. As of September 30, 2010, we had a receivable
balance of approximately $1.0 million from CTL Holdings,
LLC which relates to lender protection insurance claims that
were remitted directly by our lender protection insurer to CTL
Holdings, LLC. The proceeds of these claims should have been
paid directly to the Company rather than CTL Holdings, LLC. The
amount of principal paid under the facility during the nine
months ended September 30, 2010 and year ended
December 31, 2009 was $22.3 million and
$16.5 million, respectively, and the amount of interest
paid under the facility was $0.8 million and
$2.4 million, respectively.
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On November 15, 2008, Life Financing executed a grid
promissory note in favor of CTL Holdings, in the original
principal amount equal to the lesser of $30.0 million or
the amount outstanding from
time-to-time
a fixed interest rate per advance. The weighted average interest
rate as of September 30, 2010 was 10.5%. The largest
aggregate amount of principal outstanding on the note since
issuance was $36.7 million. As of September 30, 2010
and December 31, 2009, the outstanding principal balance on
the note was approximately $24,000 and $25.9 million,
respectively, with accrued interest of $135 and
$2.8 million, respectively. The amount of principal paid
under the facility during the nine months ended
September 30, 2010 and the year ended December 31,
2009 was $36.7 million and $0, respectively, and the amount
of accrued interest paid was $5.2 million and $0,
respectively.
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On March 13, 2009, Imperial Life Financing II, LLC, a
special purpose entity and wholly-owned subsidiary, entered into
a financing agreement with CTL Holdings II, LLC to borrow funds
to finance its purchase of premium finance loans originated by
us or the participation interests therein. On July 23,
2009, White Oak Global Advisors, LLC replaced CTL Holdings II,
LLC as the administrative agent and collateral agent with
respect to this facility. The original financing agreement
provided for up to $15.0 million of multi-draw term loans.
In September 2009, this financing agreement was amended to
increase the commitment by $12.0 million to a total
commitment of $27.0 million. The interest rate for each
borrowing made under the agreement varies and the weighted
average interest rate for the loans under this facility as of
September 30, 2010 was 21.5%. The loans are payable as the
corresponding premium finance loans mature. The agreement
requires that each loan originated under the facility be covered
by lender protection insurance. The agreement does not include
any financial covenants but does contain certain nonfinancial
covenants and restrictions. All of the assets of Imperial Life
Financing II, LLC serve as collateral under this facility.
The obligations of Imperial Life Financing II, LLC have
been guaranteed by Imperial Premium Finance, LLC; however,
except for certain expenses, the obligations are generally
non-recourse to us except to the extent of Imperial Premium
Finance, LLCs equity interest in Imperial Life
Financing II, LLC. The largest aggregate amount of
principal outstanding on the facility since issuance was
$27.0 million. As of September 30, 2010 and
December 31, 2009, the outstanding principal balance on the
note was $26.2 million and $26.6 million,
respectively, with accrued interest of $8.5 million and
$3.9 million, respectively. The amount of principal paid
under the note during the nine months ended September 30,
2010 and the year ended December 31, 2009 was $416,000 and
$391,000, respectively and the amount of interest paid under the
facility was $68,000 and $61,000, respectively.
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In November 2009, we obtained a loan from Stone Brook Partners,
a general partnership, in the principal amount of
$1.1 million. We repaid the loan in full in December 2009.
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Antony Mitchell, our chief executive officer and a director, and
Jonathan Neuman, our chief operating officer, president and a
director, have each individually guaranteed obligations under
the Acorn Capital Group, LLC credit facility, the CTL Holdings,
LLC credit facility, the Ableco Finance LLC credit facility, the
White Oak Global Advisors, LLC credit facility, the Cedar Lane
Capital LLC credit facility and the claims settlement agreement
with our lender protection insurer. These guaranties are not
unconditional sources of credit support but are intended to
protect against acts of fraud, willful misconduct or the special
purpose entity commencing a bankruptcy filing. To the extent
recourse is sought 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.
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Conversion
of Notes to Series A Preferred Units
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We issued a series of notes, dated December 19, 2007,
January 10, 2008, April 8, 2008, October 10, 2008
and December 24, 2008, in favor of Red Oak Finance, LLC, a
Florida limited liability company (Red Oak). The
notes were in the original principal amounts of $1,000,000,
$500,000, $500,000, $62,500 and $450,000, respectively, each at
a 10.0% per annum interest rate. The largest aggregate amount of
principal outstanding on the notes since issuance was
$2.5 million. Since issuance of the notes, the amount of
principal paid under the notes was $253,000, the amount of
interest paid under the notes was $319,000. On June 30,
2009, we converted $2,260,000 of these notes into 50,855
Series A Preferred Units. The Series A Preferred Units
are non-voting and can be redeemed at any time by us for an
amount equal to the applicable unreturned preferred capital
amount allocable to the Series A Preferred Units sought to
be redeemed, plus any accrued and unpaid preferred return. The
cumulative rate of preferred return is equal to 16.5% of the
outstanding units, per annum. The dividends payable at
September 30, 2010 and December 31, 2009 were $523,000
and $189,000, respectively.
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We issued a series of notes, dated August 1, 2008,
August 6, 2008, December 23, 2008 and
December 30, 2008, in favor of IFS Holdings, Inc., a
Florida corporation. The notes were in the original principal
amounts of $200,000, $75,000, $750,000 and $750,000,
respectively, each at a 16.0% per annum interest rate. The
largest aggregate amount of principal outstanding on the notes
since issuance was $1.8 million. Since issuance of the
notes, the amount of principal paid under the notes was $0, the
amount of interest paid under the notes was $163,000. On
June 30, 2009, we converted $1,775,000 of these notes into
39,941 Series A Preferred Units. The Series A
Preferred Units are non-voting and can be redeemed at any time
by us for an amount equal to the applicable unreturned preferred
capital amount allocable to the Series A Preferred Units
sought to be redeemed, plus any accrued and unpaid preferred
return. The cumulative rate of preferred return is equal to
16.5% of the outstanding units, per annum. The dividends payable
at September 30, 2010 and December 31, 2009 were
$410,000 and $155,000, respectively.
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Issuance
of Series B, C, D and E Preferred Units
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In December 2009, Premium Funding, Inc. and Imex Settlement
Corporation each contributed $2.5 million to us in
consideration for the issuance of 25,000 Series B Preferred
Units. The Series B Preferred Units are non-voting and can
be redeemed at any time by us for an amount equal to the
applicable unreturned preferred capital amount allocable to the
Series B Preferred Units sought to be redeemed, plus any
accrued and unpaid preferred return. The cumulative rate of
preferred return is equal to 16.0% of the outstanding units, per
annum. The dividends payable at September 30, 2010 and
December 31, 2009 were $647,000 and $4,000, respectively.
On November 1, 2010, the Series B Preferred Units
owned by Premium Funding, Inc. were exchanged along with the
common units owned by Premium Funding, Inc. and a promissory
note issued to Skarbonka for $30.0 million debenture that
matures October 4, 2011. The debenture will have an
interest rate of 0%. Immediately prior to the closing of this
offering, the debenture will be converted into shares of our
common stock.
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In March 2010, Imex Settlement Corporation contributed
$7.0 million to us in consideration for the issuance of
70,000 Series C Preferred Units. The Series C
Preferred Units are non-voting and can be
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redeemed at any time by us for an amount equal to the applicable
unreturned preferred capital amount allocable to the
Series C Preferred Units sought to be redeemed, plus any
accrued and unpaid preferred return. The cumulative rate of
preferred return is equal to 16.0% of the outstanding units, per
annum. The dividends payable at September 30, 2010 were
$589,000.
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In June 2010, Imex Settlement Corporation purchased from us
7,000 Series D Preferred Units for an aggregate purchase
price of $700,000. The Series D Preferred Units are
non-voting and can be redeemed at any time by us for an amount
equal to the applicable unreturned preferred capital amount
allocable to the Series D Preferred Units sought to be
redeemed, plus any accrued and unpaid preferred return. The
cumulative rate of preferred return is equal to 16.0% of the
outstanding units, per annum. The dividends payable at
September 30, 2010 were $29,000.
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Effective September 30, 2010, Imex Settlement Corporation
purchased from us 73,000 Series E Preferred Units for an
aggregate purchase price of $7,300,000. The Series E
Preferred Units are non-voting and can be redeemed at any time
by us for an amount equal to the applicable unreturned preferred
capital amount allocable to the Series E Preferred Units
sought to be redeemed, plus any accrued and unpaid preferred
return. The cumulative rate of preferred return is equal to
16.0% of the outstanding units, per annum.
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Other
Transactions
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We entered into a consulting agreement with Londo Ventures,
Inc., a Bahamas corporation, on March 31, 2009, under which
Londo Ventures agreed to provide management and financial
consulting services related to our premium finance and
structured settlement business. The agreement was effective as
of January 1, 2008. We incurred a consulting fee in 2009 of
$2,000,000 pursuant to this arrangement for services provided in
2008. This agreement has been terminated.
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Antony Mitchell, our chief executive officer, is the owner of
Warburg. Pursuant to an oral arrangement between us and Warburg,
Antony L. Mitchell serves as our chief executive officer and we
provide Warburg with (i) office space; (ii) equipment;
and (iii) personnel. During the year ended December 1,
2009 and 2008, we incurred fees of $926,000 and $1,082,000,
respectively, under this arrangement. We will enter into a
written employment agreement with Mr. Mitchell that will
become effective upon the closing of this offering. At that
time, the arrangement with Warburg will terminate.
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We have originated premium finance loans referred to us by the
Wertheim Group, an entity that is in the business of referring
individuals to premium finance lenders. Wertheim Group is owned
50.0% by the father of Jonathan L. Neuman, our president and
chief operating officer. We originated 14 premium finance loans
referred to us by the Wertheim Group in 2007 and 11 in 2008 and
received commissions from the issuing life insurance company of
$4.5 million and $4.5 million, respectively. There
were no originations of premium finance loans referred to us by
the Wertheim Group in 2009. In 2007 and 2008, we paid
$1.7 million and $1.5 million, respectively, of the
commissions we received to Wertheim for the premium finance loan
referrals.
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We have previously engaged Greenberg Traurig, LLP to provide us
with legal services. The spouse of Anne Dufour Zuckerman, our
former general counsel, is a shareholder of Greenberg Traurig,
LLP, although Mr. Zuckerman does not receive any direct
benefit from the relationship with us. We have paid Greenberg
Traurig, LLP $15,000, $1,062,000 and $1,595,000 during the years
ended December 31, 2007, 2008 and 2009, respectively, for
legal services.
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In November 2008, we purchased two loans from CY Financial, Inc.
for $811,000. At the time these loans were purchased, they had
an unpaid principal balance of $725,000. The purchase price
included $691,000 for the loans and $120,000 for purchased
interest resulting in a discount of $34,000.
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DESCRIPTION
OF CERTAIN INDEBTEDNESS
The credit facilities, promissory notes, debenture and
structured settlement purchase arrangements that we have
outstanding as of the date of this prospectus are described
below. The promissory notes that are going to be converted into
shares of our common stock upon the closing of this offering are
also described below.
Acorn
Capital Group, LLC Facility
In April 2007, our wholly-owned subsidiaries Imperial Premium
Finance, LLC (IPF) and Sovereign Life Financing, LLC
(Sovereign), a special purpose entity, entered into
a credit agreement with Acorn pursuant to which Acorn agreed to
make revolving loans to Sovereign up to an aggregate principal
amount of $50.0 million in order for Sovereign to make
loans to IPF to finance premium finance loans made by IPF.
In June 2008, Acorn breached the credit facility by not funding
the loans to be used for premium payments as required under the
credit facility, and we filed a complaint against Acorn in the
Supreme Court of the State of New York.
In May 2009, we entered into a settlement agreement with Acorn.
The settlement agreement terminated the credit agreement and all
other prior agreements between us and Acorn. Pursuant to the
settlement agreement, we issued new notes with each note
corresponding to a loan previously made by Acorn to enable us to
pay premiums due on a particular policy. Each note is secured by
the underlying premium finance loan documents and our rights in
and to the related policy. The notes have an annual interest
rate of 14.5% per annum and as of May 19, 2009, the
aggregate outstanding principal balance on the notes was
approximately $12.7 million.
Acorn subsequently assigned all of its rights and obligations
under the settlement agreement to ABRG. Pursuant to the
settlement agreement, when a premium payment upon a particular
policy is coming due, ABRG must advise us whether it will fund
such premium payment. If ABRG funds the premium payment, this
additional funding is evidenced by a new note, with an annual
interest rate of 14.5% per annum, which is due and payable by us
thirteen (13) months following the advance. If ABRG does
not fund the premium payment, we may elect to fund the premium
payment ourselves, sell the underlying premium finance loan or
related policy to another party or arrange for the sale of our
note to another party. If we elect not to fund the premium
payment ourselves, and are unable to find a purchaser or if ABRG
does not consent to a proposed sale, ABRG must arrange a sale of
the underlying premium finance loan or our related note. In
either case, in the event we elect to fund the premium payment
or upon any sale, our related note is cancelled. As of
December 31, 2009, an aggregate of $13.8 million of
outstanding principal indebtedness and interest of approximately
$2.6 million had been forgiven.
As of September 30, 2010 and December 31, 2009, we had
an aggregate of $4.2 million and $9.2 million of
outstanding principal indebtedness under this facility,
respectively, and accrued interest was approximately
$1.3 million and $2.4 million, respectively.
CTL
Holdings, LLC Grid Note
On November 15, 2008, Imperial Life Financing, LLC executed
a grid promissory note in favor of CTL Holdings, in the
original principal amount equal to the lesser of
$30.0 million or the amount outstanding from
time-to-time
at a fixed interest rate per advance. The weighted average
interest rate as of September 30, 2010 was 10.5%. The
outstanding principal at September 30, 2010 and
December 31, 2009 was approximately $24,000 and
$27.8 million, respectively and accrued interest was
approximately $135 and $2.8 million, respectively.
White Oak
Global Advisors, LLC Facility
On March 13, 2009, Imperial Life Financing II, LLC, a
special purpose entity and wholly-owned subsidiary, entered into
a financing agreement with CTL Holdings II, LLC to borrow funds
to finance its purchase of premium finance loans originated by
us or the participation interests therein. White Oak Global
Advisors, LLC subsequently replaced CTL Holdings II, LLC as the
administrative agent and collateral agent
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with respect to this facility. The original financing agreement
provided for up to $15.0 million of multi-draw term loans.
In September 2009, this financing agreement was amended to
increase the commitment by $12.0 million to a total
commitment of $27.0 million. The interest rate for each
borrowing made under the agreement varies and the weighted
average interest rate for the loans under this facility as of
September 30, 2010 was 21.5%. The loans are payable as the
corresponding premium finance loans mature. The agreement
requires that each loan originated under the facility be covered
by lender protection insurance. All of the assets of Imperial
Life Financing II, LLC serve as collateral under this facility.
In addition, the obligations of Imperial Life Financing II, LLC
have been guaranteed by Imperial Premium Finance, LLC; however,
except for certain expenses, the obligations are generally
non-recourse to us except to the extent of Imperial Premium
Finance, LLCs equity interest in Imperial Life Financing
II, LLC.
The outstanding principal under this facility at
September 30, 2010 and December 31, 2009 was
approximately $26.2 million and $26.6 million,
respectively, and accrued interest was approximately
$8.5 million and $3.9 million, respectively.
We are subject to several restrictive covenants under the
facility. The restrictive covenants include that Imperial Life
Financing II, LLC cannot: (i) create, incur, assume or
permit to exist any lien on or with respect to any property,
(ii) incur, assume, guarantee or permit to exist any
additional indebtedness (other than subordinated indebtedness),
(iii) declare or pay any dividend or other distribution on
account of any equity interests of Imperial Life Financing II,
LLC, (iv) make any repurchase, redemption, retirement,
defeasance, sinking fund or similar payment, or acquisition for
value of any equity interests of Imperial Life Financing II, LLC
or its parent (direct or indirect), (v) issue or sell or
enter into any agreement or arrangement for the issuance and
sale of any shares of its equity interests, any securities
convertible into or exchangeable for its equity interests or any
warrants, or (vi) finance with funds (other than the
proceeds of the loan under the financing agreement) any
insurance premium loan made by Imperial Premium Finance, LLC or
any interest therein.
Cedar
Lane Capital LLC Facility
On March 12, 2010, Imperial PFC Financing II, LLC, a
special purpose entity and wholly-owned subsidiary, entered into
an amended and restated financing agreement with Cedar Lane
Capital, LLC, to enable Imperial PFC Financing II, LLC to
purchase premium finance loans originated by us or participation
interests therein. The financing agreement provides for a
$15.0 million multi-draw term loan commitment. The term
loan commitment is for a
1-year term
and the borrowings bear an annual interest rate of 14.0%, 15.0%
or 16.0%, depending on the tranche of loans as designated by
Cedar Lane Capital, LLC and are compounded monthly. All of the
assets of Imperial PFC Financing II, LLC serve as collateral
under this credit facility. In addition, the obligations of
Imperial PFC Financing II, LLC have been guaranteed by Imperial
Premium Finance, LLC; however, except for certain expenses, the
obligations are generally non-recourse to us except to the
extent of Imperial Premium Finance, LLCs equity interest
in Imperial PFC Financing II, LLC.
As of September 30, 2010, Cedar Lane has made term loans in
excess of the $15.0 million term loan commitment. The
outstanding principal under this facility at September 30,
2010 and December 31, 2009 was approximately
$32.1 million and $11.8 million, respectively, and
accrued interest was approximately $3.0 million and
$0.1 million, respectively. We are required to procure
lender protection insurance 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
September 30, 2010, we have borrowed $32.1 million
with a weighted average interest rate payable of 15.6%. As of
September 30, 2010, we believe we have approximately
$31.3 million of additional borrowing capacity under this
credit facility based upon Cedar Lanes subscriptions from
its investors, however, our lender protection insurer has
informed us that it will cease providing us with lender
protection insurance under this credit facility upon the earlier
of (i) the completion of this offering or
(ii) December 31, 2010. As a result, we do not expect
to borrow under the Cedar Lane facility after the earlier of
(i) the completion of this offering or
(ii) December 31, 2010.
We are subject to several restrictive covenants under the
facility. The restrictive covenants include that Imperial PFC
Financing II, LLC cannot: (i) create, incur, assume or
permit to exist any lien on or with respect
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to any property, (ii) create, incur, assume, guarantee or
permit to exist any additional indebtedness (other than certain
types of subordinated indebtedness), (iii) declare or pay
any dividend or other distribution on account of any equity
interests of Imperial PFC Financing II, LLC, (iv) make any
repurchase, redemption, retirement, defeasance, sinking fund or
similar payment, or acquisition for value of any equity
interests of Imperial PFC Financing II, LLC or its parent
(direct or indirect), or (v) issue or sell or enter into
any agreement or arrangement for the issuance and sale of any
shares of its equity interests, any securities convertible into
or exchangeable for its equity interests or any warrants.
Imperial Holdings has executed a guaranty of payment for 5.0% of
amounts outstanding under the facility.
Debenture
and Promissory Note Converting Into Common Stock Upon Closing of
this Offering
Branch
Office of Skarbonka Sp. z o.o. Debenture
On August 31, 2009, we executed a revolving promissory note
in favor of Branch Office of Skarbonka Sp. z o.o. in the
principal amount of $17.6 million, together with interest
on the principal balance from time to time outstanding at a rate
of 16.5% per annum. The note matures on August 1, 2011 (to
be extended automatically for additional sixty (60) day
periods absent written notice from the lender to the contrary).
There is no collateral pledged to secure the note but it is
cross-defaulted with our other indebtedness and indebtedness of
Monte Carlo Securities, Ltd., CTL Holdings, LLC, and Imperial
Life Financing, LLC. As of September 30, 2010 and
December 31, 2009, respectively, the outstanding principal
balance on the note was approximately $16.1 million and
$17.6 million, respectively, with accrued interest of
approximately $2.0 million and $980,000, respectively. On
November 1, 2010, the note was exchanged along with the
common units and Series B preferred units owned by Premium
Funding, Inc. for a $30.0 million debenture that matures
October 4, 2011. The debenture will have an interest rate
of 0%. Immediately prior to the closing of this offering, the
debenture will be converted into shares of our common stock as
described under Corporate Conversion.
IMPEX
Enterprises, Ltd. Promissory Note
On August 31, 2009, we executed a revolving promissory note
in favor of IMPEX Enterprises, Ltd., for a principal amount of
$10.3 million, together with interest on the principal
balance from time to time outstanding at a rate of 16.5% per
annum. The note matures on August 1, 2011 (to be extended
automatically for additional sixty (60) day periods absent
written notice from the lender to the contrary). There is no
collateral pledged to secure the note but it is cross-defaulted
with our other indebtedness and the indebtedness of Monte Carlo
Securities, Ltd., CTL Holdings, LLC, and Imperial Life
Financing, LLC. As of September 30, 2010 and
December 31, 2009, respectively, the outstanding principal
balance on the note was approximately $3.8 million and
$10.3 million, respectively, with accrued interest of
approximately $1.3 million and $569,000, respectively. As
part of the corporate conversion, the note as well as the common
units and Series B, C, D and E preferred units owned by
Imex Settlement Corporation will be converted into shares of
common stock.
Structured
Settlement Purchase Arrangements
8.39%
Fixed Rate Asset Backed Variable Funding Notes
We recently formed Imperial Settlements Financing 2010, LLC
(ISF 2010) as a subsidiary of Washington Square
Financial, LLC (Washington Square) to serve as a new
special purpose financing entity to allow us to borrow against
certain of our structured settlements and assignable annuities,
which we refer to as receivables, to provide us liquidity. On
September 24, 2010, we entered into an arrangement to
provide us up to $50 million in financing. Under this
arrangement, a subsidiary of Partner Re, Ltd. (the
noteholder) became the initial holder of ISF
2010s 8.39% Fixed Rate Asset Backed Variable Funding Note
issued under a master trust indenture and related indenture
supplement (collectively, the indenture) pursuant to
which the noteholder has committed to advance up to
$50 million upon the terms and conditions set forth in the
indenture. The note is secured by the receivables that ISF 2010
acquires from Washington Square from time to time. The note is
due and payable on or before January 1, 2057, but principal
and interest must be repaid pursuant to a schedule of fixed
payments from the receivables that secure the notes. The
arrangement generally
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has a concentration limit of 15% for the providers of the
receivables that secure the notes. As of November 1, 2010,
$0 was outstanding under this arrangement. Wilmington Trust is
the collateral trustee.
Upon the occurrence of certain events of default under the
indenture, all amounts due under the note are automatically
accelerated. ISF 2010 is subject to several restrictive
covenants under the terms of the indenture. The restrictive
covenants include that ISF 2010 cannot: (i) create, incur,
assume or permit to exist any lien on or with respect to any
assets other than certain permitted liens, (ii) create,
incur, assume, guarantee or permit to exist any additional
indebtedness, (iii) declare or pay any dividend or other
distribution on account of any equity interests of ISF 2010
other than certain permitted distributions from available cash,
(iv) make any repurchase or redemption of any equity
interests of ISF 2010 other than certain permitted repurchases
or redemptions from available cash, (v) enter into any
transactions with affiliates other than the transactions
contemplated by the indenture, or (vi) liquidate or
dissolve.
Slate
Capital LLC
In February 2010, Haverhill Receivables, LLC
(Haverhill), a wholly owned subsidiary, entered into
a sale arrangement with Slate under which, subject to certain
conditions, we were obligated to sell, and Slate is obligated to
purchase, structured settlements at pre-determined prices
pursuant to pre-determined criteria. Sales of structured
settlements pursuant to the sale arrangement with Slate are
intended to be absolute and irrevocable sales and are not
intended to be characterized as secured loans or another form of
indebtedness.
On September 30, 2010, we entered into a wind down
agreement with Slate, whereby as of December 31, 2010, we
will cease selling structured settlements to Slate. Under the
wind down agreement, which amends our existing arrangement with
Slate, we will continue submitting structured settlements to
Slate through November 15, 2010 for purchase by
December 31, 2010. The wind down agreement provides that
these purchases generally will be on the same terms and
conditions under the sale arrangement as were in effect prior to
the entry into the wind down agreement. In addition, the wind
down agreement, among other things, (i) eliminated all
exclusivity provisions with respect to our sales of structured
settlements to Slate as of September 30, 2010;
(ii) terminates the requirement for us to maintain a
minimum net worth as of January 1, 2011; and
(iii) eliminates the requirement to pay a termination fee
to Slate upon the occurrence of a termination event as of
September 30, 2010. Certain other obligations, including
confidentiality and our indemnification of Slate, continue
indefinitely. We were not required to pay a termination fee to
Slate in connection with the entry into the wind down agreement.
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DESCRIPTION
OF CAPITAL STOCK
The following description of our capital stock and provisions
of our articles of incorporation and our bylaws are summaries
and are qualified by reference to the articles of incorporation
and the bylaws that will be in effect upon the closing of this
offering. We will file copies of these documents with the SEC as
exhibits to our registration statement of which this prospectus
forms a part. The descriptions of the common stock and preferred
stock reflect changes to our capital structure that will occur
in connection with this offering.
General
Upon the closing of this offering, our authorized capital stock
will consist of 80,000,000 shares of common stock, par
value $0.01 per share, and 40,000,000 shares of
undesignated preferred stock, par value $0.01 per share, the
rights and preferences of which may be established from time to
time by our board of directors.
As of October 27, 2010, we had issued and outstanding
337,500 common units held by three holders of record and 265,796
preferred units held by three holders of record. Since
inception, no dividends have accrued or been paid on shares of
our common stock or on our common units that were issued prior
to our corporate conversion.
Prior to the closing of this offering, we will consummate the
corporate conversion. As part of the corporate conversion, all
of our outstanding common and preferred limited liability
company units (including accrued and unpaid dividends thereon)
and all principal and accrued and unpaid interest outstanding
under our promissory note in favor of IMPEX Enterprises, Ltd.
will be converted into shares
of our common stock.
Following the corporate conversion and upon the closing of this
offering, our three current shareholders will receive warrants
that may be exercised for up
to shares of our common stock.
In addition, immediately prior the closing of this offering, a
$30.0 million debenture will be converted into shares of
our common stock as described under Corporate
Conversion.
The following description summarizes the terms of our capital
stock. Because it is only a summary, it does not contain all the
information that may be important to you. For a complete
description, you should refer to our articles of incorporation
and bylaws, as in effect immediately following the closing of
this offering, forms of which have been filed as exhibits to the
registration statement of which this prospectus is a part.
Common
Stock
Each holder of our common stock is entitled to one vote for each
share held by such holder on all matters to be voted upon by our
shareholders, and there are no cumulative voting rights. Holders
of our common stock are entitled to receive ratably the
dividends, if any, as may be declared from time to time by our
board of directors out of funds legally available therefor. See
Dividend Policy. If there is a liquidation,
dissolution or winding up of the Company, holders of our common
stock would be entitled to share in our assets remaining after
the payment of liabilities. Holders of our common stock have no
preemptive or conversion rights or other subscription rights,
and there are no redemption or sinking fund provisions
applicable to our common stock. All shares of our common stock
to be issued in this offering will be, when issued and sold in
accordance with the terms of this offering, fully paid and
non-assessable.
Preferred
Stock
Our certificate of incorporation authorizes the issuance of
shares of blank check preferred stock with such designation,
rights and preferences as may be determined from time to time by
our board of directors. No shares of preferred stock are being
issued or registered in this offering. Accordingly, our board of
directors is empowered, without shareholder approval, to issue
preferred stock with dividend, liquidation, conversion, voting
or other rights which could adversely affect the voting power or
other rights of the holders of common stock. The preferred stock
could be utilized as a method of discouraging, delaying or
preventing a change in
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control of us. Although we do not currently intend to issue any
shares of preferred stock, there can be no assurance that we
will not do so in the future.
Warrants
Prior to the closing of this offering, we plan to issue warrants
to purchase a total of up
to shares of our common stock
to Antony Mitchell, Jonathan Neuman and Pine Trading, Ltd. The
following description of the warrants is qualified in its
entirety by the form of warrant, which will be filed with the
SEC as an exhibit to the registration statement of which this
prospectus is a part. One half of the warrants will have an
exercise price equal to the price of the common stock sold in
this offering and one half of the warrants will have an exercise
price equal to 120% of the price of the common stock sold in
this offering. The warrants will
expire years after the date
of issuance and will vest over four measurement periods, subject
to Imperials achievement of certain financial metric
targets during such measurement periods as described below. The
measurement periods are:
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First measurement period: the first four fiscal quarters
following the completion of the offering.
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Second measurement period: the fifth, sixth, seventh and eight
fiscal quarters following completion of the offering.
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Third measurement period: the ninth, tenth, eleventh and twelfth
fiscal quarters following completion of the offering.
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Fourth measurement period: the thirteenth, fourteenth, fifteenth
and sixteenth fiscal quarters following completion of the
offering.
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At the end of the first measurement period, 19% of the warrants
will vest only if (i) the pre-tax earnings for the first
measurement period equals or exceeds
$
and (ii) the pre-tax return on equity as defined as pre-tax
income divided by the average equity for the first measurement
period equals or exceeds 20%.
At the end of the second measurement period, 27% of the warrants
will vest only if (i) the pre-tax earnings for the second
measurement period equals or exceeds
$ ,
(ii) the combined pre-tax earnings for the first and second
measurement periods equals or exceeds
$
and (iii) the pre-tax return on equity as defined as
pre-tax income divided by the average equity for the second
measurement period equals or exceeds 20%.
At the end of the third measurement period, 27% of the warrants
will vest only if (i) the pre-tax earnings for the third
measurement period equals or exceeds
$ ,
(ii) the combined pre-tax earnings for the first, second
and third measurement periods equals or exceeds
$
and (iii) the pre-tax return on equity as defined as
pre-tax income divided by the average equity for the third
measurement period equals or exceeds 20%.
At the end of the fourth measurement period, 27% of the warrants
will vest only if (i) the pre-tax earnings for the fourth
measurement period equals or exceeds
$ ,
(ii) the combined pre-tax earnings for the first, second, third
and fourth measurement periods equals or exceeds
$
and (iii) the pre-tax return on equity as defined as
pre-tax income divided by the average equity for the fourth
measurement period equals or exceeds 20%.
Further, at each measurement period, a reduced vesting schedule
will apply if any of the target metrics are not met, based on
the metric that is the furthest from meeting the applicable
target: if 75% of the target (but less than 100%) is met, 50% of
the subject warrants will vest; and if 60% of the target (but
less than 75%) is met, then 25% of the warrants will vest. In
the event that any metric does not meet at least 60% of the
applicable target, then all of the warrants subject to vesting
at such measurement period will be cancelled.
For each vesting period, any vested warrants will be split
evenly between those that have an exercise price equal to the
price of this offering and those that have an exercise price
equal to 120% of the price of this offering.
In the event of a change of control all of the unvested warrants
will vest.
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The exercise price may be paid in cash, or through a cashless
exercise by reducing the number of shares otherwise issuable to
the holder, based on the closing price of our common stock on
the last business day before the exercise date.
Anti-Takeover
Effects of Florida Law and Our Articles of Incorporation and
Bylaws
Certain provisions of Florida law, our articles of incorporation
and our bylaws contain provisions that could have the effect of
delaying, deferring or discouraging another party from acquiring
control of us. These provisions, which are summarized below, are
expected to discourage coercive takeover practices and
inadequate takeover bids. These provisions are also designed to
encourage persons seeking to acquire control of us to first
negotiate with our board of directors. We believe that the
benefits of increased protection of our potential ability to
negotiate with an unfriendly or unsolicited acquiror outweigh
the disadvantages of discouraging a proposal to acquire us
because negotiation of these proposals could result in an
improvement of their terms.
Requirements
for Advance Notification of Shareholder Nominations and
Proposals
Our bylaws establish advance notice procedures with respect to
shareholder proposals and the nomination of candidates for
election as directors, other than nominations made by or at the
direction of the board of directors or a committee of the board
of directors. The bylaws do not give the board of directors the
power to approve or disapprove shareholder nominations of
candidates or proposals regarding business to be conducted at a
special or annual meeting of the shareholders. However, our
bylaws may have the effect of precluding the conduct of certain
business at a meeting if the proper procedures are not followed.
Our articles of incorporation prohibit our shareholders from
acting without a meeting by written consent. Our articles
further require holders of not less than 50% of the voting power
of our common stock to call a special meeting of shareholders.
These provisions may discourage or deter a potential acquiror
from conducting a solicitation of proxies to elect the
acquirers own slate of directors or otherwise attempting
to obtain control of our company.
Certain
Provisions of Florida Law
We are subject to anti-takeover provisions that apply to public
corporations organized under Florida law unless the corporation
has elected to opt out of those provisions in its articles of
incorporation or its bylaws. We have not elected to opt out of
these provisions.
Control-Share Acquisitions. The Florida
Business Corporation Act contains a control-share acquisition
statute which provides that a person who acquires shares in an
issuing public corporation, as defined in the
statute, in excess of certain specified thresholds generally
will not have any voting rights with respect to such shares
unless such voting rights are approved by the holders of a
majority of the votes of each class of securities entitled to
vote separately, excluding shares held or controlled by the
acquiring person. The thresholds specified in the Florida
Business Corporation Act are the acquisition of a number of
shares representing:
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one-fifth or more, but less than one-third, of all voting power
of the corporation;
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one-third or more, but less than a majority, of all voting power
of the corporation; or
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a majority or more of all voting power of the corporation.
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The statute does not apply if, among other things, the
acquisition:
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is approved by the corporations board of directors before
the acquisition; or
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is effected pursuant to a statutory merger or share exchange to
which the corporation is a party.
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Affiliated Transactions. The Florida Business
Corporation Act provides that an affiliated
transaction of a Florida corporation with an
interested shareholder, as those terms are defined
in the statute and discussed more fully below, generally must be
approved by the affirmative vote of the holders of two-thirds of
the outstanding voting shares, other than the shares
beneficially owned by the interested shareholder. The Florida
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Business Corporation Act defines an interested
shareholder as any person who is the beneficial owner of
10% or more of the outstanding voting shares of the corporation.
The affiliated transactions covered by the Florida Business
Corporation Act include, with specified exceptions:
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mergers and consolidations to which the corporation and the
interested shareholder are parties;
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sales or other dispositions of assets to the interested
shareholder representing 5% or more of the aggregate fair market
value of the corporations assets, outstanding shares,
earning power or net income to the interested shareholder;
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issuances by the corporation of 5% or more of the aggregate fair
market value of its outstanding shares to the interested
shareholder;
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the adoption of any plan for the liquidation or dissolution of
the corporation proposed by or pursuant to an arrangement with
the interested shareholder;
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any reclassification of the corporations securities,
recapitalization of the corporation, merger or consolidation, or
other transaction which has the effect of increasing by more
than 5% the percentage of the outstanding voting shares of the
corporation beneficially owned by the interested
shareholder; and
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the receipt by the interested shareholder of certain loans or
other financial assistance from the corporation.
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The foregoing transactions generally also include transactions
involving any affiliate or associate of the interested
shareholder and involving or affecting any direct or indirect
majority-owned subsidiary of the corporation.
The two-thirds shareholder approval requirement does not apply
if, among other things, subject to specified qualifications:
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the transaction has been approved by a majority of the
corporations disinterested directors;
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the interested shareholder has been the beneficial owner of at
least 80% of the corporations outstanding voting shares
for at least five years preceding the transaction;
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the interested shareholder is the beneficial owner of at least
90% of the outstanding voting shares; or
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specified fair price and procedural requirements are satisfied.
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Florida Insurance Code. One of our
subsidiaries, Imperial Life Settlements, LLC, a Delaware limited
liability company, is licensed as a viatical settlement provider
and 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 acquire, directly or
indirectly, 10% or more of the voting securities of a viatical
settlement provider or its controlling company, including
Imperial Holdings, Inc., without the written approval of the
Florida Office of Insurance Regulation. Accordingly, any person
who acquires, directly or indirectly, 10% or more of our common
stock, must first file an application to acquire control of a
specialty insurer or its controlling company, and obtain the
prior written approval of the Florida Office of Insurance
Regulation.
The Florida Office of Insurance Regulation may disapprove an
acquisition of beneficial ownership 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 regulatory approval, it may order that person to cease
the acquisition and divest itself of any shares of such voting
securities which may have been acquired in violation of the
applicable Florida law. 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 was made in violation of
the applicable Florida law and would render the further
transaction of its business hazardous to its customers,
creditors, shareholders or the public.
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Indemnification
and Limitation of Liability
The Florida Business Corporation Act authorizes Florida
corporations to indemnify any person who was or is a party to
any proceeding other than an action by, or in the right of, the
corporation, by reason of the fact that he or she is or was a
director, officer, employee, or agent of the corporation. The
indemnity also applies to any person who is or was serving at
the request of the corporation as a director, officer, employee,
or agent of another corporation or other entity. The
indemnification applies against liability incurred in connection
with such a proceeding, including any appeal, if the person
acted in good faith and in a manner he or she reasonably
believed to be in, or not opposed to, the best interests of the
corporation. To be eligible for indemnity with respect to any
criminal action or proceeding, the person must have had no
reasonable cause to believe his or her conduct was unlawful.
In the case of an action by or on behalf of a corporation,
indemnification may not be made if the person seeking
indemnification is found liable, unless the court in which the
action was brought determines that such person is fairly and
reasonably entitled to indemnification.
The indemnification provisions of the Florida Business
Corporation Act require indemnification if a director, officer,
employee or agent has been successful in defending any action,
suit or proceeding to which he or she was a party by reason of
the fact that he or she is or was a director, officer, employee
or agent of the corporation or is or was serving at the request
of the corporation as a director, officer, employee or agent of
another corporation or other entity. The indemnity covers
expenses actually and reasonably incurred in defending the
action.
The indemnification authorized under Florida law is not
exclusive and is in addition to any other rights granted to
officers, directors and employees under the articles of
incorporation or bylaws of the corporation or any agreement
between officers and directors and the corporation. Each of
Mr. Mitchell and Mr. Neuman, two of our executive
officers, has signed an employment agreement that provides for
indemnification and advancement of expenses to the fullest
extent permitted by Florida law. The officer must repay such
expenses if it is subsequently found that the officer is not
entitled to indemnification. Exceptions to this additional
indemnification include criminal violations by the officer,
transactions involving an improper personal benefit to the
officer and willful misconduct or conscious and reckless
disregard for our best interests.
Our bylaws provide for the indemnification of directors,
officers, employees and agents and for the advancement of
expenses incurred in connection with the defense of any
proceeding that the director, officer, employee or agent was a
party to by reason of the fact that he or she is or was a
director, officer, employee or agent of our corporation, or at
our request, a director, officer, employee or agent of another
corporation. Our bylaws also provide that we may purchase and
maintain insurance on behalf of any director, officer, employee
or agent against liability asserted against the director,
officer, employee or agent in such capacity.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to our directors,
officers and controlling persons pursuant to the foregoing
provisions, or otherwise, we have been advised that in the
opinion of the SEC such indemnification is against public policy
as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by us of
expenses incurred or paid by a director, officer or controlling
person in the successful defense of any action, suit or
proceeding) is asserted by a director, officer or controlling
person in connection with the securities being registered, we
will, unless in the opinion of our counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by us is against public policy as expressed in
the Securities Act of 1933 and will be governed by the final
adjudication of this issue.
Under the Florida Business Corporation Act, a director is not
personally liable for monetary damages to us or to any other
person for acts or omissions in his or her capacity as a
director except in certain limited circumstances. Those
circumstances include violations of criminal law (unless the
director had reasonable cause to believe that such conduct was
lawful or had no reasonable cause to believe such conduct was
unlawful), transactions in which the director derived an
improper personal benefit, transactions involving unlawful
distributions, and conscious disregard for the best interest of
the corporation or willful misconduct
132
(only if the proceeding is by or in the right of the
corporation). As a result, shareholders may be unable to recover
monetary damages against directors for actions taken by them
which constitute negligence or gross negligence or which are in
violation of their fiduciary duties, although injunctive or
other equitable relief may be available.
Transfer
Agent and Registrar
The transfer agent and registrar for our common stock is
American Stock Transfer & Trust Company, LLC.
Listing
We have been approved to list our common stock on the New York
Stock Exchange, subject to official notice of issuance, under
the symbol IFT.
133
SHARES ELIGIBLE
FOR FUTURE SALE
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 and unpaid
dividends thereon) and all principal and accrued and unpaid
interest outstanding under our promissory note in favor of IMPEX
Enterprises, Ltd. will be converted
into shares
of our common stock; (ii) the issuance
of shares
of common stock to two of our employees pursuant to the terms of
each of their respective phantom stock agreements;
(iii) the conversion of a $30.0 million debenture
into shares of our common
stock 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 as
described under Corporate Conversion; and
(iv) the sale of
[ ] shares
in this offering, there will be
[ ] shares
of our common stock outstanding.
Of these shares, the
[ ] shares
sold in this offering and any shares issued upon exercise of the
underwriters over-allotment option will be freely tradable
without restriction or further registration under the Securities
Act, unless the shares are held by any of our
affiliates as that term is defined in Rule 144
under the Securities Act, in which case they may only be sold in
compliance with the limitations described below. The remaining
shares were issued and sold by us in reliance on exemptions from
the registration requirements of the Securities Act and are
eligible for public sale if registered under the Securities Act
or sold in accordance with Rule 144 under the Securities
Act.
Upon completion of this
offering, shares
will be available for future issuance under our Omnibus Plan. In
addition, shares
of common stock will be issuable pursuant to warrants that will
become exercisable upon the achievement of certain performance
hurdles described elsewhere in this prospectus under
Description of Capital Stock Warrants.
Lock-Up
Agreements
We, all of our current executive officers and directors and each
of our existing shareholders and our debenture holder have
agreed that, without the prior written consent of
FBR Capital Markets & Co. (FBR), as
representative of the underwriters, we and they will not,
directly or indirectly:
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offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase or otherwise
dispose of or transfer (or enter into any transaction or device
which is designed to, or could be expected to, result in the
disposition by any person at any time in the future of) any
share of our common stock or any security convertible into,
exercisable for or exchangeable for any share of our common
stock (Other Securities), whether now owned or
acquired after the date of this prospectus;
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enter into any swap or any other arrangement or transaction that
transfers to another person, in whole or in part, any of the
economic consequences of ownership of our common stock, whether
any such swap or transaction described above is to be settled by
delivery of shares of our common stock or other securities, in
cash or otherwise;
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make any demand for or exercise any right (or, in the case of
us, file) or cause to be filed a registration statement (other
than the registration statement on
Form S-8
that is described in this prospectus) under the Securities Act,
including any amendment thereto, with respect to the
registration of any shares of our common stock or Other
Securities; or
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publicly disclose the intention to do any of the foregoing,
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in each case, for a
lock-up
period of 180 days after the date of the final prospectus
relating to this offering. The
lock-up
period described in the preceding sentence will be extended if:
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during the last 17 days of the
lock-up
period, we issue an earnings release or material news or a
material event relating to us occurs; or
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prior to the expiration of the
lock-up
period, we announce that we will release earnings results during
the 16-day
period beginning on the last day of the
lock-up
period;
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134
in which case the restrictions described in the preceding
sentence will continue to apply until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
announcement of the material news or material event, unless such
extension is waived in writing by FBR.
Subject to applicable securities laws, our directors, executive
officers and shareholders may transfer their shares of our
common stock or Other Securities (i) as a bona fide gift or
gifts, provided that prior to such transfer the donee or donees
thereof agree in writing to be bound by the same restrictions or
(ii) if such transfer occurs by operation of law (e.g.,
pursuant to the rules of descent and distribution, statutes
governing the effects of a merger or a qualified domestic
relations order), provided that prior to such transfer the
transferee executes an agreement stating that the transferee is
receiving and holding the shares subject to the same
restrictions. In addition, our directors, executive officers and
shareholders may transfer their shares of our common stock or
Other Securities to any trust, partnership, corporation or other
entity formed for the direct or indirect benefit of the
director, executive officer or shareholder or the immediate
family of the director, executive officer or shareholder,
provided that prior to such transfer the transferee agrees in
writing to be bound by the same restrictions and provided that
such transfer does not involve a disposition for value.
The restrictions contained in the
lock-up
agreements do not apply to any grant of options to purchase
shares of our common stock or issuances of shares of restricted
stock or other equity-based awards pursuant to the Omnibus Plan.
Rule 144
Sales by Affiliates
Our affiliates must comply with Rule 144 of the Securities
Act when they sell shares of our common stock. Under
Rule 144, affiliates who acquire shares of common stock,
other than in a public offering registered with the SEC, are
required to hold those shares for a period of (i) one year
if they desire to sell such shares 90 or fewer days after the
issuer becomes subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act or (ii) six
months if they desire to sell such shares more than 90 days
after the issuer becomes subject to the reporting requirements
of Section 13 or 15(d) of the Exchange Act. Shares acquired
in a registered public offering or held for more than the
applicable holding period may be sold by an affiliate subject to
certain conditions. An affiliate would generally be entitled to
sell within any three-month period a number of shares that does
not exceed the greater of:
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one percent of the number of shares of common stock then
outstanding (approximately
[ ] shares
immediately after the offering); and
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the average weekly trading volume of the common stock on the New
York Stock Exchange during the four calendar weeks preceding the
filing with the SEC of a notice on Form 144 with respect to the
sale.
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Sales by affiliates under Rule 144 are also subject to
other requirements regarding the manner of sale, notice and the
availability of current public information about us.
Rule 144(b)(1)
Under Rule 144(b)(1) of the Securities Act, a person who is
not, and has not been at any time during the three months
preceding a sale, one of our affiliates and who has beneficially
owned the shares proposed to be sold for at least one year is
entitled to sell the shares for such persons own account
without complying with any other requirements of Rule 144.
After giving effect to the corporate conversion, all of the
[ ] shares
of common stock outstanding as of the date of this prospectus
would be available to be sold pursuant to Rule 144 upon the
expiration of the
lock-up
agreements described above.
We intend to file a
Form S-8
registration statement following completion of this offering to
register shares of common stock issued or issuable under our
2010 Omnibus Incentive Plan. These shares will be
available-for-sale
in the public market, subject to Rule 144 volume
limitations applicable to affiliates.
135
UNDERWRITING
Subject to the terms and conditions set forth in the
underwriting agreement between us and the underwriters named
below, for whom FBR is acting as representative, we have agreed
to sell to the underwriters, and each underwriter has severally
agreed to purchase, at the public offering price less the
underwriting discounts and commissions shown on the cover page
of this prospectus, the number of shares of common stock listed
next to its name in the following table:
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Number of
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Underwriter
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Shares
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FBR Capital Markets & Co.
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Total
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Under the terms and conditions of the underwriting agreement,
the underwriters are committed to purchase all of the shares
offered by this prospectus (other than the shares subject to the
underwriters option to purchase additional shares), if the
underwriters buy any of such shares. We have agreed to indemnify
the underwriters against certain liabilities, including certain
liabilities under the Securities Act, or to contribute to
payments the underwriters may be required to make in respect of
such liabilities.
The underwriters initially propose to offer the common stock
directly to the public at the public offering price set forth on
the cover page of this prospectus and to certain dealers at such
offering price less a concession not to exceed
$[ ] per share. The underwriters
may allow, and such dealers may re-allow, a discount not to
exceed $[ ] per share to certain
other dealers. After the public offering of the shares of common
stock, the offering price and other selling terms may be changed
by the underwriters.
Over-Allotment Option. We have granted to the
underwriters an option to purchase up to
[ ]
additional shares of our common stock at the same price per
share as they are paying for the shares shown in the table
above. The underwriters may exercise this option in whole or in
part at any time within 30 days after the date of the
underwriting agreement. To the extent the underwriters exercise
this option, each underwriter will be committed, so long as the
conditions of the underwriting agreement are satisfied, to
purchase a number of additional shares proportionate to that
underwriters initial commitment as indicated in the table
at the beginning of this section plus, in the event that any
underwriter defaults in its obligation to purchase shares under
the underwriting agreement, certain additional shares.
Discounts and Commissions. The following table
shows the per share and total underwriting discounts and
commissions we will pay to the underwriters. These amounts are
shown assuming both no exercise and full exercise of the
underwriters option to purchase additional shares of our
common stock.
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No
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Full
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Exercise
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Exercise
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Per Share
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$
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$
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Total
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$
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$
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In addition to the underwriting discounts and commissions to be
paid by us, we have agreed to reimburse FBR for certain of its
out-of-pocket
expenses incurred in connection with this offering, including
road show costs and expenses incurred in connection with this
offering, and FBRs disbursements for the fees and expenses
of underwriters counsel up to $400,000, subject to a total
expense reimbursement cap of $800,000. We have paid FBR a
$200,000 advance against its
out-of-pocket
expenses. We estimate that the total expenses of the offering
payable by us, excluding underwriting discounts and commissions,
will be approximately $[ ].
Listing. We have been approved to list our
common stock on the New York Stock Exchange, subject to official
notice of issuance. We have reserved the trading symbol
IFT. In order to meet the requirements for listing
on that exchange, the underwriters intend to sell at least the
minimum number of shares to at least the minimum number of
beneficial owners as required by that exchange.
136
Stabilization. In accordance with
Regulation M under the Exchange Act, the underwriters may
engage in activities that stabilize, maintain or otherwise
affect the price of our common stock, including short sales and
purchases to cover positions created by short positions,
stabilizing transactions, syndicate covering transactions,
penalty bids and passive market making.
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Short positions involve sales by the underwriters of shares in
excess of the number of shares the underwriters are obligated to
purchase, which creates a syndicate short position. The short
position may be either a covered short position or a naked short
position. In a covered short position, the number of shares
involved in the sales made by the underwriters in excess of the
number of shares they are obligated to purchase is not greater
than the number of shares that they may purchase by exercising
their option to purchase additional shares. In a naked short
position, the number of shares involved is greater than the
number of shares in their option to purchase additional shares.
The underwriters may close out any short position by either
exercising their option to purchase additional shares or
purchasing shares in the open market.
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Stabilizing transactions permit bids to purchase the underlying
security as long as the stabilizing bids do not exceed a
specific maximum price.
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Syndicate covering transactions involve purchases of our common
stock in the open market after the distribution has been
completed to cover syndicate short positions. In determining the
source of shares to close out the short position, the
underwriters will consider, among other things, the price of
shares available for purchase in the open market as compared to
the price at which they may purchase shares through the
underwriters option to purchase additional shares. If the
underwriters sell more shares than could be covered by
underwriters option to purchase additional shares, thereby
creating a naked short position, the position can only be closed
out by buying shares in the open market. A naked short position
is more likely to be created if the underwriters are concerned
that there could be downward pressure on the price of the shares
in the open market after pricing that could adversely affect
investors who purchase in the offering.
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Penalty bids permit the representative to reclaim a selling
concession from a syndicate member when the common stock
originally sold by the syndicate member is purchased in a
stabilizing or syndicate covering transaction to cover syndicate
short positions.
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In passive market making, market makers in the common stock who
are underwriters or prospective underwriters may, subject to
limitations, make bids for or purchase shares of our common
stock until the time, if any, at which a stabilizing bid is made.
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These activities may have the effect of raising or maintaining
the market price of our common stock or preventing or retarding
a decline in the market price of our common stock. As a result
of these activities, the price of our common stock may be higher
than the price that might otherwise exist in the open market.
These transactions may be effected on the New York Stock
Exchange or otherwise and, if commenced, may be discontinued at
any time.
Neither we nor any of the underwriters make any representation
or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of
our common stock. In addition, neither we nor any of the
underwriters make any representation that the representative of
the underwriters will engage in these stabilizing transactions
or that any transaction, once commenced, will not be
discontinued without notice.
Lock-Up
Agreements. We, all of our current executive
officers and directors and each of our shareholders and our
debenture holder have agreed that, without the prior written
consent of FBR, we and they will not, directly or indirectly:
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offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase or otherwise
dispose of or transfer (or enter into any transaction or device
which is designed to, or could be expected to, result in the
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137
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disposition by any person at any time in the future of), any
share of our common stock or Other Securities, whether now owned
or acquired after the date of this prospectus;
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enter into any swap or any other arrangement or transaction that
transfers to another person, in whole or in part, any of the
economic consequences of ownership of our common stock, whether
any such swap or transaction described above is to be settled by
delivery of shares of our common stock or other securities, in
cash or otherwise;
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make any demand for or exercise any right (or, in the case of
us, file) or cause to be filed a registration statement (other
than the registration statement on
Form S-8
that is described in this prospectus) under the Securities Act,
including any amendment thereto, with respect to the
registration of any shares of our common stock or Other
Securities; or
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publicly disclose the intention to do any of the foregoing,
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in each case, for a
lock-up
period of 180 days after the date of the final prospectus
relating to this offering. The
lock-up
period described in the preceding sentence will be extended if:
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during the last 17 days of the
lock-up
period, we issue an earnings release or material news or a
material event relating to us occurs; or
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prior to the expiration of the
lock-up
period, we announce that we will release earnings results during
the 16-day
period beginning on the last day of the
lock-up
period;
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in which case the restrictions described in the preceding
sentence will continue to apply until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
announcement of the material news or material event, unless such
extension is waived in writing by FBR.
Subject to applicable securities laws, our directors, executive
officers and shareholders may transfer their shares of our
common stock or Other Securities (i) as a bona fide gift or
gifts, provided that prior to such transfer the donee or donees
thereof agree in writing to be bound by the same restrictions or
(ii) if such transfer occurs by operation of law (e.g.,
pursuant to the rules of descent and distribution, statutes
governing the effects of a merger or a qualified domestic
relations order), provided that prior to such transfer the
transferee executes an agreement stating that the transferee is
receiving and holding the shares subject to the same
restrictions. In addition, our directors, executive officers and
shareholders may transfer their shares of our common stock or
Other Securities to any trust, partnership, corporation or other
entity formed for the direct or indirect benefit of the
director, executive officer or shareholder or the immediate
family of the director, executive officer or shareholder,
provided that prior to such transfer the transferee agrees in
writing to be bound by the same restrictions and provided that
such transfer does not involve a disposition for value.
The restrictions contained in the
lock-up
agreements do not apply to any grant of options to purchase
shares of our common stock or issuances of shares of restricted
stock or other equity-based awards pursuant to the Omnibus Plan.
FBR does not intend to release any portion of the common stock
subject to the foregoing
lock-up
agreements; however FBR, in its sole discretion, may release any
of the common stock from the
lock-up
agreements prior to expiration of the
lock-up
period without notice. In considering a request to release
shares from a
lock-up
agreement, FBR will consider a number of factors, including the
impact that such a release would have on this offering and the
market for our common stock and the equitable considerations
underlying the request for releases.
Discretionary Accounts. The underwriters have
informed us that they do not expect to make sales to accounts
over which they exercise discretionary authority in excess of 5%
of the shares of common stock being offered in this offering.
IPO Pricing. Prior to the completion of this
offering, there has been no public market for our common stock.
The initial public offering price has been negotiated between us
and the representative. Among the factors to be considered in
these negotiations were: the history of, and prospects for, us
and the industry in which we compete; our past and present
financial performance; an assessment of our management; the
present
138
state of our development; the prospects for our future earnings;
the prevailing conditions of the applicable United States
securities market at the time of this offering; and market
valuations of publicly traded companies that we and the
representative believe to be comparable to us.
Certain Information and Fees. A prospectus in
electronic format may be made available on the websites
maintained by one or more of the underwriters or selling group
members, if any, participating in the offering. The
representative may allocate a number of shares to the
underwriters and selling group members, if any, for sale to
their online brokerage account holders. Any such allocations for
online distributions will be made by the representative on the
same basis as other allocations.
Other than the prospectus in electronic format, the information
on any underwriters or selling group members website
and any information contained in any other website maintained by
any underwriter or selling group member is not part of this
prospectus or the registration statement of which this
prospectus forms a part, has not been approved or endorsed by us
or any underwriter in its capacity as underwriter or selling
group member and should not be relied upon by investors.
If you purchase shares of common stock offered in this
prospectus, you may be required to pay stamp taxes and other
charges under the laws and practices of the country of purchase,
in addition to the offering price listed on the cover page of
this prospectus.
Other Relationships. FBR may in the future
provide us and our affiliates with investment banking and
financial advisory services for which FBR may in the future
receive customary fees. We have granted FBR a right of first
refusal under certain circumstances to act as (i) financial
advisor in connection with any purchase of sale of assets or a
business combination or other strategic transaction and
(ii) the sole book runner or sole placement agent in
connection with any subsequent public or private offering of
equity securities or other capital markets financing by us.
Subject to completion of this offering, this right of first
refusal extends for one year from the date of this offering. The
terms of any such engagement of FBR will be determined by
separate agreement.
139
LEGAL
MATTERS
Foley & Lardner LLP in Jacksonville, Florida, will
pass upon the validity of the shares of common stock offered by
this prospectus and certain other legal matters for us. Locke
Lord Bissell & Liddell LLP in Chicago, Illinois, will
pass upon certain legal matters for the underwriters.
EXPERTS
The consolidated and combined financial statements of Imperial
Holdings, LLC and its subsidiaries at December 31, 2009 and
2008 and for each of the years ended December 31, 2009,
2008 and 2007 included in this prospectus and in the related
registration statement have been audited by Grant Thornton LLP,
an independent registered public accounting firm, as indicated
in their report with respect thereto, and are included in this
prospectus in reliance upon the authority of such firm as
experts in auditing and accounting.
WHERE YOU
CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on
Form S-1
under the Securities Act with respect to the shares of our
common stock to be sold in this offering. This prospectus does
not contain all the information contained in the registration
statement. For further information with respect to us and the
shares to be sold in this offering, we refer you to the
registration statement, including the agreements, other
documents and schedules filed as exhibits to the registration
statement. Statements contained in this prospectus as to the
contents of any agreement or other document to which we make
reference are not necessarily complete. In each instance, we
refer you to the copy of the agreement or other document filed
as an exhibit to the registration statement, each statement
being qualified in all respects by reference to the agreement or
document to which it refers.
After completion of this offering, we will file annual,
quarterly and current reports, proxy statements and other
information with the SEC. We intend to make these filings
available on our website at www.imprl.com. Information on
our website is not incorporated by reference in this prospectus.
In addition, we will provide copies of our filings free of
charge to our shareholders upon request. Our SEC filings,
including the registration statement of which this prospectus is
a part, will also be available to you on the SECs Internet
site at
http://www.sec.gov.
You may read and copy all or any portion of the registration
statement or any reports, statements or other information we
file at the SECs public reference room at
100 F Street, N.E., Washington, D.C. 20549. You
may call the SEC at
1-800-SEC-0330
for further information on the operation of the public reference
room. You can receive copies of these documents upon payment of
a duplicating fee by writing to the SEC. We intend to furnish
our shareholders with annual reports containing consolidated
financial statements audited by an independent registered public
accounting firm.
140
INDEX TO
FINANCIAL STATEMENTS
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Audited Consolidated and Combined Financial Statements as of
December 31, 2008 and 2009 and for each of the three years
in the period ended December 31, 2009 of Imperial Holdings,
LLC and its Subsidiaries
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F-2
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F-3
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F-4
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F-5
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F-6
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F-7
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Unaudited Interim Consolidated Financial Statements as of
September 30, 2010 and for the nine month periods ended
September 30, 2009 and 2010 of Imperial Holdings, LLC and
its Subsidiaries
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F-29
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F-30
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F-31
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F-32
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F-33
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Imperial Holdings, Inc. will succeed to the business of Imperial
Holdings, LLC and its assets and liabilities pursuant to the
corporate conversion of Imperial Holdings, LLC immediately prior
to the closing of the offering as described in this prospectus.
F-1
Report of
Independent Registered Public Accounting Firm
To the Members
Imperial Holdings, LLC
We have audited the accompanying consolidated and combined
balance sheets of Imperial Holdings, LLC and subsidiaries
(the Company) as of December 31, 2009 and 2008
and the related consolidated and combined statements of
operations, members equity and cash flows for each of the
three years in the period ended December 31, 2009. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated and combined financial
statements referred to above present fairly, in all material
respects, the financial position of Imperial Holdings, LLC and
subsidiaries as of December 31, 2009 and 2008, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2009 in
conformity with accounting principles generally accepted in the
United States of America.
Fort Lauderdale, Florida
August 11, 2010
F-2
Imperial
Holdings, LLC and Subsidiaries
December 31,
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2008
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2009
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ASSETS
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Assets
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Cash and cash equivalents
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$
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7,643,528
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$
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15,890,799
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Restricted cash
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|
2,220,735
|
|
|
|
|
|
Certificate of deposit restricted
|
|
|
659,154
|
|
|
|
669,835
|
|
Agency fees receivable, net of allowance for doubtful accounts
|
|
|
8,870,949
|
|
|
|
2,165,087
|
|
Deferred costs, net
|
|
|
26,650,270
|
|
|
|
26,323,244
|
|
Prepaid expenses and other assets
|
|
|
4,180,383
|
|
|
|
885,985
|
|
Deposits
|
|
|
476,095
|
|
|
|
982,417
|
|
Interest receivable, net
|
|
|
8,604,456
|
|
|
|
21,033,687
|
|
Loans receivable, net
|
|
|
148,743,591
|
|
|
|
189,111,302
|
|
Structured settlements receivables, net
|
|
|
1,140,925
|
|
|
|
151,543
|
|
Receivables from sales of structured settlements
|
|
|
|
|
|
|
320,241
|
|
Investment in life settlements (life insurance policies), at
estimated fair value
|
|
|
|
|
|
|
4,306,280
|
|
Investment in life settlement fund
|
|
|
|
|
|
|
542,324
|
|
Fixed assets, net
|
|
|
1,850,338
|
|
|
|
1,337,344
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
211,040,424
|
|
|
$
|
263,720,088
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS EQUITY
|
Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
3,532,745
|
|
|
$
|
2,713,543
|
|
Accrued expenses related parties
|
|
|
2,000,000
|
|
|
|
455,485
|
|
Interest payable
|
|
|
4,968,858
|
|
|
|
8,251,023
|
|
Interest payable related parties
|
|
|
594,534
|
|
|
|
4,376,299
|
|
Notes payable
|
|
|
104,284,443
|
|
|
|
153,364,326
|
|
Notes payable related parties
|
|
|
79,177,405
|
|
|
|
77,700,155
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
194,557,985
|
|
|
|
246,860,831
|
|
Member units Series A preferred (500,000
authorized; 90,796 issued and outstanding as of
December 31, 2009)
|
|
|
|
|
|
|
4,035,000
|
|
Member units Series B preferred (50,000
authorized; 50,000 issued and outstanding as of
December 31, 2009)
|
|
|
|
|
|
|
5,000,000
|
|
Member units common (500,000 authorized; 450,000
issued and outstanding as of December 31, 2009 and 2008)
|
|
|
19,945,488
|
|
|
|
19,923,709
|
|
Accumulated deficit
|
|
|
(3,463,049
|
)
|
|
|
(12,099,452
|
)
|
|
|
|
|
|
|
|
|
|
Total members equity
|
|
|
16,482,439
|
|
|
|
16,859,257
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity
|
|
$
|
211,040,424
|
|
|
$
|
263,720,088
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of this financial
statement.
F-3
Imperial
Holdings, LLC and Subsidiaries
For
the Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Agency fee income
|
|
$
|
24,514,935
|
|
|
$
|
48,003,586
|
|
|
$
|
26,113,814
|
|
Interest income
|
|
|
4,887,404
|
|
|
|
11,914,251
|
|
|
|
21,482,837
|
|
Origination fee income
|
|
|
525,964
|
|
|
|
9,398,679
|
|
|
|
29,852,722
|
|
Gain on sale of structured settlements
|
|
|
|
|
|
|
442,771
|
|
|
|
2,684,328
|
|
Gain on forgiveness of debt
|
|
|
|
|
|
|
|
|
|
|
16,409,799
|
|
Other income
|
|
|
2,300
|
|
|
|
47,400
|
|
|
|
71,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income
|
|
|
29,930,603
|
|
|
|
69,806,687
|
|
|
|
96,614,848
|
|
Interest expense
|
|
|
1,336,901
|
|
|
|
7,475,714
|
|
|
|
23,928,017
|
|
Interest expense related parties
|
|
|
6,168
|
|
|
|
5,276,600
|
|
|
|
9,826,781
|
|
Provision for losses on loans receivable
|
|
|
2,331,637
|
|
|
|
10,767,928
|
|
|
|
9,830,318
|
|
Loss (gain) on loan payoffs and settlements, net
|
|
|
(224,551
|
)
|
|
|
2,737,620
|
|
|
|
12,058,007
|
|
Amortization of deferred costs
|
|
|
125,909
|
|
|
|
7,568,541
|
|
|
|
18,339,220
|
|
Selling, general and administrative expenses
|
|
|
21,925,317
|
|
|
|
36,964,956
|
|
|
|
30,242,699
|
|
Selling, general and administrative related parties
|
|
|
2,409,148
|
|
|
|
4,601,454
|
|
|
|
1,026,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
27,910,529
|
|
|
|
75,392,813
|
|
|
|
105,251,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,020,074
|
|
|
$
|
(5,586,126
|
)
|
|
$
|
(8,636,403
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted loss per share (unaudited)
|
|
|
|
|
|
|
|
|
|
|
[ ]
|
|
Pro forma weighted average shares outstanding (unaudited)
|
|
|
|
|
|
|
|
|
|
|
[ ]
|
|
The accompanying notes are an integral part of this financial
statement.
F-4
Imperial
Holdings, LLC and Subsidiaries
For
the Years Ended December 31, 2007, 2008 and 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
|
|
|
|
Member Units
|
|
|
Member Units
|
|
|
Member Units
|
|
|
Earnings
|
|
|
|
|
|
|
Common
|
|
|
Preferred A
|
|
|
Preferred B
|
|
|
(Accumulated)
|
|
|
|
|
|
|
Units
|
|
|
Amounts
|
|
|
Units
|
|
|
Amounts
|
|
|
Units
|
|
|
Amounts
|
|
|
Deficit
|
|
|
Total
|
|
|
Balance, December 31, 2006
|
|
|
221,729
|
|
|
$
|
9,854,640
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
103,003
|
|
|
$
|
9,957,643
|
|
Member contributions
|
|
|
228,271
|
|
|
|
10,145,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,145,360
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,020,074
|
|
|
|
2,020,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
450,000
|
|
|
|
20,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,123,077
|
|
|
|
22,123,077
|
|
Member distributions
|
|
|
|
|
|
|
(54,512
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54,512
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,586,126
|
)
|
|
|
(5,586,126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
450,000
|
|
|
|
19,945,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,463,049
|
)
|
|
|
16,482,439
|
|
Member distributions
|
|
|
|
|
|
|
(21,779
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,779
|
)
|
Conversion of debt
|
|
|
|
|
|
|
|
|
|
|
90,796
|
|
|
|
4,035,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,035,000
|
|
Proceeds from sale of preferred units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
5,000,000
|
|
|
|
|
|
|
|
5,000,000
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,636,403
|
)
|
|
|
(8,636,403
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
450,000
|
|
|
$
|
19,923,709
|
|
|
|
90,796
|
|
|
$
|
4,035,000
|
|
|
|
50,000
|
|
|
$
|
5,000,000
|
|
|
$
|
(12,099,452
|
)
|
|
$
|
16,859,257
|
|
The accompanying notes are an integral part of these financial
statements.
F-5
Imperial
Holdings, LLC and Subsidiaries
For
the Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
2,020,074
|
|
|
$
|
(5,586,126
|
)
|
|
$
|
(8,636,403
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
405,049
|
|
|
|
794,306
|
|
|
|
888,446
|
|
Provision for doubtful accounts
|
|
|
287,676
|
|
|
|
1,046,178
|
|
|
|
1,289,353
|
|
Provision for losses on loans receivable
|
|
|
2,331,637
|
|
|
|
10,767,928
|
|
|
|
9,830,318
|
|
Loss (gain) of loan payoffs and settlements, net
|
|
|
(224,551
|
)
|
|
|
2,737,620
|
|
|
|
12,058,007
|
|
Origination income
|
|
|
(525,964
|
)
|
|
|
(9,398,679
|
)
|
|
|
(29,852,722
|
)
|
Gain on sale of structured settlements
|
|
|
|
|
|
|
(442,771
|
)
|
|
|
(2,684,328
|
)
|
Gain on forgiveness of debt
|
|
|
|
|
|
|
|
|
|
|
(16,409,799
|
)
|
Interest income
|
|
|
(4,887,323
|
)
|
|
|
(11,914,251
|
)
|
|
|
(21,482,837
|
)
|
Amortization of deferred costs
|
|
|
125,909
|
|
|
|
7,568,541
|
|
|
|
18,339,220
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificate of deposit
|
|
|
(561,698
|
)
|
|
|
(97,456
|
)
|
|
|
(10,681
|
)
|
Deposits
|
|
|
(419,248
|
)
|
|
|
(19,717
|
)
|
|
|
|
|
Agency fees receivable
|
|
|
(5,869,311
|
)
|
|
|
(4,199,501
|
)
|
|
|
5,416,509
|
|
Structured settlements receivables
|
|
|
(368,705
|
)
|
|
|
(704,720
|
)
|
|
|
4,658,300
|
|
Prepaid expenses and other assets
|
|
|
(930,953
|
)
|
|
|
(2,201,314
|
)
|
|
|
2,003,955
|
|
Accounts payable and accrued expenses
|
|
|
2,931,710
|
|
|
|
2,360,622
|
|
|
|
(536,823
|
)
|
Interest payable
|
|
|
881,927
|
|
|
|
7,132,789
|
|
|
|
12,498,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(4,803,771
|
)
|
|
|
(2,156,551
|
)
|
|
|
(12,631,183
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of fixed assets
|
|
|
(1,524,721
|
)
|
|
|
(769,328
|
)
|
|
|
(375,452
|
)
|
Collection (purchase) of investment
|
|
|
(1,714,216
|
)
|
|
|
1,714,216
|
|
|
|
(904,237
|
)
|
Proceeds from loan payoffs
|
|
|
1,357,607
|
|
|
|
3,543,032
|
|
|
|
36,108,662
|
|
Originations of loans receivable, net
|
|
|
(37,528,305
|
)
|
|
|
(107,301,524
|
)
|
|
|
(64,143,742
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(39,409,635
|
)
|
|
|
(102,813,604
|
)
|
|
|
(29,314,769
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Member contributions
|
|
|
7,145,360
|
|
|
|
349,000
|
|
|
|
5,000,000
|
|
Member distributions
|
|
|
|
|
|
|
(54,512
|
)
|
|
|
(21,779
|
)
|
Payments of cash pledged as restricted deposits
|
|
|
(1,674,570
|
)
|
|
|
(546,165
|
)
|
|
|
1,536,111
|
|
Payment of financing fees
|
|
|
(672,205
|
)
|
|
|
(22,608,882
|
)
|
|
|
(17,168,828
|
)
|
Repayment of borrowings under credit facilities
|
|
|
|
|
|
|
(15,289,740
|
)
|
|
|
(22,665,616
|
)
|
Repayment of borrowings from affiliates
|
|
|
|
|
|
|
(794,773
|
)
|
|
|
(2,826,418
|
)
|
Borrowings under credit facilities
|
|
|
35,559,122
|
|
|
|
131,823,862
|
|
|
|
73,402,645
|
|
Borrowings from affiliates
|
|
|
|
|
|
|
18,239,793
|
|
|
|
12,937,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
40,357,707
|
|
|
|
111,118,583
|
|
|
|
50,193,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
(3,855,699
|
)
|
|
|
6,148,428
|
|
|
|
8,247,271
|
|
Cash and cash equivalents, at beginning of year
|
|
|
5,350,799
|
|
|
|
1,495,100
|
|
|
|
7,643,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, at end of year
|
|
$
|
1,495,100
|
|
|
$
|
7,643,528
|
|
|
$
|
15,890,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of debt to preferred member units
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,035,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred costs paid directly by credit facility
|
|
$
|
|
|
|
$
|
10,926,246
|
|
|
$
|
14,600,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes contributed from members
|
|
|
3,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest during the period
|
|
$
|
458,830
|
|
|
$
|
7,994,775
|
|
|
$
|
20,311,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-6
Imperial
Holdings, LLC and Subsidiaries
December 31,
2007, 2008 and 2009
|
|
NOTE 1
|
ORGANIZATION
AND DESCRIPTION OF BUSINESS ACTIVITIES
|
Imperial Holdings, LLC (the Company) was formed
pursuant to an operating agreement dated December 15, 2006
between IFS Holdings, Inc., IMEX Settlement Corporation, Premium
Funding, Inc. and Red Oak Finance, LLC. The Company operates as
a limited liability company. The Company, operating through its
subsidiaries, is a specialty finance company with its corporate
office in Boca Raton, Florida. As a limited liability company,
each members liability is generally limited to the amounts
reflected in their respective capital accounts. The Company
operates in two reportable business segments: financing premiums
for individual life insurance policies and purchasing structured
settlements.
Premium
Finance
A premium finance transaction is a transaction in which a life
insurance policyholder obtains a loan, predominately through an
irrevocable life insurance trust established by the insured, to
pay insurance premiums for a fixed period of time. The
Companys typical premium finance loan is approximately two
years in duration and is collateralized by the underlying life
insurance policy. On each premium finance loan, the Company
charges a loan origination fee and charges interest on the loan.
In addition, the Company charges the referring agent an agency
fee.
Structured
Settlements
Washington Square Financial, LLC, a wholly owned subsidiary of
the Company, purchases structured settlements from individuals.
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, thereby providing a high
credit quality stream of payments to the plaintiff.
Recipients of structured settlements are permitted to sell their
deferred payment streams to a structured settlement purchaser
pursuant to state statutes that require certain disclosures,
notice to the obligors and state court approval. Through such
sales, the Company purchases a certain number of fixed,
scheduled future settlement payments on a discounted basis in
exchange for a single lump sum payment.
|
|
NOTE 2
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Principles
of Consolidation and Combination
The consolidated and combined financial statements include the
accounts of the Company, all of its wholly-owned subsidiaries
and its special purpose entities. The special purpose entities
have been created to fulfill specific objectives. Also included
in the consolidated and combined financial statements is
Imperial Life Financing, LLC which is owned by two members of
the Company and is combined with the Company for reporting
purposes. All significant intercompany balances and transactions
have been eliminated in consolidation.
Use
of Estimates
The preparation of these consolidated and combined financial
statements, in conformity with accounting principles generally
accepted in the United States of America, requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from
these estimates and such differences could be material.
Significant estimates made by management include the
F-7
IMPERIAL
HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
December 31,
2007, 2008 and 2009
loan impairment valuation, allowance for doubtful accounts, and
the valuation of investments in life settlements at
December 31, 2009 and 2008.
Cash
and Cash Equivalents
Cash and cash equivalents include cash on hand, investments and
all highly liquid instruments purchased with an original
maturity of three months or less.
Loans
Receivable
Loans receivable acquired or originated by the Company are
reported 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 stated rate of interest on the loans. Discounts on
loans receivable are accreted to interest income over the life
of the loans using the effective interest method.
Loan
Impairment Valuation
In accordance with ASC 310, Receivables, the Company
specifically evaluates 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 of a loan, the Company has the option to take
control of the underlying life insurance policy enabling it to
sell the policy or for those loans that are insured (see below),
collect the face value of the insurance certificate.
The loan impairment valuation is evaluated on a monthly basis by
management and is based on managements periodic review of
the fair 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 valuation is established when,
based on current information and events, it is probable that the
Company will be unable to collect the scheduled payments of
principal, interest, and origination fee due according to the
contractual terms of the loan agreement. Once established, the
impairment cannot be reversed to earnings.
The Company purchased lender protection insurance coverage on
loans that were sold to or participated by Imperial Life
Financing, LLC, Imperial PFC Financing, LLC, Imperial Life
Financing II, LLC, and Imperial PFC Financing II, LLC. This
insurance mitigates the Companys exposure to significant
losses which may be caused by declines in the value of the
underlying life insurance policies. For loans that have lender
protection insurance coverage, a loan impairment valuation
adjustment is established if the carrying value of the loan
exceeds the amount of coverage at the end of the period.
For the year ended December 31, 2009, the Company
recognized an impairment charge of approximately $8,616,000 and
$1,214,000 on the loans and related interest, respectively, and
is reflected as a component of the provision for losses on loans
receivable in the accompanying consolidated and combined
statement of operations. For the year ending December 31,
2008, the Company recognized an impairment charge of
approximately $9,346,000 and $1,422,000 related to impaired
loans and interest, respectively.
Agency
Fees Receivable
Agency fees are charged for services related to premium finance
transactions. Agency fees are due per the signed fee agreement.
Agency fees receivable are reported net of an allowance for
doubtful accounts.
F-8
IMPERIAL
HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
December 31,
2007, 2008 and 2009
Managements determination of the allowance for doubtful
accounts is based on an evaluation of the commission receivable,
prior collection history, current economic conditions, and other
inherent risks. The Company reviews agency fees receivable aging
on a regular basis to determine if any of the receivables are
past due. The Company writes off all uncollectible agency fee
receivable balances against its allowance. The allowance for
doubtful accounts was approximately $120,000 and $769,000 for
the years ended December 31, 2009 and 2008, respectively.
Deferred
Costs
Deferred costs include costs incurred in connection with
acquiring and maintaining credit facilities and costs incurred
in connection with securing lender protection insurance. These
costs are amortized over the life of the related loan using the
effective interest method and are classified as amortization of
deferred costs in the accompanying consolidated and combined
statement of operations.
Interest
Income and Origination Income
Interest income consists of interest earned on loans receivable,
income from accretion of discounts on purchased loans, and
accretion of discounts on purchased structured settlement
receivables. Interest income is recognized when it is realizable
and earned, in accordance with ASC 605, Revenue
Recognition. Discounts are accreted over the remaining life
of the loan using the effective interest method.
Loans often include origination fees which are fees payable to
the Company on the date the loan matures. The fees are
negotiated at the inception of the loan on a transaction by
transaction basis. The fees are accreted into income over the
term of the loan using the effective interest method.
Payments on loans are not due until maturity of the loan. As
such, we typically do not have non-performing loans or
non-accrual loans until post maturity of the loan. At maturity,
the loans stop accruing interest and origination income.
Interest and origination income on impaired loans is recognized
when it is realizable and earned accordance with ASC 605,
Revenue Recognition. Persuasive evidence of an
arrangement exists through a loan agreement which is signed by a
borrower prior to funding and sets forth the agreed upon terms
of the interest and origination fees. Interest income and
origination income are earned over the term of the loan and are
accreted using the effective interest method. The interest and
origination fees are fixed and determinable based on the loan
agreement. For impaired loans, we continually reassess whether
the collectability of the interest income and origination income
is reasonably assured because the fair value of the collateral
typically increases over the term of the loan. Our assessment of
whether collectability of interest income and origination income
is probable is based on our estimate of proceeds to be received
upon maturity of the loan. To the extent that additional
interest income is not recognized as collectability is not
considered probable, origination income is not recognized. This
is consistent with the objective of the interest method, as
described in ASC 310-20, of maintaining a constant
effective yield on the net investment in the receivable. Since
our loans are due upon maturity, we cannot determine whether a
loan is performing or non-performing until maturity. For
impaired loans, our estimate of proceeds to be received upon
maturity of the loan is generally correlated to our current
estimate of fair value of the insurance policy, which is the
measure to which the loans have been impaired, but also
incorporates expected increases in fair value of the insurance
policy over the term of the loan, trends in the market, and our
experience with loan payoffs.
Fixed
Assets
Fixed assets are stated at cost less accumulated depreciation
and amortization. The Company provides for depreciation of fixed
assets on a straight-line basis over the estimated useful lives
of the assets which range
F-9
IMPERIAL
HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
December 31,
2007, 2008 and 2009
from three to five years. Leasehold improvements are amortized
using the straight-line method over the shorter of the expected
life of the improvement or the remaining lease term.
Agency
Fee Income
Agency fee income for the premium finance business is recognized
as the loan is funded.
Loss
in Loan Payoffs and Settlements, Net
When a premium finance loan matures, we record the difference
between the net carrying value of the loan and the cash
received, or the fair value of the life insurance policy that is
obtained in the event of payment default, as a gain or loss on
loan payoffs and settlements, net. This account was
significantly impacted by the Acorn settlement (see
Note 14) whereby the Company recorded a loss on loan
payoffs and settlements of $10,182,000 and $1,868,000 during the
years ended December 31, 2009 and 2008, respectively.
Marketing
Expense
Marketing costs are expensed as incurred and were approximately
$4,583,000, $6,053,000 and $2,298,000 for the years ended
December 31, 2009, 2008 and 2007, respectively. These costs
are included within selling, general and administrative expenses
in the consolidated and combined statement of operations.
Investment
in Life Settlements
When the Company becomes the owner of a life insurance policy
following a default on a premium finance loan, the life
insurance policy is accounted for as an investment in life
settlements. Investments in life settlements are accounted for
in accordance with
ASC 325-30,
Investments in Insurance Contracts, which states that an
investor shall elect to account for its investments in life
settlement contracts using either the investment method or the
fair value method. The election is made on an
instrument-by-instrument
basis and is irrevocable. The Company has elected to account for
these investments using the fair value method.
Investment
in Other Companies
The Company uses the equity method of accounting to account for
its investment in other companies which the Company does not
control but over which it exerts significant influence;
generally this represents ownership interest of at least 20% and
not more than 50%. The Company considers whether the fair values
of any of its investments have declined below their carrying
values whenever adverse events or changes in circumstances
indicate that recorded values may not be recoverable. If the
Company considers any such decline to be other than temporary, a
write-down would be recorded to estimated fair value. As of
December 31, 2009, the Company has an investment in a life
settlement fund (see Note 12) and the Company has not
recorded any losses on this investment.
Fair
Value Measurements
The Company follows ASC 820, Fair Value Measurements and
Disclosures when required to measure fair value for
recognition or disclosure purposes. ASC 820 defines fair
value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date. ASC 820 also
establishes a three-level hierarchy for fair value measurements
which prioritizes and ranks the level of market price
observability used in measuring investments at fair value.
Investments measured and reported at fair value are classified
and disclosed in one of the following categories:
Level 1 Valuation is based on unadjusted quoted
prices in active markets for identical assets and liabilities
that are accessible at the reporting date. Since valuations are
based on quoted prices that are
F-10
IMPERIAL
HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
December 31,
2007, 2008 and 2009
readily and regularly available in an active market, valuation
of these products does not entail a significant degree of
judgment.
Level 2 Valuation is determined from pricing
inputs that are other than quoted prices in active markets that
are either directly or indirectly observable as of the reporting
date. Observable inputs include quoted prices for similar assets
or liabilities in active markets, quoted prices for identical or
similar assets or liabilities in markets that are not active,
and interest rates and yield curves that are observable at
commonly quoted intervals.
Level 3 Valuation is based on inputs that are
both significant to the fair value measurement and unobservable.
Level 3 inputs include situations where there is little, if
any, market activity for the financial instrument. The inputs
into the determination of fair value generally require
significant management judgment or estimation.
The availability of valuation techniques and observable inputs
can vary from investment to investment and is affected by a wide
variety of factors including, the type of investment, whether
the investment is new and not yet established in the
marketplace, and other characteristics particular to the
transaction.
To the extent that valuation is based on models or inputs that
are less observable or unobservable in the market, the
determination of fair value requires more judgment. Those
estimated values do not necessarily represent the amounts that
may be ultimately realized due to the occurrence of future
circumstances that cannot be reasonably determined. Because of
the inherent uncertainty of valuation, those estimated values
may be materially higher or lower than the values that would
have been used had a ready market for the investments existed.
Accordingly, the degree of judgment exercised by the Company in
determining fair value of assets and liabilities is greatest for
items categorized in Level 3. In certain cases, the inputs
used to measure fair value may fall into different levels of the
fair value hierarchy. In such cases, for disclosure purposes,
the level in the fair value hierarchy within which the fair
value measurement in its entirety falls, is determined based on
the lowest level input that is significant to the fair value
measurement.
Fair value is a market-based measure considered from the
perspective of a market participant rather than an
entity-specific measure. Therefore, even when market assumptions
are not readily available, the Companys own assumptions
are set to reflect those that market participants would use in
pricing the asset or liability at the measurement date. The
Company uses prices and inputs that are current as of the
reporting date, including periods of market dislocation. In
periods of market dislocation, the observability of prices and
inputs may be reduced for many investments. This condition could
cause an investment to be reclassified to a lower level within
the fair value hierarchy. See Note 13 Fair
Value Measurements.
Income
Taxes
The Company operates as a limited liability company. As a
result, the income taxes on the earnings are payable by the
member. Accordingly, no provision or liability for income taxes
is reflected in the accompanying consolidated financial
statements.
Effective January 1, 2007, the Company adopted the
provisions of ASC 740, Income Taxes, related to
uncertain tax positions. As required by the uncertain tax
position guidance, the Company recognizes 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. At the adoption
date, the Company applied the uncertain tax position guidance to
all tax positions for which the statute of limitations remained
open. The Company is subject to filing tax returns in the United
States federal jurisdiction and various states. Tax regulations
within each jurisdiction are subject to the interpretation of
the
F-11
IMPERIAL
HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
December 31,
2007, 2008 and 2009
related tax laws and regulations and require significant
judgment to apply. The Companys open tax years for United
States federal and state income tax examinations by tax
authorities are 2006 to 2009. The Companys policy is to
classify interest and penalties (if any) as administrative
expenses. The Company does not have any material uncertain tax
positions; therefore, there was no impact on the Companys
consolidated financial statements.
Restricted
Cash
Under the credit facility with Acorn, the Company was required
to pledge collateral of at least 15% of the aggregate amount of
loans held under the facility. As of December 31, 2008, the
Company had pledged cash of approximately $2,221,000, which was
classified as restricted cash. The restricted cash was released
as part of the Acorn settlements agreement (see Note 14).
Risks
and Uncertainties
In the normal course of business, the Company encounters
economic risk. There are three main components of economic risk:
credit risk, market risk and concentration of credit risk.
Credit risk is the risk of default on the Companys loan
portfolio that results from a borrowers inability or
unwillingness to make contractually required payments. Market
risk for the Company includes interest rate risk. Market risk
also reflects the risk of declines in valuation of the
Companys investments.
Reclassifications
Certain reclassifications and other immaterial adjustments have
been made to the previously issued amounts to conform their
treatment to the current presentation. These adjustments had no
impact on total assets or total equity. The impact on the
statement of operations was immaterial.
Recent
Accounting Pronouncements
In May 2009, the FASB issued authoritative guidance related to
ASC 855, Subsequent Events. The guidance provides
authoritative accounting literature related to evaluating
subsequent events that was previously addressed only in the
auditing literature. The guidance is similar to the current
guidance with some exceptions that are not intended to result in
significant change to current practice. This guidance is
effective for interim and annual periods ending after
June 15, 2009. We adopted the guidance and the adoption did
not have an impact on our financial position, results of
operations or cash flows.
In June 2009, the FASB issued authoritative guidance which
established the FASB Accounting Standards Codification
(Codification or ASC) as the source of
authoritative GAAP recognized by the FASB to be applied to
nongovernmental entities, and rules and interpretive releases of
the Securities and Exchange Commission (SEC) as authoritative
GAAP for SEC registrants. The codification supersedes all the
existing non-SEC accounting and reporting standards upon its
effective date and, subsequently, the FASB will not issue new
standards in the form of Statements, FASB Staff Positions or
Emerging Issues Task Force Abstracts. The guidance is not
intended to change or alter existing GAAP. This guidance is
effective for interim and annual periods ending after
September 15, 2009. The guidance did not have an impact on
our consolidated financial statements except that references to
accounting standards have been updated to reflect the
codification.
In August 2009 and September 2009, the FASB issued new guidance
impacting ASC 820, Fair Value Measurement and
Disclosures. The first guidance in August 2009 is intended
to reduce ambiguity in financial reporting when measuring the
fair value of liabilities. This guidance was effective for the
first reporting period (including interim periods) after its
issuance. The second guidance issued in September 2009 creates a
practical expedient to measure the fair value of an alternative
investment that does not have a readily
F-12
IMPERIAL
HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
December 31,
2007, 2008 and 2009
determinable fair value. This guidance also requires certain
additional disclosures. This guidance is effective for interim
and annual periods ending after December 15, 2009. The
adoption of this guidance did not have a material impact on our
consolidated financial statements.
Pro
Forma Information (Unaudited)
The pro forma earnings per share for the year ended
December 31, 2009 gives effect to (i) 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) and all principal and
accrued interest outstanding under our promissory note in favor
of IMPEX Enterprises, Ltd. will be converted into
[ ] shares of our common
stock; (ii) the issuance of shares of common stock to two
of our employees pursuant to the terms of each of their
respective phantom stock agreements; and (iii) the issuance
and conversion of a $30.0 million debenture into
[ ] shares of our common stock.
Unaudited pro forma net income attributable to common
stockholders per share is computed using the weighted-average
number of common shares outstanding, including the pro forma
effect of (i) to (iii) above, as if such conversion
occurred at the beginning of the period.
The following table sets forth the computation of pro forma
basic and diluted net loss per share:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2009
|
|
|
Numerator (basic and diluted):
|
|
|
|
|
Net loss
|
|
$
|
(8,636
|
)
|
|
|
|
|
|
Denominator (basic and diluted):
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
[
|
]
|
Add: Common shares from conversion of common units
|
|
|
[
|
]
|
Add: Common shares from conversion of preferred units
|
|
|
[
|
]
|
Add: Common shares from phantom stock agreements
|
|
|
[
|
]
|
|
|
|
|
|
Add: Common shares from conversion of $30.0 million
debenture
|
|
|
|
|
Pro forma weighted average common shares outstanding
|
|
|
[
|
]
|
|
|
|
|
|
Pro forma net loss per share:
|
|
|
|
|
Basic and diluted
|
|
$
|
[
|
]
|
|
|
|
|
|
The Company incurred an operating loss during 2009. The Company
plans to obtain additional financing from third party lenders to
continue to fund its operations. There can be no assurances that
the additional financing will be available, or that, if
available the financing will be obtainable on terms acceptable
to the Company. If the Company fails to obtain additional
financing, it may need to obtain additional financial support
from its owners.
During 2009, the Company paid $16,910,000 in lender protection
insurance premiums which are being capitalized and amortized
over the life of the loans using the effective interest method.
The balance of costs related to lender protection insurance
premium included in deferred costs in the accompanying balance
sheet at December 31, 2009 was approximately $21,001,000,
net of accumulated amortization of approximately
F-13
IMPERIAL
HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
December 31,
2007, 2008 and 2009
$28,351,000. The state surplus taxes on the lender protection
insurance premiums are 3.6% to 4.0% of the premiums paid. The
Company paid $647,000 in state surplus taxes during 2009. These
costs are being capitalized and amortized over the life of the
loans using the effective interest method. The balance of costs
related to state surplus taxes included in deferred costs in the
accompanying balance sheet at December 31, 2009 was
approximately $1,190,000, net of accumulated amortization of
approximately $590,000.
During 2009, the Company paid loan closing fees of approximately
$1,350,000 related to the closing of the financing agreement
with Cedar Lane Capital, LLC and approximately $629,000 related
to the closing of the financing agreement with White Oak Global
Advisors, LLC (see Note 14). These costs are being capitalized
and amortized over the life of the credit facilities using the
effective interest method. The balance of costs related to
securing credit facilities included in deferred costs in the
accompanying balance sheet at December 31, 2009 was
approximately $4,108,000, net of accumulated amortization of
approximately $2,995,000.
In May 2009, the Company settled its lawsuit with Acorn Capital
Group, a credit facility (see Note 14) and capitalized
legal fees related to the settlement for loans that continue per
the Settlement Agreement. The costs are being capitalized and
amortized over the life of the new agreement using the effective
interest method. The balance of these costs included in deferred
costs in the accompanying balance sheet at December 31,
2009 was approximately $24,000, net of accumulated amortization
of approximately $62,000.
In June 2007, the Company provided three $100,000 deposits to
various states as a requirement for applying for and obtaining
life settlement licenses in those states. The deposits are held
by the state or custodians of the state and bear interest at
market rates. Interest is generally distributed to the Company
on a quarterly basis. Interest income of approximately $2,000
has been recognized on these deposits for the year ended
December 31, 2009.
In June 2007, the Company purchased five surety bonds in various
amounts as a requirement for applying for and obtaining life
settlement licenses in certain states. The surety bonds were
backed by a letter of credit by a regional bank which was
collateralized by a certificate of deposit with the bank in the
amount of $550,000.
In February 2008, the Company obtained a new letter of credit
from a national bank which is collateralized by a certificate of
deposit with the bank in the amount of $100,000. The certificate
of deposit accrues interest at 2.23% per annum. The Company
renewed the certificate of deposit on February 14, 2010 and
it matures on February 14, 2011.
In May 2008, the Company redeemed the certificate of deposit
that was purchased in June 2007 and received approximately
$558,000 in cash, which included accrued interest. The Company
amended the $100,000 letter of credit with the national bank to
increase the letter of credit to $650,000. The Company purchased
an additional certificate of deposit with the bank in the amount
of $550,000. The certificate of deposit accrues interest at
1.00% per annum. The certificate of deposit was renewed on
May 15, 2010 and it matures on May 15, 2012. The
letter of credit expires on May 10, 2010.
The Company expects to continue to maintain the certificates of
deposit as collateral for the foreseeable future. The
certificates of deposit are recorded at cost in the balance
sheet and are restricted at year end. Interest income of
approximately $11,000 has been recognized as of
December 31, 2009.
F-14
IMPERIAL
HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
December 31,
2007, 2008 and 2009
Fixed assets at December 31, 2008 and 2009 are summarized
as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Computer software and equipment
|
|
$
|
1,644,636
|
|
|
$
|
1,885,904
|
|
Furniture, fixtures and equipment
|
|
|
957,717
|
|
|
|
1,025,841
|
|
Leasehold improvements
|
|
|
465,836
|
|
|
|
531,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,068,189
|
|
|
|
3,443,641
|
|
Less: Accumulated depreciation
|
|
|
1,217,851
|
|
|
|
2,106,297
|
|
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
$
|
1,850,338
|
|
|
$
|
1,337,344
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended December 31, 2009,
2008 and 2007 was approximately $888,000, $794,000 and $405,000,
respectively.
|
|
NOTE 7
|
LOANS
RECEIVABLE
|
A summary of loans receivables at December 31, 2008 and
2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Loan principal balance
|
|
$
|
147,937,524
|
|
|
$
|
167,691,534
|
|
Loan origination fees, net
|
|
|
11,021,018
|
|
|
|
33,044,935
|
|
Discount, net
|
|
|
(1,353,041
|
)
|
|
|
(26,403
|
)
|
Loan impairment valuation
|
|
|
(8,861,910
|
)
|
|
|
(11,598,764
|
)
|
|
|
|
|
|
|
|
|
|
Loans receivable, net
|
|
$
|
148,743,591
|
|
|
$
|
189,111,302
|
|
|
|
|
|
|
|
|
|
|
An analysis of the changes in loans receivable principal balance
during the years ended December 31, 2008 and 2009 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Loan principal balance, beginning
|
|
|
44,792,648
|
|
|
|
147,937,524
|
|
Loan originations
|
|
|
97,558,515
|
|
|
|
51,572,637
|
|
Purchases from related party
|
|
|
724,876
|
|
|
|
|
|
Subsequent year premiums paid net of reimbursement
|
|
|
12,975,647
|
|
|
|
15,875,702
|
|
Loan write-offs
|
|
|
(5,163,552
|
)
|
|
|
(12,997,742
|
)
|
Loan payoffs
|
|
|
(2,950,610
|
)
|
|
|
(29,607,625
|
)
|
Loans transferred to investments in life settlements
|
|
|
|
|
|
|
(5,088,962
|
)
|
|
|
|
|
|
|
|
|
|
Loan principal balance, ending
|
|
|
147,937,524
|
|
|
|
167,691,534
|
|
|
|
|
|
|
|
|
|
|
Loan origination fees include origination fees which are payable
to the Company on the date the loan matures. The loan
origination fees are reduced by any direct costs that are
directly related to the creation of the loan receivable in
accordance with
ASC 310-20,
Receivables Nonrefundable Fees and Other
Costs, and the net balance is accreted over the life of the
loan using the effective interest method. Discounts include
purchase discounts, net of accretion, which are attributable to
loans that were acquired from affiliated companies under common
ownership and control.
In accordance with ASC 310, Receivables, the Company
specifically evaluates all loans for impairment based on the
fair value of the underlying policies as foreclosure is
considered probable. The loans are
F-15
IMPERIAL
HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
December 31,
2007, 2008 and 2009
considered to be collateral dependent as the repayment of the
loans is expected to be provided by the underlying policies.
A summary of our investment in impaired loans at
December 31, 2008 and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Loan receivable, net
|
|
|
30,096,732
|
|
|
|
54,647,002
|
|
Interest receivable, net
|
|
|
798,466
|
|
|
|
6,439,733
|
|
|
|
|
|
|
|
|
|
|
Investment in impaired loans
|
|
|
30,895,198
|
|
|
|
61,096,031
|
|
|
|
|
|
|
|
|
|
|
The amount of the investment in impaired loans that had an
allowance as of December 31, 2008 and 2009 was $30,895,000
and $61,096,000, respectively. The amount of the investment in
impaired loans that did not have an allowance was $0 as of
December 31, 2008 and 2009, respectively. The average
investment in impaired loans during the years ended
December 31, 2008 and 2009 was approximately $16,452,000
and $45,996,000, respectively. The interest recognized on the
impaired loans was approximately $7,670,000 and $2,227,000 for
the year ended December 31, 2009 and 2008, respectively.
An analysis of the loan impairment valuation for the year ended
December 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
Interest
|
|
|
|
|
|
|
Receivable
|
|
|
Receivable
|
|
|
Total
|
|
|
Balance at beginning of period
|
|
$
|
8,861,910
|
|
|
$
|
1,441,552
|
|
|
$
|
10,303,462
|
|
Provision for loan losses
|
|
|
8,616,097
|
|
|
|
1,214,221
|
|
|
|
9,830,318
|
|
Charge-offs
|
|
|
(5,879,243
|
)
|
|
|
(867,229
|
)
|
|
|
(6,746,472
|
)
|
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
11,598,764
|
|
|
$
|
1,788,544
|
|
|
$
|
13,387,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
An analysis of the loan impairment valuation for the year ended
December 31, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
Interest
|
|
|
|
|
|
|
Receivable
|
|
|
Receivable
|
|
|
Total
|
|
|
Balance at beginning of period
|
|
$
|
2,250,580
|
|
|
$
|
81,057
|
|
|
$
|
2,331,637
|
|
Provision for loan losses
|
|
|
8,927,947
|
|
|
|
1,839,981
|
|
|
|
10,767,928
|
|
Charge-offs
|
|
|
(2,316,617
|
)
|
|
|
(479,486
|
)
|
|
|
(2,796,103
|
)
|
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
8,861,910
|
|
|
$
|
1,441,552
|
|
|
$
|
10,303,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The allowance for interest receivable represents interest that
is not expected to be collected. At the time the interest income
was recognized and at the end of the reporting period in which
the interest income was recognized, the interest income was
believed to be collectible. The Company continually reassesses
whether interest income is collectible in conjunction with its
loan impairment analysis. The allowance for interest receivable
represents interest that was determined to be uncollectible
during a reporting period subsequent to the initial recognition
of the interest income.
As of December 31, 2009, the loan portfolio consisted of
loans due in the next 2 to 5 years with both fixed (8.5%
average interest rate among all fixed rate loans, compounded
monthly) and variable (10.7% average interest rate among all
variable rate loans) interest rates.
During 2009 and 2008, the Company originated 194 and 499 loans
receivable with a principal balance of approximately $51,227,000
and $99,557,000, respectively. The balances of these loans were
financed from the
F-16
IMPERIAL
HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
December 31,
2007, 2008 and 2009
Companys credit facilities. All loans were issued to
finance insurance premiums. Loan interest receivable at
December 31, 2009 and 2008, was approximately $21,030,000,
and $8,604,000 net of impairment of approximately
$1,789,000 and $1,442,000, respectively. As of December 31,
2009, there were 696 loans with the average loan balance of
approximately $246,000.
In November 2008, the Company acquired two loans from an
affiliated company under common ownership and control for cash.
These loans were purchased by the affiliated company and had an
unpaid principal balance at the date of purchase of
approximately $725,000 and were purchased for approximately
$811,000, which included approximately $691,000 for the loans
and approximately $120,000 for purchased interest. The resulting
discount at date of purchase was approximately $34,000 and is
accreted over the life of the loans.
In 2009 and 2008, the Company financed subsequent premiums to
keep the underlying insurance policies in force on 485 and 284
loans receivable with a principal balance of approximately
$15,718,000 and $8,354,000, respectively. This balance included
approximately $6,204,000 and $3,371,000 of loans financed from
the Companys credit facilities and approximately
$9,514,000 and $4,983,000 of loans financed with cash received
from affiliated companies, respectively.
During 2009 and 2008, 110 and 10 of the Companys loans
were paid off with proceeds totaling approximately $36,109,000
and $3,543,000, respectively, of which approximately $27,864,000
and $3,005,000 was for the principal of the loans and
approximately $3,775,000 and $476,000 was for accrued interest,
respectively. The loans had discount balances at the time of
repayment totaling approximately $60,000 and $391,000,
respectively. The Company recognized losses of approximately
$73,000 and $441,000 on these transactions, respectively.
The Company wrote off 94 and 18 loans during 2009 and 2008
respectively, because the collectability of the original loans
was unlikely and the underlying policies were allowed to lapse.
The principal amount written off was approximately $3,309,000
and $3,348,000 with accrued interest of approximately $572,000
and $552,000, respectively, and accreted origination fees of
approximately $153,000. The Company had an impairment associated
with these loans of approximately $1,471,000 and $2,605,000 and
incurred a loss on these loans of approximately $2,612,000 and
$1,245,000, respectively.
During 2009 and 2008, the Company wrote off 64 and 11 loans,
respectively related to the Acorn facility (see Note 14).
The principal amount written off was approximately $8,441,000
and $1,761,000 with accrued interest of approximately $1,031,000
and $192,000, and origination receivable of approximately
$559,000 and $52,000, respectively. The Company had an
impairment associated with these loans of approximately $584,000
and $137,000, and incurred a loss on these loans of
approximately $10,182,000 and $1,868,000, respectively.
|
|
NOTE 8
|
ORIGINATION
FEES
|
A summary of the balances of origination fees that are included
in loans receivable in the consolidated and balance sheet as of
December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Loan origination fees gross
|
|
$
|
46,124,533
|
|
|
$
|
57,641,266
|
|
Un-accreted origination fees
|
|
|
(36,257,855
|
)
|
|
|
(25,211,898
|
)
|
Amortized loan originations costs
|
|
|
1,154,340
|
|
|
|
615,567
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,021,018
|
|
|
$
|
33,044,935
|
|
|
|
|
|
|
|
|
|
|
F-17
IMPERIAL
HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
December 31,
2007, 2008 and 2009
Loan origination fees are fees payable to the Company on the
date of loan maturity or repayment. Loan origination costs are
deferred costs that are directly related to the creation of the
loan receivable.
|
|
NOTE 9
|
AGENCY
FEES RECEIVABLE
|
Agency fees receivable are agency fees due from insurance agents
related to premium finance loans. The balance of agency fees
receivable at December 31, 2009 and 2008 were approximately
$2,165,000 and $8,871,000 respectively, net of a reserve of
approximately $120,000 and $769,000, respectively. Bad debt
expense was approximately $1,289,000 and $1,046,000 at
December 31, 2009 and 2008, respectively, and is included
in selling, general and administrative expenses on the
consolidated and combined statement of operations.
An analysis of the changes in the allowance for doubtful
accounts for past due agency fees during the years ended
December 31, 2008 and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
Balance at beginning of period
|
|
$
|
287,676
|
|
|
$
|
768,806
|
|
Bad debt expense
|
|
|
536,490
|
|
|
|
1,290,241
|
|
Write-offs
|
|
|
(55,360
|
)
|
|
|
(1,939,161
|
)
|
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
768,806
|
|
|
$
|
119,886
|
|
|
|
NOTE 10
|
STRUCTURED
SETTLEMENTS
|
Total income recognized on structured settlement transactions
for the year ended December 31, 2009 was approximately
$1,211,000 through accretion. The receivables at
December 31, 2009 were approximately $152,000, net of a
discount of approximately $153,000.
During 2009, the Company sold several structured settlements
with proceeds totaling approximately $15,344,000, of which
approximately $31,519,000 was for receivables, net of a discount
of approximately $18,539,000, and a holdback of approximately
$320,000. The Company recognized a gain of approximately
$2,684,000 on this transaction. The Company was also retained to
service the future collections on one of the sales and collected
approximately $90,000 at December 31, 2009 for future
servicing activity. This amount is reflected in the accounts
payable, accrued expenses, and other liabilities section of the
balance sheet.
The holdback is equal to the aggregate amount of payments due
and payable by the annuity holder within 90 days after the
date of sale. These amounts are held back in accordance with the
purchase agreement and will be released upon proof of collection
by the Company acting as servicer. Of the total holdback of
approximately $320,000 receivable at December 31, 2009,
approximately $102,000 was collected subsequent to year end. The
remaining $218,000 was received from the annuity issuers but the
holdback was not released to the Company until June, 2010. As
such, this amount was recorded as a receivable as of
December 31, 2009.
|
|
NOTE 11
|
INVESTMENT
IN LIFE SETTLEMENTS (LIFE INSURANCE POLICIES)
|
During 2009, the Company acquired certain life insurance
policies as a result of certain of the Companys borrowers
defaulting on premium finance loans and relinquishing the
underlying policy to the Company in exchange for being released
from further obligations under the loan. The Company elected to
account for these policies using the fair value method. The fair
value is determined on a discounted cash flow basis,
incorporating current life expectancy assumptions. The discount
rate incorporates current information about
F-18
IMPERIAL
HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
December 31,
2007, 2008 and 2009
market interest rates, the credit exposure to the insurance
company that issued the life settlement contracts and the
Companys estimate of the risk premium an investor in the
policy would require.
During 2009, the Company recognized a gain of approximately
$843,000 which was recorded at the time of foreclosure related
to recording the policies acquired at the transaction price
(fair value of the policy) which is included in loss on loan
payoffs and settlements, net in the accompanying consolidated
and combined statement of operations. The following table
describes the Companys investment in life settlements as
of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
Number of
|
|
|
|
|
|
|
|
Life Expectancy
|
|
Life Settlement
|
|
|
Fair
|
|
|
Face
|
|
(In Years)
|
|
Contracts
|
|
|
Value
|
|
|
Value
|
|
|
0-1
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
1-2
|
|
|
|
|
|
|
|
|
|
|
|
|
2-3
|
|
|
|
|
|
|
|
|
|
|
|
|
3-4
|
|
|
|
|
|
|
|
|
|
|
|
|
4-5
|
|
|
|
|
|
|
|
|
|
|
|
|
Thereafter
|
|
|
27
|
|
|
|
4,306,280
|
|
|
|
72,875,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
27
|
|
|
$
|
4,306,280
|
|
|
$
|
72,875,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the 27 policies held as of December 31, 2009, none of
these policies previously had lender protection insurance
related to their premium finance loans prior to being classified
as investments in life settlements.
Premiums to be paid for each of the five succeeding fiscal years
to keep the life insurance policies in force as of
December 31, 2009, are as follows:
|
|
|
|
|
2010
|
|
$
|
1,523,016
|
|
2011
|
|
|
1,667,116
|
|
2012
|
|
|
1,689,947
|
|
2013
|
|
|
1,800,647
|
|
2014
|
|
|
1,954,147
|
|
Thereafter
|
|
|
23,899,310
|
|
|
|
|
|
|
|
|
$
|
32,534,183
|
|
|
|
|
|
|
|
|
NOTE 12
|
INVESTMENT
IN LIFE SETTLEMENT FUND
|
On September 3, 2009, the Company formed MXT Investments,
LLC (MXT Investments) as a wholly-owned subsidiary.
MXT Investments signed an agreement with Insurance Strategies
Fund, LLC (Insurance Strategies) whereby MXT
Investments would purchase an equity interest in Insurance
Strategies in exchange for providing financing for the
acquisition of life insurance policies. Insurance Strategies
would purchase life insurance policies from the Company and
other sources. During 2009, MXT Investments contributed
approximately $904,000 to Insurance Strategies and Insurance
Strategies purchased 5 insurance policies from the Company for
approximately $1,434,000. No gain was recognized on the
transaction due to the related equity contribution made by MXT
Investments into Insurance Strategies. As of December 31,
2009, MXT Investments had investments in Insurance Strategies of
$542,000, net of deferred gains of $362,000.
F-19
IMPERIAL
HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
December 31,
2007, 2008 and 2009
|
|
NOTE 13
|
FAIR
VALUE MEASUREMENTS
|
The balances of the Companys assets measured at fair value
on a recurring basis as of December 31, 2009, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in life settlements
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,306,280
|
|
|
$
|
4,306,280
|
|
The following table provides a roll-forward in the changes in
fair value for the year ended December 31, 2009, for all
assets for which the Company determines fair value using a
material level of unobservable (Level 3) inputs.
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
|
|
Change in unrealized appreciation
|
|
|
|
|
Acquisition of policies
|
|
|
4,306,280
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
$
|
4,306,280
|
|
|
|
|
|
|
Unrealized appreciation, December 31, 2009
|
|
$
|
|
|
|
|
|
|
|
Investments in insurance policies were acquired in conjunction
with the acquisition of life insurance policies upon
relinquishment by the borrower after default on premium finance
loans during September to December 2009. During this time there
were no significant changes in life expectancy assumptions,
market interest rates, credit exposure to insurance companies,
or estimated risk margins required by investors. As such, the
cost approximates the fair value and no unrealized appreciation
or depreciation occurred during the period.
The Companys impaired loans are measured at fair value on
a non-recurring basis, as the carrying value is based on the
fair value of the underlying collateral. The method used to
estimate the fair value of impaired collateral-dependent loans
depends on the nature of the collateral. For collateral that has
lender protection insurance coverage, the fair value measurement
is considered to be Level 2 as the insured value is an
observable input and there are no material unobservable inputs.
For collateral that does not have lender protection insurance
coverage, the fair value measurement is considered to be
Level 3 as the estimated fair value is based on a model
whose significant inputs into are the life expectancy of the
insured and the discount rate, which are not observable. As of
December 31, 2009 and 2008, the Company had insured
impaired loans (Level 2) with a net carrying value,
which includes principal, accrued interest, and accreted
origination fees, net of impairment, of approximately
$57,495,000 and $25,174,000, respectively. As of
December 31, 2009 and 2008, the Company had uninsured
impaired loans (Level 3) with a net carrying value of
approximately $3,601,000 and $5,721,000, respectively. The
provision for losses on loans receivable related to impaired
loans was approximately $9,830,000 and $10,768,000 for the years
ended December 31, 2009 and 2008, respectively.
F-20
IMPERIAL
HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
December 31,
2007, 2008 and 2009
A summary of the principal balances of notes payable included in
the consolidated and combined balance sheet as of
December 31, 2009 is as follows:
|
|
|
|
|
|
|
Total Notes
|
|
|
|
Payable
|
|
|
Acorn Capital Group
|
|
$
|
9,178,805
|
|
CTL Holdings, LLC
|
|
|
49,743,657
|
|
Ableco Finance
|
|
|
96,173,950
|
|
White Oak, Inc.
|
|
|
26,594,974
|
|
Cedar Lane
|
|
|
11,806,000
|
|
Other Note Payable
|
|
|
9,627,123
|
|
Related Party
|
|
|
27,939,972
|
|
|
|
|
|
|
Total
|
|
$
|
231,064,481
|
|
|
|
|
|
|
Acorn
Capital Group
A lender, Acorn Capital Group (Acorn), breached a
credit facility agreement with the Company by not funding
ongoing premiums on certain life insurance policies serving as
collateral for premium finance loans. The first time that they
failed to make scheduled premium payments was in July 2008 and
the Company had no forewarning that this lender was experiencing
financial difficulties. When they stopped funding under the
credit facility, the Company had no time to seek other financing
to fund the ongoing premiums. The result was that a total of 81
policies lapsed due to non-payment of premiums from
January 1, 2008 though March 31, 2010.
In May 2009, the Company entered a settlement agreement whereby
Acorn released us from our obligations related to the credit
agreement. Acorn subsequently assigned all of is rights and
obligations under the settlement agreement to Asset Based
Resource Group, LLC (ABRG). As part of the
settlement agreement, the Company continues 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, the Company has the option to fund the loan or
try to sell the loan or related policy to another party. If ABRG
funds the premium payment, this additional funding is evidenced
by a new note, with an annual interest rate of 14.5% per annum,
which is due and payable by the Company thirteen
(13) months following the advance. During 2008, the Company
recorded losses of approximately $1,868,000 related to policies
that lapsed where ABRG decided not to fund the second year
premium. Once the Company is legally released from their debt
obligation either judicially or by ABRG, the Company will record
a corresponding debt reduction. During 2009, the Company
recorded additional losses of approximately $10,182,000 related
to additional policies that lapsed.
As part of the settlement agreement, new notes were signed with
annual interest rates of 14.5% compounding annually and totaled
approximately $12,650,000 on May 19, 2009. On the notes
that were cancelled by ABRG, the Company was forgiven principal
totaling approximately $13,783,000 and interest of approximately
$2,627,000 in 2009. As of December 31, 2009 and 2008 the
Company owed approximately $9,179,000 and $22,440,000,
respectively, and accrued interest was approximately $2,412,000
and $3,214,000, respectively.
CTL
Holdings LLC
On December 27, 2007, Imperial Life Financing, LLC was
formed to enter into a $50,000,000 loan agreement with CTL
Holdings, LLC, an affiliated entity under common ownership and
control, Imperial Life
F-21
IMPERIAL
HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
December 31,
2007, 2008 and 2009
Financing, LLC has used the proceeds of the loan to fund our
origination of premium finance loans in exchange for a
participation interest in the loans. There were no borrowings
under this arrangement during 2007.
In April 2008, CTL Holdings, LLC, entered into a participation
agreement with Perella Weinberg Partners Asset Based Value
Master Fund II, L.P. with Imperial Holdings, LLC as the
guarantor whereby Perella Weinberg Partners contributed
$10,000,000 for an interest in the participated notes with
Imperial Life Finance, LLC. In connection with Perellas
purchase of the participation interest, we agreed to reimburse
CTL Holdings sole owner, Cedarmount, for any amounts paid
or allocated to Perella under the participation agreement which
cause Cedarmounts rate of return paid by Imperial Life
Financing to be less than 10% per annum on the funds Cedarmount
advanced to CTL Holdings to make loans to us or cause Cedarmount
not to recover its invested capital.
In April 2008, the CTL Holdings, LLC loan agreement was amended
and the authorized borrowings were increased from $50,000,000 to
$100,000,000. The first $50,000,000 tranche
(Tranche A) was restricted such that no further
advances could be made with the exception of funding second year
premiums. All new advances are made under the second $50,000,000
tranche (Tranche B). The credit facility matures on
December 26, 2012.
The loans are payable as the corresponding premium finance loans
mature and as of March 31, 2010, bear a weighted average
annual interest rate of approximately 10.31% on average. The
Company is subject to several restrictive covenants under the
facility. The restrictive covenants include items such as
restrictions on the ability to pay dividends or incur additional
indebtedness by Imperial Life Financing, LLC. The Company
believes it is in compliance at December 31, 2009. All of
the assets of Imperial Life Financing, LLC serve as collateral
under the credit facility. The outstanding principal at
December 31, 2009 and 2008 was approximately $21,863,000
and $44,391,000, respectively and accrued interest was
approximately $46,000 and $32,000, respectively.
In November 2008, Imperial Life Financing, LLC entered into a
promissory note for $30,000,000 with CTL Holdings, LLC. The note
is due on December 26, 2012 and bears interest at a fixed
rate per advance. The average interest rate as of
December 31, 2009 is approximately 10.2%. The outstanding
principal at December 31, 2009 and 2008 was approximately
$27,881,000 and $16,190,000, respectively, and accrued interest
was approximately $2,820,000 and $100,000, respectively. There
are no financial or restrictive covenants under this promissory
note.
Ableco
Finance
On July 22, 2008, Imperial PFC Financing, LLC was formed to
enter into a loan agreement with Ableco Finance, LLC, so that
Imperial PFC Financing, LLC could purchase Imperial Premium
Finance notes for cash or a participation interest in the notes.
The loan agreement is for $100,000,000. In October 2009,
Imperial PFC Financing, LLC signed an amendment to the loan
agreement adding a revolving line of credit of $3,000,000 to
only be used to pay down interest. The agreement is for a term
of three years and the borrowings bear an annual interest rate
of 16.5% compounded monthly. The Company is subject to several
restrictive covenants under the facility. The restrictive
covenants include items such as restrictions on the ability to
pay dividends or incur additional indebtedness by Imperial PFC
Financing, LLC. The Company believes it is in compliance at
December 31, 2009. The notes are payable 26 months
from the date of issuance. All of the assets of Imperial PFC
Financing, LLC serve as collateral under this credit facility.
The loan matures February 7, 2011. The outstanding
principal at December 31, 2009 and 2008 was approximately
$96,174,000 and $71,594,000, respectively and accrued interest
was approximately $1,401,000 and $1,153,000, respectively.
F-22
IMPERIAL
HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
December 31,
2007, 2008 and 2009
White
Oak, Inc.
On February 5, 2009, Imperial Life Financing II, LLC, was
formed to enter into a loan agreement with White Oak Global
Advisors, LLC, so that Imperial Life Financing II, LLC could
purchase Imperial Premium Finance notes in exchange for cash or
a participation interest in the notes.
The loan agreement is for $15,000,000. The interest rate for
each borrowing made under the agreement varies and the weighted
average interest rate for the loans under this facility as of
December 31, 2009 was 22.0%. All of the assets of
Imperial Life Financing II, LLC serve as collateral under this
facility. The Company is subject to several restrictive
covenants under the facility. The restrictive covenants include
items such as restrictions on the ability to pay dividends or
incur additional indebtedness by Imperial Life
Financing II, LLC. The Company believes it is in compliance
at December 31, 2009. The notes are payable
6-26 months from issuance and the facility matures on
September 30, 2011.
In September 2009, the Imperial Life Financing II, LLC loan
agreement was amended to increase the commitment by $12,000,000
to a total commitment of $27,000,000. All of the assets of
Imperial Life Financing II, LLC serve as collateral under this
facility. The notes are payable 6-26 months from issuance
and the facility matures on March 11, 2012. The outstanding
principal at December 31, 2009 was approximately
$26,595,000 and accrued interest was approximately $3,858,000.
Cedar
Lane
On December 2, 2009, Imperial PFC Financing II, LLC was
formed to enter into a financing agreement with Cedar Lane
Capital, LLC, so that Imperial PFC Financing II, LLC could
purchase Imperial Premium Finance notes for cash or a
participation interest in the notes. The financing agreement is
for a minimum of $5,000,000 to a maximum of $250,000,000. The
agreement is for a term of 28 months from the time of
borrowing and the borrowings bear an annual interest rate of
14%, 15% or 16%, depending on the class of lender and are
compounded monthly. The Company had available capacity under the
facility of approximately $238,194,000 at December 31,
2009. All of the assets of Imperial PFC Financing II, LLC serve
as collateral under this credit facility. The Company is subject
to several restrictive covenants under the facility. The
restrictive covenants include items such as restrictions on the
ability to pay dividends or incur additional indebtedness by
Imperial PFC Financing II, LLC. The Company believes it is in
compliance at December 31, 2009. The outstanding principal
at December 31, 2009 was approximately $11,806,000 and
accrued interest was approximately $111,000.
Other
Note Payable
On August 31, 2009, the Company extended its promissory
note, with an unrelated party, with a revolving line of credit
of $25,000,000. This note plus accrued interest are due and
payable in full in one lump sum on August 1, 2011, unless
the lender shall provide notice on or prior to the third
business day prior to the originally scheduled maturity date or
any extended maturity date demanding payment on such date, the
maturity date shall be extended automatically for an additional
60 days. This note bears an annual interest rate of 16.5%.
The available credit on this note as of December 31, 2009
was approximately $15,373,000.
There is no collateral pledged to secure this note. As of
December 31, 2009 and 2008, the balance of the note was
approximately $9,627,000 and $11,572,000, respectively, with
accrued interest of approximately $469,000 and $86,000,
respectively. There are no financial or restrictive covenants
contained in this promissory note.
F-23
IMPERIAL
HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
December 31,
2007, 2008 and 2009
Related
Party
As of December 31, 2008, the Company had a note with a
related party with principal and accrued interest of
approximately $2,513,000 and $16,000, respectively. During 2009,
this note was converted to preferred equity units (see
NOTE 18). There was no gain or loss recorded as a result of
this transaction as the fair value of the equity approximated
the fair value of the debt at the time of conversion.
In June 2008 and in August 2008, the Company entered into
balloon promissory note agreements with a related party where
money was borrowed to cover operating expenses of approximately
$5,000,000 and $1,600,000, respectively. The loan agreements are
unsecured, have terms of two years, and bear an annual interest
rate of 16.5% compounded monthly. In August 2009, the Company
paid off these notes with proceeds from a note issued with a new
debtor which bears an interest rate of 16.5% and matures on
August 1, 2011. The outstanding principal balance of this
new note at December 31, 2009 was approximately $17,616,000
and accrued interest was approximately $980,000. There are no
financial or restrictive covenants contained in this promissory
note.
In August 2008, the Company entered into balloon promissory note
agreements with a related party where money was borrowed to
cover operating expenses of approximately $2,049,000 of which
$274,000 was repaid within two months, leaving a balance of
approximately $1,775,000. The loan agreements were for
$1,500,000; $200,000; and $75,000, are unsecured, have terms of
two years, and bear an annual interest rate of 16% compounded
monthly. This note was converted to preferred equity units
during 2009 (see Note 18). There was no gain or loss
recorded as a result of this transaction as the fair value of
the equity approximated the fair value of the debt at the time
of conversion.
In October 2008, the Company entered into two balloon promissory
note agreements with a related party where money was borrowed to
cover operating expenses of approximately $8,900,000. The loan
agreements were for $4,450,000 each, are unsecured, have terms
of two years, and bear an annual interest rate of 16.5%
compounded monthly. On August 31, 2009, these notes were
assigned to another related party and consolidated into a new
revolving promissory note which bears an interest rate of 16.5%
and matures on August 1, 2011. The outstanding principal at
December 31, 2009 was approximately $10,324,000 and accrued
interest was approximately $569,000. There are no financial or
restrictive covenants contained in this promissory note.
Maturities
The aggregate maturities of notes payable subsequent to
December 31, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related
|
|
|
|
|
|
|
Acorn
|
|
|
CTL
|
|
|
Ableco
|
|
|
White Oak
|
|
|
Cedar Lane
|
|
|
Other
|
|
|
Party
|
|
|
Total
|
|
|
2010
|
|
$
|
9,178,805
|
|
|
$
|
24,936,541
|
|
|
$
|
|
|
|
$
|
6,036,372
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
40,151,718
|
|
2011
|
|
|
|
|
|
|
21,481,589
|
|
|
|
96,173,950
|
|
|
|
20,558,602
|
|
|
|
|
|
|
|
9,627,123
|
|
|
|
27,939,972
|
|
|
|
175,781,236
|
|
2012
|
|
|
|
|
|
|
3,325,527
|
|
|
|
|
|
|
|
|
|
|
|
11,806,000
|
|
|
|
|
|
|
|
|
|
|
|
15,131,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,178,805
|
|
|
$
|
49,743,657
|
|
|
$
|
96,173,950
|
|
|
$
|
26,594,974
|
|
|
$
|
11,806,000
|
|
|
$
|
9,627,123
|
|
|
$
|
27,939,972
|
|
|
$
|
231,064,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 15
|
SEGMENT
INFORMATION
|
The Company operates in two segments: financing premiums for
individual life insurance policies and purchasing structured
settlements. The premium finance segment provides financing in
the form of loans to trusts and individuals for the purchase of
life insurance policies and the loans are collateralized by the
life insurance policies. The structured settlements segment
purchases structured settlements from individuals.
F-24
IMPERIAL
HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
December 31,
2007, 2008 and 2009
Recipients of structured settlements are permitted to sell their
deferred payment streams to a structured settlement purchaser
pursuant to state statutes that require certain disclosures,
notice to the obligors and state court approval. Through such
sales, the Company purchases a certain number of fixed,
scheduled future settlement payments on a discounted basis in
exchange for a single lump sum payment.
The performance of the segments is evaluated on the segment
level by members of the Companys senior management team.
Cash and income taxes generally are managed centrally.
Performance of the segments is based on revenue and cost control.
Segment results and reconciliation to consolidated net income
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Premium finance
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency fee income
|
|
$
|
24,514,935
|
|
|
$
|
48,003,586
|
|
|
$
|
26,113,814
|
|
Origination income
|
|
|
525,964
|
|
|
|
9,398,679
|
|
|
|
29,852,722
|
|
Interest income
|
|
|
4,879,416
|
|
|
|
11,339,822
|
|
|
|
20,271,581
|
|
Gain on forgiveness of debt
|
|
|
|
|
|
|
|
|
|
|
16,409,799
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,920,315
|
|
|
|
68,742,087
|
|
|
|
92,648,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct segment expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
776,621
|
|
|
|
9,913,856
|
|
|
|
28,466,092
|
|
Provision for losses
|
|
|
2,331,637
|
|
|
|
10,767,928
|
|
|
|
9,830,318
|
|
Loss (gain) on loans payoff and settlements, net
|
|
|
(224,551
|
)
|
|
|
2,737,620
|
|
|
|
12,058,007
|
|
Amortization of deferred costs
|
|
|
125,909
|
|
|
|
7,568,541
|
|
|
|
18,339,220
|
|
SG&A expense
|
|
|
15,081,517
|
|
|
|
21,744,468
|
|
|
|
13,741,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,091,133
|
|
|
|
52,732,413
|
|
|
|
82,435,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$
|
11,829,182
|
|
|
$
|
16,009,674
|
|
|
$
|
10,212,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-25
IMPERIAL
HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
December 31,
2007, 2008 and 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Structured settlements
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of structured settlements
|
|
$
|
|
|
|
$
|
442,771
|
|
|
$
|
2,684,328
|
|
Interest income
|
|
|
7,988
|
|
|
|
574,429
|
|
|
|
1,211,256
|
|
Other income
|
|
|
2,300
|
|
|
|
47,400
|
|
|
|
70,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,288
|
|
|
|
1,064,600
|
|
|
|
3,966,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct segment expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A expenses
|
|
|
2,722,377
|
|
|
|
9,770,400
|
|
|
|
9,474,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating loss
|
|
$
|
(2,712,089
|
)
|
|
$
|
(8,705,800
|
)
|
|
$
|
(5,508,353
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$
|
9,117,093
|
|
|
$
|
7,303,874
|
|
|
$
|
4,704,587
|
|
Unallocated expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A expenses
|
|
|
6,530,571
|
|
|
|
10,051,542
|
|
|
|
8,052,284
|
|
Interest expense
|
|
|
566,448
|
|
|
|
2,838,458
|
|
|
|
5,288,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,097,019
|
|
|
|
12,890,000
|
|
|
|
13,340,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,020,074
|
|
|
$
|
(5,586,126
|
)
|
|
$
|
(8,636,403
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets and reconciliation to consolidated total assets
were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2008
|
|
|
2009
|
|
|
Direct segment assets
|
|
|
|
|
|
|
|
|
Premium finance
|
|
$
|
205,428,688
|
|
|
$
|
245,574,288
|
|
Structured settlements
|
|
|
2,299,720
|
|
|
|
9,201,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
207,728,408
|
|
|
|
254,775,305
|
|
Other unallocated assets
|
|
|
3,312,016
|
|
|
|
8,944,783
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
211,040,424
|
|
|
$
|
263,720,088
|
|
|
|
|
|
|
|
|
|
|
Amounts are attributed to the segment that holds the assets.
There are no intercompany sales and all intercompany account
balances are eliminated in segment reporting.
|
|
NOTE 16
|
RELATED
PARTY TRANSACTIONS
|
The Company obtained brokerage services from a related party.
The Company incurred expenses of approximately $1,521,000 for
the year ended December 31, 2008 for commissions related to
broker services provided by this related party. The Company owed
this broker $78,000 at December 31, 2008. There were no
services obtained from this broker for the year ended
December 31, 2009.
The Company incurred consulting fees of approximately $926,000
and $3,082,000 for the years ended December 31, 2009 and
2008, respectively, for services provided by parties related to
the Company. As of December 31, 2009 and 2008, there was
approximately $354,000 and $2,000,000 owed to these related
parties, respectively.
F-26
IMPERIAL
HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
December 31,
2007, 2008 and 2009
|
|
NOTE 17
|
COMMITMENTS
AND CONTINGENCIES
|
The Company leases office space under operating lease
agreements. The leases expire at various dates through 2012.
Some of these leases contain a provision for a 5% increase of
the base rent annually on the anniversary of the rent
commencement date.
Future minimum payments under operating leases for years
subsequent to December 31, 2009 are as follows:
|
|
|
|
|
Year Ending December 31,
|
|
|
|
|
2010
|
|
$
|
550,220
|
|
2011
|
|
|
557,087
|
|
2012
|
|
|
115,438
|
|
|
|
|
|
|
|
|
$
|
1,222,745
|
|
|
|
|
|
|
Rent expense under these leases was approximately $549,000,
$509,000 and $369,000 for the years ended December 31,
2009, 2008 and 2007, respectively. Rent expense is recorded on a
straight-line basis over the term of the lease. The difference
between actual rent payments and straight-line rent expense is
recorded as deferred rent. Deferred rent in the amount of
$77,000 and $66,000 at December 31, 2009 and 2008,
respectively, is included in accounts payable and accrued
expenses in the accompanying consolidated and combined balance
sheets.
|
|
NOTE 18
|
PREFERRED
EQUITY
|
On June 30, 2009, a related party converted outstanding
debt of $2,260,000 for 50,855 units of Series A
Preferred Units of equity with a face amount of $44.44 per unit.
Series A Preferred Units are non-voting, non-convertible,
can be redeemed at any time by the Company for an amount equal
to the applicable unreturned preferred capital amount allocable
to the Series A Preferred Units sought to be redeemed, plus
any accrued and unpaid preferred return, and shall be entitled
to priority rights in distribution and liquidations as set forth
in the Operating Agreement. The rate of preferred return is
16.5% per annum.
On June 30, 2009, a related party converted outstanding
debt of $1,775,000 for 39,941 units of Series A
Preferred Units of equity with a face amount of $44.44 per unit.
Dividends in arrears for all Series A Preferred Units at
December 31, 2009 were approximately $344,000.
On December 30, 2009, two related parties contributed
$5,000,000 for 50,000 units of Series B Preferred
Units of equity with a liquidating preference of $100.00 per
unit. Series B Preferred Units are non-voting,
non-convertible, can be redeemed at any time by the Company for
an amount equal to the applicable unreturned preferred capital
amount allocable to the Series B Preferred Units sought to
be redeemed, plus any accrued and unpaid preferred return, and
shall be entitled to priority rights in distribution and
liquidations as set forth in the operating agreement. The rate
of preferred return is 16.0% per annum. The dividends in arrears
for all Series B Preferred Units at December 31, 2009
were approximately $4,000.
|
|
NOTE 19
|
EMPLOYEE
BENEFIT PLAN
|
The Company has adopted a 401(k) plan that covers employees that
have reached 18 years of age and completed three months of
service. The plan provides for voluntary employee contributions
through salary reductions, as well as discretionary employer
contributions. For the year ended December 31, 2009 and
2008, there were no employer contributions made.
F-27
IMPERIAL
HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
December 31,
2007, 2008 and 2009
|
|
NOTE 20
|
SUBSEQUENT
EVENTS
|
On April 7, 2010, Imperial Premium Finance, LLC signed a
settlement agreement with Clearwater Consulting Concepts, LLP
and was relieved of an obligation of approximately $73,000
related to an agreement where Clearwater Consulting Concepts
referred clients to the Company. As part of the settlement, the
Company paid approximately $38,000 which was accrued for at
December 31, 2009.
To retain the life settlement license for the State of Utah for
2010, the Company was required to increase the surety bond from
$50,000 to $250,000. The Company increased its letter of credit
and certificate of deposit by $200,000 on January 29, 2010.
On March 31, 2010, one related party contributed $7,000,000
for 70,000 units of Series C Preferred Units with a
liquidating preference of $100.00 per unit. The rate of
preferred return is equal to 16.0% per annum.
On June 30, 2010, we sold to a related party
7,000 units of Series D Preferred Units with a
liquidating preference of $100.00 per unit for an aggregate
amount of $700,000. The rate of preferred return is equal to
16.0% per annum.
The Company is not aware of any other subsequent events which
would require recognition or disclosure in the financial
statements.
F-28
Imperial
Holdings, LLC and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
ASSETS
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,890,799
|
|
|
$
|
3,684,847
|
|
|
|
|
|
Restricted cash
|
|
|
|
|
|
|
642,698
|
|
|
|
|
|
Certificate of deposit restricted
|
|
|
669,835
|
|
|
|
877,391
|
|
|
|
|
|
Agent fees receivable, net of allowance for doubtful accounts
|
|
|
2,165,087
|
|
|
|
736,469
|
|
|
|
|
|
Deferred costs, net
|
|
|
26,323,244
|
|
|
|
11,454,686
|
|
|
|
|
|
Prepaid expenses and other assets
|
|
|
885,985
|
|
|
|
1,010,051
|
|
|
|
|
|
Due from related party
|
|
|
|
|
|
|
1,007,030
|
|
|
|
|
|
Deposits
|
|
|
982,417
|
|
|
|
698,957
|
|
|
|
|
|
Interest receivable, net
|
|
|
21,033,687
|
|
|
|
17,175,216
|
|
|
|
|
|
Loans receivable, net
|
|
|
189,111,302
|
|
|
|
121,564,332
|
|
|
|
|
|
Structured settlement receivables, net
|
|
|
151,543
|
|
|
|
10,553,648
|
|
|
|
|
|
Receivables from sales of structured settlements
|
|
|
320,241
|
|
|
|
528,075
|
|
|
|
|
|
Investment in life settlements, at estimated fair value
|
|
|
4,306,280
|
|
|
|
8,846,149
|
|
|
|
|
|
Investment in life settlement fund
|
|
|
542,324
|
|
|
|
1,269,657
|
|
|
|
|
|
Fixed assets, net
|
|
|
1,337,344
|
|
|
|
918,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
263,720,088
|
|
|
$
|
180,968,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS EQUITY
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
2,713,543
|
|
|
$
|
2,229,244
|
|
|
|
|
|
Accrued expenses related parties
|
|
|
455,485
|
|
|
|
70,833
|
|
|
|
|
|
Payable for purchase of structured settlements
|
|
|
|
|
|
|
7,093,576
|
|
|
|
|
|
Other liabilities
|
|
|
|
|
|
|
1,910,068
|
|
|
|
|
|
Lender protection insurance claims received in advance
|
|
|
|
|
|
|
60,645,099
|
|
|
|
|
|
Interest payable
|
|
|
8,251,023
|
|
|
|
12,811,040
|
|
|
|
|
|
Interest payable related parties
|
|
|
4,376,299
|
|
|
|
3,360,847
|
|
|
|
|
|
Notes payable
|
|
|
153,364,326
|
|
|
|
62,539,800
|
|
|
|
|
|
Notes payable related parties
|
|
|
77,700,155
|
|
|
|
19,853,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
246,860,831
|
|
|
|
170,514,154
|
|
|
|
|
|
Member units preferred (500,000 authorized in the
aggregate)
|
|
|
|
|
|
|
|
|
|
|
|
|
Member units Series A preferred (90,796 issued
and outstanding as of December 31, 2009 and
September 30, 2010)
|
|
|
4,035,000
|
|
|
|
4,035,000
|
|
|
|
|
|
Member units Series B preferred (50,000 issued
and outstanding as of December 31, 2009 and
September 30, 2010)
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
|
|
|
|
Member units Series C preferred (70,000 issued
and outstanding as of September 30, 2010)
|
|
|
|
|
|
|
7,000,000
|
|
|
|
|
|
Member units Series D preferred (7,000 issued
and outstanding as of September 30, 2010)
|
|
|
|
|
|
|
700,000
|
|
|
|
|
|
Member units Series E preferred (73,000 issued
and outstanding as of September 30, 2010)
|
|
|
|
|
|
|
7,300,000
|
|
|
|
|
|
Subscription receivable
|
|
|
|
|
|
|
(5,000,000
|
)
|
|
|
|
|
Member units common (500,000 authorized; 450,000
issued and outstanding as of December 31, 2009 and
September 30, 2010)
|
|
|
19,923,709
|
|
|
|
19,923,709
|
|
|
|
|
|
Accumulated deficit
|
|
|
(12,099,452
|
)
|
|
|
(28,504,768
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total members equity
|
|
|
16,859,257
|
|
|
|
10,453,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity
|
|
$
|
263,720,088
|
|
|
$
|
180,968,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-29
Imperial
Holdings, LLC and Subsidiaries
For
the Nine Months Ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
|
September 30
|
|
|
|
2009
|
|
|
2010
|
|
|
Agency fee income
|
|
$
|
20,215,518
|
|
|
$
|
9,099,047
|
|
Interest income
|
|
|
15,842,555
|
|
|
|
15,794,962
|
|
Origination fee income
|
|
|
21,865,432
|
|
|
|
16,728,185
|
|
Gain on sale of structured settlements
|
|
|
499,410
|
|
|
|
4,847,649
|
|
Forgiveness of debt
|
|
|
14,885,912
|
|
|
|
6,967,828
|
|
Change in fair value of life settlements and structured
receivables
|
|
|
|
|
|
|
4,805,387
|
|
Gain on sale of life settlements
|
|
|
|
|
|
|
1,954,112
|
|
Other income
|
|
|
53,250
|
|
|
|
194,646
|
|
|
|
|
|
|
|
|
|
|
Total income
|
|
|
73,362,077
|
|
|
|
60,391,816
|
|
Interest expense
|
|
|
18,342,353
|
|
|
|
18,341,797
|
|
Interest expense related parties
|
|
|
6,367,949
|
|
|
|
5,901,939
|
|
Provision for losses on loans receivables
|
|
|
6,705,249
|
|
|
|
3,514,191
|
|
Loss on loan payoffs and settlements, net
|
|
|
11,278,543
|
|
|
|
4,320,219
|
|
Amortization of deferred costs
|
|
|
13,100,595
|
|
|
|
22,600,831
|
|
Selling, general and administrative expenses
|
|
|
22,224,687
|
|
|
|
21,401,216
|
|
Selling, general and administrative expenses related
parties
|
|
|
772,713
|
|
|
|
716,939
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
78,792,089
|
|
|
|
76,797,132
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,430,012
|
)
|
|
$
|
(16,405,316
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted loss per share
|
|
|
|
|
|
|
[ ]
|
|
|
|
|
|
|
|
|
|
|
Pro forma fully diluted weighted average shares
|
|
|
|
|
|
|
[ ]
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-30
Imperial
Holdings, LLC and Subsidiaries
For
the Nine Months Ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
Balance at December 31, 2009
|
|
|
Member Contributions
|
|
|
Subscription Receivable
|
|
|
Net Loss
|
|
|
September 30, 2010
|
|
|
|
Units
|
|
|
Amount
|
|
|
Units
|
|
|
Amount
|
|
|
Units
|
|
|
Amount
|
|
|
Units
|
|
|
Amount
|
|
|
Units
|
|
|
Amount
|
|
|
Member units-Series A Preferred
|
|
|
90,796
|
|
|
$
|
4,035,000
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,796
|
|
|
$
|
4,035,000
|
|
Member units-Series B Preferred
|
|
|
50,000
|
|
|
|
5,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
5,000,000
|
|
Member units-Series C Preferred
|
|
|
|
|
|
|
|
|
|
|
70,000
|
|
|
|
7,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,000
|
|
|
|
7,000,000
|
|
Member units-Series D Preferred
|
|
|
|
|
|
|
|
|
|
|
7,000
|
|
|
|
700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,000
|
|
|
|
700,000
|
|
Member units-Series E Preferred
|
|
|
|
|
|
|
|
|
|
|
73,000
|
|
|
|
7,300,000
|
|
|
|
|
|
|
|
(5,000,000
|
)
|
|
|
|
|
|
|
|
|
|
|
73,000
|
|
|
|
2,300,000
|
|
Member units-Common
|
|
|
450,000
|
|
|
|
19,923,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
450,000
|
|
|
|
19,923,709
|
|
Accumulated Deficit
|
|
|
|
|
|
|
(12,099,452
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,405,316
|
)
|
|
|
|
|
|
|
(28,504,768
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
590,796
|
|
|
$
|
16,859,257
|
|
|
|
150,000
|
|
|
$
|
15,000,000
|
|
|
|
|
|
|
$
|
(5,000,000
|
)
|
|
|
|
|
|
$
|
(16,405,316
|
)
|
|
|
740,796
|
|
|
$
|
10,453,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-31
Imperial
Holdings, LLC and Subsidiaries
For
the Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,430,012
|
)
|
|
$
|
(16,405,316
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
668,612
|
|
|
|
560,814
|
|
Provision for doubtful accounts
|
|
|
980,813
|
|
|
|
105,047
|
|
Provision for losses on loans receivable
|
|
|
6,705,249
|
|
|
|
3,514,191
|
|
Loss of loan payoffs and settlements, net
|
|
|
11,278,543
|
|
|
|
4,320,219
|
|
Origination income
|
|
|
(21,865,432
|
)
|
|
|
(16,728,185
|
)
|
Gain on sale of structured settlements
|
|
|
(499,410
|
)
|
|
|
(4,847,649
|
)
|
Gain on sale of life settlements
|
|
|
|
|
|
|
(1,954,112
|
)
|
Change in fair value of investments
|
|
|
|
|
|
|
(4,805,387
|
)
|
Gain on forgiveness of debt
|
|
|
(14,885,912
|
)
|
|
|
(6,967,828
|
)
|
Interest income
|
|
|
(15,842,555
|
)
|
|
|
(15,794,962
|
)
|
Amortization of deferred costs
|
|
|
12,634,586
|
|
|
|
22,600,831
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
Purchase of certificate of deposit
|
|
|
|
|
|
|
(200,000
|
)
|
Deposits
|
|
|
(10,705
|
)
|
|
|
283,460
|
|
Restricted cash
|
|
|
684,624
|
|
|
|
|
|
Agency fees receivable
|
|
|
6,074,016
|
|
|
|
1,323,571
|
|
Structured settlements receivables
|
|
|
(4,548,613
|
)
|
|
|
(3,633,749
|
)
|
Prepaid expenses and other assets
|
|
|
5,589,261
|
|
|
|
(3,803,686
|
)
|
Due from related party
|
|
|
|
|
|
|
(1,007,030
|
)
|
Accounts payable, accrued expenses and other liabilities
|
|
|
(2,558,299
|
)
|
|
|
8,132,148
|
|
Interest payable
|
|
|
8,988,607
|
|
|
|
3,544,565
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(12,036,627
|
)
|
|
|
(31,763,058
|
)
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchases of fixed assets
|
|
|
(332,198
|
)
|
|
|
(142,360
|
)
|
Purchase of investments
|
|
|
|
|
|
|
(727,333
|
)
|
Proceeds from loan payoffs
|
|
|
22,579,535
|
|
|
|
119,065,842
|
|
Originations of loans receivable, net
|
|
|
(51,104,212
|
)
|
|
|
(23,546,748
|
)
|
Proceeds from sale of investments, net
|
|
|
|
|
|
|
2,070,494
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(28,856,875
|
)
|
|
|
96,719,895
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Member contributions
|
|
|
|
|
|
|
10,000,000
|
|
Member distributions
|
|
|
(21,807
|
)
|
|
|
|
|
Payments of cash pledged as restricted deposits
|
|
|
1,536,111
|
|
|
|
(642,698
|
)
|
Payment of financing fees
|
|
|
(16,141,397
|
)
|
|
|
(5,416,447
|
)
|
Repayment of borrowings under credit facilities
|
|
|
(41,342,500
|
)
|
|
|
(65,119,158
|
)
|
Repayment of borrowings from affiliates
|
|
|
(22,516,946
|
)
|
|
|
(60,518,397
|
)
|
Borrowings under credit facilities
|
|
|
100,721,701
|
|
|
|
35,249,406
|
|
Borrowings from affiliates
|
|
|
11,480,543
|
|
|
|
9,284,505
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
33,715,705
|
|
|
|
(77,162,789
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(7,177,797
|
)
|
|
|
(12,205,952
|
)
|
Cash and cash equivalents, at beginning of the period
|
|
|
7,643,528
|
|
|
|
15,890,799
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, at end of the period
|
|
$
|
465,731
|
|
|
$
|
3,684,847
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest during the period
|
|
$
|
12,959,547
|
|
|
$
|
19,324,030
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash financing activities:
|
|
|
|
|
|
|
|
|
Deferred costs paid directly by credit facility
|
|
$
|
11,132,246
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Subscription to purchase Member units Series E
preferred
|
|
$
|
|
|
|
$
|
5,000,000
|
|
|
|
|
|
|
|
|
|
|
Conversion of debt to preferred member units
|
|
$
|
4,035,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of borrowings paid directly by our lender protection
|
|
|
|
|
|
|
|
|
Insurance carrier
|
|
$
|
|
|
|
$
|
63,967,983
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-32
Imperial
Holdings, LLC and Subsidiaries
For the
Nine Month Ended September 30, 2009 and September 30,
2010
|
|
NOTE 1
|
ORGANIZATION
AND DESCRIPTION OF BUSINESS ACTIVITIES
|
Imperial Holdings, LLC (the Company) was formed
pursuant to an operating agreement dated December 15, 2006
between IFS Holdings, Inc, IMEX Settlement Corporation, Premium
Funding, Inc. and Red Oak Finance, LLC. The Company operates as
a Limited Liability Company. The Company, operating through its
subsidiaries, is a specialty finance company with its corporate
office in Boca Raton, Florida. As a limited liability company,
each members liability is generally limited to the amounts
reflected in their respective capital accounts. The
Companys operates in two reportable business segments:
financings premium for individual life insurance policies and
purchasing structured settlements.
Premium
Finance
A premium finance transaction is a transaction in which a life
insurance policyholder obtains a loan, predominately through an
irrevocable life insurance trust established by the insured, to
pay insurance premiums for a fixed period of time. The
Companys typical premium finance loan is approximately two
years in duration and is collateralized by the underlying life
insurance policy. On each premium finance loan, the Company
charges a loan originate fee and charges interest on the loan.
In addition, the Company charges the referring agent an agency
fee.
Structured
Settlements
Washington Square Financial, LLC, a wholly owned subsidiary of
the Company, purchases structured settlements from individuals.
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, thereby providing a high
credit quality stream of payments to the plaintiff.
Recipients of structured settlements are permitted to sell their
deferred payment streams to a structured settlement purchaser
pursuant to state statutes that require certain disclosures,
notice to the obligors and state court approval. Through such
sales, the Company purchases a certain number of fixed,
scheduled future settlement payments on a discounted basis in
exchange for a single lump sum payment.
|
|
NOTE 2
|
BASIS OF
PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of Presentation
The accompanying unaudited interim consolidated financial
statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission
(SEC) for reporting of interim financial
information. Pursuant to such rules and regulations, certain
information and footnote disclosures normally included in
financial statements prepared in accordance with accounting
principles generally accepted in the United States of America
have been condensed or omitted.
In the opinion of management, the accompanying unaudited interim
consolidated financial statements of the Company contain all
adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the financial position of the
Company as of the dates and for the periods presented.
Accordingly, these statements should be read in conjunction with
the financial statements and notes thereto for the year ended
December 31, 2009. The results of operations for the nine
months ended September 30, 2010 are not necessarily
indicative of the results to be expected for any future period
or for the full 2010 fiscal year.
F-33
Imperial
Holdings, LLC and Subsidiaries
NOTES TO
CONSOLIDATED AND COMBINED UNAUDITED FINANCIAL
STATEMENTS (Continued)
For the
Nine Month Ended September 30, 2009 and September 30,
2010
Use
of Estimates
The preparation of these consolidated and combined financial
statements, in conformity with accounting principles generally
accepted in the United States of America, requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from
these estimates and such differences could be material.
Significant estimates made by management include the loan
impairment valuation, allowance for doubtful accounts, valuation
of structured settlements and the valuation of investments in
life settlements at September 30, 2010.
Gain
on Sale of Life Settlements
Gain on sale of life settlements includes gains from company
owned life settlements and gains from sales on behalf of third
parties.
Fair
Value Option
As of July 1, 2010, we elected to adopt the fair value
option, in accordance with ASC 825, Financial
Instruments, to record certain newly-acquired structured
settlements at fair value. We have the option to measure
eligible financial assets, financial liabilities, and
commitments at fair value on an
instrument-by-instrument
basis. This option is available when we first recognize a
financial asset or financial liability or enter into a firm
commitment. Subsequent changes in fair value of assets,
liabilities, and commitments where we have elected fair value
option are recorded in our consolidated and combined statement
of operations. We have made this election because it is our
intention to sell these assets within the next twelve months,
and we believe it significantly reduces the disparity that
exists between the GAAP carrying value of these structured
settlements and our estimate of their economic value. All
structured settlements that were acquired subsequent to
July 1, 2010 were marked to fair value. Structured
settlements that were acquired prior to July 1, 2010 are
recorded at cost. For the nine months ended September 30,
2010, changes in the fair value of structured settlements where
we elected the fair value option resulted in income of
approximately $1,505,000.
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 is 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, 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
F-34
Imperial
Holdings, LLC and Subsidiaries
NOTES TO
CONSOLIDATED AND COMBINED UNAUDITED FINANCIAL
STATEMENTS (Continued)
For the
Nine Month Ended September 30, 2009 and September 30,
2010
adoption of this guidance did not have a material impact on our
financial position, results of operations or cash flows.
In January 2010, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Update
(ASU)
No. 2010-6,
Improving Disclosures about Fair Value
Measurements (ASU
2010-6).
This update amended guidance and issued a clarification with
regard to disclosure requirements about fair market value
measurement. A reporting entity is required to disclose
separately the amounts of significant transfers in and out of
Level 1 and Level 2 fair value measurements and
describe the reasons for the transfers. In addition, for
measurement utilizing significant unobservable inputs, a
reporting entity should present separately information about
purchases, sales, issuances, and settlements. We adopted ASU
2010-6 on
January 1, 2010. There was no impact upon adoption of ASU
2010-6 to
our financial position or results of operations.
In February 2010, the FASB issues ASU
No. 2010-9,
Amendments to Certain Recognition and Disclosure
Requirements (ASU
2010-9).
This amendment removed the requirement for a Securities and
Exchange Commission (SEC) filer to disclose a date
through which subsequent events have been evaluated in both
issued and revised financial statements. This amendment is
effective upon issuance date of February 24, 2010. There
was no impact upon adoption of ASU
2010-9 to
our financial position or results of operations.
Restricted
Cash
The Cedar Lane credit facility requires the company to retain 2%
of the principal amount of each loan made to the borrower, for
the purposes of indemnifying the facility for any breaches of
representations, warranties or covenants of the borrower, as
well as to fund collection efforts, if required. As of
December 31, 2009 and September 30, 2010 the
Companys consolidated financial statements reflected
balances of approximately $149,000 included in deposits and
$643,000 included in restricted cash, respectively.
Agency
Fees Receivable
Agency fees are charged for services related to premium finance
transactions. Agency fees are due per the signed fee agreement.
Agency fees receivable are reported net of an allowance for
doubtful accounts. Managements determination of the
allowance for doubtful accounts is based on an evaluation of the
commission receivable, prior collection history, current
economic conditions, and other inherent risks. The Company
reviews agency fees receivable aging on a regular basis to
determine if any of the receivables are past due. The Company
writes off all uncollectible agency fee receivable balances
against its allowance. The allowance for doubtful accounts was
approximately $186,000 and $120,000 as of September 30,
2010 and December 31,2009, respectively.
An analysis of the changes in the allowance for doubtful
accounts for past due agency fees during the nine months ended
September 30, 2009 and 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
Balance at beginning of period
|
|
$
|
768,806
|
|
|
$
|
119,886
|
|
Bad debt expense
|
|
|
957,340
|
|
|
|
66,027
|
|
Write-offs
|
|
|
(19,742
|
)
|
|
|
|
|
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
1,706,404
|
|
|
$
|
185,913
|
|
F-35
Imperial
Holdings, LLC and Subsidiaries
NOTES TO
CONSOLIDATED AND COMBINED UNAUDITED FINANCIAL
STATEMENTS (Continued)
For the
Nine Month Ended September 30, 2009 and September 30,
2010
Pro
Forma Information (Unaudited)
The pro forma earnings per share for the nine months ended
September 30, 2010 gives effect to (i) 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) and all
principal and accrued interest outstanding under our promissory
note in favor of IMPEX Enterprises, Ltd. will be converted into
[ ] shares of our common
stock; (ii) the issuance of shares of common stock to two
of our employees pursuant to the terms of each of their
respective phantom stock agreements; and (iii) the issuance
and conversion of a $30.0 million debenture into
[ ] shares of our common stock.
Unaudited pro forma net income attributable to common
stockholders per share is computed using the weighted-average
number of common shares outstanding, including the pro forma
effect of (i) to (iii) above, as if such conversion
occurred at the beginning of the period.
The following table sets forth the computation of pro forma
basic and diluted net loss per share:
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2010
|
|
|
Numerator (basic and diluted):
|
|
|
|
|
Net loss
|
|
$
|
(16,405
|
)
|
|
|
|
|
|
Denominator (basic and diluted):
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
[
|
]
|
Add: Common shares from conversion of common units
|
|
|
[
|
]
|
Add: Common shares from conversion of preferred units
|
|
|
[
|
]
|
Add: Common shares from phantom stock agreements
|
|
|
[
|
]
|
Add: Common shares from conversion of $30.0 million
debenture
|
|
|
[
|
]
|
|
|
|
|
|
Pro forma weighted average common shares outstanding
|
|
|
[
|
]
|
|
|
|
|
|
Pro forma net loss per share:
|
|
|
|
|
Basic and diluted
|
|
$
|
[
|
]
|
|
|
|
|
|
Diluted
|
|
$
|
[
|
]
|
|
|
|
|
|
|
|
NOTE 3
|
LOANS
RECEIVABLE
|
An analysis of the changes in loans receivable principal balance
during the nine months ended September 30, 2010 is as
follows:
|
|
|
|
|
|
|
2010
|
|
|
Loan principal balance, beginning
|
|
$
|
167,691,523
|
|
Loan originations
|
|
|
18,244,655
|
|
Subsequent year premiums paid, net of reimbursements
|
|
|
5,302,093
|
|
Loan write-offs
|
|
|
(6,593,350
|
)
|
Loan payoffs
|
|
|
(80,847,708
|
)
|
|
|
|
|
|
Loan principal balance, ending
|
|
$
|
103,797,213
|
|
|
|
|
|
|
Loan origination fees include origination fees or maturity fees
which are payable to the Company on the date the loan matures.
The loan origination fees are reduced by any direct costs that
are directly related to the creation of the loan receivable in
accordance with
ASC 310-20,
Receivables Nonrefundable Fees and Other
F-36
Imperial
Holdings, LLC and Subsidiaries
NOTES TO
CONSOLIDATED AND COMBINED UNAUDITED FINANCIAL
STATEMENTS (Continued)
For the
Nine Month Ended September 30, 2009 and September 30,
2010
Costs, and the net balance is accreted over the life of
the loan using the effective interest method. Discounts include
purchase discounts, net of accretion, which are attributable to
loans that were acquired from affiliated companies under common
ownership and control.
During the nine months ended September 30, 2010 and
September 30, 2009, the Company had 31 and 52 loans,
respectively, that were impacted by the Acorn facility
settlement. The Company incurred a loss on these loans of
approximately $5,181,000 and $8,442,000, respectively. The
Company also recorded gains related to the associated
forgiveness of debt of $6,968,000 and $14,886,000, respectively.
An analysis of the loan impairment valuation for the nine months
ended September 30, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
Interest
|
|
|
|
|
|
|
Receivable
|
|
|
Receivable
|
|
|
Total
|
|
|
Balance at beginning of period
|
|
$
|
11,598,765
|
|
|
$
|
1,788,544
|
|
|
$
|
13,387,308
|
|
Provision for loan losses
|
|
|
3,408,162
|
|
|
|
106,029
|
|
|
|
3,514,191
|
|
Charge-offs
|
|
|
(8,360,092
|
)
|
|
|
(443,709
|
)
|
|
|
(8,803,801
|
)
|
Recoveries
|
|
|
1,341,732
|
|
|
|
|
|
|
|
1,341,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
7,988,567
|
|
|
$
|
1,450,864
|
|
|
$
|
9,439,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2010, the Company
had a provision for loan losses of $3,514,191. The Company had
loan payoffs/write-offs on 355 loans during the nine months
ended September 30, 2010, the principal and origination fee
that was charged-off of these loans was $8,360,092 and the
related interest that was charged-off was $443,709.
|
|
NOTE 4
|
LENDER
PROTECTION INSURANCE CLAIMS RECEIVED IN ADVANCE
|
On September 8, 2010, the lender protection insurance
related to our credit facility with Ableco Finance, LLC
(Ableco) was terminated and settled pursuant to a
claims settlement agreement, resulting in our receipt of an
insurance claims settlement of approximately $96.9 million.
We used approximately $64.0 million of the settlement
proceeds to pay off the credit facility with Ableco in full and
the remainder was used to pay off the amounts borrowed under the
grid promissory note in favor of CTL Holdings, LLC.
As a result of this settlement transaction, our subsidiary,
Imperial PFC Financing, LLC, a special purpose entity, agreed to
reimburse the lender protection insurer for certain loss
payments and related expenses by remitting to the lender
protection insurer all amounts received in the future in
connection with the related premium finance loans issued through
the Ableco credit facility and the life insurance policies
collateralizing those loans until such time as the lender
protection insurer has been reimbursed in full in respect of its
loss payments and related expenses. These loss payments and
related expenses include the $96.9 million insurance claims
settlement described above, $77.0 million for loss payments
previously made, any additional advances made by the lender
protection insurer to or for the benefit of Imperial PFC
Financing, LLC and interest on such amounts. The reimbursement
obligation is generally non-recourse to us and our other
subsidiaries except to the extent of our equity interest in
Imperial PFC Financing, LLC. Messrs. Mitchell and Neuman
each guaranteed the obligations of Imperial PFC Financing, LLC
for matters other than financial performance.
Under the lender protection program, we pay lender protection
insurance premiums at or about the time the coverage for a
particular loan becomes effective. We record this amount as a
deferred cost on our balance sheet, and then expense the
premiums over the life of the underlying premium finance loans
using the effective interest method. As of September 8,
2010, the deferred premium costs associated with the Ableco
facility totaled $5.4 million. Since these insurance claims
have been prepaid and Ableco has been repaid in full, we have
accelerated the expensing of these deferred costs and recorded
this $5.4 million expense as Amortization
F-37
Imperial
Holdings, LLC and Subsidiaries
NOTES TO
CONSOLIDATED AND COMBINED UNAUDITED FINANCIAL
STATEMENTS (Continued)
For the
Nine Month Ended September 30, 2009 and September 30,
2010
of Deferred Costs. Also in connection with the termination of
the Ableco facility, we have accelerated the expensing of
approximately $980,000 of deferred costs which resulted from
professional fees related to the creation of the Ableco
facility. We recorded these charges as Amortized Deferred Costs.
In the aggregate, we accelerated the expensing of
$6.4 million in deferred costs as a result of this one-time
transaction.
The insurance claim settlement of $96.9 million was
recorded as lender protection insurance claims paid in advance
on our consolidated and combined balance sheet. As the premium
finance loans mature and in the event of default, the insurance
claim is applied against the premium finance loan. As of
September 30, 2010, we have approximately
$60.6 million remaining of lender protection insurance
claims paid in advance related to premium finance loans which
have not yet matured. As of September 30, 2010, we have
approximately $51.9 million of loans receivable, net and
$8.5 million of interest receivable, net in premium finance
loans which have not yet matured for which this insurance claims
settlement relates. The remaining premium finance loans will
mature by August 5, 2011.
|
|
NOTE 5
|
STRUCTURED
SETTLEMENTS
|
The balances of the Companys structured settlements are as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
Structured settlements at cost
|
|
$
|
151,543
|
|
|
$
|
1,080,362
|
|
Structured settlements at fair value
|
|
|
|
|
|
|
9,473,286
|
|
|
|
|
|
|
|
|
|
|
Structured settlements receivable, net
|
|
$
|
151,543
|
|
|
$
|
10,553,648
|
|
On February 1, 2010, the Company signed a purchase and sale
agreement with Slate Capital, LLC (Slate) whereby
the Company will originate and sell to them certain eligible
structured settlements and life contingent structured
settlements. The Companys subsidiary, Washington Square
Financial, LLC, also entered into a servicing agreement with
Slate to service the sold structured settlements. Under this
facility, transactions began funding in April, 2010. During the
nine months ended September 30, 2010, there were 139
transactions completed generating income of approximately
$3,125,000, which was recorded as a gain on sale of structured
settlements.
On September 30, 2010, we entered into a wind down
agreement with Slate whereby as of December 31, 2010, we
will cease selling structured settlements to Slate. Under the
wind down agreement, which amends our existing arrangement with
Slate, we will continue submitting structured settlements to
Slate through November 15, 2010 for purchase by
December 31, 2010.
In addition to our sales to Slate, during the nine months ended
September 30, 2010 the company sold 152 structured
settlements for proceeds totaling approximately $5,996,000. The
Company recognized a gain of approximately $1,723,000 on these
transactions and recorded a holdback of approximately $310,000,
which is included in accounts payable and accrued expenses in
the accompanying consolidated balance sheet and will be
recognized as income when cash is recorded.
Effective September 24, 2010, Imperial Settlements
Financing 2010, LLC, a wholly owned subsidiary of the Company,
entered into an agreement with Portfolio Financial Servicing
Company, the Master Servicer, Wilmington Trust Company, as
the Trustee and Collateral Trustee and ParterRe Principal
Finance, Inc. as the Purchaser. Beginning October, 2010, the
Company expects to originate and sell structured settlements and
life contingent structured settlements transactions under this
facility. This facility will include up to a $50 million
capacity under a 8.39% fixed rate asset backed variable funding
note,
series 2010-1.
F-38
Imperial
Holdings, LLC and Subsidiaries
NOTES TO
CONSOLIDATED AND COMBINED UNAUDITED FINANCIAL
STATEMENTS (Continued)
For the
Nine Month Ended September 30, 2009 and September 30,
2010
|
|
NOTE 6
|
INVESTMENT
IN LIFE SETTLEMENT FUND
|
On September 3, 2009, the Company formed MXT Investments,
LLC (MXT Investments) as a wholly-owned subsidiary.
MXT Investments signed an agreement with Insurance Strategies
Fund, LLC (Insurance Strategies) whereby MXT
Investments would purchase an equity interest in Insurance
Strategies and Insurance Strategies would purchase life
settlement policies from the Company and other sources. During
the three months ending March 31, 2010, MXT Investments
contributed approximately $727,000 to Insurance Strategies and
Insurance Strategies purchased 5 settlement policies from
Imperial Premium for approximately $1,268,000. During the six
month period beginning April 1, 2010 and ending
September 30, 2010, no additional policies were purchased.
No gain was recognized on the transaction due to the related
equity contribution made by MXT Investments into Insurance
Strategies. As of September 30, 2010, MXT Investments had
investments in Insurance Strategies of $1,270,000, net of
deferred gains of $365,000.
|
|
NOTE 7
|
FAIR
VALUE MEASUREMENTS
|
We carry investments in life and structured settlements at fair
value in the consolidated and combined balance sheets. Fair
value is defined as an exit price, representing the amount that
would be received to sell an asset or 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.
Fair value measurements are classified based on the following
fair value hierarchy:
Level 1 Valuation is based on unadjusted quoted
prices in active markets for identical assets and liabilities
that are accessible at the reporting date. Since valuations are
based on quoted prices that are readily and regularly available
in an active market, valuation of these products does not entail
a significant degree of judgment.
Level 2 Valuation is determined from pricing
inputs that are other than quoted prices in active markets that
are either directly or indirectly observable as of the reporting
date. Observable inputs include quoted prices for similar assets
or liabilities in active markets, quoted prices for identical or
similar assets or liabilities in markets that are not active,
and interest rates and yield curves that are observable at
commonly quoted intervals.
Level 3 Valuation is based on inputs that are
both significant to the fair value measurement and unobservable.
Level 3 inputs include situations where there is little, if
any, market activity for the financial instrument. The inputs
into the determination of fair value generally require
significant management judgment or estimation.
The balances of the Companys assets measured at fair value
on a recurring basis as of September 30, 2010, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in life settlements
|
|
$
|
|
|
|
$
|
|
|
|
$
|
8,846,149
|
|
|
$
|
8,846,149
|
|
Structured settlement receivables
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9,473,286
|
|
|
$
|
9,473,286
|
|
The Company experienced a loss on realized change in fair value
of life settlements of approximately $102,000 during the nine
months ended September 30, 2010 as a result of deciding to
let four policies lapse when it determined that future premium
expense could be deployed for better uses.
F-39
Imperial
Holdings, LLC and Subsidiaries
NOTES TO
CONSOLIDATED AND COMBINED UNAUDITED FINANCIAL
STATEMENTS (Continued)
For the
Nine Month Ended September 30, 2009 and September 30,
2010
The balances of the Companys assets measured at fair value
on a recurring basis as of December 31, 2009, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in life settlements
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,306,280
|
|
|
$
|
4,306,280
|
|
Structured settlement receivables
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
The following table provides a roll-forward in the changes in
fair value for the nine months ended September 30, 2010,
for all assets for which the Company determines fair value using
a material level of unobservable (Level 3) inputs.
|
|
|
|
|
|
|
|
|
Life Settlements:
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
|
|
|
$
|
4,306,280
|
|
Purchase of policies
|
|
|
|
|
|
|
2,976,230
|
|
Change in unrealized appreciation
|
|
|
|
|
|
|
3,736,435
|
|
Realized change in fair value
|
|
|
|
|
|
|
(102,302
|
)
|
|
|
|
|
|
|
|
|
|
Sale of policies
|
|
|
|
|
|
|
(2,070,494
|
)
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2010
|
|
|
|
|
|
$
|
8,846,149
|
|
|
|
|
|
|
|
|
|
|
Unrealized appreciation, September 30, 2010
|
|
|
|
|
|
$
|
3,377,025
|
|
|
|
|
|
|
|
|
|
|
Structured Settlements:
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
|
|
|
$
|
|
|
Purchase of contracts
|
|
|
|
|
|
|
7,981,050
|
|
Change in unrealized appreciation
|
|
|
|
|
|
|
1,505,373
|
|
Collections
|
|
|
|
|
|
|
(13,137
|
)
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2010
|
|
|
|
|
|
$
|
9,473,286
|
|
|
|
|
|
|
|
|
|
|
Unrealized appreciation, September 30, 2010
|
|
|
|
|
|
$
|
1,505,373
|
|
|
|
|
|
|
|
|
|
|
The Companys impaired loans are measured at fair value on
a non-recurring basis, as the carrying value is based on the
fair value of the underlying collateral. The method used to
estimate the fair value of impaired collateral-dependent loans
depends on the nature of the collateral. For collateral that has
lender protection insurance coverage, the fair value measurement
is considered to be Level 2 as the insured value is an
observable input and there are no material unobservable inputs.
For collateral that does not have lender protection insurance
coverage, the fair value measurement is considered to be
Level 3 as the estimated fair value is based on a model
whose significant inputs into are the life expectancy of the
insured and the discount rate, which are not observable. As of
September 30, 2010 and December 31, 2009, the Company
had insured impaired loans (Level 2) with a net
carrying value, which includes principal, accrued interest, and
accreted origination fees, net of impairment, of approximately
56,816,000 and $57,495,000, respectively. As of
September 30, 2010 and December 31, 2009, the Company
had uninsured impaired loans (Level 3) with a net
carrying value of approximately $1,619,000 and $3,601,000,
respectively. The provision for losses on loans receivable
related to impaired loans was approximately $6,705,000 and
$3,514,000 for the nine months ended September 30, 2009 and
2010, respectively.
The Company may sell a life insurance policy on behalf of its
own account or for the benefit of another. In the case of such
sales, which are always sales of the whole policy and not
fractional interests, the Company recognizes a gain from the
excess of the sales price over carrying value. If the Company is
acting on behalf of
F-40
Imperial
Holdings, LLC and Subsidiaries
NOTES TO
CONSOLIDATED AND COMBINED UNAUDITED FINANCIAL
STATEMENTS (Continued)
For the
Nine Month Ended September 30, 2009 and September 30,
2010
a third party, the gain is the Companys negotiated share
of the resulting gain. Total gains recognized were
$1.9 million for the nine months ended September 30,
2010. Policies owned by the Company and sold in the nine months
ended September 30, 2010 had a fair value of
$2.1 million.
The following table describes the Companys investment in
life settlements as of September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
Number of
|
|
|
|
|
|
|
|
Life Expectancy
|
|
Life Settlement
|
|
|
|
|
|
|
|
(In Years)
|
|
Contracts
|
|
|
Fair Value
|
|
|
Face Value
|
|
|
0-1
|
|
|
|
|
|
$
|
0
|
|
|
$
|
0
|
|
1-2
|
|
|
|
|
|
$
|
0
|
|
|
$
|
0
|
|
2-3
|
|
|
|
|
|
$
|
0
|
|
|
$
|
0
|
|
3-4
|
|
|
1
|
|
|
$
|
738,888
|
|
|
$
|
2,000,000
|
|
4-5
|
|
|
1
|
|
|
$
|
540,359
|
|
|
$
|
2,200,000
|
|
Thereafter
|
|
|
29
|
|
|
$
|
7,566,902
|
|
|
$
|
132,432,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
31
|
|
|
$
|
8,846,149
|
|
|
$
|
136,632,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the 31 policies held as of September 30, 2010, 14 of
these policies previously had lender protection insurance
related to their premium finance loans prior to being classified
as investments in life settlements.
Premiums to be paid for each of the five succeeding years to
keep the life insurance policies in force as of
September 30, 2010, are as follows:
|
|
|
|
|
12 Months Ending September 30,
|
|
Premiums to be Paid
|
|
|
2011
|
|
$
|
2,467,561
|
|
2012
|
|
$
|
3,378,195
|
|
2013
|
|
$
|
3,438,684
|
|
2014
|
|
$
|
3,358,507
|
|
2015
|
|
$
|
3,515,607
|
|
Thereafter
|
|
$
|
51,307,396
|
|
|
|
|
|
|
Total:
|
|
$
|
67,465,949
|
|
|
|
|
|
|
|
|
Note 8
|
Note
Payable Acorn Capital Group
|
A lender, Acorn Capital Group (Acorn), breached a
credit facility agreement with the Company by not funding
ongoing premiums on certain life insurance policies serving as
collateral for premium finance loans. The first time that Acorn
failed to make scheduled premium payments was in July 2008. The
Company had no forewarning and therefore did not have access to
funds necessary to pay ongoing premiums on the policies. The
Company did not incur liability with its borrowers because the
terms of the Acorn loans provided that the Company was only
required to fund future premium if the Companys lender
provided it with the funds necessary to advance the premiums.
Through September 30, 2010, a total of 101 policies under
the Acorn facility incurred losses primarily due to non-payment
of premiums.
In May 2009, the Company entered a settlement agreement with
Acorn whereby all obligations under the credit agreement were
terminated. Acorn subsequently assigned all of its rights and
obligations under the settlement agreement to Asset Based
Resource Group, LLC (ABRG). As part of the
settlement agreement, the Company continues to service the
original loans and ABRG determines whether or not it will
continue to fund the loans. The Company believes that ABRG will
elect to fund the loan only if it believes there is value in the
policy serving as collateral for the loan. If ABRG chooses not
to continue funding a loan, the Company
F-41
Imperial
Holdings, LLC and Subsidiaries
NOTES TO
CONSOLIDATED AND COMBINED UNAUDITED FINANCIAL
STATEMENTS (Continued)
For the
Nine Month Ended September 30, 2009 and September 30,
2010
has the option to fund the loan or try to sell the loan or
related policy to another party. The Company elects to fund the
loan only if it believes there is value in the policy serving as
collateral for the loan after considering the costs of keeping
the policy in force. Regardless of whether the Company funds the
loan or sells the loan or related policy to another party, the
Companys debt under the Acorn facility is forgiven and it
records a gain on the forgiveness of debt. If the Company funds
the loan, it remains as an asset on the balance sheet, otherwise
it is written off and the Company records the amount written off
as a loss on loan payoffs and settlements, net.
On the notes that were cancelled under the Acorn facility, the
Company had debt forgiven totaling approximately $6,968,000 and
$16,410,000 for the nine months ended September 30, 2010
and for the year ended December 31, 2009, respectively. The
Company recorded these amounts as gain on forgiveness of debt.
Partially offsetting these gains, the Company had loan losses
totaling approximately $5,181,000, $10,182,000, and $1,868,000
during the nine months ended September 30, 2010 and the
years ended December 31, 2009 and 2008, respectively. The
Company recorded these amounts as loss on loan payoffs and
settlements, net. As of September 30, 2010, only 18 loans
out of 119 loans originally financed in the Acorn facility
remained outstanding. These notes have a carrying amount of
$4,416,000 which is included within loans receivable, net. These
notes mature within the next 12 months.
|
|
NOTE 9
|
RELATED
PARTY TRANSACTIONS
|
The Company incurred consulting fees of approximately $637,499
for the nine months ended September 30, 2010 for services
provided by a party related to the Company. As of
September 30, 2010, the Company owed approximately $70,833
to this related party.
Utilizing $32.2 million of the proceeds received as advance
payment of lender protection insurance claims, on
September 7, 2010, the Company paid down the notes payable
to CTL Holdings, LLC. As of September 30, 2010 there was a
balance of approximately $24,000 remaining due on this note.
In August 2009, the Company paid off notes with proceeds from
borrowings from two related party creditors which bear an
interest rate of 16.5% and mature on August 1, 2011. The
outstanding principal balance of these two notes at
September 30, 2010 was approximately $16,102,000 and
$3,752,000 and accrued interest was approximately $2,011,000 and
$1,349,000.
As of September 30, 2010, the Company had a receivable
balance of approximately $1,007,000 from CTL Holdings, LLC. This
receivable relates to lender protection insurance claims that
were remitted directly by our lender protection insurer to CTL
Holdings, LLC. The proceeds of these claims should have been
paid directly to the Company rather than CTL Holdings, LLC.
|
|
NOTE 10
|
PREFERRED
EQUITY
|
On September 27, 2010 we sold to a related party
23,000 units of Series E Preferred Units with a
liquidating preference of $100.00 per unit for an aggregate
amount of $2,300,000. The rate of preferred return is equal to
16.0% per annum.
On September 30, 2010, we sold to a related party
50,000 units of Series E Preferred Units with a
liquidating preference of $100.00 per unit for an aggregate
amount of $5,000,000. The rate of preferred return is equal to
16.0% per annum. The Company recorded a subscription receivable
of $5,000,000 as a component of members equity, as the
cash was not received until October, 2010.
The dividends in arrears for all preferred units at
September 30, 2010 were approximately $1,840,000.
F-42
Imperial
Holdings, LLC and Subsidiaries
NOTES TO
CONSOLIDATED AND COMBINED UNAUDITED FINANCIAL
STATEMENTS (Continued)
For the
Nine Month Ended September 30, 2009 and September 30,
2010
|
|
NOTE 11
|
SEGMENT
INFORMATION
|
The Company operates in two reportable business segments:
financings premium for individual life insurance policies and
purchasing structured settlements. The premium finance segment
provides financing in the form of loans to trusts and
individuals for the purchase of life insurance policies and the
loans are collateralized by the life insurance policies. The
structured settlements segment purchases settlements from
individuals who are plaintiffs in lawsuits and the Company will
pay the plaintiff a lump sum at a negotiated discount and take
title to the settlement payments.
The performance of the segments is evaluated on the segment
level by members of the Companys senior management team.
Cash and income taxes generally are managed centrally.
Performance of the segments is based on revenue and cost control.
F-43
Imperial
Holdings, LLC and Subsidiaries
NOTES TO
CONSOLIDATED AND COMBINED UNAUDITED FINANCIAL
STATEMENTS (Continued)
For the
Nine Month Ended September 30, 2009 and September 30,
2010
Segment results and reconciliation to consolidated net income
were as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
Premium finance
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
|
|
Agency fee income
|
|
$
|
20,215,518
|
|
|
$
|
9,099,047
|
|
Origination income
|
|
|
21,865,432
|
|
|
|
16,728,185
|
|
Interest income
|
|
|
15,426,584
|
|
|
|
15,482,339
|
|
Gain on forgiveness of debt
|
|
|
14,885,912
|
|
|
|
6,967,828
|
|
Change in fair value of investments
|
|
|
|
|
|
|
3,300,014
|
|
Other
|
|
|
|
|
|
|
2,065,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,393,446
|
|
|
|
53,643,092
|
|
|
|
|
|
|
|
|
|
|
Direct segment expenses
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
20,868,766
|
|
|
|
21,349,549
|
|
Provision for losses
|
|
|
6,705,249
|
|
|
|
3,514,191
|
|
Loss on loans payoffs and settlements, net
|
|
|
11,278,543
|
|
|
|
4,320,219
|
|
Amortization of deferred costs
|
|
|
13,100,595
|
|
|
|
22,600,831
|
|
SG&A expense
|
|
|
11,164,673
|
|
|
|
7,312,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,117,826
|
|
|
|
59,097,629
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$
|
9,275,620
|
|
|
$
|
(5,454,537
|
)
|
|
|
|
|
|
|
|
|
|
Structured settlements
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
|
|
Gain on sale of structured settlements
|
|
$
|
499,410
|
|
|
$
|
4,847,649
|
|
Interest income
|
|
|
415,971
|
|
|
|
312,623
|
|
Change in fair value of investments
|
|
|
|
|
|
|
1,505,373
|
|
Other income
|
|
|
53,250
|
|
|
|
83,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
968,631
|
|
|
|
6,748,724
|
|
|
|
|
|
|
|
|
|
|
Direct segment expenses
|
|
|
|
|
|
|
|
|
SG&A expense
|
|
|
6,735,674
|
|
|
|
8,855,095
|
|
|
|
|
|
|
|
|
|
|
Segment operating loss
|
|
$
|
(5,767,043
|
)
|
|
$
|
(2,106,371
|
)
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
Segment operating (loss) income
|
|
|
3,508,577
|
|
|
|
(7,560,908
|
)
|
Unallocated expenses
|
|
|
|
|
|
|
|
|
SG&A expenses
|
|
|
5,097,053
|
|
|
|
5,950,221
|
|
Interest expense
|
|
|
3,841,536
|
|
|
|
2,894,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,938,589
|
|
|
|
8,844,408
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,430,012
|
)
|
|
$
|
(16,405,316
|
)
|
|
|
|
|
|
|
|
|
|
F-44
Imperial
Holdings, LLC and Subsidiaries
NOTES TO
CONSOLIDATED AND COMBINED UNAUDITED FINANCIAL
STATEMENTS (Continued)
For the
Nine Month Ended September 30, 2009 and September 30,
2010
Segment assets and reconciliation to consolidated total assets
were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
September 30
|
|
|
|
2009
|
|
|
2010
|
|
|
Direct segment assets
|
|
|
|
|
|
|
|
|
Premium finance
|
|
$
|
245,574,288
|
|
|
$
|
164,517,923
|
|
Structured settlements
|
|
|
9,201,017
|
|
|
|
11,444,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
254,775,305
|
|
|
|
175,962,806
|
|
Other unallocated assets
|
|
|
8,944,783
|
|
|
|
5,005,289
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
263,720,088
|
|
|
$
|
180,968,095
|
|
|
|
|
|
|
|
|
|
|
Amounts are attributed to the segment that recognized the sale
and holds the assets. There are no intercompany sales and all
intercompany account balances are eliminated in segment
reporting.
|
|
NOTE 12
|
SUBSEQUENT
EVENTS
|
On September 30, 2010, the Company entered into an
agreement with a third party for the sale of structured
settlements. In accordance with the agreement, the transaction
was finalized upon the condition of the occurrence of certain
events, one of which was the receipt of the purchase amount. On
October 1, 2010, the third party remitted payment of
$6.1 million for the purchase of the structured settlements
and the Company recorded the corresponding gain on sale of
approximately $377,000 in the financial statements. As of
September 30, 2010, these assets were valued at estimated
fair value and recorded in the financial statements as
structured settlements.
On November 1, 2010, Premium Funding, Inc. and Branch
Office of Skarbonka Sp. z o.o. (Skarbonka) agreed to
exchange the common and preferred units owned by Premium
Funding, Inc. and the promissory note issued to Skarbonka for a
$30.0 million debenture that matures October 4, 2011.
The debenture was issued to Skarbonka. Premium Funding and
Skarbonka are related parties. The denture is automatically
convertible into shares of the Companys common stock
immediately prior to the closing of this offering.
The Companys former general counsel has notified the
Company that, pursuant to an offer letter entered into at the
time of her employment, she believes she is entitled to an
option to purchase up to 8% of the Companys total options
pool and that she is entitled to pursue civil causes of action
against the Company and two of its executive officers. She
alleges that she suffered harm, among other reasons, because a
lower paid male employee was provided an employment agreement
with a greater severance benefit and that she never received an
option award as referenced in her offer letter. The Company
reviewed the claim and believes that it is without merit. The
Company intends to vigorously defend against any action that the
employee may initiate. The Company is currently unable to
estimate the amount of potential damages, if any, it would incur
as a result of with this claim and has not established a reserve
for this dispute.
F-45
Until
[ ],
2010 (25 days after the date of this prospectus), all
dealers that buy, sell or trade shares of our common stock,
whether or not participating in this offering, may be required
to deliver a prospectus. This requirement is in addition to the
dealers obligation to deliver a prospectus when acting as
underwriters and with respect to unsold allotments or
subscriptions.
[ ] Shares
Common Stock
PROSPECTUS
FBR
Capital
Markets
[ ],
2010
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other
Expenses of Issuance and Distribution.
|
The table below sets forth the costs and expenses payable by
Imperial Holdings, Inc. in connection with the issuance and
distribution of the securities being registered (other than
underwriting discounts and commissions). All amounts are
estimated except the SEC registration fee. All costs and
expenses are payable by us.
|
|
|
|
|
SEC Registration Fee
|
|
$
|
20,498.75
|
|
FINRA Filing Fees
|
|
|
29,250.00
|
|
New York Stock Exchange Listing Fee
|
|
|
*
|
|
Legal Fees and Expenses
|
|
|
*
|
|
Underwriters Expense Reimbursement
|
|
|
*
|
|
Accounting Fees and Expenses
|
|
|
*
|
|
Transfer Agent and Registrar Fees
|
|
|
*
|
|
Printing and Engraving Expenses
|
|
|
*
|
|
Blue Sky Fees and Expenses
|
|
|
*
|
|
Miscellaneous Expenses
|
|
|
*
|
|
Total
|
|
$
|
*
|
|
|
|
|
* |
|
to be provided by amendment |
|
|
Item 14.
|
Indemnification
of Directors and Officers.
|
The Companys officers and directors are and will be
indemnified under Florida law, their employment agreements and
our articles of incorporation and bylaws.
The Florida Business Corporation Act, under which the Company is
organized, permits a Florida corporation to indemnify a present
or former director or officer of the corporation (and certain
other persons serving at the request of the corporation in
related capacities) for liabilities, including legal expenses,
arising by reason of service in such capacity if such person
shall have acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the
corporation, and in any criminal proceeding if such person had
no reasonable cause to believe his conduct was unlawful.
However, in the case of actions brought by or in the right of
the corporation, no indemnification may be made with respect to
any matter as to which such director or officer shall have been
adjudged liable, except in certain limited circumstances.
Article 10 of the Companys bylaws provides that the
Company shall indemnify directors and executive officers to the
fullest extent now or hereafter permitted by the Florida
Business Corporation Act.
|
|
Item 15.
|
Recent
Sales of Unregistered Securities.
|
The following sets forth information regarding securities sold
by the registrant since inception:
|
|
|
|
|
On December 15, 2006, we issued 112,500 common units to IFS
Holdings, Inc. in exchange for an initial capital contribution
of $5,000,000.
|
|
|
|
On December 15, 2006, we issued 112,500 common units to
Premium Funding, Inc. in exchange for an initial capital
contribution of $5,000,000.
|
|
|
|
On December 15, 2006, we issued 112,500 common units to
IMEX Settlement Corporation in exchange for an initial capital
contribution of $5,000,000.
|
II-1
|
|
|
|
|
On December 15, 2006, we issued 112,500 common units to Red
Oak Finance, LLC in exchange for an initial capital contribution
of $5,000,000. Three Million Dollars of the capital contribution
was satisfied by a contribution of 28 premium finance loans
originated during 2006 with principal and accrued interest as of
the contribution date of $2,788,008.18 and $211,991.82,
respectively.
|
|
|
|
On February 2, 2007, we issued 1,184.21 and 2,337.66
phantom share units to James Purdy and Jonathan Moulton in
exchange for future contributions to us in their capacity as our
employees.
|
|
|
|
On December 19, 2007, we issued a note to Red Oak Finance,
LLC, a Florida limited liability company, in the original
principal amount of $1,000,000, at a ten (10%) per annum
interest rate, with a maturity date of February 18, 2008
(subject to extensions).
|
|
|
|
On January 10, 2008, we issued a note to Red Oak Finance,
LLC, a Florida limited liability company, in the original
principal amount of $500,000, at a ten (10%) per annum interest
rate, with a maturity date of March 10, 2008 (subject to
extensions).
|
|
|
|
On April 8, 2008, we issued a note to Red Oak Finance, LLC,
a Florida limited liability company, in the original principal
amount of $500,000, at a ten (10%) per annum interest rate, with
a maturity date of June 8, 2008 (subject to extensions).
|
|
|
|
On August 1, 2008, Imperial Premium Finance, LLC issued a
note to IFS Holdings, Inc., a Florida corporation, in the
original principal amount of $200,000, at a sixteen (16%) per
annum interest rate, with a maturity date of August 2, 2010
(subject to extensions).
|
|
|
|
On August 6, 2008, Imperial Finance & Trading,
LLC issued a note to IFS Holdings, Inc., a Florida corporation,
in the original principal amount of $75,000, at a sixteen (16%)
per annum interest rate, with a maturity date of August 7,
2010 (subject to extensions).
|
|
|
|
On October 10, 2008, we issued a note to Red Oak Finance,
LLC, a Florida limited liability company, in the original
principal amount of $62,500, at a ten (10%) per annum interest
rate, with a maturity date of December 10, 2008 (subject to
extensions).
|
|
|
|
On December 23, 2008, we issued a note to IFS Holdings,
Inc., a Florida corporation, in the original principal amount of
$750,000, at a sixteen (16%) per annum interest rate, with a
maturity date of December 24, 2010 (subject to extensions).
|
|
|
|
On December 24, 2008, we issued a note to Red Oak Finance,
LLC, a Florida limited liability company, in the original
principal amount of $450,000, at a ten (10%) per annum interest
rate, with a maturity date of February 24, 2009 (subject to
extensions).
|
|
|
|
On December 30, 2008, we issued a note to IFS Holdings,
Inc., a Florida corporation, in the original principal amount of
$750,000, at a sixteen (16%) per annum interest rate, with a
maturity date of December 30, 2010 (subject to extensions).
|
|
|
|
Effective June 30, 2009, we converted $2,260,000 in notes
from Red Oak Finance, LLC issued on December 19, 2007,
January 10, 2008, April 8, 2008, October 10, 2008
and December 24, 2008 into 50,855 Series A Preferred
Units held by Red Oak Finance, LLC.
|
|
|
|
Effective June 30, 2009, we converted $1,775,000 in notes
from IFS Holdings, Inc. issued on August 1, 2008,
August 6, 2008, December 23, 2008 and
December 30, 2008 into 39,941 Series A Preferred Units
held by IFS Holdings, Inc.
|
|
|
|
Effective December 30, 2009, we sold 25,000 16%
Series B Preferred Units to Imex Settlement Corporation for
a price of $2,500,000.
|
|
|
|
Effective December 30, 2009, we sold 25,000 16%
Series B Preferred Units to Premium Funding, Inc. for a
price of $2,500,000.
|
|
|
|
Effective March 31, 2010, we sold 70,000 16% Series C
Preferred Units to Imex Settlement Corporation for a price of
$7,000,000.
|
II-2
|
|
|
|
|
Effective June 30, 2010, we sold 7,000 Series D
Preferred Units to Imex Settlement Corporation for a price of
$700,000.
|
|
|
|
Effective September 30, 2010, we sold 73,000 Series E
Preferred Units to Imex Settlement Corporation for a price of
$7,300,000.
|
|
|
|
Effective November 1, 2010, we converted a
$16.1 million note plus accrued interest from Branch Office
of Skarbonka Sp. z o.o. and 112,500 common units and 25,000
Series B preferred units from Premium Funding, Inc. into a
$30.0 million debenture held by the Branch Office of
Skarbonka Sp. z o.o.
|
The issuance of securities described above were deemed to be
exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act with the exception of
the shares issuable under the phantom stock agreements, which
were issued pursuant to a transaction exempt from the
registration requirements of the Securities Act in reliance upon
Rule 701 of the Securities Act. The recipients of
securities in each transaction represented their intention to
acquire the securities for investment only and not with a view
to or for sale in connection with any distribution thereof, and
appropriate legends were affixed to any certificated shares and
other instruments issued in each such transaction. The sales of
these securities were made without general solicitation or
advertising and without the involvement of any underwriter.
|
|
Item 16.
|
Exhibits
and Financial Statement Schedules.
|
(a) Exhibits.
The exhibits to the registration statement are listed in the
Exhibit Index to this registration statement and are
incorporated by reference herein.
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting
agreement, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the Securities Act) may be
permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise,
the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(2) For purposes of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Amendment No. 6 to the
Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Boca
Raton, State of Florida, on December 28, 2010.
IMPERIAL HOLDINGS, LLC*
Name: Antony Mitchell
|
|
|
|
Title:
|
Chief Executive Officer
|
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Antony
Mitchell
Antony
Mitchell
|
|
Chief Executive Officer
(Principal Executive Officer)
|
|
December 28, 2010
|
|
|
|
|
|
/s/ Richard
A. OConnell
Richard
A. OConnell
|
|
Chief Financial Officer and
Chief Credit Officer
(Principal Financial Officer)
|
|
December 28, 2010
|
|
|
|
|
|
/s/ Jerome
A. Parsley
Jerome
A. Parsley
|
|
Director of Finance and Accounting (Principal Accounting Officer)
|
|
December 28, 2010
|
|
|
|
|
|
/s/ Jonathan
Neuman
Jonathan
Neuman
|
|
President and Chief Operating Officer
|
|
December 28, 2010
|
* to be converted to Imperial Holdings,
Inc.
II-4
Board of
Managers
IFS HOLDINGS, INC.
Date: December 28, 2010
Antony Mitchell
President, Secretary and Treasurer
Date: December 28, 2010
Antony Mitchell,
Sole Director
IMEX SETTLEMENT CORPORATION
Date: December 28, 2010
Antony Mitchell
President, Secretary and Treasurer
Date: December 28, 2010
Antony Mitchell, Sole Director
RED OAK FINANCE, LLC
Date: December 28, 2010
Jonathan Neuman
Manager
II-5
EXHIBIT INDEX
In reviewing the agreements included as exhibits to this
registration statement, please remember they are included to
provide you with information regarding their terms and are not
intended to provide any other factual or disclosure information
about us, our subsidiaries or other parties to the agreements.
The agreements contain representations and warranties by each of
the parties to the applicable agreement. These representations
and warranties have been made solely for the benefit of the
other parties to the applicable agreement and:
|
|
|
|
|
should not in all instances be treated as categorical
statements of fact, but rather as a way of allocating the risk
to one of the parties if those statements prove to be
inaccurate;
|
|
|
|
have been qualified by disclosures that were made to the
other party in connection with the negotiation of the applicable
agreement, which disclosures are not necessarily reflected in
the agreement;
|
|
|
|
may apply standards of materiality in a way that is different
from what may be viewed as material to you or other investors;
and
|
|
|
|
were made only as of the date of the applicable agreement or
such other date or dates as may be specified in the agreement
and are subject to more recent developments.
|
Accordingly, these representations and warranties may not
describe the actual state of affairs as of the date they were
made or at any other time. We acknowledge that, notwithstanding
the inclusion of the foregoing cautionary statements, we are
responsible for considering whether additional specific
disclosures of material information regarding material
contractual provisions are required to make the statements in
this registration statement not misleading. Additional
information about us may be found elsewhere in the prospectus
included in this registration statement.
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
*1
|
.1
|
|
Underwriting Agreement
|
|
*2
|
.1
|
|
Plan of Conversion
|
|
***3
|
.1
|
|
Form of Articles of Incorporation of Registrant
|
|
***3
|
.2
|
|
Form of Bylaws of Registrant
|
|
****4
|
.1
|
|
Form of Common Stock Certificate
|
|
*4
|
.2
|
|
Form of Warrant to purchase common stock
|
|
*5
|
.1
|
|
Opinion of Foley & Lardner LLP
|
|
****~10
|
.1
|
|
Employment Agreement between the Registrant and Antony Mitchell
dated November 8, 2010
|
|
***~10
|
.2
|
|
Employment Agreement between the Registrant and Jonathan Neuman
dated September 29, 2010
|
|
****~10
|
.3
|
|
Employment Agreement between the Registrant and Rory
OConnell dated November 4, 2010
|
|
****~10
|
.4
|
|
Employment Agreement between the Registrant and Deborah Benaim
dated November 8, 2010
|
|
10
|
.5
|
|
Reserved
|
|
***~10
|
.6
|
|
Imperial Holdings 2010 Omnibus Incentive Plan
|
|
***~10
|
.7
|
|
2010 Omnibus Incentive Plan Form of Stock Option Award Agreement
|
|
******+10
|
.8
|
|
Omnibus Claims Settlement Agreement dated as of
September 8, 2010 by and between Imperial PFC Financing,
LLC and Lexington Insurance Company
|
|
******10
|
.9
|
|
Pledge and Security Agreement dated September 8, 2010 by
Imperial Premium Finance, LLC
|
|
****10
|
.10
|
|
Guarantor Security Agreement dated November 2009 by Imperial
Premium Finance, LLC
|
|
****10
|
.11
|
|
Guarantor Security Agreement dated March 13, 2009 by
Imperial Premium Finance, LLC
|
II-6
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
**10
|
.12
|
|
Settlement Agreement dated as of May 19, 2009 among Sovereign
Life Financing, LLC, Imperial Premium Finance, LLC and Acorn
Capital Group, LLC
|
|
***10
|
.12.1
|
|
Assignment Agreement dated June 10, 2009 between Acorn Capital
Group, LLC and Asset Based Resource Group, LLC assigning rights
to the Settlement Agreement dated as of May 19, 2009 among
Sovereign Life Financing, LLC, Imperial Premium Finance, LLC and
Acorn Capital Group, LLC
|
|
****10
|
.13
|
|
Second Amended and Restated Financing Agreement dated as of
March 12, 2010 by and among Imperial PFC Financing II, LLC as
Borrower, Cedar Lane Capital LLC as Lender and EBC Asset
Management, Inc. as Administrative Agent and Collateral Agent
|
|
*****+10
|
.14
|
|
Letter Agreement dated September 14, 2009 among Imperial
Holdings, LLC, Lexington Insurance Company and National Fire
& Marine Insurance Company
|
|
****10
|
.15
|
|
Master Trust Indenture dated as of September 24, 2010 by and
among Imperial Settlements Financing 2010, LLC as the Issuer,
Portfolio Financial Servicing Company as the Initial Master
Servicer, and Wilmington Trust Company as the Trustee and
Collateral Trustee
|
|
****10
|
.16
|
|
Series 2010-1 Supplement dated as of September 24, 2010 to the
Master Trust Indenture dated as of September 24, 2010 by and
among Imperial Settlements Financing 2010, LLC as the Issuer,
Portfolio Financial Servicing Company as the Initial Servicer,
and Wilmington Trust Company as the Trustee and Collateral
Trustee
|
|
****10
|
.17
|
|
Oral agreement between Imperial Holdings, LLC and Warburg
Investment Corporation
|
|
****10
|
.18
|
|
Financing Agreement dated as of March 13, 2009 by and among
Imperial Life Financing II, LLC as Borrower, the Lenders from
time to time party thereto, and CTL Holdings II LLC as
Collateral Agent and Administrative Agent
|
|
*****+10
|
.19
|
|
Letter Agreement dated March 13, 2009 among Imperial Holdings,
LLC, Lexington Insurance Company and National Fire & Marine
Insurance Company
|
|
***10
|
.20
|
|
First Amendment to Financing Agreement dated as of April 30,
2009 by and among Imperial Life Financing II, LLC as Borrower,
the Lenders from time to time party thereto, and CTL
Holdings II LLC as Collateral Agent and Administrative Agent
|
|
***10
|
.21
|
|
Notice of Resignation and Appointment dated as of April 30, 2009
among CTL Holdings II LLC, White Oak Global Advisors, LLC
and the Lenders party to the Financing Agreement dated March 13,
2009
|
|
***10
|
.22
|
|
Second Amendment to Financing Agreement dated as of July 23,
2009 among Imperial Life Financing II, LLC as Borrower, the
Lenders from time to time party thereto, and White Oak Global
Advisors, LLC as Collateral Agent and Administrative Agent
|
|
***10
|
.23
|
|
Third Amendment and Consent to Financing Agreement dated as of
September 11, 2009 among Imperial Life Financing II, LLC as
Borrower, the Lenders from time to time party thereto, and White
Oak Global Advisors, LLC as Collateral Agent and Administrative
Agent
|
|
***10
|
.24
|
|
Fourth Amendment to Financing Agreement dated as of December 1,
2009 among Imperial Life Financing II, LLC as Borrower, the
Lenders from time to time party thereto, and White Oak Global
Advisors, LLC as Collateral Agent and Administrative Agent
|
|
***10
|
.25
|
|
Consent Letter dated September 30, 2010 by and among
Imperial Holdings, LLC and Lexington Insurance Company
|
|
***10
|
.26
|
|
Consent Letter dated September 30, 2010 by and among
Imperial Holdings, LLC and Slate Capital LLC
|
|
10
|
.27
|
|
Reserved
|
|
**10
|
.28
|
|
Promissory Note effective as of August 31, 2009 in the principal
amount of $17,616,271 held by the Branch Office of Skarbonka Sp.
z o.o.
|
|
**10
|
.29
|
|
Promissory Note effective as of August 31, 2009 in the principal
amount of $25,000,000 held by Amalgamated International
Holdings, S.A.
|
II-7
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
**10
|
.30
|
|
Promissory Note effective as of August 31, 2009 in the principal
amount of $10,323,756 held by IMPEX Enterprises, Ltd.
|
|
10
|
.31
|
|
Reserved
|
|
****10
|
.32
|
|
Consent Letter dated November 9, 2010 by and among Imperial
Holdings, LLC and Lexington Insurance Company
|
|
****10
|
.33
|
|
Consent Letter dated November 9, 2010 by and among Imperial
Holdings, LLC and Slate Capital LLC
|
|
**10
|
.34
|
|
Marketing Agreement between Imperial Litigation Funding, LLC as
Originator and Plaintiff Funding Holding Inc d/b/a LawCash as
Funder
|
|
**10
|
.35
|
|
Agreement dated November 13, 2009 among GWG Life Settlements,
LLC and Imperial Premium Finance, LLC as Selling Advisor
|
|
****10
|
.36
|
|
$30.0 million Unsecured Convertible Debenture issued on
November 1, 2010 by Imperial Holdings, LLC to Branch Office
of Skarbonka Sp. z o.o.
|
|
****10
|
.37
|
|
Note and Share Purchase Agreement effective as of
November 1, 2010 by and among Imperial Holdings, LLC,
Branch Office of Skarbonka sp. z o.o. and Premium Funding, Inc.
|
|
***21
|
.1
|
|
Subsidiaries of the Registrant
|
|
*23
|
.1
|
|
Consent of Foley & Lardner LLP (included as part of its
opinion to be filed as Exhibit 5.1 hereto)
|
|
23
|
.2
|
|
Consent of Grant Thornton LLP
|
|
**24
|
.1
|
|
Power of Attorney
|
|
***99
|
.1
|
|
Consent of Director Nominees (Messrs. Crow, Higgins, Rosenberg
and Wyrough)
|
|
****99
|
.2
|
|
Consent of Director Nominee (Mr. Buzen)
|
|
|
|
* |
|
To be filed by amendment. |
|
** |
|
Filed as exhibit to registration statement on
Form S-1
on August 12, 2010. |
|
*** |
|
Filed as exhibit to amendment No. 1 to registration statement on
Form S-1 on October 1, 2010. |
|
**** |
|
Filed as exhibit to amendment No. 2 to registration
statement on
Form S-1
on November 10, 2010. |
|
***** |
|
Filed as exhibit to amendment No. 3 to registration
statement on Form S-1 on November 12, 2010. |
|
****** |
|
Filed as exhibit to amendment No. 4 to registration
statement on Form S-1 on November 19, 2010. |
|
~ |
|
Compensatory plan or arrangement. |
|
+ |
|
Certain portions of the exhibit have been omitted pursuant to a
request for confidential treatment. An unredacted copy of the
exhibit has been filed separately with the United States
Securities and Exchange Commission pursuant to a request for
confidential treatment. |
II-8