UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549-1004

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission file number 000-55783

Commission file number 000-55784

 (Exact name of registrants as specified in their charters)

 

214-698-7893

(Registrants’ telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrants: (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrants have submitted electronically and posted on their 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 registrants were required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrants are large accelerated filer, accelerated filers, non-accelerated filers, smaller reporting company filers, or emerging growth companies. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):

If emerging growth companies, indicate by check mark if the registrants have elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐

 

Indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act).   Yes ☐ No ☒

 

The registrants do not have any voting or non-voting equity securities.

 

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrants have filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.                   Yes ☐  No ☒

 

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Item 1.

Financial Statements and Supplementary Data

 

Index to Financial Statements

 

 

 

 

 

LIFE PARTNERS POSITION HOLDER TRUST

BALANCE SHEETS

MARCH 31, 2018 AND DECEMBER 31, 2017

 

 

LIFE PARTNERS POSITION HOLDER TRUST

STATEMENTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31

 

LIFE PARTNERS POSITION HOLDER TRUST

STATEMENTS OF CHANGES IN NET ASSETS

THREE MONTHS ENDED MARCH 31

 

LIFE PARTNERS POSITION HOLDER TRUST

STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31

 

(unaudited)

Life Partners Position Holder Trust (the “Trust”) was created on December 9, 2016, pursuant to the Revised Third Amended Joint Plan of Reorganization of Life Partners Holdings, Inc.,  et al., dated as of October 27, 2016, which we call the “Plan,” that was confirmed by order of the United States Bankruptcy Court for the Northern District of Texas, Fort Worth Division (“Bankruptcy Court”) on November 1, 2016. Life Partners Holdings, Inc. was the parent company of Life Partners, Inc., a Texas corporation, and its wholly-owned subsidiary LPI Financial Services, Inc., a Texas corporation (collectively, the “Debtors”). From 1991 until 2014, Life Partners, Inc. was a specialty financial services company engaged in the business of purchasing individual life insurance policies from third parties by raising money from the offer and sale to investors of “fractional interests” in such policies with a face value of approximately $2.2 billion as of December 31, 2016 (“Policies”). LPI Financial Services, Inc. was organized to bill and collect certain fees charged to investors in connection with the business.

In connection with its formation and the inception of its activities on December 9, 2016, the Trust issued a total of 1,012,355,948 units of beneficial interest (the “Units”) to the fractional interest holders having claims in the Debtors bankruptcy pursuant to the Plan. Each fractional interest holder received a Unit for each dollar of expected death benefit such holder contributed to the Trust. As of March 31, 2018 and December 31, 2017, there were 10,415 and 10,187 holders of the 1,202,532,887 and 1,162,059,511 Units outstanding, respectively. The Trust owns a portfolio of life insurance policies; a portion of the policies is encumbered by the beneficial interest of continuing fractional interest holders. The Trust’s portion of the portfolio consists of 3,108 and 3,140 life insurance policies, with fair values of $257.6 million and $272.1 million and an aggregate face value of approximately $1.3 billion and $1.3 billion at March 31, 2018 and December 31, 2017, respectively. The fair value of the interests in the life insurance policies owned by continuing fractional interest holders are not reflected in the financial statements of the Trust.

 

Description of Securities

 

In the opinion of management, the financial statements of the Trust as of March 31, 2018 and for the three months ended March 31, 2018 and 2017 include all adjustments and accruals, consisting only of normal, recurring accrual adjustments, which are necessary for a fair presentation of the results for the interim periods. These interim results are not necessarily indicative of results for a full year.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed in or omitted from this report pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). These financial statements should be read together with the consolidated financial statements and notes thereto included in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2017.

Certain reclassifications have been made to the 2017 financial statement and footnote amounts in order to conform to the 2018 presentation.

The Trust’s primary purpose is the liquidation of the Trust’s assets and the distribution of proceeds to its beneficial interest holders. The Trust expects that fulfilling its purpose requires a significant amount of time, and that the Trust will have significant ongoing operations during that period due to the nature of its assets and its plan to maximize the proceeds to its beneficiaries by maintaining the majority of its life insurance policies until maturity. As a result, the Trust has concluded that its liquidation is not imminent, in accordance with the definitions under accounting principles generally accepted in the United States of America and has not applied the liquidation basis of accounting in presenting its financial statements. The Trust will continue to evaluate its operations to determine when its liquidation becomes imminent and the liquidation basis of accounting is required.

Adoption of New Accounting Standard

 In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 (“ASC 606”) “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements in ASC 605 “Revenue Recognition” (“ASC 605”), and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Trust adopted ASC 606 as of January 1, 2018 using the retrospective transition method. There is no impact to the Trust’s recognition of revenue associated with the adoption of ASC 606.

The Trust accounts for its interests in life insurance policies at fair value in accordance with ASC 325-30, Investments in Insurance Contracts. The Trust initially recognized the life insurance policies transferred at its inception at their fair market value on December 9, 2016 and the Trust will estimate the fair value of its life insurance policies and recognize changes therein at each subsequent reporting period.

The Trust follows ASC 820, Fair Value Measurements and Disclosures, in estimating the fair value of its life insurance policies, which defines fair value as an exit price representing the amount that would be received if an asset were sold or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.

 

 As a basis for considering such assumptions, the guidance establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. Level 1 relates to quoted prices in active markets for identical assets or liabilities. Level 2 relates to observable inputs other than quoted prices included in Level 1. Level 3 relates to unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Trust’s investments in life insurance policies are considered to be Level 3 as there is currently no active market where the Trust is able to observe quoted prices for identical assets and the Trust’s valuation model incorporates significant inputs that are not observable.

 

 

Premiums Receivable

The FASB has provided guidance for how uncertain tax positions should be recognized, measured, disclosed, and presented in the financial statements. This requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Trust’s tax returns to determine whether the tax positions are more-likely-than-not of being sustained when challenged or when examined by the applicable taxing authority. The Trust has no material uncertain income tax positions as of March 31, 2018 or December 31, 2017.

Accounts Payable and Accrued Expenses

As of March 31, 2018, and December 31, 2017, the Trust holds $25.0 million and $23.6 million, respectively, of maturities collected on behalf of continuing fractional holders pending payment.

 

Risks and Uncertainties

The main components of legal risk are (i) the risk that an insurer could successfully challenge its obligation to pay policy benefits upon the death of an insured and (ii) that an insured’s family could successfully challenge the Trust’s entitlement to the benefits of an insurance policy. In the event that either an insurer or an insured’s family was successful in challenging the Trust’s right to payment, there is also risk that the Trust would not be able to recover the premiums it paid towards the insurance policy.

 

The Trust maintains the majority of its cash in several accounts with a commercial bank. Balances on deposit are insured by the Federal Deposit Insurance Corporation (“FDIC”). However, from time to time the Trust’s balances may exceed the FDIC insurable amount at its banks.

Under certain circumstances, the Trust may be required to indemnify certain persons performing services on behalf of the Trust for liability they may incur arising out of the indemnified persons’ activities conducted on behalf of the Trust. There is no limitation on the maximum potential payments under these indemnification obligations and, due to the number and variety of events and circumstances under which these indemnification obligations could arise, the Trust is not able to estimate such maximum potential payments. The Trust has not made any payments under such indemnification obligations and no amount has been accrued in the accompanying financial statements for these indemnification obligations of the Trust.

 

Estimated premiums to be paid by the Trust for its portfolio during each of the five succeeding fiscal years and thereafter as of March 31, 2018, are as follows:

 

 

 

 

 

 

 

 

In assessing and determining the PHT Portfolio’s valuation, the Position Holder Trust retained Lewis & Ellis, Inc. as its principal actuaries. The PHT Portfolio’s value was estimated using an actuarially based approach incorporating net cash flows and life expectancies. This approach applies a monthly mortality scale as generated by the specific life expectancy (“LE”) and/or a default mortality multiplier of each insured which is used to project the PHT Portfolio’s present value of net cash flows (death benefits less premium payments and Servicing Company compensation). The mortality scale is actuarially rolled forward from the LE underwriting date to the valuation date. The Trust will not obtain current medical information for each insured which would be necessary to update the LE’s due to the significant time and financial burden that would be required. Accordingly, as LE’s become aged, less weight will be applied to them and more weight will be placed with the default mortality multiplier. A 25% discount will be applied quarterly starting 21 months past the underwriting date until the aged LE date is fully discounted and replaced by the default mortality multiplier. An LE that is 24 to 26 months old will have a 50% discount, an LE that is 27 to 29 months old will have a 75% discount, and an LE greater than or equal to 30 months will solely use the default mortality multiplier, as described below.

 

 

 

 

 

 

The following table provides a roll-forward in the changes in fair value for the Trust’s life insurance policies:

LIFE PARTNERS IRA HOLDER PARTNERSHIP, LLC

BALANCE SHEETS

MARCH 31, 2018 AND DECEMBER 31, 2017

 

LIFE PARTNERS IRA HOLDER PARTNERSHIP, LLC

STATEMENTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31

 

See accompanying notes to financial statements

 

LIFE PARTNERS IRA HOLDER PARTNERSHIP, LLC

STATEMENTS OF CHANGES IN NET ASSETS

THREE MONTHS ENDED MARCH 31

 

See accompanying notes to financial statements

 

LIFE PARTNERS IRA HOLDER PARTNERSHIP, LLC

STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31

 

See accompanying notes to financial statements

 

LIFE PARTNERS IRA HOLDER PARTNERSHIP, LLC

NOTES TO FINANCIAL STATEMENTS

(unaudited)

 

The Life Partners IRA Holder Partnership, LLC (the “Partnership”) was created on December 9, 2016, pursuant to the Revised Third Amended Joint Plan of Reorganization of Life Partners Holdings, Inc., et al. (the “Debtors”), dated as of October 27, 2016, which we call the “Plan,” that was confirmed by order of the United States Bankruptcy Court for the Northern District of Texas, Fort Worth Division (“Bankruptcy Court”) on November 1, 2016. Life Partners Holdings, Inc. was the parent company of Life Partners, Inc., a Texas corporation, and its wholly-owned subsidiary LPI Financial Services, Inc., a Texas corporation. From 1991 until 2014, Life Partners, Inc. was a specialty financial services company engaged in the business of purchasing individual life insurance policies from third parties by raising money from the offer and sale to investors of “fractional interests” in such policies. LPI Financial Services, Inc. was organized to bill and collect certain fees charged to investors in connection with the business.

 

In connection with its formation and the inception of its activities on December 9, 2016, the Partnership issued limited liability company interests (“Member Interests”) in satisfaction of claims against the Debtors. The only assets of the Partnership are beneficial interest units of the Trust. The Partnership held 734,249,706 and 733,164,743 units as of March 31, 2018 and December 31, 2017, respectively, of the Trust’s outstanding units totaling 1,202,532,887 and 1,162,059,511 as of March 31, 2018 and December 31, 2017, respectively. The sole purpose of the Partnership is to hold Trust interests to permit holders of partnership interests to participate in distributions of the proceeds of the liquidation of the Trust. The Partnership was created to allow IRA holders to hold an interest in an entity classified as a partnership for federal tax purposes, rather than the assets of a grantor trust, such as the Trust. The Partnership’s sole asset is its investment in the Trust and it engages in no other business activity.

 

 

Equity Method Accounting

 

The Partnership accounts for its investment in the Trust using the equity method of accounting in accordance with Accounting Standards Codification (ASC) 323, Investments – Equity Method and Joint Ventures. The Partnership and the Trust are closely connected, with a common trustee and common management.  As a result of this common oversight and control, as well as the Partnership’s position as the majority holder of the Trust’s beneficial interest units, the Partnership is considered to have significant influence under the provisions of ASC 323, resulting in the application by the Partnership of the equity method of accounting.

 

The following table presents the financial data resulting from Trust transactions:

 

Balance Sheet Data

 

 

Income Statement Data

 

Income Taxes

 

No provision for state or Federal income taxes has been made as the liability for such taxes is attributable to the members rather than the Partnership. In certain instances, however, the Partnership may be required under applicable state laws to remit directly to state tax authorities amounts otherwise due to members prior to any distributions. Such payments on behalf of the members are deemed distributions to them.

 

The Financial Accounting Standards Board (the “FASB”) has provided guidance for how uncertain tax positions should be recognized, measured, disclosed, and presented in the financial statements. This requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Partnership’s tax returns to determine whether the tax positions are more-likely-than-not of being sustained when challenged or when examined by the applicable taxing authority. The Partnership has no material uncertain income tax positions as of March 31, 2018 nor December 31, 2017.

 

Use of Estimates

 

The preparation of these financial statements, in conformity with generally accepted accounting principles in the United States of America (“GAAP”), requires the Partnership to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting periods. Actual results could differ from these estimates and such differences could be material

 

Risks and Uncertainties

 

The Partnership, due to the nature of its assets and operations, is subject to significant risks and uncertainties affecting the Trust which encounters economic risk. The two main components of economic risk potentially impacting the Partnership’s interest in the Trust are market risk and concentration of credit risk. The market risks include interest rate risk and the risk of declines in valuation of the Trust’s life insurance policies, including declines caused by the selection of increased discount rates associated with the Trust’s fair value model. Concentration of credit risk is the risk that an insurance carrier who has issued life insurance policies held by the Trust, does not remit the amount due under those policies due to the deteriorating financial condition of the carrier or otherwise. It is reasonably possible that future changes to estimates involved in valuing life insurance policies could result in material effects to the Partnership’s financial position and results of operations.

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

You should read the following discussion in conjunction with the consolidated financial statements and accompanying notes and the information contained in other sections of this quarterly report on Form 10-Q. The statements in this discussion and analysis concerning expectations regarding Life Partners Position Holder Trust’s future performance, liquidity and capital resources, as well as other non-historical statements in this discussion and analysis, are forward-looking statements. The actual results of the Trust could differ materially from those suggested or implied by any forward-looking statements.

 

Business Overview

 

The Life Partners Position Holder Trust (“Position Holder Trust” or “Trust”) and the Life Partners IRA Holder Partnership, LLC (“IRA Partnership” or “Partnership”) came into existence on December 9, 2016, as a result of the Plan of Reorganization confirmed pursuant to the Chapter 11 bankruptcy proceeding initiated in 2015 by Life Partners Holdings, Inc. At the time of its establishment by the Bankruptcy Court, the Trust’s primary asset was a life insurance portfolio of 3,252 Policies, with an aggregate fair value of $470.7 million and an aggregate face value of approximately $2.2 billion at December 9, 2016. Adjustments in the calculation of the aggregate fair value of the PHT Portfolio may occur over time as maturities ensue in the PHT Portfolio and life expectancies change.

 

The Bankruptcy Court organized the Trust and the IRA Partnership in order to liquidate the assets of the Debtors in a manner calculated to conserve, protect and maximize the value of the assets, and to distribute the proceeds thereof to the Trust’s securities holders in accordance with the Plan. The Trust and IRA Partnership have no other business interests nor operations and will not acquire any additional life insurance policies in the future. The Trust’s beginning assets and liabilities were contributed pursuant to the Plan as of December 9, 2016.

 

Continuing Operations

 

While the Position Holder Trust is a liquidating trust with no intent to continue or to engage in a trade or business, the nature of the life insurance policies assets being liquidated are such that it is not practical or advantageous to simply liquidate the Policies by disposing of them. In this regard, there is no viable secondary market for the Policies, nor is there another practical means of disposing of them or monetizing them in the near term.

 

The Position Holder Trust expects that fulfilling its liquidating purpose will require a significant amount of time. As such, the Trust will have significant ongoing operations during that period due to the nature of its assets and its plan to maximize the proceeds to its beneficiaries by maintaining the majority of its Policies until maturity. As a result, the Trust has concluded that its liquidation is not imminent, in accordance with the definitions under accounting principles generally accepted in the United States and has not applied the liquidation basis of accounting in presenting its financial statements. The Trust will continue to evaluate its operations to determine when its liquidation becomes imminent and the liquidation basis of accounting is required.

 

The IRA Partnership operations consist entirely of its interests in the operations of the Trust and will continue as long as the Trust is liquidating its assets. The Partnership utilizes the equity method of accounting for its interests in the Trust and recognizes its proportionate interest in the results of the Trust’s continuing operations accordingly.

 

Results of Continuing Operations

 

 

The Position Holder Trust’s net decrease in net assets resulting from operations for the three months ended March 31, 2018 was $10.4 million. The Trust recognizes income on its respective portion of the Policies primarily from changes in their aggregate fair value. There was no tax expense nor benefit for the three months ended March 31, 2018. The following are the components of net decrease in net assets resulting from operations for the three months ended March 31, 2018:

 

The following table provides a roll-forward of the fair value of life insurance policies for the three months ended March 31, 2018:

The change in fair value of the Trust’s life insurance Policies is primarily due to realized gains on maturities, unwinding the discount over time, and changes in valuation assumptions, including mortality and discount rates.

 

As of March 31, 2018, the aggregate portfolio held 3,108 Policies with an estimated fair value of $435.9 million compared to 3,140 Policies with an estimated fair value of $471.6 million at December 31, 2017, a decrease of $35.7 million. Of the aggregate portfolio’s estimated fair value as of March 31, 2018, $257.6 million is attributable to the PHT Portfolio and $178.3 million to the continuing fractional holders. As of March 31, 2018, the Policies’ aggregate death benefit was approximately $2.1 billion, which was comprised of $1.8 billion in life settlement contracts and $249.7 million in viatical contracts.

 

The Policies were valued using a base or foundational discount rate of 15%, with further valuation adjustments based upon the size of the insured pool, life expectancy data, distinctions between life settlement and viatical policies and whether the Policies are whole life, convertible term or non-convertible term policies and with a post-adjustment weighted average discount rate of 25.8% for Life Settlements and 31.8% for Viaticals. See, Note 6, “Fair Value Measurements” to the accompanying consolidated financial statements.

 

Interest expense for the three months ended March 31, 2018 primarily consisted of note payable interest on two note payables.

 

The Position Holder Trust’s net increase in net assets resulting from operations for the three months ended March 31, 2017 was $6.2 million. The Trust recognizes income on its respective portion of the Policies primarily from changes in their aggregate fair value. There was no tax expense nor benefit for the three months ended March 31, 2017. The following are the components of net decrease in net assets resulting from operations for the three months ended March 31, 2017:

The following table provides a roll-forward of the fair value of life insurance policies for the three months ended March 31, 2017:

The change in fair value of the Trust’s life insurance Policies is primarily due to realized gains on maturities, unwinding the discount over time, and changes in valuation assumptions, including mortality and discount rates.

 

As of March 31, 2017, the aggregate portfolio held 3,235 Policies with an estimated fair value of $480.3 million compared to 3,252 Policies with an estimated fair value of $470.7 million at December 31, 2016, an increase of $9.6 million. Of the aggregate portfolio’s estimated fair value as of March 31, 2017, $269.9 million is attributable to the PHT Portfolio and $210.4 million to the continuing fractional holders. As of March 31, 2017, the Policies’ aggregate death benefit was approximately $2.2 billion.

 

The Policies were valued using a base or foundational discount rate of 15%, with further valuation adjustments based upon the size of the insured pool, life expectancy data, distinctions between life settlement and viatical policies and whether the Policies are whole life, convertible term or non-convertible term policies and with a post-adjustment weighted average discount rate of 25.0% for Life Settlements and 31.7% for Viaticals.

 

Interest expense for the three months ended March 31, 2017 primarily consisted of interest on two notes payables.

 

Liquidity and Capital Resources

 

The principal sources of the Trust’s operating liquidity are certain investment maturities and premium collections. The principal uses of that liquidity include payments to unit holders in connection with maturity payouts and payment of premiums on policies and general and administrative expenses.

 

The primary needs for working capital are to pay premiums on Policies and expenses relating to the administration of the Trust and its assets. The Trust is authorized for the use of collected death benefits, called the “Maturity Funds Facility,” from which the Trustee may borrow on a short-term revolving basis to fund its premium reserves. The Trust is also entitled to access the cash surrender value included in the beneficial ownership registered in its name to use for any purpose permitted by the Position Holder Trust Agreement, including to satisfy its share of the premium obligations relating to the Policies. If any such use results in a decrease in the death benefit payable under the related Policy, the decrease will be taken out of the Position Holder Trust’s share of the maturity proceeds of the Policy or, if the Trust’s share is insufficient, the Trust must make up the difference. Fees for servicing the Policies will be paid out of the death benefits paid on Policies in an amount equal to 2.65% of the death benefits paid.

 

At March 31, 2018, the Position Holder Trust had $71.9 million of cash primarily consisting of $2.6 million held to pay Policy premiums, $27.8 million held to pay for premiums collected and due on behalf of the continuing fractional holders, $25.2 million held to pay maturities collected and owed to current fractional holders, $15.8 million held as collateral deposits on debt, and $0.5 million was available to pay for operating expenses of the Trust. At December 31, 2017, the Position Holder Trust had $78.1 million of cash primarily consisting of $5.7 million was held to pay Policy premiums, $30.2 million was held to pay for premiums collected and due on behalf of the continuing fractional holders, $18.8 million was held to pay pre and post effective date maturities collected and owed to current fractional holders, $16.6 million was held as collateral deposits on debt, and $1.8 million was available to pay for operating expenses of the Trust.

 

The Trust’s total outstanding liabilities decreased by $7.5 million from $130.8 million at December 31, 2017, to $123.3 million at March 31, 2018. The decrease was mainly attributable to the expenditure of cash to pay outstanding liabilities associated with the payout of funds, offset by increase in liabilities for maturities owed to Continued Functional Interest Holders.

 

During the three months ended March 31, 2018 and 2017, the Position Holder Trust paid premiums on Policies totaling $10.3 million and $7.3 million, respectively on the PHT Portfolio. Also, for the three months ended March 31, 2018 and 2017 there were maturities of $17.0 million and $12.3 million, respectively.

 

The Position Holder Trust paid off $10.0 million of its outstanding notes payable during the three months ended March 31, 2018.  There were no financing activities during the three months ended March 31, 2017.

 

In addition, the Trust was required by the Plan to contribute $12 million to the creditors’ trust over the three-year period following the effective date. An initial $2 million was contributed to the creditors’ trust on December 9, 2016, and an additional $5 million was contributed in both January and December 2017.

 

 

Vida Opportunity Fund, LP, an affiliate of Vida Capital, Inc. provided the $55 million Exit Loan Facility needed to provide for consummation of the reorganization transactions contemplated by the Plan. At the same time, Vida Longevity Fund, LP, also an affiliate of Vida Capital, Inc., provided a $25 million revolving line of credit. The obligations are secured by liens on virtually all of the Position Holder Trust’s assets.

 

Outstanding debt for the period ended March 31, 2018 was $64.1 million and included $25.0 million of outstanding principal on the Vida Opportunity Fund, LP loan, $36.5 million secured 15-year promissory note issued by the Trust to the IRA Holders (“IRA Notes”), and $2.6 million to an individual. Outstanding debt for the period ended December 31, 2017 was $74.1 million and included $35.0 million of outstanding principal on the Vida Opportunity Fund, LP loan, $36.5 million of New IRA Notes, and $2.6 million to an individual.

 

The Plan authorizes the Trustee to use the Maturity Funds Facility to borrow on a short-term revolving basis to fund its premium reserves. The Position Holder Trust is also entitled to access the cash surrender value included in the beneficial ownership registered in its name from time to time to use for any purpose permitted by the Position Holder Trust Agreement, including to satisfy its share of the premium obligations relating to the Policies. If any such use results in a decrease in the death benefit payable under the related Policy, the decrease will reduce the Trust’s share of the maturity proceeds of the Policy, or if the Trust’s share is insufficient, it must make up the difference.

 

 

The Debtors’ estate included 1,177 security holders who held their positions through their individual retirement accounts (“IRA”), which are prohibited investments for an IRA. As a result, the Plan included a mechanism to resolve the IRA investors’ claims by establishing the IRA Partnership and authorizing the issuance of the New IRA Notes.

 

The Position Holder Trust was authorized to issue New IRA Notes in a principal amount of $63.7 million bearing interest at 3.0% per annum, due 2031. As of March 31, 2018, there were $36.5 million of New IRA Notes outstanding. Interest is payable annually in December.

 

If the Trust elects to redeem any New IRA Notes, it must notify the New IRA Note trustee of the redemption date and the principal amount to be redeemed at least 60 days before the redemption date (unless a shorter period is satisfactory to the trustee). If fewer than all the New IRA Notes are being redeemed, the notice must also specify a record date not less than 15 days after the date of the notice of redemption is given to the New IRA Note trustee. The New IRA Note trustee will select the notes to be redeemed on a pro rata basis in denominations of $100 principal amount and higher integral multiples of $100.

 

 

On March 28, 2017, the Bankruptcy Court allowed $5.5 million to be paid as compensation for the services rendered by H. Thomas Moran as the Chapter 11 Trustee, with fifty percent (50%), or $2.8 million, paid promptly. The remaining amount is to be paid in cash pursuant to the terms of an unsecured promissory note issued by the Trust. The note does not bear interest and the principal amount will be paid in three equal annual installments on January 1 of 2019, 2020 and 2021, with the full principal amount paid no later than December 30, 2021, or in full on or after January 1, 2019.

 

Off-Balance Sheet Arrangements

 

As of March 31, 2018, and December 31, 2017, the Position Holder Trust and IRA Partnership had no off-balance sheet arrangements.

The Trust accounts for its interests in life insurance policies at fair value in accordance with ASC 325-30, Investments in Insurance Contracts. The Trust initially recognized the life insurance policies transferred at its inception at their fair market value on December 9, 2016 and the Trust will estimate the fair value of its life insurance policies and recognize changes therein at each subsequent reporting period.

The Trust follows ASC 820, Fair Value Measurements and Disclosures, in estimating the fair value of its life insurance policies, which defines fair value as an exit price representing the amount that would be received if an asset were sold or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.

 

As a basis for considering such assumptions, the guidance establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. Level 1 relates to quoted prices in active markets for identical assets or liabilities. Level 2 relates to observable inputs other than quoted prices included in Level 1. Level 3 relates to unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Trust’s investments in life insurance policies are considered to be Level 3 as there is currently no active market where the Trust is able to observe quoted prices for identical assets and the Trust’s valuation model incorporates significant inputs that are not observable.

 

 

The Trust’s investments in life insurance policies are its primary source of income. Gain or loss is recognized from ongoing changes in the portfolio’s estimated fair value, including any gains or losses at maturity. Gains or losses from maturities are recognized at receipt of a death notice or verified obituary for an insured party, and determined based on the difference between the death benefit and the estimated fair value of the policy at maturity.

 

Premiums Receivable

 

 

 

 

Accounts Payable and Accrued Expenses

 

As of March 31, 2018 and December 31, 2017, the Trust holds $25.0 million and $23.6 million, respectively, of maturities collected on behalf of continuing factional holders pending payment.

Risks and Uncertainties

The Trust encounters economic, legal, and longevity risk. The two main components of economic risk potentially impacting the Trust are market risk and concentration of credit risk. The Trust’s market risks include interest rate risk and the risk of declines in valuation of the Trust’s life insurance policies, including declines caused by the selection of increased discount rates associated with the Trust’s fair value model. It is reasonably possible that future changes to estimates involved in valuing life insurance policies could change and result in material effects to the future financial statements. Concentration of credit risk is the risk that an insurance carrier who has issued life insurance policies held by the Trust, does not remit the amount due under those policies due to the deteriorating financial condition of the carrier or otherwise. Another credit risk potentially impacting the Trust is the risk continuing fractional holders may default on their future premium obligations, increasing the Trust’s premium liability.

 

The main components of legal risk are (i) the risk that an insurer could successfully challenge its obligation to pay policy benefits upon the death of an insured and (ii) that an insured’s family could successfully challenge the Trust’s entitlement to the benefits of an insurance policy. In the event that either an insurer or an insured’s family was successful in challenging the Trust’s right to payment, there is also risk that the Trust would not be able to recover the premiums it paid towards the insurance policy.

Longevity risk refers to the reasonable possibility that actual mortalities of insureds in the Trust’s portfolio extend over longer periods than are anticipated, resulting in the Trust paying more for premiums.

The Trust maintains the majority of its cash in several accounts with a commercial bank. Balances on deposit are insured by the Federal Deposit Insurance Corporation (“FDIC”). However, from time to time the Trust’s balances may exceed the FDIC insurable amount at its banks.

Equity Method Accounting

 

The Partnership accounts for its investment in the Trust using the equity method of accounting in accordance with Accounting Standards Codification (ASC) 323, Investments – Equity Method and Joint Ventures. The Partnership and the Trust are closely connected, with a common trustee and common management.  As a result of this common oversight and control, as well as the Partnership’s position as the majority holder of the Trust’s beneficial interest units, the Partnership is considered to have significant influence under the provisions of ASC 323, resulting in the application by the Partnership of the equity method of accounting.

 

Income Taxes

 

No provision for state or Federal income taxes has been made as the liability for such taxes is attributable to the members rather than the Partnership. The Partnership is a limited liability company with taxable income or loss passing through to the members. In certain instances, however, the Partnership may be required under applicable state laws to remit directly to state tax authorities amounts otherwise due to members. Such payments on behalf of the members are deemed distributions to them.

 

FASB has provided guidance for how uncertain tax positions should be recognized, measured, disclosed, and presented in the financial statements. This requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Partnership’s tax returns to determine whether the tax positions are more-likely-than-not of being sustained when challenged or when examined by the applicable taxing authority. The Partnership has no material uncertain income tax positions as of March 31, 2018 nor December 31, 2017.

The Partnership, due to the nature of its assets and operations, is subject to significant risks and uncertainties affecting the Trust which encounters economic risk. The two main components of economic risk potentially impacting the Partnership’s interest in the Trust are market risk and concentration of credit risk. The market risks include interest rate risk and the risk of declines in valuation of the Trust’s life insurance policies, including declines caused by the selection of increased discount rates associated with the Trust’s fair value model. Concentration of credit risk is the risk that an insurance carrier who has issued life insurance policies held by the Trust, does not remit the amount due under those policies due to the deteriorating financial condition of the carrier or otherwise. It is reasonably possible that future changes to estimates involved in valuing life insurance policies could change and result in material effects to the Partnership’s financial position and results of operations.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

 

Evaluation of Disclosure Controls and Procedures

The Position Holder Trust, under the supervision and with the participation of its management, including the Trustee, evaluated the effectiveness of the design and operation of the Position Holder Trust’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) or Rule 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 on that evaluation, the Trustee concluded that the Position Holder Trust’s disclosure controls and procedures were not effective as of March 31, 2018.

In preparing the financial statements for the year ended December 31, 2017, for the Position Holder Trust and the IRA Partnership, we identified a material weakness in our internal control over financial reporting, as defined by the SEC guidelines for public companies. The material weakness identified relates to the Position Holder Trust and the IRA Partnership having not yet established processes and controls sufficient to ensure the accuracy of data and information regarding its Policies, insured parties and position holder interests on an ongoing basis. In addition, such controls are not fully implemented at the servicer and subservicer, and relevant controls to monitor the performance of those organizations are not yet in place.

Remediation Plan and Actions

The Trust is actively working on the entity level and computer general and application controls in response to this assessment. We began implementing entity level controls to provide oversight on financial reporting and cash management provided by the servicing company. In addition, the servicing company has begun to implement new accounting and operating systems that incorporate appropriate accounting controls over their assigned functions. We believe that the continued implementation of these measures will address and remedy this material weakness in our internal control over financial reporting by December 31, 2018.

Changes in Internal Control Over Financial Reporting

 

Except as described above, there were no other changes in the Trust’s internal control over financial reporting (as such defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) within the fiscal quarter to which this report relates, that have materially affected, or reasonably likely to materially affect, the Trust’s internal control over financial reporting.

 

PART II—OTHER INFORMATION

Item 1.

Legal Proceedings.

 

There have been no material changes to any litigation matters during the three months ended March 31, 2018.

 

Item 1A.

Risk Factors.

 

Not required for smaller reporting companies.

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.

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.

Dated: May 14, 2018

 

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