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: August 31, 2012

 

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	74-2962475
(State of incorporation)	(I.R.S. Employer ID no.)

 

204 Woodhew Drive	76712
Waco, Texas	(Zip Code)
(Address of Principal Executive Offices)

 

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 x 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 October 2, 2012: 18,647,468 (18,750,000 issued and outstanding less 102,532 treasury shares)

 

 

LIFE PARTNERS HOLDINGS, INC.

 

TABLE OF CONTENTS

 

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets – August 31, 2012 (Unaudited) and February 29, 2012	3-4
	Condensed Consolidated Statements of Income - For the Three and Six Months Ended  August 31, 2012 and 2011 (Unaudited)	5
	Condensed Consolidated Statements of Cash Flows - For the Six Months Ended  August 31, 2012 and 2011 (Unaudited)	6
	Notes to Condensed Consolidated Financial Statements	7-18
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18-27
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	27
Item 4.	Controls and Procedures	27
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults upon Senior Securities	29
Item 4.	Mine Safety Disclosures	29
Item 5.	Other Information	29
Item 6.	Exhibits	29
Signatures		30
Exhibit Index		31

 

 

PART I - FINANCIAL INFORMATION

 

LIFE PARTNERS HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

AUGUST 31, 2012 (Unaudited) AND FEBRUARY 29, 2012

Page 1 of 2

 

ASSETS

 

		Aug. 31,				Feb. 29,
		2012				2012
CURRENT ASSETS:
Cash and cash equivalents		$	12,748,717			$	11,362,688
Certificates of deposit			101,027				100,848
Investment in securities			-				400,000
Accounts receivable – trade			-				99,363
Accounts receivable – other			65,881				34,359
Note receivable			-				581,096
Current portion of investment in policies			2,788,515				2,317,974
Current portion of income tax receivable			2,477,600				1,807,128
Deferred income taxes			1,305,596				1,327,918
Prepaid expenses			282,207				474,837
Total current assets			19,769,543				18,506,211
PROPERTY AND EQUIPMENT:
Land and building			2,316,202				2,316,202
Proprietary software			550,063				545,663
Furniture, fixtures and equipment			1,552,063				1,478,885
Transportation equipment			9,800				9,800
Subtotal			4,428,128				4,350,550
Accumulated depreciation			(2,196,637	)			(2,070,316	)
Net property and equipment			2,231,491				2,280,234
OTHER ASSETS:
Premium advances, net of reserve of $4,051,936 and $3,804,219, respectively			8,020,112				7,216,534
Investments in policies			-				6,540,560
Investment in life settlements trust			6,287,816				6,337,339
Artifacts and other			834,700				834,700
Income tax receivable			2,494,415				-
Deferred income taxes			1,327,379				4,051,036
Total other assets			18,964,422				24,980,169
Total assets		$	40,965,456			$	45,766,614

 

See the accompanying notes to Condensed Consolidated Financial Statements.

 

 

LIFE PARTNERS HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

AUGUST 31, 2012 (Unaudited) AND FEBRUARY 29, 2012

Page 2 of 2

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

		Aug. 31,				Feb. 29,
		2012				2012
CURRENT LIABILITIES:
Accounts payable		$	944,205			$	710,148
Accrued liabilities			227,333				605,299
Dividends payable			1,873,976				1,872,399
Accrued settlement expense			419,292				419,292
Current deferred policy monitoring costs			382,941				398,689
Total current liabilities			3,847,747				4,005,827
Long-term portion of deferred policy monitoring costs			2,457,907				2,523,493
Income taxes payable			43,373				77,678
Total long-term liabilities			2,501,280				2,601,171
Total liabilities			6,349,027				6,606,998
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value 18,750,000 shares authorized; 18,647,468 shares issued and outstanding			187,500				187,500
Additional paid-in capital			11,423,054				11,423,054
Retained earnings			23,390,939				27,934,126
Less: treasury stock – 102,532 shares as of August 31, and  February 29, 2012			(385,064	)			(385,064	)
Total shareholders' equity			34,616,429				39,159,616
Total liabilities and shareholders’ equity		$	40,965,456			$	45,766,614

 

See the accompanying notes to Condensed Consolidated Financial Statements.

 

 

LIFE PARTNERS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE AND SIX MONTHS ENDED AUGUST 31, 2012 AND 2011

(Unaudited)

		Three Months								Six Months
		Ended Aug. 31,								Ended Aug. 31,
		2012				2011				2012				2011
REVENUES		$	3,062,587			$	10,811,349			$	8,802,144			$	20,644,744
BROKERAGE FEES			2,411,017				7,162,042				5,984,416				13,311,044
REVENUES, NET OF BROKERAGE FEES			651,570				3,649,307				2,817,728				7,333,700
OPERATING AND ADMINISTRATIVE EXPENSES:
General and administrative			1,989,312				1,749,074				3,764,964				3,529,298
Legal and professional expense			834,838				1,732,960				1,845,919				3,780,532
Impairment of investments in policies			32,112				109,175				704,030				370,004
Premium advances, net			242,250				232,011				517,281				852,053
Settlement costs			118,500				270,400				198,104				613,374
Depreciation			63,488				64,701				126,320				130,965
Total operating and administrative expenses			3,280,500				4,158,321				7,156,618				9,276,226
INCOME (LOSS) FROM OPERATIONS			(2,628,930	)			(509,014	)			(4,338,890	)			(1,942,526	)
OTHER INCOME (EXPENSES):
Interest and other income (expense)			23,272				111,073				117,821				297,066
Gain (loss) on sale of assets			70,808				-				3,553,278				-
Loss on settlement of note receivable			-				-				(231,096	)			-
Realized loss on sales of securities			-				(7,599	)			-				(50,947	)
Total other income (expense)			94,080				103,474				3,440,003				246,119
INCOME (LOSS) BEFORE INCOME TAXES			(2,534,850	)			(405,540	)			(898,887	)			(1,696,407	)
Total income tax expense (benefit)			(685,525	)			(82,357	)			(86,593	)			(499,080	)
NET (LOSS) INCOME		$	(1,849,325	)		$	(323,183	)		$	(812,294	)		$	(1,197,327	)
EARNINGS (LOSS):
Per share – Basic and Diluted		$	(0.10	)		$	(0.02	)		$	(0.04	)		$	(0.06	)
AVERAGE COMMON AND COMMON			18,647,468				18,647,468				18,647,468				18,647,468
EQUIVALENT SHARES OUTSTANDING:
Basic and diluted
THE COMPONENTS OF COMPREHENSIVE (LOSS) INCOME:
Net (loss) income		$	(1,849,325	)		$	(323,183	)		$	(812,294	)		$	(1,197,327	)
Unrealized (loss) gain on investment securities, net of  taxes			-				(12,087	)			-				(1,705	)
COMPREHENSIVE (LOSS) INCOME		$	(1,849,325	)		$	(335,270	)		$	(812,294	)		$	(1,199,032	)

 

See the accompanying notes to Condensed Consolidated Financial Statements.

 

 

LIFE PARTNERS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED AUGUST 31, 2012 AND 2011

(Unaudited)

		Six Months
		Ended Aug. 31,
		2012				2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(812,294	)		$	(1,197,327	)
Adjustments to reconcile net income (loss) to operating activities:
Depreciation			126,320				130,965
Impairment of investments in policies			704,030				370,004
Increase in allowance for premium advances			247,717				303,588
Gain on sale of investments in policies			(3,553,278	)			-
Loss on settlement of note receivable			231,096				-
Realized loss on sales of securities			-				50,947
Deferred income taxes			2,745,979				381,765
(Increase) decrease in operating assets:
Accounts receivable			67,841				(7,731	)
Note receivable			350,000				-
Prepaid expenses			192,630				(864,008	)
Premium advances			(1,051,295	)			(996,301	)
Increase (decrease) in operating liabilities:
Accounts payable			234,057				(1,303,867	)
Accrued liabilities			(377,966	)			1,468,476
Accrued settlement expense			-				137,821
Income taxes payable and receivable			(3,199,192	)			(1,443,922	)
Deferred policy monitoring costs			(81,334	)			(62,158	)
Net cash used in operating activities			(4,175,689	)			(3,031,748	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in certificates of deposit			(179	)			(25	)
Proceeds from sales of marketable securities			400,000				1,931,724
Purchases of  property and equipment			(77,577	)			(42,308	)
Investment in life settlement trust			-				(190,782	)
Proceeds from sales of investments in policies			8,994,335				-
Proceeds from  investment in life settlements trust			49,523				-
Maturities of investment in policies			45,678				261,690
Purchase of  policies for investment purposes			(120,746	)			(320,172	)
Net cash provided by (used in) investing activities			9,291,034				1,640,127
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid			(3,729,316	)			(7,462,057	)
Net cash used in financing activities			(3,729,316	)			(7,462,057	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			1,386,029				(8,853,678	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			11,362,688				27,610,564
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	12,748,717			$	18,756,886
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid		$	-			$	5,694
Income taxes paid		$	366,620			$	563,080

 

See accompanying notes to Consolidated Condensed Financial Statements.

 

 

Life Partners Holdings, Inc.

 

Notes to Condensed Consolidated Financial Statements

 

August 31, 2012

 

(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 settlements between 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 Condensed Consolidated 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 Condensed Consolidated 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 Condensed Consolidated Financial Statements have been prepared without audit, pursuant to the rules and regulations of the SEC, and reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods, on a basis consistent with the annual audited financial statements. All such adjustments are of a normal recurring nature. Certain information, accounting policies, and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to make the financial statements and information presented not misleading. These financial statements should be read in conjunction with the financial statements and the summary of significant accounting policies and notes thereto included in our most recent Annual Report on Form 10-K.

 

Property and Equipment. Our property and equipment are depreciated over their estimated useful lives using the straight-line method. Depreciation expense for the six months ended August 31, 2012 and 2011 (the “First Half of this year” and “First Half of last year”, respectively), were $126,320 and $130,965, respectively. The useful lives of property and equipment for purposes of computing depreciation are:

 

Building and components	7 to 39 years
Machinery and equipment	5 to 7 years
Software	3 to 7 years
Transportation equipment	5 years

 

 

Artifacts and Other. The artifacts and other assets are stated at cost. We have evaluated these assets, obtained a recent appraisal, and believe there is no impairment in their value as of August 31, 2012, and February 29, 2012.

 

Impairment of Long-Lived Assets. We account for the impairment and disposition of long-lived assets in accordance with ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets. We review the carrying value 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 would be 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 include 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 our analysis, Investments in Policies is the only balance sheet item that has been impaired. During the First Half of this year and last year, we recorded impairments of $704,030 and $370,004, respectively.

 

Revenue Recognition. We recognize income at the time a settlement closes and we defer revenue to cover minor policy monitoring services provided after the settlement date and amortize this amount over the anticipated life expectancy of the insureds. This amount is shown as Deferred Policy Monitoring Costs within current and long-term liabilities on the consolidated balance sheets.

 

Income Taxes. We recognize deferred tax assets and liabilities for the expected future tax consequences of transactions and events. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Timing differences between the reporting of income and expenses for financial statement and income tax reporting purposes are reported as deferred tax assets, net of valuation allowances, or as deferred tax liabilities depending on the cumulative effect of all timing differences, recorded at amounts expected to be more likely than not recoverable.

 

Earnings Per Share. Basic earnings per share computations are calculated on the weighted-average of common shares and common share equivalents outstanding during the year, reduced by the treasury stock. Common stock options and warrants are considered to be common share equivalents and are used to calculate diluted earnings per common and common share equivalents except when they are anti-dilutive.

 

Concentrations of Credit Risk and Major Customers. In the First Half of this year and last year and in the Second Quarter of this year and last year, there was no compensation to any single licensee that represented more than 10% of brokerage fees. For the Second Quarter of this year, three brokers constituted 100% of the total face value of completed transactions. For the Second Quarter of last year, three brokers accounted for more than 10% of the face value of all completed transactions, and constituted 52.3% of the total face value of completed transactions. For the First Half of this year, four brokers accounted for more than 10% of the face value of all completed transactions and constituted 85% of the total face value of completed transactions. For the First Half of last year, three brokers accounted for more than 10% of the face value of all completed transactions, and constituted 39.6% of the total face value of completed transactions.

 

(3) NEW ACCOUNTING PRONOUNCEMENTS

 

In January 2011, the FASB issued ASU 2011-06, Improving Disclosures about Fair Value Measurements. ASU 2011-06 amends the Fair Value Measurements and Disclosures Topic to require additional disclosure and clarify existing disclosure requirements about fair value measurements. ASU 2011-06 requires entities to provide fair value disclosures by each class of assets and liabilities, which may be a subset of assets and liabilities within a line item in the statement of financial position. The additional requirements also include disclosure regarding the amounts and reasons for significant transfers in and out of Level 1 and 2 of the fair value hierarchy and separate presentation of purchases, sales, issuances and settlements of items within Level 3 of the fair value hierarchy. ASU 2011-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements, which is effective for fiscal years beginning after December 15, 2011, and for interim periods within those fiscal years. We adopted ASU 2011-06 on March 1, 2012. The adoption of ASU 2011-06 did not have a material impact on our footnote disclosures.

 

 

(4) 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. 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.

 

(5) 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 August 31, 2012, or February 29, 2012.

 

(6) 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 February 29, 2012:

 

		Cost Basis				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Municipal and corporate bonds		$	400,000			$	-			$	-			$	400,000
Total at Feb. 29, 2012		$	400,000			$	-			$	-			$	400,000

 

As of August 31, 2012, we had no investment securities.

 

(7) ACCOUNTS RECEIVABLE – TRADE

 

The amounts shown on the balance sheet termed Accounts Receivable – Trade are amounts reflecting 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 August 31, 2012, and February 29, 2012, were $0 and $99,363, respectively.

 

 

(8) ACCOUNTS RECEIVABLE – OTHER

 

The amounts shown on the balance sheet at August 31, 2012, termed Accounts Receivable – Other, is composed of $50,000 due us from maturities of policies and loans of $15,881 to various employees for a total of $65,881. The amount for February 29, 2012, is composed of $15,949 due us from maturities of policies and loans of $18,410 to various employees for a total of $34,359. We consider all receivables to be current and collectible.

 

(9) NOTE RECEIVABLE

 

The amount of $581,096 shown on the consolidated balance sheet at February 29, 2012, termed Note Receivable represented 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. 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 on that date, attorney’s fees, costs, all taxable costs of court and post judgment interest at the highest rate allowable by law. On May 15, 2012, we received a payment of $350,000 and settled this note, which resulted in a loss of $231,096.

 

(10) 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.

 

Total premium advance balance at February 29, 2012		$	11,020,753
Advances			2,122,347
Reimbursements and adjustments			(1,071,052	)
Total premium advance balance at August 31, 2012			12,072,048
Allowance for doubtful accounts			(4,051,936	)
Net premium advance balance at August 31, 2012		$	8,020,112

 

(11) INVESTMENTS IN POLICIES

 

From time to time, we have purchased 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 Investments in Policies account at August 31, 2012.

 

Policies with Remaining Life Expectancy (in years)		Number of Life Settlement Contracts				Carrying   Value				Face Value
0-1			1			$	0			$	17,098
1-2			1				14,092				53,818
2-3			22				475,866				812,025
3-4			14				556,818				910,496
4-5			8				1,058,142				2,197,750
Thereafter			59				683,597				2,949,638
Total			105			$	2,788,515			$	6,940,825

 

We evaluate the carrying value of our investments 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, capitalization 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 $704,030 and $370,004 of impairment for the First Half of this year and the First Half of last year, respectively. The fair value of the impaired policies at August 31, 2012, and February 29, 2012, was $214,620 and $1,201,561, respectively.

 

Estimated premiums to be paid for each of the five succeeding fiscal years to keep the life settlement contracts in force as of August 31, 2012, are as follows.

 

Year 1		$	76,529
Year 2			199,423
Year 3			250,849
Year 4			288,813
Year 5			267,992
Thereafter			1,513,981
Total estimated premiums		$	2,597,587

 

The majority of our Investments in Policies were purchased as part of settlement agreements and goodwill purchases from existing clients, which we refer to as tertiary purchases. Due to the capital requirements, we do not intend to buy large amounts of policies for investment purposes, and we shall likely resell any policies that we purchase rather instead of holding the policies for investment. 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 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.

 

We sold the viatical portion of our Investments in Policies to an unrelated party on May 1, 2012, for $3,829,849, and a significant portion of the life settlements portion of our Investment in Policies to two unrelated parties on May 23, 2012, for $4,056,214. Within the current quarter we also sold several life settlement interests, to various unrelated buyers, for $1,108,272. The remainder of the carrying value of the investment, $2,788,515, net of impairment, is classified as a current asset, as we anticipate selling the policy interests within the next twelve months.

 

 

(12) 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 August 31, 2012, and February 29, 2012, we owned 19.9% of the trust, which we carried at $6.3 million and accounted for on the equity method of accounting. At August 31, 2012, the Trust owned a portfolio of 252 life insurance settlements with a face value of $653 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. We have considered any potential impairment to the investment and believe no impairment to the investment value is warranted.

 

(13) INCOME TAXES

 

Total income tax expense was allocated for the First Half of this year and last year is as follows:

 

		2012				2011
Income tax (benefit) expense from continuing operations		$	(86,593	)		$	(499,080	)

 

Income tax expense was made up of the following components:

 

		Six Months Ended August 31,
		2012				2011
Current income taxes		$	(2,832,572	)		$	(880,845	)
Deferred tax expense (benefit)			2,745,979				381,765
Total income tax (benefit) expense		$	(86,593	)		$	(499,080	)

 

Income tax expense differed from amounts computed by applying the Federal income tax rate to pre-tax earnings for the First Half of this year and last year, as a result of the following:

 

		Six Months Ended August 31,
		2012				2011
United States statutory rate			35.0	%			35.0	%
State income taxes			(3.1	)%			(2.0	)%
Permanent differences			(22.3	)%			(3.6	)%
Combined effective tax rate			9.6	%			29.4	%

 

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:

 

 

		Aug. 31, 2012				Feb. 29, 2012
Deferred tax assets:
Impairment of investment in policies		$	442,664			$	3,706,127
Premium advances allowance			1,418,178				1,331,477
Deferred policy monitoring costs			962,672				980,597
Charitable contributions			248,719				176,199
Investment in securities			672,115				672,115
Contingency costs			146,752				146,752
Compensated absences			28,522				40,932
State taxes			15,180				27,188
Valuation allowance			(643,403	)			(643,403	)
Net deferred tax assets			3,291,399				6,437,984
Deferred tax liabilities:
Unrealized revenues and broker fees			(387,140	)			-
Settlement costs			(39,647	)			(861,080	)
Depreciation			(122,047	)			(140,860	)
Prepaid expenses			(96,250	)			(43,750	)
Loss in investment in trust			(13,340	)			(13,340	)
Net deferred tax liabilities			(658,424	)			(1,059,030	)
Total deferred tax asset, net		$	2,632,975			$	5,378,954
Summary of deferred tax assets:
Current		$	1,305,596			$	1,327,918
Non-current			1,327,379				4,051,036
Total deferred tax asset, net		$	2,632,975			$	5,378,954

 

Income Tax Receivable. As a result of our operating losses for fiscal 2012 and in the current fiscal 2013, we recorded an income tax receivable for overpayment of federal income taxes in prior fiscal years. As of August 31, 2012, we have recorded $2,477,600 as the current portion of our income tax receivables and anticipate receiving approximately $2.5 million in federal income tax refunds related to our income tax receivables within the next fiscal quarter.

 

Valuation Allowance. 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 and 2012, we had net capital losses of $91,729. This increased the valuation allowance to $643,403 at February 29, 2012, and August 31, 2012.

 

With few exceptions, we are no longer subject to U.S. federal, state or local examinations by tax authorities for fiscal years 2009 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 29, 2012, 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. The amount accrued for this uncertain tax position at August 31, 2012, and February 29, 2012 was $123,374.

 

A reconciliation of the beginning and ending amount of unrecognized tax expense for the current period is as follows.

 

Balance at February 29, 2012		$	123,374
Reductions based on tax positions related to the current period			-
Balance at August 31, 2012		$	123,374

 

(14) COMPREHENSIVE INCOME PER SHARE, SHAREHOLDERS’ EQUITY, STOCK TRANSACTIONS AND COMMON STOCK OPTIONS

 

Comprehensive (loss) income for Second Quarter of this year and last year was $(1,849,325) and $(335,270), respectively. Comprehensive (loss) income for the First Half of this year and last year was $(812,294) and $(1,199,032), respectively. Basic and diluted earnings per share for comprehensive income for the Second Quarter of this year and last year was $(0.10) and $(0.02), respectively. Basic and diluted earnings per share for the First Half of this year and last year was $(0.04) and $(0.06), respectively.

 

Dividends. We declared and paid dividends in the amounts as set forth in the following table for the First Half of this year and last year.

 

Date Declared		Date Paid		Dividend Amount
01/21/11		03/15/11		$	0.20
05/04/11		06/15/11		$	0.20
08/11/11		09/15/11		$	0.20
02/27/12		03/15/12		$	0.10
05/23/12		06/15/12		$	0.10
08/08/12		09/26/12		$	0.10

 

We had no share based awards that were granted, modified or outstanding for the First Half of this year or last year, and as a result, we had no share based compensation expense in any quarter.

 

 

(15) FAIR VALUE MEASUREMENTS

 

ASC 820, Fair Value Measurements and Disclosures, addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP. ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. 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.

 

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 February 29, 2012, 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		$	400,000				-				-			$	400,000
Total at Feb. 29, 2012		$	400,000				-				-			$	400,000

 

As of August 31, 2012, we had no investment securities.

 

Our financial assets and liabilities are cash and cash equivalents, certificates of deposit, accounts receivable, 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, investment in securities, accounts receivable, accounts payable, and accrued liabilities approximate their fair values based on their short-term nature and are discussed in Notes 4 through 8. Before settlement of the note receivable in the first quarter of this year, the recorded value of the note receivable was the original note amount plus accrued interest. Fair value was not readily determinable; the note is discussed in Note 9. The investment in the trust is accounted for using the equity method of accounting. Fair value is not readily determinable; the investment is discussed in Note 12.

 

As of August 31, 2012, the carrying value of our investments in policies totaled $2,788,515, which includes $374,442 of capitalized premiums, and has an estimated fair value, net of the present value of estimated premiums, of $1,602,004. 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 investment in policies is discussed more fully in Note 11. The roll forward of the fair value of the investment is as follows:

 

Fair Value at  February 29, 2012		$	4,483,039
Sales of Policies			(2,572,019	)
Purchases of Policies			9,534
Maturity of Policies			(10,583	)
Change in Unrealized Gains			(307,967	)
Fair Value at August 31, 2012		$	1,602,004

 

In April 2009, the FASB issued ASC 820-10, Fair Value Measurements and Disclosures, that provides additional guidance for estimating fair value in accordance with ASC 820 when the volume and level of activity for the asset or liability have significantly decreased. ASC 820-10 also includes guidance on identifying circumstances that indicate a transaction is not orderly. ASC 820-10 has had no impact on our financial condition, results of operations or cash flows.

 

(16) RELATED PARTY TRANSACTION

 

We currently 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 $90,000 in each of the First Half of this year and last year.

 

 

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). We believe the reimbursed cost is well below the fair rental value for such use. In the First Half of this year and last year, we reimbursed costs of $205,744 and $90,645, respectively, for such use. We also periodically use a boat owned by our Chairman and CEO, and reimburse him for the direct costs of our use. We believe the reimbursed cost is well below the fair rental value for such use. In the First Half of this year and last year, we reimbursed costs of $25,226 and $127,542, respectively, for such use.

 

(17) CONTINGENCIES

 

On August 16, 2012, the Texas Attorney General, acting for the State Securities Board, filed suit against Life Partners Holdings, Inc., Life Partners, Inc., its Chairman and President, Brian Pardo, and its General Counsel, Scott Peden. The suit sought a temporary restraining order preventing us from doing business and appointment of receiver based generally on allegations that our life settlements are securities under Texas law and that we made various misrepresentations in the sale of the life settlements, including misrepresentations about the life expectancies of the insureds.

 

At a hearing on the matter held on August 17, 2012, the court refused to grant the Attorney General’s request to block our business or to appoint a receiver. The court did issue a temporary restraining order that prevented us dissipating assets, but allowed us to continue conducting our business in the ordinary course pending an evidentiary hearing, which was set for September 24, 2012.

 

At the conclusion of the hearing held September 24 and 25, 2012, the court ruled that the life settlement transactions that we facilitate are not securities under Texas law. Since the claims were based on the premise that the life settlements were securities, the ruling effectively terminated the Attorney General’s case. The Attorney General has stated that it will appeal.

 

LPI is aware of certain instances in which 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 $541,665 and our estimated liability is recorded in accrued liabilities at August 31, 2012. There was no activity in accrued settlement expense in the First Half of this year.

 

Except as described above, there have been no material developments during the current quarter for legal proceedings that were disclosed in our Annual Report on Form 10-K for the year ended February 29, 2012 (the “2012 Annual Report”). For a full disclosure of legal proceedings, please reference our 2012 Annual Report.

 

We record provisions in the Condensed Consolidated 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 Condensed Consolidated Financial Statements for unfavorable outcomes, if any.

 

 

It is possible that our consolidated results of operations, cash flows or financial position could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome or settlement of any pending litigation. Nevertheless, although litigation is subject to uncertainty, management believes and we have been so advised by counsel handling the respective cases that we have a number of valid claims and defenses in all pending litigation to which we are a party, as well as valid bases for appeal of adverse verdicts against us. All such cases are, and will continue to be, vigorously defended and all valid counterclaims pursued. However, we may enter into settlement discussions in particular cases if we believe it is in the best interests of our shareholders to do so.

 

(18)

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. The contribution expense for our matching contributions to the 401(k) plan for the First Half of this year and last year was $45,574 and $41,666, respectively.

 

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 29, 2012 (“Fiscal 2012”), 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 Condensed Consolidated 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 income at the time a settlement closes and the purchasers have made the obligation to make the purchase. We defer revenue equal to the estimated costs to monitor policies into the future, and we amortize this deferred cost over the anticipated life expectancy of the insureds.

 

We sometimes make short-term advances to facilitate a life settlement transaction. These amounts are included in “Accounts receivable – trade”, and are collected as the life settlement transactions close. All amounts are considered collectible as we are repaid the advance before any of the other parties involved in the transaction receive funds.

 

We follow the guidance contained in ASC 325-30, Investments in Insurance Contracts, to account for our investments in life settlement contracts. ASC 325-30 states that a purchaser may elect to account for its investments in life settlement contracts using either the investment method or the fair value method. The election is made on an instrument-by instrument basis and is irrevocable. Under the investment method, a purchaser recognizes 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 capitalized. Under the fair value method, a purchaser recognizes the initial investment at the purchase price. In subsequent periods, the purchaser re-measures the investment at fair value in its entirety at each reporting period and recognizes changes in fair value earnings (or other performance indicators for entities that do not report earnings) in the period in which the changes occur. We elected to value our investments in life settlement contracts using the investment method. As of August 31, 2012, and February 29, 2012, our investments in life settlements held for our own account were carried at $2,788,515 and $8,858,534, respectively.

 

We review the carrying value of our investments in policies for impairment whenever events and circumstances indicate that we might not recover the carrying value of the policies from future maturities. In cases where undiscounted expected proceeds from future maturities are less than the carrying value, we recognize an impairment loss equal to an amount by which the carrying value (including expected future costs to maintain the policies) exceeds the expected proceeds. Based on this assessment, we recorded impairment costs for investments in policies of $704,030 and $370,004 during the First Half of this year and last year, respectively.

 

We establish litigation and policy analysis loss accruals based on our best estimates as to the ultimate outcome of contingent liabilities. This loss 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 these accruals, 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 accrual 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 could have a material impact on our financial statements.

 

We must make estimates of the collectability of accounts and notes receivable and premium advances. The accounts associated with these areas are critical to recognizing the correct amount of revenue and expenses in the proper period. Within the last quarter of fiscal 2011, issues were resolved which have enabled us to better estimate the collectability of premium advances. The agreement with the State of Texas allowed us to specifically identify a class of investors for whom we made premium advances, and which, under the terms of the agreement, will be uncollectible. Our historical success of collecting premium advances enabled us to build a body of evidence by which we can demonstrate full collectability of the remaining balance of advanced premiums. As a result of the resolution of the suit, the reserve for uncollectible premium advances is based on our best estimate and historical data and premium advances are no longer fully reserved.

 

 

We review the carrying value of our property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment includes current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, there was no impairment during the First Half of this year or last year.

 

We must evaluate the useful lives of our property and equipment to assure that an adequate amount of depreciation is being charged to operations. Useful lives are based generally on specific knowledge of life for specific types of assets.

 

We are required to estimate our income taxes. This process involves estimating our current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include a tax provision or reduce our tax benefit in the statements of income. We use our judgment to determine our provision or benefit for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets.

 

We cannot predict what future laws and regulations might be passed that could have a material effect on our results of operations. We assess the impact of significant changes in laws and regulations on a regular basis and update the assumptions and estimates used to prepare our financial statements when we deem it necessary.

 

We have not made any material changes to our critical accounting estimates or assumptions or the judgments affecting the application of those estimates or assumptions. We discuss our significant accounting policies, including those policies that are not critical, in Note 2 of our Condensed Consolidated Financial Statements.

 

New Accounting Pronouncements

 

Recent accounting pronouncements have been issued including ASU 2011-06. For a discussion of these pronouncements, refer to Note 3 of our Condensed Consolidated Financial Statements.

 

Life Partners

 

General. 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 settlements between 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.

 

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. 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 specialty financial services company, providing purchasing services for life settlements to our client base. 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 143,000 purchaser transactions involving over 6,500 policies totaling over $3 billion in face value. We believe our experience, infrastructure and intellectual capital provide us a unique market position and will enable us to maintain sustainable growth within the life settlement market.

 

The following table shows the number of settlement contracts we have transacted, the aggregate face values of those contracts, and the revenues we derived, for the three and six months ended August 31, 2012 and 2011:

 

		Three Months Ended Aug. 31,								Six Months Ended Aug. 31,
		2012				2011				2012				2011
Number of settlements			3				16				13				34
Face value of policies		$	16,000,000			$	63,100,000			$	46,650,000			$	112,043,976
Avg. revenue per settlement		$	1,020,863			$	675,709			$	677,088			$	607,198
Net revenues derived*		$	651,570			$	3,649,307			$	2,817,728			$	7,333,700

 

*      Net revenues derived are exclusive of brokerage and referral fees.

 

Comparison of the Three Months Ended August 31, 2012 and 2011

 

We reported a net loss of $(1,849,325) for the three months ended August 31, 2012 (the “Second Quarter of this year”), compared to a net loss of $(323,183) for the three months ended August 31, 2011 (the “Second Quarter of last year”). Our lower net income resulted primarily from a 71.7% decrease in revenues, an 82.1% decrease in revenues net of brokerage fees, and a 21.1% decrease in total operating and administrative expenses, which was largely attributable to a 51.8% decrease in legal and professional expenses. The number of life settlement transactions we brokered decreased from 16 to 3, but the average revenue per settlement was increased by 51% from $675,709 in the Second Quarter of last year compared to $1,020,863 in the Second Quarter of this year.

 

The dramatic decrease in revenue was due to two factors. First, we believe the life settlement market declined from approximately $8 billion in face value transactions in calendar 2009 to approximately $4 billion in calendar 2011 and the market has continued to perform at this lower level. A second contributing factor was the publication of news articles criticizing our operations coupled with our disclosure of a pending SEC investigation, both of which occurred in the fourth quarter of fiscal 2012. The articles and disclosure of the pending investigation resulted in a significant drop in the price of our common stock and were followed by civil suits based generally on alleged false disclosures or omissions. In addition, the SEC filed a civil action against us in January 2012 as a result of their investigation. These developments significantly impacted our operations. Compared to the Second Quarter of last year, we closed a lower number of settlements (3 from 16), had lower aggregate face values ($16 million from $63.1 million) and realized lower total net revenues derived ($0.65 million from $3.6 million). The increase in the average revenue per settlement reflects the fact that our revenue decreases result generally from decreases in purchaser demand for life settlements and not in the availability of policies for life settlement transactions. We also believe the small number of transactions completed during the Second Quarter of this year was due in part to a seasonal lag in the return of transaction documents during the summer months. Many of the transactions that we expected to complete in the Second Quarter of this year were not completed until after the close of that period. Thus, we do not believe this reduction in transactions to be a trend and, based on the number of transactions completed during the first month of the Third Quarter of this year, we expect the Third Quarter of this year to have a substantially higher number of transactions than the Second Quarter of this year.

 

 

Revenues: Revenue decreased by $7,748,762, or 71.7%, from $10,811,349 in the Second Quarter of last year to $3,062,587 in the Second Quarter of this year. Brokerage fees declined by 66.3% or $4,751,025 due to fewer transactions during the Second Quarter of this year resulting in an 82.1% decrease in Revenues net of brokerage fees in the Second Quarter of this year.

 

Although the general decline in the life settlement markets may have had some effect on us, the greater impact upon demand for our services appears to have come from the critical news articles and the uncertainty related to legal actions by the SEC and private litigants. These developments have especially hurt our licensee network and purchaser base. Our business model is somewhat unique in the industry in that we are the only publicly held, life settlement company and the only prominent company with a broad, retail base. We believe the publicity from the news articles affected our client base more acutely than the articles might have affected a company with an institutional-oriented base. We believe the articles portrayed us in a false light, and we have worked with our licensees and clients to restore lost confidence and rebut the charges in the articles. Since the start of our current fiscal year (March 1, 2012), approximately 1,800 of our clients have been paid over $43 million in proceeds from their life settlement transactions, and we believe the amount of payouts will increase during the remainder of this fiscal year. Since many of our life settlement purchasers are repeat purchasers, we believe the payouts will restore some demand in the remainder of this fiscal year and the following fiscal year and will enable us to gradually rebuild our markets. However, the uncertainty of the pending litigation described above is likely to continue to adversely affect our operating results. Restoration of demand approaching levels we recorded in fiscal 2011 is unlikely to occur until and unless we are able to favorably resolve the civil actions brought by the SEC and private litigants.

 

Brokerage and Referral Fees: Brokerage and referral fees decreased $4,751,025 from $7,162,042 in the Second Quarter of last year to $2,411,017 in the Second Quarter of this year. Brokerage and referral fees as a percentage of gross revenue increased from 66% in the Second Quarter of last year to 79% in the Second Quarter of this year. We believe the increase was due primarily to a policy resale accommodation to institutional clients, in which we cover their resale fees to encourage reinvestment of the sale proceeds. In the Second Quarter of this year, broker referrals accounted for 100% of the total face value of policies transacted, which is unchanged from the Second Quarter of last year. For the Second Quarter of this year, three brokers accounted for more than 10% of the face value of all completed transactions and constituted 100% of the total face value of completed transactions. For the Second Quarter of last year, three brokers accounted for more than 10% of the face value of all completed transactions and constituted 52.3% of the total face value of completed transactions. No one licensee accounts for more than 10% of the brokerage and referral fees expense.

 

Brokerage and referral fees generally increase or decrease with revenues, face values of policies transacted, and the volume of transactions, although the exact ratio of fees may vary. 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.

 

Expenses: Operating and administrative expenses decreased by 21%, or $877,821, from $4,158,321 in the Second Quarter of last year to $3,280,500 in the Second Quarter of this year. The decrease is primarily due to decreased legal and professional fees which were $834,838 and $1,732,960 in the Second Quarter of this year and last year, respectively. Legal and professional fees are a result of the legal fees associated with the SEC and shareholder suits and were lower due to lower activity and partial coverage by insurance.

 

 

Impairment of investments in policies in the Second Quarter of this year was $32,112, compared to $109,175 in the Second Quarter of last year.

 

During the Second Quarter of this year and last year, we made premium advances of $1,132,644 and $1,815,516, respectively, were reimbursed from maturities and collections $647,544 and $1,123,727, respectively, and wrote off as bad debt $108,879 and $137,022, 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 to pay future premiums. When the future premium amounts are exhausted, purchasers are contractually obligated to pay the additional policy premiums. We bill and collect the purchasers’ proportionate share and may advance premiums pending collection. In some instances, purchasers have failed to pay the premiums and we have repurchased 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. The provision for bad debt is a reserve generally relating to premium payments we make on certain viatical settlements, which will likely be uncollectible if and when the policies mature. Net premium advance expense for the Second Quarter of this year and last year was $242,250 and $232,011, respectively, primarily as a result of the increased number of policies exhausting escrow. See the discussion of Policy Advances within Critical Accounting Estimates, Assumptions and Policies on page 18.

 

Settlement costs decreased 56.2%, or $151,900, from $270,400 in the Second Quarter of last year to $118,500 in the Second Quarter of this year.

 

Other Income (Expenses): Total other income was largely unchanged from $103,474 in the Second Quarter of last year to $94,080 in the Second Quarter of this year.

 

Income Taxes: As a result of our losses in fiscal 2012 and in the current fiscal 2013, we have accrued net operating losses, which can be used to offset future taxable income and are recorded as income tax benefit. Our income tax benefit increased from $82,357 in the Second Quarter of last year to a $685,525 benefit in the Second Quarter of this year due to higher operating losses in the current period compared to smaller losses in the previous period.

 

Comparison of the Six Months Ended August 31, 2012 and 2011

 

We reported a net loss of $812,294 for the six months ended August 31, 2012 (the “First Half of this year”), compared to net loss of $1,197,327 for the six months ended August 31, 2011 (the “First Half of last year”). Our lower net income resulted primarily from a 57.4% decrease in revenues, a 61.6% decrease in revenues net of brokerage fees, and a 22.8% decrease in total operating and administrative expenses, which was largely attributable to a 51.2% decrease in legal and professional expenses. Lower net income was partially offset by sales of a large portion of our Investments in Policies for $8.9 million, resulting in a $3.5 million gain. The number of life settlement transactions we brokered decreased from 34 to 13, while the average revenue per settlement increased 11.5% from $607,198 in the Second Half of last year compared to $677,088 in the Second Half of this year

 

 

The dramatic decrease in revenue was due to two factors. First, we believe the life settlement market declined from approximately $8 billion in face value transactions in calendar 2009 to approximately $4 billion in calendar 2011 and the market has continued to perform at this lower level. A second contributing factor was the publication of news articles criticizing our operations coupled with our disclosure of a pending SEC investigation, both of which occurred in the fourth quarter of fiscal 2012. The articles and disclosure of the pending investigation resulted in a significant drop in the price of our common stock and were followed by civil suits based generally on alleged false disclosures or omissions. In addition, the SEC filed a civil action against us in January 2012 as a result of their investigation. These developments significantly impacted our operations. Compared to the First Half of last year, we closed a lower number of settlements (13 from 34), had lower aggregate face values ($46.7 million from $112 million) and realized lower total net revenues derived ($2.8 million from $7.3 million). The slight increase in the average revenue per settlement reflects the fact that our revenue decreases result generally from decreases in purchaser demand for life settlements and not in the availability of policies for life settlement transactions. We also believe the small number of transactions completed during the Second Quarter of this year was due in part to a seasonal lag in the return of transaction documents during the summer months. Many of the transactions that we expected to complete in the Second Quarter of this year were not completed until after the close of that period. We do not believe this reduction in transactions to be a trend and, based on the number of transactions completed during the first month of the Third Quarter of this year, we expect the Third Quarter of this year to have a substantially higher number of transactions than the Second Quarter of this year.

 

Revenues: Revenues decreased by $11,842,600, or 57.4% from $20,644,744 in the First Half of last year to $8,802,144 in the First Half of this year. Brokerage fees declined 55% or $7,326,628 due to fewer transactions during the Second Quarter of this year, resulting in a 61.6% decrease in revenues net of brokerage fees.

 

Although the general decline in the life settlement markets may have had some effect on us, the greater impact upon demand for our services appears to have come from the critical news articles and the uncertainty related to legal actions by the SEC and private litigants. These developments have especially hurt our licensee network and purchaser base. Our business model is somewhat unique in the industry in that we are the only publicly held, life settlement company and the only prominent company with a broad, retail base. We believe the publicity from the news articles affected our client base more acutely than the articles might have affected a company with an institutional-oriented base. We believe the articles portrayed us in a false light, and we have worked with our licensees and clients to restore lost confidence and rebut the charges in the articles. Since the start of our current fiscal year (March 1, 2012), approximately 1,800 of our clients have been paid over $43 million in proceeds from their life settlement transactions, and we believe the amount of payouts will increase during the remainder of this fiscal year. Since many of our life settlement purchasers are repeat purchasers, we believe the payouts will restore some demand in the remainder of this fiscal year and the following fiscal year and will enable us to gradually rebuild our markets. The uncertainty of the pending litigation described above will continue, however, to adversely affect our operating results. Restoration of demand approaching levels we recorded in fiscal 2011 is unlikely to occur until and unless we are able to favorably resolve the civil actions brought by the SEC and private litigants.

 

Brokerage and Referral Fees: Brokerage and referral fees decreased 55% or $7,326,628 from $13,311,044 in the First Half of last year to $5,984,416 in the First Half of this year. Brokerage and referral fees as a percentage of gross revenue increased from 64% in the First Half of last year to 68% in the First Half of this year. In the First Half of this year, broker referrals accounted for 100% of the total face value of policies transacted, which is unchanged from the First Half of last year. For the First Half of this year, four brokers who each accounted for more than 10% of the face value of all completed transactions, constituted 85% of the total face value of completed transactions. For the First Half of last year, three brokers accounted for more than 10% of the face value of all completed transactions, and constituted 39.6% of the total face value of completed transactions.

 

 

Brokerage and referral fees generally increase or decrease with revenues, face values of policies transacted, and the volume of transactions, although the exact ratio of fees may vary. 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.

 

Expenses: Operating and administrative expenses decreased by 22.8% or $2,119,608 from $9,276,226 in the First Half of last year to $7,156,618 in the First Half of this year. The decrease is primarily due to decreased legal and professional fees which were $1,845,919 and $3,780,832 in the Second Half of this year and last year, respectively. Legal and professional fees are a result of the legal fees associated with the SEC and shareholder suits and were lower due to lower activity and partial coverage by insurance.

 

Impairment of investments in policies in the Second Half of this year was $704,030, compared to $370,004 in the Second Half of last year.

 

During the First Half of this year and last year, we made premium advances of $2,122,347 and $3,053,333, respectively, were reimbursed from maturities and collections $1,071,052 and $2,195,809, respectively, and wrote off as bad debt $247,716 and $303,588, 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 to pay future premiums. When the future premium amounts are exhausted, purchasers are contractually obligated to pay the additional policy premiums. We bill and collect the purchasers’ proportionate share and may advance premiums pending collection. In some instances, purchasers have failed to pay the premiums and we have repurchased 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. The provision for bad debt is a reserve generally relating to premium payments we make on certain viatical settlements, which will likely be uncollectible if and when the policies mature. Net premium advance expense for the First Half of this year and last year was $517,281 and $852,053, respectively. See the discussion of Policy Advances within Critical Accounting Estimates, Assumptions and Policies on page 18.

 

Settlement costs decreased 67.7% or $415,270 from $613,374 in the Second Half of last year to $198,104 in the Second Half of this year.

 

Other Income (Expenses): Total other income increased from $246,119 in the First Half of last year to $3,440,003 in the First Half of this year, primarily due to gains on the sales of the majority of our Investments in Policies. We sold all of our viatical positions and approximately 40% of our life settlements portfolio to unrelated parties in May 2012. The total gain realized was $3,553,278. The gains on sales of Investment in Policies were partially offset by a loss of $231,096, which we incurred in the settlement of a note receivable in May 2012.

 

Income Taxes: As a result of our losses in fiscal 2012 and in the current fiscal 2013, we have accrued net operating losses, which can be used to offset future taxable income and are recorded as income tax benefit. Our income tax benefit declined from $499,080 in the First Half of last year to $86,593 in the First Half of this year, primarily due to the taxable gains we incurred on the sales of our Investments in Policies.

 

 

Contractual Obligations and Commitments

 

Our outstanding contractual obligations and commitments as of August 31, 2012, were:

 

		Total				Due in less than 1 year				Due in 1 to 3 years				Due in 4 to 5 years				Due after 5 years
Operating leases		$	164,873			$	79,388			$	78,999			$	6,486			$	-
Total obligations		$	164,873			$	79,388			$	78,999			$	6,486			$	-

 

Liquidity and Capital Resources

 

Operating Activities: Net cash flows used by operating activities for the First Half of this year were $4,175,689. Uses of cash flow resulted primarily from a net loss of $812,294, a gain on sale of investments in policies of $3,553,278 and net premium advances of $1,051,295, which were offset by an increase of net income taxes receivable of $3,199,192, a decrease of accrued liabilities of $377,966, and a reduction of deferred policy monitoring costs of $81,334.

 

The primary source of cash flow was an increase in accounts payable of $234,057 and a decrease in prepaid expenses of $192,630. Net cash flows provided by operating activities for the First Half of last year were $3,031,748. The cash flows from operating activities for last year resulted primarily from a net loss of $1,197,327, a reduction of accounts payable to pay referral fees of $1,303,867, a reduction of net income taxes payable of $1,443,922, net premium advances of $996,301, and an increase in prepaid expenses of $864,008. The primary source of cash flow was from an increase in accrued liabilities of $1,468,476.

 

Investing Activities: Net cash flow provided by investing activities was $9,291,034 during the First Half of this year, which consisted primarily of $8,994,335 of proceeds from sales of policies and $400,000 in proceeds from sales of marketable securities. In comparison, in the First Half of last year, net cash flow provided by investing activities was $1,640,127, most of which resulted from $1,931,724 of proceeds from sales of securities and $261,690 in proceeds from maturities of owned policies, less $320,172 for purchases of policies for investment purposes.

 

Financing Activities: For the First Half of this year and last year, we used $3,729,316 and $7,462,057, respectively, to pay dividends.

 

Working Capital and Capital Availability: As of August 31, 2012, we had working capital of $13,420,516, which included $12,748,717 in cash and cash equivalents and $2,477,600 in current income tax receivables and $2,788,515 in investment in policies. We anticipate receiving a federal income tax refund of approximately $2.4 million within the 2013 fiscal year. The tax refund is due to the overpayment of estimated tax payments. We have recorded our investment in policies as a current asset since we intend to sell the policies within the year. We believe our existing working capital and future cash flows from operating activities will allow us to meet our anticipated working capital needs.  

 

Outlook

 

We anticipate that our revenues and recurring expenses for the remaining fiscal quarters of fiscal 2013 will improve somewhat over those of the First Half of this year. The Second Quarter of this year was lower in part due to purchaser delays in completing settlements, which have since been completed in the Third Quarter. This should result in higher Third Quarter revenues in comparison to the Second Quarter. We also believe that the life settlement market in general will rebound, although we cannot say when or to what extent a rebound might occur. We believe that life settlements as an asset class are attractive alternatives for persons seeking to diversify investment portfolios and avoid economically sensitive investments. Since the returns on life settlements are based on policy maturities, they are not correlated to traditional equity and debt markets and commodity investments. We believe we have made progress in rebuilding the confidence and interest of our clients and will continue to do so throughout the remaining fiscal quarters of fiscal 2013. Our clients have received over $43 million and $77 million in settlement payouts in the last six and twelve months, respectively. We believe these payouts will help restore client confidence and aid in rebuilding the relationships that have been damaged by the SEC action and private litigation.

 

 

The large drops in revenues, the significant legal and professional fees, and operating losses have eroded the strength of our financial condition. The SEC suit and other litigation have been highly damaging to our business, and we do not anticipate a substantial recovery in our revenues and net income while the SEC suit and the other private litigation continues. To mitigate these developments, we are conserving our cash in anticipation that the suit will not be quickly resolved. We have decreased our stock dividends and may make further cuts and could eliminate the dividends. We have sold the majority of our portfolio of investments in policies, from which we have realized an approximate $3.5 million gain, and are reducing our investments, including investments in policies. We have applied for an income tax refund of approximately $2.4 million, which we expect to receive within the next fiscal quarter.

 

Until we can realize improved operating results, we shall rely on our working capital position, which is strong, and we believe we have sufficient cash and cash equivalents and other assets to support our short and long-term operations. We do not anticipate a need for future borrowings or stock sales.

 

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 be material.

 

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 Securities and Exchange Commission’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.

 

 

Changes in Internal Control over Financial Reporting.  With the participation of our Chief Executive Officer and our interim Chief Accounting Officer, we have concluded that there were no changes to our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q (the fiscal quarter ended August 31, 2012). As we reported on a Form 8-K filed on July 16, 2012, our former Chief Financial Officer, David M. Martin, resigned on July 12, 2012, to pursue another employment opportunity, and we have not yet filled the position.  The functions previously performed by Mr. Martin are being performed on an interim basis by Paula Toy, our Interim Chief Accounting Officer.

 

Part II – other information

 

Item 1. Legal Proceedings

 

There have been no material developments during the current quarter for our legal proceedings that were not disclosed in our Annual Report on Form 10-K for the year ended February 29, 2012 (the “2012 Annual Report”). For a full disclosure of legal proceedings, please reference our 2012 Annual Report.

 

On August 16, 2012, the Texas Attorney General, acting for the State Securities Board, filed suit against Life Partners Holdings, Inc., Life Partners, Inc., its Chairman and President, Brian Pardo, and its General Counsel, Scott Peden. The suit sought a temporary restraining order preventing us from doing business and appointment of receiver based generally on allegations that our life settlements are securities under Texas law and that we made various misrepresentations in the sale of the life settlements, including misrepresentations about the life expectancies of the insureds.

 

At a hearing on the matter held on August 17, 2012, the court refused to grant the Attorney General’s request to block our business or to appoint a receiver. The court did issue a temporary restraining order that prevented us dissipating assets, but allowed us to continue conducting our business in the ordinary course pending an evidentiary hearing, which was set for September 24, 2012.

 

At the conclusion of the hearing held September 24 and 25, 2012, the court ruled that the life settlement transactions that we facilitate are not securities under Texas law. Since the claims were based on the premise that the life settlements were securities, the ruling effectively terminated the Attorney General’s case. The Attorney General has stated that it will appeal.

 

We are subject to other legal proceedings in the ordinary course of business. When we determine that an unfavorable outcome is probable, and the amount of the loss can be reasonably estimated, we reserve for such losses. Except as discussed above: (i) management has not concluded that it is probable that a loss has been incurred in any of our pending litigation; (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 Condensed Consolidated Financial Statements for unfavorable outcomes, if any.

 

It is possible that our consolidated results of operations, cash flows or financial position could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome or settlement of any pending litigation. Nevertheless, although litigation is subject to uncertainty, management believes, and we have been so advised by counsel handling the respective cases, that we have a number of valid legal defenses in all pending litigation to which we are a party, as well as valid bases for appeal of potential adverse rulings that may be rendered against us. All such cases are, and will continue to be, vigorously defended, and, to the extent available, all valid counterclaims pursued. Notwithstanding this fact, we may enter into settlement discussions in particular cases if we believe it is in the best interests of our shareholders to do so.

 

 

ITEM 1A. RISK FACTORS

 

See “Risk Factors” in our 2012 Annual Report for a detailed discussion of the risk factors affecting us.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None

 

ITEM 6. EXHIBITS

 

31.1

Rule 13a-14(a) Certification of CEO

31.2

Rule 13a-14(a) Certification of CFO

32

Section 1350 Certification

 

 

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:    October 10, 2012

 

	Life Partners Holdings, Inc.
	By:  /s/ Brian D. Pardo
	Brian D. Pardo
	President and Chief Executive Officer
	By:  /s/  Paula Toy
	Paula Toy
	Interim Chief Accounting Officer and
	Principal Financial Officer

 

  

EXHIBIT INDEX

 

DESCRIPTION OF EXHIBITS

 

Number		Description		Page
31.1		Rule 13a-14(a) Certification of CEO		32
31.2		Rule 13a-14(a) Certification of CFO		33
32.1		Section 1350 Certification		34