The Company leases approximately 3,050 square feet of office space in Miami Beach, Florida under a lease expiring in May 1997 at an annual base rent of $35,652, subject to annual increases that have historically
On May 11, 1994, the Company entered into a new lease to consolidate and expand existing office space. The initial six year term of the lease provides for annual base rent in each of the first two years of $207,000 for approximately 11,400 square feet and $325,000 annually thereafter when the square footage will increase to approximately 17,000 square feet, subject to increases reflecting changes in the consumer price index. The lease provides for one four-year renewal period. The lease commenced on August 1, 1994. In February, 1996 the Company vacated these premises, and is currently using them for storage. The Company is currently seeking a party to sublease or assume its lease obligations with respect to these premises. No assurance can be given that the Company will be able to find such a party or that if the Company finds such a party, the Company will be able to enter into an arrangement with such party on terms favorable to the Company.
The following selected financial data of the Company for the fiscal years ended March 31, 1996, 1995, 1994, 1993 and 1992 has been derived from the audited consolidated financial statements and should be read in conjunction with such consolidated financial statements and the notes thereto. The Company commenced its viatical settlements business on April 1, 1991. On April 6, 1993, the Company acquired certain operating assets of American Life Resources Corporation, a Florida corporation engaged in the viatical settlements business. The Company ceased since December 22, 1995 to purchase Installment Contracts Receivable and since September 29, 1994 to purchase Policies. On May 20, 1994 the Company commenced its Installment Contracts Receivable business and on March 9, 1995 it commenced its Inventory Assistance Program Business. Accordingly, results of operations prior to such dates are not indicative of future operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business."
Although the Company was organized in May 1989, it did not commence its viatical settlements business until April 1991 when it acquired certain assets of Living Benefits, Inc. ("LBI") and covenants not to compete from the former owners of LBI. In April 1993, the Company acquired certain operating assets of American Life Resources Corporation ("ALRC"), which was also engaged in the viatical settlements business. ALRC retained the Policies it had purchased prior to January 14, 1993. Goodwill and intangibles related to these acquisitions were amortized over the remaining life of the viatical portfolio, extending through the fiscal year ended March 31, 1996.
Under the terms of the Settlement, IAP will be sold by the Company. See "Item 3 - Legal Proceedings." Accordingly, for the fiscal years ended March 31, 1996 and 1995, net assets of IAP are included in the Financial Statements as "Net assets of discontinued operation" and IAP net operating losses are included as "Discontinued operations -- loss from operations of discontinued subsidiary." IAP's revenues consist of a non-refundable administrative fee received on the date of the loan and interest revenue collected and recognized during the time the loan is outstanding. For the fiscal years ended March 31, 1996 and 1995, administrative fees and interest revenues totaled $379,667 and $2,163, respectively.
Effective August 1995, the Company changed the method by which finance charges are recorded from a cash basis using simple interest calculation to an accrual basis using the "Rule of 78" interest calculation method. The cumulative effect on the prior period ending March 31, 1995 was $176,735 net of income taxes of $117,239. Revenue is recognized on the difference between the gross cash flow from the Installment Contracts Receivable and the total amount paid by the Company to acquire the Installment Contracts Receivable. Recognition of revenue is suspended for any Installment Contracts Receivable that is in default and is only reinstated upon the curing of the default.
The Company recognizes revenues in its viatical settlements business upon the death of the insured. See Note 1 of Notes to Consolidated Financial Statements. Costs associated with the acquisition of a Policy are charged to operations as revenues are recognized. The ability of the Company to recognize revenue from the maturity of a Policy depends upon the Company receiving notification of the Policy maturity from a representative of the insured, which in some instances may not occur until significantly after the death of the insured. As a result of the Company's revenue recognition policy, the Company may experience periods without revenues from the maturity of Policies or significant fluctuations in operating results from period to period.
During the fiscal year ended March 31, 1996, revenues from Installment Contracts Receivable increased by $5,089,464, to $7,808,369 from $2,718,905 during the fiscal year ended March 31, 1995. This increase resulted from the increased size of the Company's portfolio of Installment Contracts Receivable during the fiscal year ended March 31, 1996 as compared with the fiscal year ended March 31, 1995. The Company has ceased to purchase Installment Contracts Receivable since December 1995.
Provision for credit losses in connection with the Company's Installment Contracts Receivable increased to $8,839,461 for the year ended March 31, 1996, from $1,561,062 for the year ended March 31, 1995. In addition, chargeoffs and adjustments for credit losses in connection with the Company's Installment Contracts Receivable increased to $6,388,165 during the year ended March 31, 1996 from $17,062 during the year ended March 31, 1995. These increases reflected increased loan delinquencies and writeoffs in the Company's portfolio of consumer finance receivables and were a factor in the Company's decision to discontinue its purchases of Installment Contracts Receivable.
During the year ended March 31, 1995, revenues from Installment Contracts Receivable totalled $2,718,905.
During the year ended March 31, 1995, viatical revenues increased 0.5% to $19,937,906, reflecting the maturity of 195 Policies, from $19,835,258, reflecting the maturity of 232 Policies, during the year ended March 31, 1994. Net viatical revenues for the year ended March 31, 1995 were $6,677,650, or 33.5% of revenues, reflecting costs of $13,260,256 associated with such matured Policies. The cost of a Policy includes the initial purchase price, insurance premiums, and other direct expenditures, if any, by the Company in connection with the purchase and maintenance of a Policy. Such costs in excess of the purchase price accounted for approximately 2% of the face value of Policies that matured during the year ended March 31, 1995 as compared with 1% of the face value of Policies that matured during the year ended March 31, 1994. Net viatical revenues for the year ended March 31, 1994 were $6,508,628, or 32.8% of revenues, reflecting costs of $13,326,630. The overall increase in Policy maturities and net revenue relates to the relative age of the overall portfolio of Policies.
The Company's viability as a going concern is dependent upon the successful closing of the Settlement, the restructuring of its obligations and asset base, and ultimately, a return to profitability. The Company has been operating at a loss and has incurred operating losses in the last three years. Management has initiated a plan to terminate certain of its operations and to improve the profitability of the Company. The Company has ceased since December 22, 1995 to purchase Installment Contracts Receivable and since September 29, 1994 to purchase Policies. During the third quarter of the year ended March 31, 1996 the Company significantly downsized its operations resulting in significant reductions in salary expense. See "--Results of Operations." In June 1996, the Company entered into a settlement of the Derivative Suit. In connection with the closing of the Settlement, the Company will enter into various agreements, providing for, among other things, the disposition of certain operations, and the replacement of current management. See "Item 13. Certain Relationships and Related Transactions."
In September 1996 the Company is obligated to make an interest payment on the remaining outstanding debentures of approximately $2.1 million. The outstanding principal amount of the debentures, which is due in September 1997, will become current debt in September 1996, and without a capital infusion, refinancing or amendment of the debentures, such current debt will render the Company insolvent on a balance sheet basis See Note 5 to the Consolidated Financial Statements for information relating to the Company's debenture obligations. There was positive cash flow from operations of $8,724,470 for the year ended March 31, 1996. Although the Company currently has sufficient liquidity to meet its September 1996 interest obligations under the debentures, intervening operating losses may prevent the Company from meeting its obligations to make interest payments, and in September 1997 to repay the principal under the Debentures as such payments become due. If the Company is unsuccessful in its efforts to obtain capital or to refinance or amend the debentures, it may be necessary for the Company to seek the protection of the bankruptcy laws or to undertake such other actions as may be appropriate to preserve asset its business.
During the fiscal year ended March 31, 1996, the Company's viatical settlement business did not purchase any new Policies compared to purchases of 21 Policies with a face value of approximately $1.6 million at a cost of approximately $1.1 million during the year ended March 31, 1995.
The Company's portfolio of unmatured Policies at March 31, 1996 totaled 19 Policies with a face value of approximately $2.2 million, which Policies were purchased at a cost of approximately $1.4 million. Policies are recorded on the Company's balance sheet at cost, with the difference between the face value and costs associated with the Policies recognized as net revenues as Policies mature.
On May 8, 1995 and July 18, 1995, ALRG and LB NM, Inc. entered into Purchase and Sale Agreements (the "Agreements") providing for the assignment of certain Policies held by the Company to Viaticus, Inc.
During the fiscal year ended March 31, 1996, the Company had cash flow from operations of $8,724,470 compared to a deficit of $5,842,303 during the fiscal year ended March 31, 1995 and $1,965,672 during the year ended March 31, 1994. The increase in cash flow from operations is due primarily to decreased use of cash to fund purchases of Installment Contracts Receivable, proceeds from the assignment of viatical insurance policies to Viaticus and increased proceeds from maturities of Policies, which were only partially offset by increased repurchases of Debentures and an increase in the purchase of IAP loans.
During the year ended March 31, 1996, the Company had cash flows from investing activities of $9,015,309 as compared with cash flows from investing activities of $8,196,584 during the year ended March 31, 1995 and $377,453 during the year ended March 31, 1994. This increase in cash flows resulted primarily from the liquidation of a significant portion of the Company's investment portfolio in order to fund automobile loan purchases.
Funds not immediately required for operation of the businesses are invested in securities available for sale. These investments consist of short term money market instruments and are immediately available to the Company.