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EX-32.1 - LIFE PARTNERS HOLDINGS INC | v207727_ex32-1.htm |
EX-31.1 - LIFE PARTNERS HOLDINGS INC | v207727_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act
of 1934
For the
quarterly period ended: November 30, 2010
or
¨
Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934
Commission
File Number: 0-7900
LIFE
PARTNERS HOLDINGS, INC.
(Exact
name of Registrant as specified in its charter)
Texas
(State
of incorporation)
|
74-2962475
(I.R.S.
Employer ID no.)
|
204
Woodhew Drive
Waco,
Texas
(Address
of Principal Executive Offices)
|
76712
(Zip
Code)
|
Registrant’s
telephone number, including area code: 254-751-7797
Check
whether the Registrant (1) filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to the filing requirements for at least the past 90 days. Yes
x
No ¨
Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
Registrant was required to submit and post such files). Yes ¨ No
¨
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer ¨
|
Accelerated
filer x
|
Non-accelerated
filer ¨
(Do
not check if a smaller reporting company)
|
Smaller
reporting company ¨
|
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
Shares of
Common Stock, $.01 par value, outstanding as of November 30, 2010:
14,915,246 (15,024,354 issued and outstanding less 109,108 treasury
shares).
LIFE
PARTNERS HOLDINGS, INC.
TABLE
OF CONTENTS
PART
I.
|
FINANCIAL
INFORMATION
|
||
Item
1.
|
Financial
Statements
|
||
Consolidated
Balance Sheets – November 30, 2010 and February 28, 2010
|
3-4
|
||
Consolidated
Statements of Income - For the Three and Nine Months Ended November 30,
2010 and 2009
|
5
|
||
Consolidated
Statements of Cash Flows - For the Nine Months Ended November 30, 2010 and
2009
|
6
|
||
Notes
to Consolidated Condensed Financial Statements
|
7-19
|
||
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
19-28
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
28
|
|
Item
4.
|
Controls
and Procedures
|
28
|
|
PART
II.
|
OTHER
INFORMATION
|
||
Item
1.
|
Legal
Proceedings
|
29
|
|
Item
1A.
|
Risk
Factors
|
29
|
|
Item
6.
|
Exhibits
|
29
|
|
Signatures
|
30
|
||
Exhibit
Index
|
31
|
2
PART
I - FINANCIAL INFORMATION
LIFE
PARTNERS HOLDINGS, INC.
CONSOLIDATED
BALANCE SHEETS
NOVEMBER 30,
2010 (Unaudited) AND FEBRUARY 28, 2010
ASSETS
November 30,
|
February 28,
|
|||||||
2010
|
2010
|
|||||||
CURRENT
ASSETS:
|
||||||||
Cash
and cash equivalents
|
$ | 28,610,977 | $ | 22,808,728 | ||||
Certificate
of deposit
|
100,724 | 100,534 | ||||||
Investment
in securities
|
5,408,816 | 4,529,169 | ||||||
Accounts
receivable – trade
|
11,893,089 | 12,494,404 | ||||||
Accounts
receivable – other
|
52,637 | 595,025 | ||||||
Notes
receivable
|
581,096 | 581,096 | ||||||
Income
tax receivable
|
- | 152,125 | ||||||
Deferred
income taxes
|
670,236 | 745,788 | ||||||
Prepaid
expenses
|
138,204 | 375,587 | ||||||
Total
current assets
|
47,455,779 | 42,382,456 | ||||||
PROPERTY
AND EQUIPMENT:
|
||||||||
Land
and building
|
2,312,002 | 2,274,895 | ||||||
Proprietary
software
|
515,553 | 511,405 | ||||||
Furniture,
fixtures and equipment
|
1,519,468 | 1,525,197 | ||||||
Transportation
equipment
|
9,800 | 9,800 | ||||||
Subtotal
|
4,356,823 | 4,321,297 | ||||||
Accumulated
depreciation
|
(1,805,792 | ) | (1,657,293 | ) | ||||
Net
property and equipment
|
2,551,031 | 2,664,004 | ||||||
OTHER
ASSETS:
|
||||||||
Premium
advances, net of allowance for uncollectible of $3,128,905 and $3,299,624,
respectively
|
4,899,810 | 3,549,912 | ||||||
Investments
in policies
|
18,603,572 | 16,460,353 | ||||||
Investment
in life settlements trust
|
6,249,060 | 6,456,155 | ||||||
Artifacts
and other
|
834,700 | 834,700 | ||||||
Deferred
income taxes
|
370,808 | 379,592 | ||||||
Total
other assets
|
30,957,950 | 27,680,712 | ||||||
Total
assets
|
$ | 80,964,760 | $ | 72,727,172 |
See the
accompanying notes to consolidated condensed financial
statements.
3
LIFE
PARTNERS HOLDINGS, INC.
CONSOLIDATED
BALANCE SHEETS
NOVEMBER 30,
2010 (Unaudited) AND FEBRUARY 28, 2010
LIABILITIES
AND SHAREHOLDERS' EQUITY
November 30,
|
February 28,
|
|||||||
2010
|
2010
|
|||||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable
|
$ | 5,743,050 | $ | 5,514,270 | ||||
Accrued
liabilities
|
909,386 | 2,345,276 | ||||||
Dividends
payable
|
3,735,079 | 3,719,341 | ||||||
Accrued
settlement expense
|
255,587 | 503,783 | ||||||
Income
taxes payable
|
199,448 | - | ||||||
Deferred
policy monitoring fees
|
954,728 | 240,950 | ||||||
Total
current liabilities
|
11,797,278 | 12,323,620 | ||||||
Income
taxes payable
|
385,201 | 553,896 | ||||||
Total
liabilities
|
12,182,479 | 12,877,516 | ||||||
SHAREHOLDERS'
EQUITY:
|
||||||||
Common
stock, $0.01 par value 18,750,000 shares authorized; 15,024,354 shares
issued and outstanding
|
150,243 | 150,243 | ||||||
Additional
paid-in capital
|
11,460,311 | 11,460,311 | ||||||
Retained
earnings
|
57,735,687 | 49,874,166 | ||||||
Accumulated
comprehensive income, net of taxes
|
(178,896 | ) | - | |||||
Less:
treasury stock - 109,108 shares as of November 30, 2010 and 165,338
as of February 28, 2010
|
(385,064 | ) | (1,635,064 | ) | ||||
Total
shareholders' equity
|
68,782,281 | 59,849,656 | ||||||
Total
liabilities and shareholders' equity
|
$ | 80,964,760 | $ | 72,727,172 |
See the
accompanying notes to consolidated condensed financial
statements.
4
LIFE
PARTNERS HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF INCOME
FOR
THE THREE AND NINE MONTHS ENDED NOVEMBER 30, 2010 AND 2009
(Unaudited)
Three
Months
Ended November 30,
|
Nine
Months
Ended November 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
REVENUES
|
$ | 26,241,865 | $ | 30,967,256 | $ | 83,282,026 | $ | 87,466,426 | ||||||||
BROKERAGE
FEES
|
12,109,403 | 14,503,000 | 37,758,450 | 39,514,746 | ||||||||||||
REVENUES,
NET OF BROKERAGE FEES
|
14,132,462 | 16,464,256 | 45,523,576 | 47,951,680 | ||||||||||||
OPERATING
AND ADMINISTRATIVE EXPENSES:
|
||||||||||||||||
General
and administrative
|
2,980,624 | 2,744,524 | 9,102,224 | 9,510,659 | ||||||||||||
Premium
advances, net
|
208,435 | 471,160 | 663,521 | 1,277,885 | ||||||||||||
Settlement
costs
|
205,833 | 477,821 | 575,016 | 1,954,400 | ||||||||||||
Depreciation
|
71,118 | 79,935 | 211,879 | 234,119 | ||||||||||||
Total
operating and administrative expenses
|
3,466,010 | 3,773,440 | 10,552,640 | 12,977,063 | ||||||||||||
INCOME
FROM OPERATIONS
|
10,666,452 | 12,690,816 | 34,970,936 | 34,974,617 | ||||||||||||
OTHER
INCOME (EXPENSES):
|
||||||||||||||||
Interest
and other income
|
277,966 | 464,307 | 575,297 | 1,750,454 | ||||||||||||
Interest
expense
|
- | - | (1,505 | ) | (46,988 | ) | ||||||||||
Realized
gains (losses) on securities
|
231,118 | - | 119,914 | - | ||||||||||||
Total
other income and expense
|
509,084 | 464,307 | 693,706 | 1,703,466 | ||||||||||||
INCOME
BEFORE INCOME TAXES
|
11,175,536 | 13,155,123 | 35,664,642 | 36,678,083 | ||||||||||||
Total
income taxes
|
4,108,138 | 4,723,199 | 12,886,281 | 13,175,675 | ||||||||||||
NET
INCOME
|
$ | 7,067,398 | $ | 8,431,924 | $ | 22,778,361 | $ | 23,502,408 | ||||||||
EARNINGS:
|
||||||||||||||||
Per
share - Basic and diluted
|
$ | 0.47 | $ | 0.57 | $ | 1.53 | $ | 1.58 | ||||||||
AVERAGE
COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING: Basic and diluted
|
14,915,246 | 14,859,016 | 14,912,588 | 14,859,016 | ||||||||||||
THE
COMPONENTS OF COMPREHENSIVE INCOME:
|
||||||||||||||||
Net
income
|
$ | 7,067,398 | $ | 8,431,924 | $ | 22,778,361 | $ | 23,502,408 | ||||||||
Unrealized
gains (losses) on investment securities, net of taxes
|
21,402 | 115,256 | (178,896 | ) | 922,028 | |||||||||||
COMPREHENSIVE
INCOME
|
$ | 7,088,800 | $ | 8,547,180 | $ | 22,599,465 | $ | 24,424,436 | ||||||||
Common
share dividends declared
|
$ | 0.50 | $ | 0.25 | $ | 1.00 | $ | 0.75 |
See
the accompanying notes to consolidated condensed financial
statements.
5
LIFE
PARTNERS HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE NINE MONTHS ENDED NOVEMBER 30, 2010 AND 2009
(Unaudited)
Nine
Months
Ended November 30,
|
||||||||
2010
|
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income
|
$ | 22,778,361 | $ | 23,502,408 | ||||
Adjustments
to reconcile net income to operating activities:
|
||||||||
Depreciation
|
211,879 | 234,119 | ||||||
Realized
gain on sales of securities
|
(119,914 | ) | - | |||||
Impairment
of investments in policies
|
111,333 | 188,125 | ||||||
Earnings
on life settlements trust
|
(104,272 | ) | (649,027 | ) | ||||
Deferred
income taxes
|
180,666 | (450,948 | ) | |||||
(Increase)
decrease in operating assets:
|
||||||||
Accounts
receivable
|
1,143,697 | (2,939,318 | ) | |||||
Note
receivable
|
- | (19,705 | ) | |||||
Prepaid
expenses
|
237,383 | 64,302 | ||||||
Increase
(decrease) in operating liabilities:
|
||||||||
Accounts
payable
|
228,779 | 1,104,203 | ||||||
Accrued
liabilities
|
(185,890 | ) | 815,711 | |||||
Accrued
settlement expense
|
(248,196 | ) | 134,526 | |||||
Income
taxes payable
|
182,882 | 368,802 | ||||||
Deferred
policy monitoring fees
|
713,778 | 10,900 | ||||||
Net
cash provided by operating activities
|
25,130,486 | 22,364,098 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Investment
in certificate of deposit
|
(190 | ) | - | |||||
Certificate
of deposit maturities
|
- | 2,933,237 | ||||||
Proceeds
from sales of marketable securities
|
9,819,622 | - | ||||||
Purchases
of marketable securities
|
(10,854,577 | ) | (348,522 | ) | ||||
Premium
advances, net
|
(1,349,898 | ) | - | |||||
Purchases
of property and equipment
|
(98,906 | ) | (354,741 | ) | ||||
Proceeds
from life settlements trust
|
311,367 | 101,147 | ||||||
Proceeds
from investments in policies
|
83,469 | - | ||||||
Increase
in other assets
|
- | (3,000 | ) | |||||
Purchases
of investment in policies and capitalized premiums
|
(2,338,021 | ) | (7,656,105 | ) | ||||
Net
cash used in investing activities
|
(4,427,134 | ) | (5,327,984 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Payment
on notes payable
|
- | (779,073 | ) | |||||
Dividends
paid
|
(14,901,103 | ) | (9,509,776 | ) | ||||
Net
cash used in financing activities
|
(14,901,103 | ) | (10,288,849 | ) | ||||
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
5,802,249 | 6,747,265 | ||||||
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
22,808,728 | 15,261,217 | ||||||
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
$ | 28,610,977 | $ | 22,008,482 | ||||
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||
Interest
paid
|
$ | 1,505 | $ | 46,988 | ||||
Income
taxes paid
|
$ | 13,015,000 | $ | 12,962,000 |
See
accompanying notes to consolidated condensed financial
statements.
6
Life
Partners Holdings, Inc.
Notes
to Consolidated Condensed Financial Statements
November 30,
2010
(Unaudited)
(1)
DESCRIPTION OF BUSINESS
Life
Partners Holdings, Inc. (“We” or “Life Partners”) is a specialty financial
services company and the parent company of Life Partners, Inc. (“LPI”). LPI is the
oldest and one of the most active companies in the United States engaged in the
secondary market for life insurance known generally as “life
settlements”. LPI facilitates the sale of life insurance policies
between the sellers and purchasers, but does not take possession or control of
the policies. The purchasers acquire the life insurance policies at a
discount to their face value for investment purposes.
(2)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of
Presentation. The accompanying consolidated condensed
financial statements include the accounts of Life Partners and its wholly owned
subsidiary, LPI. All significant intercompany balances and
transactions have been eliminated in consolidation. The consolidated
condensed financial statements have been prepared in accordance with accounting
principles generally accepted in the United States (“GAAP”). The
preparation of financial statements in accordance with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period in the normal course of business. Actual
results inevitably will differ from those estimates and such differences may be
material to the financial statements.
These
Consolidated Condensed Financial Statements have been prepared without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
(the “SEC”), and reflect all
adjustments that are, in the opinion of management, necessary for a fair
statement of the results for the interim periods, on a basis consistent with the
annual audited financial statements. All such adjustments are of a
normal recurring nature. Certain information, accounting policies,
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations, although we believe that the disclosures
are adequate to make the financial statements and information presented not
misleading. These financial statements should be read in conjunction
with the financial statements and the summary of significant accounting policies
and notes thereto included in our most recent Annual Report on Form
10-K.
Reclassifications. Certain
prior period amounts have been reclassified to conform to the current year’s
presentation. Investment in securities is shown as a current asset as
opposed to the prior period when it was classified as a long-term
asset. This change was made to reflect management’s short-term
holding strategy. State income tax expense is shown on the statements
of income in all periods as deducted from pre-tax earnings to arrive at net
income. State income tax expense in previous periods was part of
general and administrative expense. Payments for state income
taxes are now presented as a component of income taxes paid on the Statements of
Cash Flows. These reclassifications had no impact on our
results of operation or financial condition. It is management’s
opinion that all adjustments necessary for a fair statement of the results for
the interim period have been made and that all adjustments are of a normal
recurring nature.
7
We follow
accounting standards set by the Financial Accounting Standards Board (the “FASB”). The FASB
sets the GAAP that we follow to ensure we consistently report our financial
condition, results of operations and cash flows. References to GAAP
issued by the FASB in these footnotes are to the FASB Accounting Standards
Codification Topic 105 (the “ASC”). In June 2009,
the FASB approved the FASB ASC, which, as of July 1, 2009, became the single
source of authoritative, nongovernmental GAAP. The ASC was not
intended to change GAAP. Rather, the ASC reorganizes all previous
GAAP pronouncements into accounting topics, and displays all topics using a
consistent structure. All existing standards that were used to create
the ASC are now superseded, aside from those issued by the SEC, replacing the
previous references to specific Statements of Financial Accounting Standards
with numbers used in the ASC’s structural organization. All guidance
in the ASC has an equal level of authority. The ASC is effective for
financial statements that cover interim and annual periods ended after
September 15, 2009. There was no impact on our financial
position, results of operations or cash flows as a result of the adoption of
ASC.
ASC 320,
Investments – Debt and Equity
Securities – Debt and Equity Securities, amends the other-than-temporary
impairment guidance for debt securities to make the guidance more operational
and to improve the presentation and disclosure of the other-than-temporary
impairments on debt and equity securities in the financial
statements. Adoption of ASC 320 and ASC 958-320 during
Fiscal 2010 had no impact on our financial condition, results of operations or
cash flows.
ASC 810,
Consolidation, among
other things, provides guidance and establishes amended accounting and reporting
standards for a parent company’s non-controlling interest in a
subsidiary. ASC 810 was adopted on March 1, 2009, and had no
impact on our financial condition, results of operations or cash
flows.
ASC 820,
Fair Value Measurements and
Disclosures, addresses how companies should measure fair value when they
are required to use a fair value measure for recognition or disclosure purposes
under GAAP. ASC 820 defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value
measurements. Effective March 1, 2008, management adopted
ASC 820 with the exception of certain non-financial assets and
non-financial liabilities that were specifically deferred. In April
2009, the FASB issued ASC 820-10, which provides additional guidance for
estimating fair value in accordance with ASC 820, when the volume and level
of activity for the asset or liability have significantly
decreased. In August 2009, the FASB further clarified
ASC 820-10, Measuring
Liabilities at Fair Value, which applies to all entities that measure
liabilities at fair value within the scope of Topic 820 and provides
clarification that in circumstances in which a quoted price in an active market
for the identical liability is not available, a reporting entity is required to
measure fair value using one or more other valuation techniques. We
have no liabilities that are traded or exchanged, requiring measurement at fair
value. ASC 820 also includes guidance on identifying
circumstances that indicate a transaction is not orderly. In such
circumstances, the ASC specifies that a valuation technique should be applied
that uses either the quote of the liability when traded as an asset, the quoted
prices for similar liabilities or similar liabilities when traded as assets, or
another valuation technique consistent with existing fair value measurement
guidance. Adoption of ASC 820 during our Fiscal 2010 had no
impact on our financial condition, results of operations or cash flows.
ASU 2010-06 – Improving
Disclosures about Fair Value Measurements, amended ASC 820 to
clarify certain existing fair value disclosures and requires a number of
additional disclosures. The guidance in ASU 2010-06 clarified that
disclosures should be presented separately for each class of assets and
liabilities measured at fair value and provided guidance on how to determine the
appropriate classes of assets and liabilities to be presented. ASU
2010-06 also clarified the requirements for entities to disclose information
about both the valuation techniques and inputs used in estimating Level 2 and
Level 3 fair value measurements. ASU 2010-06 introduced new
requirements to disclose the amounts (on a gross basis) and reason for any
significant transfers between Levels 1, 2, and 3 of the fair value hierarchy and
present information regarding the purchases, sales, issuances and settlements of
Level 3 assets and liabilities on a gross basis. With the exception
of the requirement to present changes in Level 3 measurements on a gross basis,
which is delayed until 2011, the guidance in ASU 2010-06 became effective for
reporting periods beginning after December 15, 2009. Adoption of ASU
2010-06 on March 1, 2010, had no impact on our financial condition, results of
operations or cash flows.
8
ASC 825,
Financial Instruments,
directs that entities include disclosures about the fair value of financial
instruments whenever it issues summarized financial information for interim
reporting periods. Entities are to disclose in the body or in the
accompanying notes of their summarized financial information the fair value of
all financial instruments for which it is practicable to estimate that value,
whether recognized or not recognized in the statement of financial
position. Adopted on March 1, 2009, ASC 825 had no impact on our
financial condition, results of operations or cash flows.
In
February 2010, the FASB issued ASU No. 2010-09, “Amendments to Certain
Recognition and Disclosure Requirements”, which amends ASC 855, “Subsequent
Events”. This ASU, which was effective immediately, removes the
requirement for an SEC filer to disclose a date through which subsequent events
have been evaluated. We adopted this standard in the first quarter of
Fiscal 2010. The adoption of this standard did not have a material impact
on our financial condition, results of operations or cash flows.
(3)
CASH AND CASH EQUIVALENTS
For
purposes of the balance sheets and statements of cash flows, we consider all
highly liquid investments available for current use with an original maturity of
three months or less to be cash equivalents. The average balance of
our operating checking account balance is generally in excess of
$250,000. The Federal Deposit Insurance Corporation (“FDIC”) currently insures all
bank accounts up to $250,000, with unlimited coverage on non-interest-bearing
accounts. The amount of our cash accounts in excess of the FDIC
insurance limit at November 30, 2010, and February 28, 2010, was
$26,649,910 and $17,866,367, respectively. Amounts in
interest-bearing accounts in excess of $250,000, with the exception of amounts
in FDIC sweep accounts, are at risk to the extent that their balances exceed
FDIC coverage. Money market investments generally do not have FDIC
protection. We believe we have mitigated our exposure to loss with
deposits in a combination of five smaller, community banks and four of the
largest national financial institutions.
(4)
CERTIFICATES OF DEPOSIT
A
certificate of deposit with an original maturity of greater than three months,
but less than a year, is held in one banking institution. The
certificate of deposit was not in excess of the FDIC insurance limit at
November 30, 2010, and February 28, 2010.
(5)
ACCOUNTS RECEIVABLE – TRADE
The
amounts shown on the balance sheet termed Accounts Receivable – Trade are
amounts reflecting settlement transactions that have closed, and revenue has
been recognized, before the final funds are received to settle the
transactions. We also sometimes make non-interest-bearing advances to
facilitate a settlement transaction. We collect the advances
generally within 30 days after the transactions close, and we receive payment
before any of the parties involved in the transaction receive
funds. Our business model does not use leverage, which minimizes
issues of collectability or adverse effects due to the credit
environment. The receivable amounts at November 30, 2010, and
February 28, 2010, were $11,893,089 and $12,494,404,
respectively.
(6)
ACCOUNTS RECEIVABLE – OTHER
The
amounts shown on the balance sheet at November 30, 2010, termed Accounts
Receivable – Other, is composed of $31,158 due us from maturities of
policies and loans of $21,479 to various employees for a total of $52,637.
The amount for February 28, 2010, is composed of $574,288 due us from
maturities of policies, loans of $18,115 to various employees, and $2,622 for an
equipment financing loan for a total of $595,025. We consider all
receivables to be current and collectible.
9
(7)
NOTES RECEIVABLE
The
amounts shown on the balance sheet termed Notes Receivable represent a note,
including interest at 5%, with a non-related partnership originally dated
January 8, 2008, and renewed with a guaranty and security agreement on January
23, 2009. The original due date was February 28,
2009. This note is substantially collateralized and we instituted
collection proceedings, which resulted in an agreed final judgment being entered
against the debtor on April 7, 2010, for the full amount of the note plus
accrued interest, attorney’s fees, costs, all taxable costs of court and post
judgment interest at the highest rate allowable by law. Our counsel
in this matter is seeking collection of this judgment and is investigating the
available collateral to foreclose upon to satisfy the judgment. We
believe we will collect the full amount, including accrued interest, in the near
term. The amount, including accrued interest, at November 30,
2010, and February 28, 2010, was $581,096.
(8)
PREMIUM ADVANCES
We make
advances on policy premiums to maintain certain policies. When the
future premium amounts in escrow are exhausted, purchasers are contractually
obligated to pay the additional policy premiums. In some instances,
purchasers have failed to pay the premiums and we have acquired the policy or
advanced the premiums to maintain the policies. While we have no
contractual or other legal obligation to do so, and do not do so in every
instance, we have made premium advances as an accommodation based on our
assumptions that we will ultimately recoup the advances. Although we
expect ultimate repayment, we make estimates of the collectability of these
premium advances.
The table
below shows the changes in the premium advances account.
Premium
advance balance at February 28, 2010
|
$ | 6,849,536 | ||
Advances
|
854,401 | |||
Reimbursements
|
(253,314 | ) | ||
Premium
advance balance at May 31, 2010
|
7,450,623 | |||
Advances
|
394,426 | |||
Reimbursements
|
(471,761 | ) | ||
Premium
advance balance at August 31, 2010
|
7,373,288 | |||
Advances
|
1,001,356 | |||
Reimbursements
|
(345,929 | ) | ||
Premium
advance balance at November 30, 2010
|
8,028,715 | |||
Allowance
for doubtful accounts
|
(3,128,905 | ) | ||
Net
premium advance balance at November 30, 2010
|
$ | 4,899,810 |
(9)
INVESTMENTS IN SECURITIES
Securities
investments not classified as either held-to-maturity or trading securities are
classified as available-for-sale securities. Our securities
investments consist of common stocks, municipal and corporate bonds,
and commodity, index and foreign currency funds and are classified as
available-for-sale securities.
The table
below shows the cost and estimated fair value of the investment securities
classified as available-for-sale as of November 30, 2010, and
February 28, 2010:
10
Cost
Basis
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair Value
|
|||||||||||||
Municipal
and corporate bonds
|
$ | 4,735,374 | $ | - | $ | (122,932 | ) | $ | 4,612,442 | |||||||
U.S.
common stocks
|
596,651 | - | (115,844 | ) | 480,807 | |||||||||||
Commodity,
index and foreign currency funds
|
352,015 | - | ( 36,448 | ) | 315,567 | |||||||||||
Total
at November 30, 2010
|
$ | 5,684,040 | $ | - | $ | (275,224 | ) | $ | 5,408,816 | |||||||
U.S.
common stocks and funds
|
$ | 4,529,169 | $ | - | $ | - | $ | 4,529,169 | ||||||||
Total
at February 28, 2010
|
$ | 4,529,169 | $ | - | $ | - | $ | 4,529,169 |
The
current unrealized loss is considered temporary in nature and the securities are
recorded at fair value in Investment in Securities on the balance sheet, with
the change in fair value during the current period included in equity through
Other Comprehensive Income. As of February 28, 2010, we concluded
that, based on the length of time the securities were in a loss position, some
reductions in dividend rates, and the fact that we intended to sell the
securities after year end, the unrealized loss was no longer temporary in nature
and an impairment in the amount of the unrealized losses was recorded in
earnings during the year ended February 28, 2010. The basis on
which the amount reclassified out of other comprehensive income and into
earnings was determined using specific identification. Our
investments in securities held at February 28, 2010, were sold in the
quarter ended May 31, 2010, and the proceeds were invested in the investments
noted in the table.
(10)
INVESTMENT IN POLICIES
From time
to time, we purchase interests in policies to hold for investment
purposes. ASC 325-30, Investments in Insurance
Contracts, provides that a
purchaser may elect to account for its investments in life settlement contracts
based on the initial investment at the purchase price plus all initial direct
costs. Continuing costs (e.g., policy premiums, statutory interest,
and direct external costs, if any) to keep the policy in force are
capitalized. We have historically elected to use the investment
method, and refer to the recorded amount as the carrying value of the
policies.
The table
below describes the Investment in Policies account at November 30,
2010.
Policies
With Remaining Life
Expectancy (in years)
|
Number
of Interests
in Life Settlement Contracts |
Carrying
Value |
Face
Value |
|||||||||
0-1
|
170 | $ | 4,289,527 | $ | 6,853,676 | |||||||
1-2
|
46 | 1,051,435 | 2,128,103 | |||||||||
2-3
|
11 | 228,798 | 414,115 | |||||||||
3-4
|
1 | 10,204 | 20,000 | |||||||||
4-5
|
- | - | - | |||||||||
Thereafter
|
1 | 5,789 | 26,000 |
11
Policies With Extended Life
Expectancy |
||||||||||||
Viaticals
|
797 | 7,200,172 | 11,615,454 | |||||||||
Life
settlements
|
259 | 5,817,647 | 8,605,697 | |||||||||
1,056 | 13,017,819 | 20,221,151 | ||||||||||
Total
of all policies
|
1,285 | $ | 18,603,572 | $ | 29,663,045 |
Before
fiscal 2004, our business model focused on viatical settlements, in which the
insured is terminally ill. At that time, most viaticals involved
insureds with HIV. Subsequent advances in medical science and health
care greatly extended the life expectancies of these insureds, and we and the
industry switched to life settlements. Our current business model,
since fiscal 2004, has focused on facilitating the purchase of life settlements
for our clients. The bulk of policies that we own that have exceeded
life expectancy are viaticals.
Remaining
life expectancy is based on original life expectancy estimates and is not an
indication of expected maturity. Actual maturity dates in any
category may vary significantly (either earlier or later) from the remaining
life expectancies reported above. Policies with an extended life expectancy are
those policies whose initial estimated life expectancy has been exceeded as of
the end of the reporting period.
We
evaluate the carrying value of our investment in owned policies on a regular
basis, and adjust our total basis in the policies using new or updated
information that affects our assumptions about remaining life expectancy, credit
worthiness of the policy issuer, funds needed to maintain the asset until
maturity, discount rates and potential return. We recognize
impairment on individual policies if the expected discounted cash flows are less
than the carrying amount of the investment, plus anticipated undiscounted future
premiums and capitalizable direct external costs, if any. Impairment
of policies is generally caused by the insured significantly exceeding the
estimate of the original life expectancy, which causes the original policy costs
and projected future premiums to exceed the estimated maturity
value. We recorded $111,333 and $188,125 of impairment for the nine
months ended November 30, 2010 and 2009, respectively. The fair
value of the impaired policies at November 30, 2010, and February 28,
2010, was $713,534 and $576,148, respectively.
Estimated
premiums to be paid for each of the five succeeding fiscal years to keep the
policies in force as of November 30, 2010, are as follows.
Year
1
|
$ | 524,740 | ||
Year
2
|
433,201 | |||
Year
3
|
387,673 | |||
Year
4
|
342,254 | |||
Year
5
|
90,418 | |||
Thereafter
|
13,860 | |||
Total
estimated premiums
|
$ | 1,792,146 |
The
majority of our Investment in Policies was purchased as part of settlement
agreements and purchases from existing clients, which we refer to as tertiary
purchases. We do not currently have a strategy of buying large
amounts of policies for investment purposes, but we expect to continue to make
purchases as they may be presented to us and if the purchases can be made with
benefit to both parties. Since the purchases for our own account are
motivated by settlements and tertiary purchases, the supply of available
policies in the secondary market does not affect our purchases. The
risks that we might experience as a result of investing in policies are an
unknown remaining life expectancy, a change in credit worthiness of the policy
issuer, funds needed to maintain the asset until maturity and changes in
discount rates.
12
(11)
INVESTMENT IN LIFE SETTLEMENTS TRUST
The
amount shown on the balance sheet termed “Investment in Life Settlements Trust”
is an investment in an unaffiliated corporation, Life Assets Trust, S.A., (the
“Trust”) created for
the acquisition of life settlements. As of November 30, 2010,
and February 28, 2010, we owned 19.9% of the trust, carried at $6.2 and
$6.5 million, respectively, and accounted for on the equity method of
accounting. At November 30, 2010, the Trust owned a portfolio of
266 life insurance settlements with a face value of $689 million, of which
LPI supplied settlements with a face value of approximately
$278 million. We anticipate the policies will mature over the
next few years, although we cannot determine the exact time of the policy
maturities and the distribution of the underlying assets. The Trust
experienced maturities during the quarters ended May 31, 2010, and
November 30, 2010, and we were paid $311,367 from these
maturities. We have considered any potential impairment to the
investment and believe no impairment to the investment value is
warranted.
(12)
INCOME TAXES
Income
tax expense was made up of the following components:
Nine Months Ended
November 30,
|
||||||||
2010
|
2009
|
|||||||
Federal
income taxes
|
$ | 12,592,597 | $ | 13,330,802 | ||||
Deferred
tax expense (benefit)
|
180,666 | (450,948 | ) | |||||
State
income taxes
|
113,018 | 295,821 | ||||||
Total
income tax expense
|
$ | 12,886,281 | $ | 13,175,675 |
The tax
effects of temporary differences that gave rise to significant portions of the
deferred tax assets and deferred tax liabilities were as follows:
November 30, 2010
|
Feb. 28, 2010
|
|||||||
Deferred
tax assets:
|
||||||||
Premium
advances allowance
|
$
|
1,095,117
|
$
|
1,154,865
|
||||
Investment
in securities
|
-
|
638,177
|
||||||
Deferred
policy monitoring fees
|
334,157
|
-
|
||||||
State
taxes
|
258,532
|
286,150
|
||||||
Policy
impairments
|
190,759
|
196,487
|
||||||
Unrealized
loss on investment securities
|
96,329
|
-
|
||||||
Contingency
costs
|
89,455
|
569,129
|
||||||
Compensated
absences
|
43,550
|
34,098
|
||||||
Loss
on investment in trust
|
-
|
22,444
|
||||||
Capital
loss carryover
|
638,177
|
-
|
||||||
Valuation
allowance
|
(569,329
|
)
|
(611,298
|
)
|
||||
Net
deferred tax assets
|
2,176,747
|
2,290,052
|
||||||
Deferred
tax liabilities:
|
||||||||
Settlement
costs
|
(945,259
|
)
|
(945,258
|
)
|
||||
Depreciation
|
(166,341
|
)
|
(207,456
|
)
|
||||
Gain
on investment in trust
|
(13,340
|
)
|
-
|
|||||
Prepaid
expenses
|
(10,763
|
)
|
(11,958
|
)
|
||||
Net
deferred tax liabilities
|
(1,135,703
|
)
|
(1,164,672
|
)
|
||||
Total
deferred tax asset, net
|
$
|
1,041,044
|
$
|
1,125,380
|
||||
Summary
of deferred tax assets:
|
||||||||
Current
|
$
|
670,236
|
$
|
745,788
|
||||
Non-current
|
370,808
|
379,592
|
||||||
Total
deferred tax asset, net
|
$
|
1,041,044
|
$
|
1,125,380
|
13
In Fiscal
2010, we recorded a valuation allowance of $611,298 for capital losses resulting
from other-than-temporary impairments. This amount represents capital
losses that we were not able to deduct until we had corresponding capital gains
to apply the losses against. In fiscal 2011, we had capital gains of
$119,914. This reduced the valuation allowance to $569,329 at
November 30, 2010.
With few
exceptions, we are no longer subject to U.S. federal, state or local
examinations by tax authorities for fiscal years 2006 and
prior.
Accounting for Uncertainty in Income
Taxes. In June 2006, the FASB issued guidance contained in
ASC 740, Income Taxes
(formerly FIN 48). The guidance is intended to clarify
the accounting for uncertainty in income taxes recognized in a company’s
financial statements and prescribes the recognition and measurement of a tax
position taken or expected to be taken in a tax return. ASC 740
also provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure and
transition.
Under
ASC 740, evaluation of a tax position is a two-step process. The
first step is to determine whether it is more likely than not that a tax
position will be sustained upon examination, including the resolution of any
related appeals or litigation based on the technical merits of that
position. The second step is to measure a tax position that meets the
more-likely-than-not threshold to determine the amount of benefit to be
recognized in the financial statements. A tax position is measured at
the largest amount of benefit that is greater than 50% likely of being realized
upon ultimate settlement.
At
February 28, 2010, we determined that it is more likely than not that we
will be assessed additional Texas Margin Tax for non-deductibility of certain
payments in past and current periods included in our calculation of the Texas
Margin Tax taxable basis. At November 30, 2010, the amount
accrued for this uncertain tax position was $123,374. At
February 28, 2010, the amount accrued for this uncertain tax position
including estimated interest and penalties of $21,932, was
$402,104.
The year
ended February 28, 2010, was the first period with such a tax
position. A reconciliation of the beginning and ending amount of
unrecognized tax expense for the current period is as
follows.
Balance
at February 28, 2010
|
$ | 402,104 | ||
Reductions
based on tax positions related to the current period
|
(278,730 | ) | ||
Balance
at November 30, 2010
|
$ | 123,374 |
14
(13)
|
COMPREHENSIVE
INCOME PER SHARE, SHAREHOLDERS’ EQUITY, STOCK TRANSACTIONS AND COMMON
STOCK OPTIONS
|
Comprehensive
income for the three months ended November 30, 2010 and 2009, was
$7,088,801 and $8,547,180, respectively. Basic and diluted earnings
per share for comprehensive income for the three months ended November 30,
2010 and 2009, net of tax, were $0.48 and $0.58,
respectively. Comprehensive income for the nine months ended
November 30, 2010 and 2009, was $22,599,466 and $24,424,436,
respectively. Basic and diluted earnings per share for comprehensive
income for the nine months ended November 30, 2010 and 2009, net of tax,
were $1.52 and $1.64, respectively.
Dividends. We declared and paid
dividends in the amounts as set forth in the following table for the nine month
periods ended November 30, 2009 and 2010:
Date Declared
|
Date Paid
|
Dividend Amount
|
||||
05/07/09
|
06/15/09
|
$ | 0.07 | |||
05/14/09
|
06/15/09
|
$ | 0.25 | |||
07/27/09
|
09/15/09
|
$ | 0.25 | |||
10/26/09
|
12/15/09
|
$ | 0.25 | |||
04/26/10
|
06/15/10
|
$ | 0.25 | |||
08/06/10
|
09/15/10
|
$ | 0.25 | |||
09/03/10
|
10/29/10
|
$ | 0.25 | |||
10/21/10
|
12/15/10
|
$ | 0.25 |
(14)
|
FAIR
VALUE MEASUREMENTS
|
ASC 820,
Fair Value Measurements and
Disclosures, addresses how companies should measure fair value when they
are required to use a fair value measure for recognition or disclosure purposes
under GAAP. ASC 820 defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value
measurements. Effective March 1, 2008, adoption of ASC 820-10
did not have an impact on our financial condition, results of operations or cash
flows.
In
February 2008, the FASB agreed to defer the effective date of ASC 820
for one year for certain nonfinancial assets and liabilities, except those that
are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). We adopted ASC 820 as to
these items effective March 1, 2009. Examples of these items
include:
|
·
|
Nonfinancial
assets and nonfinancial liabilities that initially are measured at fair
value in a business combination or other new basis event, but are not
measured at fair value in subsequent
periods;
|
|
·
|
Asset
retirement obligations that are measured at fair value at initial
recognition, but are not measured at fair value in subsequent periods;
or
|
|
·
|
Nonfinancial
liabilities for exit or disposal activities that are measured at fair
value at initial recognition, but are not measured at fair value in
subsequent periods.
|
We
determined the fair values of our financial instruments based on the fair value
hierarchy established in ASC 820, which requires an entity to maximize the
use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. The standard defines fair value, describes
three levels of inputs that may be used to measure fair value, and expands
disclosures about fair value measurements.
15
The term
inputs refers to the
assumptions that market participants use in pricing the asset or
liability. ASC 820 distinguishes between observable inputs and unobservable
inputs. Observable inputs reflect the assumptions market
participants would use in pricing the asset or liability based on market data
obtained from independent sources. Unobservable inputs reflect an
entity’s own assumptions about the assumptions market participants would use in
pricing the asset or liability. ASC 820 indicates that valuation
techniques should maximize the use of observable inputs and minimize the use of
unobservable inputs. ASC 820 establishes a fair value hierarchy
that prioritizes the inputs used in valuation techniques and creates the
following three broad levels, with Level 1 being the highest
priority:
|
·
|
Level
1 inputs: Level 1 inputs are quoted market prices in active markets for
identical assets or liabilities that are accessible at the measurement
date (e.g., equity securities traded on the New York Stock
Exchange).
|
|
·
|
Level
2 inputs: Level 2 inputs are from other-than-quoted market prices included
in Level 1 that are observable for the asset or liability, either directly
or indirectly (e.g., quoted market prices of similar assets or liabilities
in active markets, or quoted market prices for identical or similar assets
or liabilities in markets that are not
active).
|
|
·
|
Level
3 inputs: Level 3 inputs are unobservable (e.g., a company’s own data) and
should be used to measure fair value to the extent that observable inputs
are not available.
|
Following
is a table of Investment in Securities measured at fair value on a recurring
basis as of November 30, 2010, and February 28, 2010, using quoted
prices in active markets for identical assets (Level 1); significant other
observable inputs (Level 2); and significant unobservable inputs (Level
3).
Description
|
Level 1:
Quoted Prices in
Active Markets for
Identical Assets
|
Level 2:
Significant Other
Observable
Inputs |
Level 3:
Significant
Unobservable Inputs
|
Total
|
||||||||||||
Municipal
and corporate bonds
|
$ | - | $ | 4,612,442 | $ | - | $ | 4,612,442 | ||||||||
U.S.
common stocks
|
480,807 | - | - | 480,807 | ||||||||||||
Commodity,
index and foreign currency funds
|
315,567 |
-
|
-
|
315,567 | ||||||||||||
Total
at November 30, 2010
|
$ | 796,374 | $ | 4,612,442 | $ | - | $ | 5,408,816 | ||||||||
U.S.
common stocks and funds
|
$ | 4,529,169 |
-
|
-
|
$ | 4,529,169 | ||||||||||
Total
at Feb. 28, 2010
|
$ | 4,529,169 | $ | - | $ | - | $ | 4,529,169 |
Our
financial assets and liabilities are cash and cash equivalents, certificates of
deposit, accounts receivable, a note receivable, investments in securities,
investments in policies, investment in a life settlements trust, accounts
payable and accrued liabilities. The recorded values of cash and cash
equivalents, certificates of deposit, accounts receivable, accounts payable, and
accrued liabilities approximate their fair values based on their short-term
nature and are discussed in Notes 3 through 6. The recorded value of
the note receivable is the original note amount plus accrued
interest. The note’s fair value is not readily determinable; it is
discussed in Note 7. The recorded value of investments in securities
is based on fair value and is discussed in Note 9. The
investment in the Trust is accounted for using the equity method of accounting,
and is recorded at our investment account balance. The investment’s
fair value is not readily determinable; it is discussed in Note
11.
16
The
carrying value of our investments in policies totaled $18,603,572, which
includes $571,203 of capitalized premiums, and has an estimated fair value, net
of the present value of estimated premiums, of $19,549,272. Fair
value of the investment in policies was determined using unobservable Level 3
inputs and was calculated by performing a net present value calculation of the
face amount of the life policies less premiums for the total
portfolio. The unobservable Level 3 inputs use new or updated
information that affects our assumptions about remaining life expectancy, credit
worthiness of the policy issuer, funds needed to maintain the asset until
maturity, and discount rates. The investments in policies are
discussed more fully in Note 10. A progression of the Level 3
inputs is shown in the table below:
Balance
at February 28, 2010
|
$ | - | ||
Transfers
from Level 2
|
18,866,580 | |||
Purchases
of policies
|
2,074,540 | |||
Maturities
of policies
|
(83,469 | ) | ||
Change
in unrealized gains
|
(1,308,379 | ) | ||
Estimated
Fair Value at November 30, 2010
|
$ | 19,549,272 |
In April
2009, the FASB issued ASC 820-10, Fair Value Measurements and
Disclosures, which provides additional guidance for estimating fair
value in accordance with ASC 820 when the volume and level of activity for
the asset or liability have significantly decreased. ASC 820-10
also includes guidance on identifying circumstances that indicate a transaction
is not orderly. ASC 820-10 has had no impact on our financial
condition, results of operations or cash flows.
(15)
|
CONTINGENCIES
|
We are
involved in various claims, suits, assessments, regulatory investigations, and
legal proceedings that arise from time-to-time in the ordinary course
of our business.
LPI is
aware of certain instances wherein the insurance companies denied payment on
policies in which LPI arranged the settlement with purchasers. Most
of these denials are related to unforeseeable reductions in face
value. Face value of the policies in question total $196,546 and our
estimated liability is recorded in accrued liabilities at November 30,
2010. We did not accrue any additional liability in the quarter ended
November 30, 2010. During the nine months ended
November 30, 2010, we accrued an additional $41,000 for future claims that
might arise in relation to these policies. During the three and nine
months ended November 30, 2010, we paid $192,547 and $289,196 of
settlements, respectively, which had been accrued in the current and previous
periods.
We record
provisions in the Consolidated Condensed Financial Statements for pending
litigation when we determine that an unfavorable outcome is probable and the
amount of the loss can be reasonably estimated. Except as discussed
elsewhere in this note:
(i) management has not concluded that it is probable that a loss has been
incurred in any pending litigation; or (ii) management is unable to
estimate the possible loss or range of loss that could result from an
unfavorable outcome of any pending litigation; and (iii) accordingly,
management has not provided any amounts in the Consolidated Condensed Financial
Statements for unfavorable outcomes, if any.
While we
do not expect that the ultimate outcomes in these proceedings or matters,
individually or collectively, will have a material adverse effect on our
business, financial position, results of operations, or cash flows, the results
and timing of the ultimate resolutions of these various proceedings and matters
are inherently unpredictable. Whether the outcome of any claim, suit,
assessment, regulatory investigation, or legal proceeding, individually or
collectively, could have a material effect on our business, financial condition,
results of operations, or cash flows, will depend on a number of variables,
including the nature, timing, and amount of any associated expenses and amounts
paid in settlement or damages, or the results of regulatory action that might
limit markets or increase compliance costs.
17
On April
12, 2010, we entered into a settlement agreement with Maxim Group, LLC, an
investment firm, to settle all claims in a civil action filed in
2007. Under the settlement, we agreed to deliver to Maxim 56,230
shares of our common stock, which were held in treasury, valued for settlement
purposes at $22.23 per share, or $1.25 million. The cost of this
settlement was accrued in our consolidated financial statements as of
February 28, 2010, and had no effect on our cash position as of
February 28, 2010, or November 30, 2010. The shares were
issued to Maxim on April 13, 2010.
On April
24, 2001, the state of Texas initiated a suit against LPI for alleged violations
of the Texas Deceptive Trade Practices Act (“DTPA”). The State
claimed that the contracts LPI used with purchasers before 1998 did not clearly
state that the purchasers were responsible for paying premiums to keep life
insurance policies purchased in force and that LPI had violated the DTPA by
requesting premiums from purchasers. LPI contended that the
purchasers of the policy interests were responsible to pay premiums, as they
were the owners of the policies. The trial court issued a summary
judgment in favor of LPI, which was appealed by the State. After a
lengthy appeals process, the matter was remanded back to the trial court and the
LPI and the State agreed to settle the matter by entering into an Assurance of
Voluntary Compliance (“AVC”) agreement, which was
filed with the court on April 1, 2010. Under the AVC, both parties
stipulate that the action relates only to certain contracts used with Texas
purchasers before 1998. The AVC further stipulates that the Attorney
General did not allege that LPI miscalculated escrow accounts or that it
committed any crime, fraud, misappropriation or malfeasance regarding escrow
accounts. Under the terms of the AVC, LPI agreed not to request any
further premium payments from the Texas purchasers identified in the AVC, to pay
future premiums on their behalf, estimated at $32,162 annually, and to pay
settlement costs totaling $300,000. This amount was accrued in our consolidated
financial statements as of February 28, 2010. By entering into
the AVC, both parties agree to release and discharge each other from any and all
claims for damages or other relief arising out of the action and we consider
this matter to be completely resolved and settled. Substantially all
of the $300,000 was paid during the quarter ended May 31,
2010.
On May 6,
2010, we settled an administrative case with the Virginia State Corporation
Commission, which provides for a “safe harbor” of procedures and disclosures
that will permit us to accept Virginia residents as purchasers within a clearly
defined regulatory structure. The estimated cost of this settlement
of $170,000 was accrued in our consolidated financial statements as of
February 28, 2010, and was paid during the quarter ended May 31,
2010.
(16)
DEFINED
CONTRIBUTION PLAN
All
employees are eligible to participate in our 401(k) retirement plan once they
have met specified employment and age requirements. The 401(k) has a
matching feature whereby we will make an annual matching contribution to each
participant’s plan account equal to 100% of the lesser of the participant’s
contribution to the plan for the year or 4% of the participant’s eligible
compensation for that year. For the nine months ended
November 30, 2010 and 2009, contribution expense for our matching
contributions to the 401(k) plan was $116,975 and $73,882,
respectively.
(17)
RELATED PARTY TRANSACTION
We
operate under an agreement with ESP Communications, Inc. (“ESP”), which is owned by the
spouse of our Chief Executive Officer. Under the agreement, ESP
performs certain post-settlement services for us, which include periodic contact
with insureds and their health care providers, monthly record checks to
determine an insured’s status, and working with the outside escrow agent in the
filing of death claims. Either party may cancel the agreement with a
30-day written notice. We currently pay ESP $7,500 on a semi-monthly
basis for its services. We recorded management services expense
concerning this agreement with ESP of $135,000 in each of the nine months ended
November 30, 2010 and 2009.
We
periodically use an aircraft owned by our Chairman and CEO, and reimburse him
for the incremental costs of our use, as described in applicable Federal
Aviation Administration regulations (FAA Part 91, subpart F). For the
nine months ended November 30, 2010 and 2009, the aircraft costs were
$143,786 and $262,462, respectively.
18
(18)
SUBSEQUENT EVENTS
On
November 22, 2010, the Board of Directors authorized a 5-for-4 stock split
payable in the form of a dividend. The dividend was paid on
December 31, 2010, to shareholders of record on December 21, 2010, and
the stock began trading on a post-split basis on January 3,
2011. The number of shares outstanding and per share amounts in this
Report are not adjusted to reflect the stock split. The stock split
had no impact on our financial results for the period.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Special
Note: Certain statements in this quarterly report on Form 10-Q
concerning our business prospects or future financial performance, anticipated
revenues, expenses, profitability or other financial items, estimates as to
size, growth in or projected revenues from the life settlement market,
developments in industry regulations and the application of such regulations,
expected outcomes of pending or potential litigation and regulatory actions, and
our strategies, plans and objectives, together with other statements that are
not historical facts, are “forward-looking statements” as that term is defined
under the federal securities laws. All of these forward-looking
statements are based on information available to us on the date hereof, and we
assume no obligation to update any such forward-looking
statements. You should carefully review the risks described herein
and in other documents we file from time to time with the Securities and
Exchange Commission, (“SEC”), including our Annual
Report on Form 10-K for the year ended February 28, 2010 (“Fiscal 2010”), particularly
in the sections entitled “Item 1A – Risk Factors” and “Item 7 -
Management’s Discussion and Analysis of Financial Condition and Results of
Operations”. We do not undertake any obligation to release publicly
any revisions to such forward-looking statements to reflect events or
uncertainties after the date hereof or reflect the occurrence of unanticipated
events.
Critical
Accounting Estimates, Assumptions and Policies
Our
discussion and analysis of financial condition and results of operations are
based on our consolidated condensed financial statements that were prepared in
accordance with accounting principles generally accepted in the United States of
America. To guide our preparation, we follow accounting policies,
some of which represent critical accounting policies as defined by the
SEC. The SEC defines critical accounting policies as those that are
both most important to the portrayal of a company’s financial condition and
results and require management’s most difficult, subjective, or complex
judgment, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain and may change in subsequent
periods. Certain accounting estimates involve significant judgments,
assumptions and estimates by management that may have a material impact on the
carrying value of certain assets and liabilities, disclosures of contingent
liabilities, and the reported amounts of income and expenses during the
reporting period that management considers critical accounting
estimates. The judgments, assumptions and estimates used by
management are based on historical experience, management’s experience,
knowledge of the accounts and other factors that are believed to be
reasonable. Because of the nature of the judgments and assumptions
made by management, actual results may differ materially from these judgments
and estimates, which could have a material impact on the carrying values of
assets and liabilities and the results of our operations. Areas
affected by our estimates and assumptions are identified below.
We
recognize revenue upon the receipt of executed contracts and assignment
documents, and when the sellers have obligated themselves to transfer title of
policies. We defer specific costs associated with the monitoring
services provided subsequent to the settlement date.
19
ASC 325-30,
Investments in Insurance
Contracts, states that an investor
may elect to account for its investments in life settlement contracts using
either the investment method or the fair value method. The election
is to be made on an instrument-by instrument basis and is
irrevocable. Under the investment method, an investor is to recognize
the initial investment at the purchase price plus all initial direct
costs. Continuing costs (e.g., policy premiums and direct external
costs, if any) to keep the policy in force are to be
capitalized. Under the fair value method, an investor recognizes the
initial investment at the purchase price. In subsequent periods, the
investor re-measures the investment at fair value in its entirety at each
reporting period and recognizes change in fair value earnings (or other
performance indicators for entities that do not report earnings) in the period
in which the changes occur. We value all of our investments in life
settlement contracts using the investment method. As of
November 30, 2010, and February 28, 2010, the total of our investment
in life settlements held for our own account was valued at $18,603,572 and
$16,460,353, respectively.
We
establish litigation and policy analysis loss reserves based on our best
estimates as to the ultimate outcome of contingent liabilities. This
reserve analysis is necessary to properly match current expenses to currently
recognized revenues and to recognize that there is a certain amount of liability
associated with litigation and policy losses. Through this reserve,
we recognize the estimated cost to settle pending litigation as an
expense. These estimates are reviewed on a quarterly basis and
adjusted to management’s best estimate of the anticipated liability on a
case-by-case basis. A high degree of judgment is required in
determining these estimated reserve amounts since the outcomes are affected by
numerous factors, many of which are beyond our control. As a result,
there is a risk that the estimates of future litigation and policy analysis loss
costs could differ from our currently estimated amounts. Any
difference between estimates and actual final outcomes are not expected to have
a material impact on our financial statements.
We make
estimates of the collectability of accounts and notes receivable. The
accounts associated with these areas are critical to recognizing the correct
amount of revenue in the proper period. We have not experienced any
material changes in our estimates of collectability versus actual results in the
current or prior periods.
We review
the carrying value of the property and equipment for impairment whenever events
and circumstances indicate that the carrying value of an asset may not be
recoverable from the estimated future cash flows expected to result from its use
and eventual disposition. In cases where undiscounted expected future
cash flows are less than the carrying value, an impairment loss is recognized
equal to an amount by which the carrying value exceeds the fair value of
assets. The factors considered by management in performing this
assessment includes current operating results, trends and prospects, the manner
in which the property is used, and the effects of obsolescence, demand,
competition and other economic factors. Based on this assessment,
there were no asset impairments during the nine months ended November 30,
2010, or the year ended February 28, 2010.
We
evaluate the useful lives of our property and equipment to assure that an
adequate amount of depreciation is being charged to
operations. Useful lives are based generally on specific knowledge of
an asset’s life in combination with the Internal Revenue Service rules and
guidelines for depreciable lives for specific types of assets.
We make
advances on policy premiums to maintain certain policies. In a
typical life settlement, policy premiums for the insured’s projected life
expectancy are added to the purchase price and those future premium amounts are
set aside in an escrow account to pay future premiums. When the
future premium amounts are exhausted, purchasers are contractually obligated to
pay the additional policy premiums. In some instances, purchasers
have failed to pay the premiums and we have acquired the policy or advanced the
premiums to maintain the policies. While we have no contractual or
other legal obligation to do so, and do not do so in every instance, we have
made premium advances as an accommodation to certain purchasers based on our
assumptions that we will ultimately recoup the advances. While some
purchasers repay the advances directly, reimbursements of these premiums will
come most likely as a priority payment from the policy proceeds when an insured
dies.
20
We make
estimates of the collectability of these premium advances. Until
Fiscal 2010, due to the uncertainty of the outcome of a relevant court case, we
were unable to estimate the amount of any future advances we may elect to make
or the timing of the amount of reimbursements we were likely to
receive. Within Fiscal 2010, issues were resolved that enabled us to
better estimate the collectability of premium advances. An agreement
with the state of Texas allowed us to specifically identify a class of
purchasers for whom we made premium advances, and which, under the terms of the
agreement, will be uncollectible. Our historical success of
collecting premium advances has enabled us to build a body of evidence by which
we can demonstrate full collectability of the remaining balance of advanced
premiums. To date, we have ultimately been fully reimbursed when we
have made an advance and the policy has matured. As a result, we
eliminated $3.5 million of the allowance on the advanced premiums account
in the fourth quarter of Fiscal 2010. We record invoiced premiums as
an increase to premium advances, and reduce the account for payments and other
adjustments. We establish an allowance against the premium advance
account for certain Texas purchasers based on the date of the contract
issuance.
We
evaluate the carrying value of our investment in owned policies. We
adjust our total basis in the policies (original cost plus capitalized premiums)
based on assumptions made about remaining life expectancy, funds needed to
maintain the asset until maturity, discount rates and potential
return. This evaluation provides us with any impairment of individual
policies and also provides us with an estimate of fair value.
We are
required to estimate our income taxes. This process involves
estimating our current tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax and financial
reporting purposes. These differences result in deferred tax assets
and liabilities. We then assess the likelihood that our deferred tax
assets will be recovered from future taxable income, and, to the extent we
believe that recovery is not likely, we establish a valuation
allowance. To the extent we establish a valuation allowance or
increase this allowance in a period, we include a tax provision or reduce our
tax benefit in the statements of income. We use our judgment to
determine our provision or benefit for income taxes, deferred tax assets and
liabilities and any valuation allowance recorded against our net deferred tax
assets.
We cannot
predict what future laws and regulations might be passed that could have a
material effect on our results of operations. We assess the impact of
significant changes in laws and regulations on a regular basis and update the
assumptions and estimates used to prepare our financial statements when we deem
it necessary.
We have
not made any material changes to our critical accounting estimates or
assumptions or the judgments affecting the application of those estimates or
assumptions.
New
Accounting Pronouncements
We follow
accounting standards set by the Financial Accounting Standards Board (the “FASB”). The FASB
sets the accounting principles generally accepted in the United States (“GAAP”) that we follow to
ensure we consistently report our financial condition, results of operations and
cash flows. References to GAAP issued by the FASB in these footnotes
are to the FASB Accounting
Standards Codification Topic 105 (the “ASC”). In June
2009, the FASB approved the FASB ASC, which, as of July 1, 2009, became the
single source of authoritative, nongovernmental GAAP. The ASC was not
intended to change GAAP. Rather, the ASC reorganizes all previous
GAAP pronouncements into accounting topics, and displays all topics using a
consistent structure. All existing standards that were used to create
the ASC are now superseded, aside from those issued by the SEC, replacing the
previous references to specific Statements of Financial Accounting Standards
with numbers used in the ASC’s structural organization. All guidance
in the ASC has an equal level of authority. The ASC is effective for
financial statements that cover interim and annual periods ended after
September 15, 2009. There was no impact on our financial
position, results of operations or cash flows as a result of the adoption of
ASC.
21
ASC 320,
Investments – Debt and Equity
Securities – Debt and Equity Securities, amends the other-than-temporary
impairment guidance in GAAP for debt securities to make the guidance more
operational and to improve the presentation and disclosure of the
other-than-temporary impairments on debt and equity securities in the financial
statements. Adoption of ASC 320 during Fiscal 2010 had no impact
on our financial condition, results of operations or cash flows.
ASC 810,
Consolidation, among
other things, provides guidance and establishes amended accounting and reporting
standards for a parent company’s non-controlling interest in a
subsidiary. ASC 810 was adopted on March 1, 2009, and had no
impact on our financial condition, results of operations or cash
flows.
ASC 820,
Fair Value Measurements and
Disclosures, addresses how companies should measure fair value when they
are required to use a fair value measure for recognition or disclosure purposes
under GAAP. ASC 820 defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value
measurements. Effective March 1, 2008, management adopted
ASC 820 with the exception of certain non-financial assets and
non-financial liabilities that were specifically deferred. In April
2009, the FASB issued ASC 820-10, which provides additional guidance for
estimating fair value in accordance with ASC 820, when the volume and level
of activity for the asset or liability have significantly
decreased. In August 2009, the FASB further clarified
ASC 820-10, Measuring
Liabilities at Fair Value, which applies to all entities that measure
liabilities at fair value within the scope of Topic 820 and provides
clarification that in circumstances in which a quoted price in an active market
for the identical liability is not available, a reporting entity is required to
measure fair value using one or more other valuation techniques. We
have no liabilities that are traded or exchanged, requiring measurement at fair
value. ASC 820 also includes guidance on identifying
circumstances that indicate a transaction is not orderly. In such
circumstances, the ASC specifies that a valuation technique should be applied
that uses either the quote of the liability when traded as an asset, the quoted
prices for similar liabilities or similar liabilities when traded as assets, or
another valuation technique consistent with existing fair value measurement
guidance. Adoption of ASC 820 during our Fiscal 2010 had no
impact on our financial condition, results of operations or cash flows.
ASU
2010-06, Improving Disclosures
about Fair Value Measurements, amended ASC 820 to clarify certain
existing fair value disclosures and requires a number of additional
disclosures. The guidance in ASU 2010-06 clarified that disclosures
should be presented separately for each class of assets and liabilities measured
at fair value and provided guidance on how to determine the appropriate classes
of assets and liabilities to be presented. ASU 2010-06 also clarified
the requirements for entities to disclose information about both the valuation
techniques and inputs used in estimating Level 2 and Level 3 fair value
measurements. ASU 2010-06 introduced new requirements to disclose the
amounts (on a gross basis) and reason for any significant transfers between
Levels 1, 2, and 3 of the fair value hierarchy and present information regarding
the purchases, sales, issuances and settlements of Level 3 assets and
liabilities on a gross basis. With the exception of the requirement
to present changes in Level 3 measurements on a gross basis, which is delayed
until 2011, the guidance in ASU 2010-06 became effective for reporting periods
beginning after December 15, 2009. Adoption of ASU 2010-06 on March
1, 2010, had no impact on our financial condition, results of operations or cash
flows.
ASC 825,
Financial Instruments,
directs that entities include disclosures about the fair value of financial
instruments whenever it issues summarized financial information for interim
reporting periods. Entities are to disclose in the body or in the
accompanying notes of their summarized financial information the fair value of
all financial instruments for which it is practicable to estimate that value,
whether recognized or not recognized in the statement of financial
position. Adopted on March 1, 2009, ASC 825 had no impact on our
financial condition, results of operations or cash flows.
22
In
February 2010, the FASB issued ASU No. 2010-09, “Amendments to Certain
Recognition and Disclosure Requirements”, which amends ASC 855, “Subsequent
Events”. This ASU, which was effective immediately, removes the
requirement for an SEC filer to disclose a date through which subsequent events
have been evaluated. We adopted this standard in the first quarter of
Fiscal 2010. The adoption of this standard did not have a material impact
on our financial condition, results of operations or cash flows.
Life
Partners
General. Life
Partners Holdings, Inc. (“We” or “Life Partners”) is a financial services
company and the parent company of Life Partners, Inc. (“LPI”). LPI is the
oldest and one of the most active companies in the United States engaged in the
secondary market for life insurance known generally as “life
settlements”. LPI performs services to transact policies between the
seller and buyer of life insurance policies, without taking title or control of
the policies. These financial transactions involve the purchase of
life insurance policies at a discount to their face value for investment
purposes.
The Secondary Market for Life
Insurance Policies. LPI was incorporated in 1991 and has
conducted business under the registered service mark “Life Partners” since
1992. Our operating revenues are derived from fees for facilitating
life settlement transactions. Life settlement transactions involve
the sale of an existing life insurance policy to another party. By
selling the policy, the policyholder receives an immediate cash payment to use
as he or she wishes. The purchaser takes an ownership interest in the
policy at a discount to its face value and receives the death benefit under the
policy when the insured dies.
We are a
financial services company providing purchasing services for life settlements to
our client base. We do this by matching life settlors with
purchasers. We facilitate these transactions by identifying,
examining, and purchasing the policies as agent for the
purchasers. To meet market demand and maximize our value to our
clients, we have made significant investments in proprietary software and
processes that enable us to facilitate a higher volume of transactions while
maintaining our quality controls. Since our inception, we have
facilitated over 126,000 purchaser transactions associated with the purchase of
over 6,400 policies totaling over $2.7 billion in face value.
The
following table shows the number of settlement contracts we have transacted, the
aggregate face values of those contracts, and the revenues we derived, for the
three and nine months ended November 30, 2010 and 2009:
Three Months
|
Nine
Months
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Number
of settlements
|
44 | 52 | 132 | 156 | ||||||||||||
Face
value of policies
|
$ | 153,525,000 | $ | 162,131,377 | $ | 401,076,170 | $ | 447,336,819 | ||||||||
Average
revenue per settlement
|
$ | 596,406 | $ | 595,524 | $ | 630,924 | $ | 560,682 | ||||||||
Net
revenues derived*
|
$ | 14,132,462 | $ | 16,464,256 | $ | 45,523,576 | $ | 47,951,680 |
*
Net revenues derived are exclusive of brokerage and referral
fees.
Comparison
of the Three Months Ended November 30, 2010 and 2009
We
reported net income of $7,067,398 for the three months ended November 30,
2010 (the “Third
Quarter of this
year”), compared to net income of $8,431,924 for the three months ended
November 30, 2009 (the “Third Quarter of last
year”). Our lower net income resulted primarily from a
15.3% decrease in gross revenue, resulting in a 14.2% decline in net
revenue. Net income in the Third Quarter of this year was aided by an
8.1% decrease in total expenses primarily resulting from a reduction in
settlement costs and net premium advances. The number of life
settlement transactions we brokered decreased from 52 to 44, while the
average revenue per settlement was relatively unchanged, from $595,524 in the
Third Quarter of last year to $596,406 in the Third Quarter of this year,
continuing a trend of fewer transactions, but at higher face values per
settlement and a higher revenue, net of brokerage fees, per
transaction.
23
Revenues: Revenues decreased
15.3%, or $4,725,391, from $30,967,256 in the Third Quarter of last year to
$26,241,865 in the Third Quarter of this year. Total brokerage and
referral fees decreased by $2,393,597, resulting in a 14.2% decrease in the net
revenues derived.
During
the periods presented, demand for our services declined. We believe
demand for our services comes in part from the desire to diversify investment
portfolios and avoid economically sensitive investments. Returns on
life settlements are based on the face value of life insurance policies, which
are purchased at a discount to face value and adjusted for projected future
premiums and the projected holding period of the policy to
maturity. For this reason, life settlement returns are not correlated
to traditional equity and debt markets and commodity investments. We
do not currently have enough information to indicate definitively the reason for
the reduction in demand or to determine whether this reduction is a
trend. It is possible that the demand decline results from a shift of
a portion of investment capital to more traditional investment markets because
of recent improvements in those markets. It is also possible that the
continued uncertainty with regard to the economy has resulted in investors
retaining a larger portion of their investment capital in cash and cash
equivalents.
The
industry generally has experienced a decline in activity. We have
countered the decline by seeking attractive policies with higher face
values. This move has largely allowed us to maintain profitability
through higher margins per settlement with fewer policies. We believe
there is a growing awareness of the secondary market for insurance policies
among potential sellers, especially for those with higher face value
policies. Whether this growing awareness will continue to expand the
supply of eligible and financially attractive policies is, however,
uncertain.
We
believe the life settlement industry generally is experiencing lower
demand. As we face these fluctuations in demand and supply, we
believe that our business model, which utilizes a broad purchaser base, is
better suited to weather the fluctuations than the single or preferred-client
business model, which is used by most of our competitors. We also
believe that our large network of brokers and licensees will assist us in
finding attractive policies and suitable purchasers for those
policies.
Brokerage and Referral
Fees: Brokerage and referral
fees decreased 16.5%, or $2,393,597, from $14,503,000 in the Third Quarter of
last year to $12,109,403 in the Third Quarter of this year, primarily as a
result of lower revenues and number of transactions. Brokerage and
referral fees as a percentage of gross revenue were relatively unchanged from
46.8% in the Third Quarter of last year to 46.2% in the Third Quarter of this
year. In the Third Quarter of this year, broker referrals accounted
for 100% of the total face value of policies transacted, which is unchanged from
the Third Quarter of last year. For the Third Quarter of this year,
two brokers accounted for more than 10% of the face value of all completed
transactions and constituted 32.6% of the total face value of completed
transactions. For the Third Quarter of last year, two brokers
accounted for more than 10% of the face value of all completed transactions, and
constituted 23.5% of the total face value of completed
transactions. The increase in concentration for the Third Quarter of
this year counters an earlier trend toward lesser concentration. We
will continue to monitor supply concentration and its possible effects on
brokerage and referral fees.
Brokerage
and referral fees generally increase or decrease with revenues, the face values
of policies transacted, and the volume of transactions, although the exact ratio
of fees may vary. Brokers may adjust their fees with the individual
policyholders whom they represent. In some instances, several brokers
may compete for representation of the same seller, which may result in lower
broker fees. Referral fees also vary depending on factors such as
varying contractual obligations, market demand for a particular kind of policy
or life expectancy category and individual agreements between clients and their
referring financial planners. No broker fees are paid when a life
settlor presents a policy to us directly.
24
Expenses: General and administrative
expenses increased by 8.6%, or $236,100, from $2,744,524 in the Third Quarter of
last year to $2,980,624 in the Third Quarter of this year. The
increase is primarily due to a $196,188 increase in legal fees and $118,923
increase in other outside services. The current period saw our legal
expenses return to historic levels, compared with a very low level of activity
in the previous period. We expect this higher level of legal expenses
to continue throughout the remainder of this fiscal year. The only
significant decrease in general and administrative expenses during the Third
Quarter of this year was the $105,750 decrease in executive
bonuses. Executive bonuses are calculated based on quarterly pre-tax
earnings, which were lower. There were no other significant expense
changes.
During
the Third Quarter of this year and last year, we made premium advances of
$1,001,356 and $621,590, respectively, and were reimbursed $345,929 and
$150,430, respectively. In a typical life settlement, policy premiums
for the insured’s projected life expectancy are added to the purchase price and
those future premium amounts are set aside in an escrow account maintained by an
unrelated third party to pay future premiums. When the future premium
amounts are exhausted, purchasers are contractually obligated to pay the
additional policy premiums. In some instances, purchasers have failed
to pay the premiums and we have acquired the policy or advanced the premiums to
maintain the policies. While we have no contractual or other legal
obligation to do so, and do not do so in every instance, we have made premium
advances as an accommodation to certain purchasers based on our assumptions that
we will ultimately recoup the advances. While some purchasers repay
the advances directly, reimbursements of these premiums will come most likely as
a priority payment from the policy proceeds when an insured dies.
Total
other income increased $44,777 from $464,307 in the Third Quarter of last year
to $509,084 in the Third Quarter of this year, primarily due to realized gains
on sales of securities. Although cash holdings were significantly
higher than a year ago, interest rates continued to decline, which resulted in
slightly lower interest income in the Third Quarter of this
year. This year also saw fewer policies maturing and income from the
Investment in Trust.
Income Taxes: Income tax
expense decreased 13.0%, from $4,723,199 in the Third Quarter of last year to
$4,108,138 in the Third Quarter of this year. This decrease is
primarily a result of lower taxable income. The effective tax rate
was 36.8% and 35.9% for the three months ended November 30, 2010 and 2009,
respectively.
Comparison
of the Nine Months Ended November 30, 2010 and 2009
We
reported net income of $22,778,361 for the nine months ended November 30,
2010 (“the First Nine Months of this year”), compared to
net income of $23,502,408 for the nine months ended November 30, 2009
(“the First Nine Months of last
year”). Our lower net income resulted primarily from a 4.8%
decrease in total revenues. Net income benefited from a 70.6% decline in
settlement costs. The First Nine Months of last year included a
$770,000 settlement with the state of Florida and a $500,000 settlement to
reimburse investors for a policy that did not pay out. Net income was
also increased with a 48.1% decline in net premium advances and a 4.3% decrease
in general and administrative expenses. The positive effect of the
declines in these expense levels were reduced by the $1,175,157 decrease in
interest and dividend income. The number of settlements transacted
decreased from 156 to 132 and the average revenue per settlement increased by
12.5%, increasing from $560,682 in the First Nine Months of last year to
$630,924 in the First Nine Months of this year.
Revenues: Revenues declined
4.8%, decreasing by $4,184,400 from $87,466,426 in the First Nine Months of last
year to $83,282,026 in the First Nine Months of this year. We are
continuing a trend toward transactions with larger face amounts. The
decrease in revenue, in conjunction with a similar decrease in brokerage and
licensee fees, resulted in a 5.1% decrease in the net revenues
derived.
25
During
the periods presented, demand for our services declined. Since the
attraction of life settlements is due partially to its lack of correlation with
traditional investment markets and its benefits in diversifying investment
portfolios, it is possible that the demand decline results from a strengthening
in the traditional investment markets as the economy improves. The
industry generally has experienced a decline in the supply of
policies. We have countered the decline by seeking policies with
higher face values. This move has largely allowed us to maintain
profitability through higher margins per settlement with fewer
policies. While we expect the supply of policies to stabilize with an
increased awareness of the secondary market for life insurance policies, whether
the supply will do so is uncertain.
Brokerage and Referral Fees:
Brokerage and referral fees decreased 4.4%, or $1,756,296, from
$39,514,746 in the First Nine Months of last year to $37,758,450 in the First
Nine Months of this year. Brokerage and referral fees as a percentage
of gross revenue increased slightly from 45.2% in the First Nine Months of last
year to 45.3% in the First Nine Months of this year. The decrease
resulted primarily from changes in licensee and broker fees. Licensee
fees increased $2,460,894 primarily due to a promotional bonus in place in the
current period. Brokerage fees decreased $3,655,146 as more policies
were presented directly to us. In the First Nine Months of this year,
broker referrals accounted for 99.9% of the total face value of policies
transacted compared with 99.1% of the policies transacted in the First Nine
Months of last year. For the First Nine Months of this year, two
brokers accounted for more than 10% of the face value of all completed
transactions and constituted 31.4% of the total face value of completed
transactions. For the First Nine Months of last year, one broker
accounted for more than 10% of the face value of all completed transactions and
constituted 15.8% of completed transactions. The increase in
concentration for the First Nine Months of this year counters an earlier trend
toward lesser concentration. We will continue to monitor supply
concentration and its possible effects on brokerage and referral
fees.
Brokerage
and referral fees generally increase or decrease with revenues, the face values
of policies transacted and the volume of transactions, although the exact ratio
may vary according to a number of factors. Brokers may adjust their
fees with the individual policyholders whom they represent. In some instances,
several brokers may compete for representation of the same seller, which may
result in lower broker fees. Referral fees also vary depending on
factors such as varying contractual obligations, market demand for a particular
kind of policy or life expectancy category and individual agreements between
clients and their referring financial planners. No broker fees are
paid when a life settlor is not represented by a broker and the life settlor
presents a policy to us directly.
Some
states are moving to license life settlement brokerage activity, which may
result in the capping of fees or greater disclosure of fees, either of which
could tend to lower our fees.
Expenses: General and administrative
expenses decreased 4.2%, or $408,435, from $9,510,659 in the First Nine Months
of last year to $9,102,224 in the First Nine Months of this
year. This decrease was due to lower executive bonuses of $363,051,
investor relations fees of $200,893 and aircraft expenses of
$118,676. These decreases were countered with an increase in
donations of $190,568.
During
the First Nine Months of this year and last year, we made premium advances of
$2,250,183 and $1,734,760, respectively, and were reimbursed $1,061,004 and
$456,875, respectively. In the typical life settlement, policy
premiums for the insured’s projected life expectancy are added to the purchase
price and reserved to pay future premiums. When the premium reserve is
exhausted, purchasers are contractually obligated to pay policy premiums.
In some instances, purchasers have failed to pay the premiums and we have
acquired the policies or advanced the premiums to maintain the policies.
While we have no contractual or other legal obligation to do so, and do not do
so in every instance, we have made premium advances as an accommodation to
certain purchasers based on our assumptions that we will ultimately recoup the
advances. While some purchasers repay the advances directly,
reimbursements these premiums will come most likely as a priority payment from
the policy proceeds when an insured dies.
Other
income and expense decreased from $1,703,466 of income in the First Nine Months
of last year to $693,706 in the First Nine Months of this year primarily due to
reduced interest and dividend income in the current year and the $426,783 gain
in the prior year that resulted from converting the investment in a partnership
to an investment in a life settlements trust as well as lower gains from
maturities of owned policies. There was a $119,914 gain realized on
sales of securities in the current year.
26
Income Taxes: Income tax
expense decreased $289,394, or 2.2%, from $13,175,675 in the First Nine Months
of last year to $12,886,281 in the First Nine Months of this
year. This increase is primarily a result of lower taxable income and
deferred tax assets reversing and becoming an expense, while in the previous
period they were a benefit. The effective tax rate was 36.1% and
35.9% for the nine months ended November 30, 2010 and 2009,
respectively.
Contractual
Obligations
We lease
office equipment under non-cancelable operating leases expiring in various years
through 2015. The following table summarizes our outstanding lease
commitments as of November 30, 2010:
Year
1
|
$ | 62,056 | ||
Year
2
|
27,187 | |||
Year
3
|
25,095 | |||
Year
4
|
21,155 | |||
Year
5
|
11,122 | |||
Thereafter
|
- | |||
Total
Lease Commitments
|
$ | 146,615 |
Liquidity
and Capital Resources
Operating Activities: Net
cash flows provided by operating activities for the First Nine Months of
this year were $25,130,486. Sources of cash flow resulted primarily
from net income of $22,778,361, a $1,143,697 decrease in accounts receivable as
we collected more closing funds before the end of the period and a $713,778
increase in deferred policy monitoring fees. Uses of cash
were minor with the biggest uses being a $248,196 reduction in accrued
settlements, as previously accrued settlements were paid, and a $185,890
reduction in other accrued liabilities. Net cash flows provided by
operating activities for the First Nine Months of last year were
$22,364,098. The cash flows from operating activities for last year
resulted primarily from net income of $23,502,408, an increase in accounts
payable of $1,104,203 due to accrued commissions and an increase in accrued
liabilities of $815,711, less $649,027 earnings from the investment in the life
settlements trust, and a $450,948 increase in deferred income
taxes.
Investing Activities: Net
cash flows used in investing activities were $4,427,134 during the First Nine
Months of this year. This amount consists of $9,819,622 proceeds
from sales of marketable securities, $311,367 from maturities within the life
settlements trust and $83,469 from maturities of owned policies, less
$10,854,577 for purchases of marketable securities, $2,338,021 for the purchase
of policies for investment purposes, net premium advances of $1,349,898, $98,906
for purchases of property and equipment and $190 from the earnings on a
certificate of deposit. In comparison, in the First Nine
Months of last year, we used $5,327,984 for investing
activities. Of these cash flows, $2,933,237 came from maturities of
certificates of deposit and $101,147 from maturities within the life settlements
trust, less $7,656,105 for the purchase of policies for investment purposes,
$354,741 for purchases of property and equipment and $348,522 for purchases of
marketable securities.
Financing Activities: We used
$14,901,103 for financing activities during the First Nine Months of this
year to pay dividends. We used $10,288,849 of net cash in financing
activities in the First Nine Months of last year to pay dividends of
$9,509,776 and make payments of $779,073 to retire all long-term
debt.
Working Capital and Capital
Availability: As of November 30, 2010, we had working capital of
$35,658,501. We believe future income from operating activities will
generate sufficient profits and cash flows to meet our anticipated working
capital needs.
27
Outlook
We
continue to produce strong financial results, although our growth rate has
declined. We believe our company and our industry are fundamentally
sound and well positioned to deal with the current uncertainty in the financial
and capital markets. Our life settlements are not correlated to the
financial or commodities markets, which increases their appeal in uncertain
times. Further, we have an adequate amount of cash and cash
equivalents. We carry no debt and do not rely on leverage in our
capital structure. We do rely, however, upon the availability of
investment capital. Our experience during the First Nine Months of
this year indicates that investment capital remains available and will continue
to be placed in life settlements. We believe this is due to the fact
that returns in life settlements are relatively attractive and not correlated to
the performance of the financial markets.
Our
operating strategy is to increase cash flows generated from operations by
increasing revenues, while controlling brokerage, settlement and general and
administrative expenses. We believe that domestic and international
demand for life settlements will continue to grow as the prospects for
economic conditions remain uncertain and purchasers look for alternative
investments. We continue efforts to attract institutional
clients. On the supply side, we are increasing our advertising and
professional awareness marketing to potential sellers of policies and to
strengthen our broker network.
Off-Balance
Sheet Arrangements
We do not
engage in any off-balance sheet arrangements or transactions.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our risk
exposure in the financial markets consists of exposure to interest rate changes
and changes in the fair values of our investments. Our risk exposure
to changes in interest rates relates primarily to our investment
portfolio. We invest our excess cash in depository accounts with
financial institutions and in income and equity-oriented investment
funds. We attempt to protect and preserve our invested funds by
limiting default, market, and reinvestment risk through portfolio
diversification and review of the financial stability of the institutions with
which we deposit funds. We do not hold derivative financial
instruments or financial instruments such as credit default swaps, auction rate
securities, mortgage-backed securities or collateralized debt obligations in our
investment portfolio.
Investments
in both fixed-rate and floating-rate interest earning instruments carry a degree
of interest rate risk. Because our business strategy does not rely on
generating material returns from our investment portfolio or cash holdings, we
do not expect our market risk exposure on our interest-bearing assets to
materially impact our operating results.
Fixed-rate
securities may have their fair value adversely impacted due to a rise in
interest rates, while floating rate securities may produce less income than
expected if interest rates fall. Due in part to these factors, our
future investment income may fluctuate due to changes in interest
rates. We may suffer losses in principal if forced to sell securities
that have declined in fair value due to negative market fluctuations although it
is not expected that this potential loss would have a material impact on our
financial condition, results of operations or cash flows.
ITEM
4. CONTROLS AND PROCEDURES
Disclosure Controls and
Procedures. With the participation of our Chief Executive
Officer and Chief Accounting Officer, we have evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the
end of the period covered by this Report. Based upon such evaluation, our
Chief Executive Officer and Chief Accounting Officer have concluded that, as of
the end of such periods, our disclosure controls and procedures were effective
in ensuring that (i) information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC’s rules
and forms and (ii) information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including our principal executive and principal
financial officers, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure.
28
There
were no changes in our internal controls over financial reporting during the
quarter or nine months ended November 30, 2010, that have materially
affected, or are reasonable likely to materially affect, our internal control
over financial reporting.
PART
II – OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
In the
ordinary course of business, we are involved in various claims, suits,
assessments, regulatory investigations, and legal proceedings that arise
from time-to-time. We are not currently a party to any
litigation or regulatory action that we believe could reasonably be expected to
have a material adverse effect on our financial position, results of operations
or cash flows.
ITEM
1A.
|
RISK
FACTORS
|
See “Risk
Factors” in our Annual Report on Form 10-K for the year ended February 28,
2010, for a detailed discussion of the risk factors affecting us.
ITEM
6.
|
EXHIBITS
|
31.1 Rule
13a-14(a) Certifications
32.1 Section
1350 Certification
29
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: January
10, 2011
|
|
Life
Partners Holdings, Inc.
|
|
By: /s/ Brian D.
Pardo
|
|
Brian
D. Pardo
|
|
President
and Chief Executive Officer
|
|
(Signing
on behalf of the registrant and as principal
executive
officer)
|
|
By: /s/ David M.
Martin
|
|
David
M. Martin
|
|
Chief
Financial Officer and Principal Financial and
Accounting
Officer
|
30
EXHIBIT
INDEX
DESCRIPTION
OF EXHIBITS
Number
|
Description
|
Page
|
||
31.1
|
Rule
13a-14(a) Certifications
|
32-33
|
||
32.1
|
Section
1350 Certification
|
34
|
31