The following table sets forth certain information concerning our consolidated financial condition, operating results, and key operating ratios for the dates and periods indicated. See Explanatory Note and Note 2 to our Consolidated Financial Statements for discussion of the restatement. This information does not purport to be complete, and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and Notes thereto.
(1) Earnings per share data restated for the fiscal 2009 and 2011 stock splits.
We provide the following discussion to assist in understanding our financial position as of February 28, 2011 (“fiscal 2011”), and results of operations for the years ended February 28, 2011, 2010 (“fiscal 2010”), and 2009 (“fiscal 2009”). As you read this discussion, refer to our Consolidated Financial Statements and Notes thereto. We analyze and explain the differences between periods in the material line items of these statements.
We recognize revenue at the time a settlement closes and defer costs for anticipated policy monitoring costs. 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 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 for property and equipment during fiscal 2011, 2010 and 2009.
Our change in methodology for estimating life expectancies, as well as changing the basis for monitoring costs, affected our calculation of deferred policy monitoring costs. Deferred policy monitoring costs are the projected costs that we can expect incur for monitoring insureds and their policies. The costs are covered by a deferral of income at the time of settlement. The amount of deferred policy monitoring costs increases with the general increase in life expectancies. The restatement reduced reported earnings before income taxes by $0.7 million and $0.4 million for fiscal 2009 and 2010, respectively.
Until fiscal 2010, we recognized executive bonus expense when paid. The restatement is a timing issue and reduced (increased) reported earnings before income taxes by $0.3 million and $(0.3 million) for fiscal 2009 and 2010, respectively.
More detail about our restatements and the adjustments, including a table of adjustments, is presented in Note 2 of our Notes to Consolidated Financial Statements.
We are the world’s oldest and only publicly traded company operating exclusively in the life settlement industry. Our revenues are primarily derived from fees associated with facilitating life settlement transactions.
We had net income of $23,425,749 for fiscal 2011, compared to net income of $26,077,214 for fiscal 2010, and $25,521,613 for fiscal 2009. The 10.2% decrease in net income in fiscal 2011 and a similar drop in revenues were 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 2010. 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 2011. The 3.9% increase in revenues in fiscal 2010 and our ability to increase our operating margins by remaining highly selective in our purchasing strategies resulted in a 10.6% increase in revenues net of brokerage and licensee fees in fiscal 2010. The increase in revenues, net of brokerage fees, together with the large decrease in the allowance account for premium advances, resulted in an increase in income from operations of 15.7%. The 75.1% increase in net income in fiscal 2009 was attributable to a 66.4% increase in revenues and a 72.7% increase in revenues net of brokerage and licensee fees. The large increase in revenues, net of brokerage fees, resulted in an increase in income from operations of 79.2%. Legal and professional costs were $1,986,648, $1,311,637 and $1,839,782 in fiscal 2011, 2010 and 2009, respectively, and after executive and employee bonuses and payroll, were the largest single general and administrative expense. The legal and professional costs were attributable primarily to legal costs associated with the SEC investigation, our audit and tax preparation fees, litigation, our SEC filings and other legal matters as they arise. See Item 3, Legal Proceedings.
Revenues - Revenues decreased by $7,213,346, or 6.6%, from $108,792,559 in fiscal 2010 to $101,579,213 in fiscal 2011. This decrease was due primarily to the decreased number of settlements, from 186 in fiscal 2010 to 166 in fiscal 2011 and a decrease in the total face value of policies from $541,755,547 in fiscal 2010 to $515,109,503 in fiscal 2011. Revenues increased by $4,105,440, or 3.9%, from $104,687,119 in fiscal 2009 to $108,792,559 in fiscal 2010. This increase was due primarily to an increase in the revenues net of brokerage fees, even though the number of settlements declined from 214 in fiscal 2009 to 186 in fiscal 2010. Average revenue per settlement increased in both fiscal 2010 and 2011. The average revenue per settlement increased 4.6% from $584,906 in fiscal 2010 to $611,923 in fiscal 2011. Average revenue per settlement increased 19.5% from $489,192 in fiscal 2009 to $584,906 in fiscal 2010. Our revenues increased at a slower rate than in previous years as institutional sales declined, leaving retail sales as our primary source of revenue.
The global economic recession in fiscal 2009 and its aftermath resulted in declines in the estimated life settlements market. The well-regarded Conning reports for 2010 and 2011 indicated that the life settlement industry completed $11.8 billion in face value of transactions in calendar 2008, but dropped to $7.6 billion in 2009 and to $3.8 billion in 2010. Despite these industry trends, in fiscal 2009 and 2010, demand for our services remained strong and the number of policies meeting our purchasing qualifications remained constant. We continued to see a supply of policies with higher face values that meet our purchasing parameters. The demand side also showed promise in fiscal 2009 and 2010 with increases in average revenue per settlement and in total revenues derived from settlements. We believe this demand resulted from our broad-based, retail oriented purchasing model and referrals from a large licensee network, in contrast to many of our competitors, which rely on the credit markets or a single institutional provider of investment capital.
The fourth quarter results burdened the results for fiscal 2011, resulting in lower revenues and net income. Compared to fiscal 2010, fiscal 2011 saw a lower number of settlements (166 from 186), lower aggregate face values ($515,109,503 from $541,755,547) and lower total net revenues derived ($55,130,665 from $59,540,774). On the upside, average revenue per settlement increased in fiscal 2011 ($611,923 from $584,906), as did the average face value per policy ($3.1 million from $2.9 million), which continues to suggest some supply strength in the upper ends of the life settlement market.
Brokerage and Referral Fees - Brokerage and referral fees decreased 5.7%, or $2,803,237, from $49,251,785 in fiscal 2010 to $46,448,548 in fiscal 2011. Brokerage and referral fees decreased 3.1%, or $1,583,612, from $50,835,397 in fiscal 2009 to $49,251,785 in fiscal 2010. Brokerage and referral fees constituted 45.7%, 45.3%, and 48.6% of revenues in fiscal 2011, 2010 and 2009, respectively. In fiscal 2011, 2010 and 2009, broker referrals accounted for 99% of the total face value of policies transacted. Policies presented from two brokers each represented more than 10% of all completed transaction in fiscal 2011, and represented 26.9% in total. Policies presented from one broker represented more than 10% of all completed transactions in fiscal 2010, at 15%. In fiscal 2009, policies presented from three brokers who each represented more than 10% of all completed transactions totaled 44% of the total face value.
Executive and employee bonuses decreased $615,716 in fiscal 2011 as earnings decreased. Executive and employee bonuses increased $865,775 from $2,287,995 in fiscal 2009 to $3,153,770 in fiscal 2010. Increased payments in 2009 and 2010 and decreased payments in 2011 are a direct result of our increasing and decreasing profitability, which is linked to executive compensation plans and bonuses given to all employees.
Included in fiscal 2011 general and administrative expenses are legal and professional expenses of $1,986,648, which were primarily associated with the SEC investigation and auditing and tax preparation fees. General and administrative expenses in fiscal 2010 and 2009 included legal and professional expenses of $1,311,637 and $1,839,782, respectively, which were primarily associated with legal actions with various states and in defending ourselves in previously disclosed civil actions, all of which were resolved.
We increased impairment expense for our investment in policies from $2,139,183 in fiscal 2010 to $6,212,150 in fiscal 2011 due primarily to longer projected life expectancies within the investment portfolio. Impairment expense decreased slightly from $2,255,698 in fiscal 2009 to $2,139,183 in fiscal 2010.
For various legal actions or claims in which we believe we might incur liability, we paid non-recurring settlement expenses of $789,622 in fiscal 2011 compared to $3,615,726 in fiscal 2010 and $1,382,140 in fiscal 2009. Fiscal 2011 was composed primarily of recurring goodwill settlements, plus final settlement with purchasers related to the Texas Attorney General’s office. A significant portion of the settlement expense in fiscal 2010 was the result of settlements with Maxim for $1,250,000 of treasury stock, the state of Florida for $770,000, a $500,000 reimbursement to purchasers for prepaid premiums, $300,000 to the State of Texas and $170,000 to the State of Virginia. Settlement expense in fiscal 2009 was composed primarily of payments to purchasers for policies that did not pay out.
Premium advances in fiscal 2010 were a negative $1,715,265 as the allowance account for net premium advances was reduced. Premium advances, net of reimbursements, were $882,920 in fiscal 2011 and $1,444,476 in fiscal 2009. For business goodwill, we make advances on policy premiums to maintain certain policies. In the typical life settlement, policy premiums for the insured’s projected life expectancy are added to the purchase price and those future premium amounts are set aside in an escrow account to pay future premiums. When the future premium amounts are exhausted, purchasers are contractually obligated to pay the additional policy premiums. In some instances, purchasers have failed to pay the premiums and we have 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 or purchased the policies as an accommodation to certain purchasers based on our assumptions that we will ultimately recoup the advances and upon our desire to preserve business goodwill. 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.
Realized Loss on Investments - We realized a loss of $1,823,364 on investment securities in fiscal 2010, compared to none in fiscal 2009 and an $88,492 gain in fiscal 2011. The tax effect for fiscal 2010, was calculated assuming that the long-term capital loss deduction for tax purposes would be reduced by any long-term capital gains we are able to net against by carrying back or carrying forward the loss to past and future tax returns. At February 28, 2010, we had no certain future capital gains; therefore, the net tax effect for fiscal 2010 is only what we will be able to carry back, or $26,879. The loss in fiscal 2010 was a result of our conclusion that the unrealized loss in fair value of our investment securities was no longer temporary. The decline in fair value of securities in previous periods was not recognized for financial reporting purposes, as the loss was considered temporary in nature. The unrealized loss in fiscal 2009 and the current unrealized loss in 2011 were included in Other Comprehensive Loss within the Shareholders’ Equity section of the Consolidated Balance Sheet.
Operating Activities - Net cash flows provided by operating activities decreased by 1.5%, decreasing $468,653 from $31,201,876 in fiscal 2010 to $30,733,223 in fiscal 2011. Net cash flows provided by operating activities increased 9.7% from fiscal 2009 to fiscal 2010, increasing $2,756,585, from $28,445,291 to $31,201,876. Net cash flows provided by operating activities in all years resulted primarily from net income. Fiscal 2011’s cash flow was also increased by impairment of owned policies. Fiscal 2010’s cash flow was increased by impairment of owned policies, impairment of investment in securities, an increase in accrued liabilities and a decrease in accounts receivable. Fiscal 2010’s cash flow was decreased by a decrease in accounts payable. Fiscal 2009’s cash flow was increased primarily by impairment of owned policies, an increase in accrued liabilities and decreased by an increase in deferred income taxes.
While we anticipate declines in revenues and net income for fiscal 2012 before a gradual recovery in the following years, our working capital position is strong and we believe we have more than sufficient cash and cash equivalents to support our short and long-term operations. We do not anticipate a need for future borrowings or stock sales. The declines in revenue and net income could influence the Board of Directors’ determinations about the timing and amount of future dividends. While the Board declared a dividend of $0.20 cents per share (split-adjusted) payable on or about June 15, 2011, to shareholders of record as of May 16, 2011, and declared a dividend of $0.20 per share (split-adjusted) payable on or about September 15, 2011 to shareholders of record as of August 26, 2011, its determinations regarding future dividends will consider our cash and working capital, results of operations, and other relevant factors.
Our outstanding contractual obligations and commitments as of February 28, 2011 were:
Our audited Consolidated Financial Statements, together with the report of auditors and the notes to the Consolidated Financial Statements, are included in this Annual Report beginning on page 56.
The following tables set forth our unaudited consolidated financial data regarding operations for each quarter of fiscal 2011, 2010 and 2009. The financial data for fiscal 2010 and 2009 and the first three fiscal quarters of 2011 is restated. See Explanatory Note and Note 2 to our Consolidated Financial Statements for discussion of the restatement. This information, in the opinion of management, includes all adjustments necessary, consisting only of normal and recurring adjustments, to state fairly the information set forth therein. Certain amounts previously reported have been reclassified to conform to the current presentation. These reclassifications had no net impact on the results of operations.