Special Note: Certain statements set forth below under this caption constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. See Special Note Regarding Forward-Looking Statements for additional factors relating to such statements. We have restated our Consolidated Financial Statements for fiscal 2010 and 2009. The nature of the restatement is discussed more fully below.
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 February 28, 2011, our investments in life settlements held for our own account were carried at $9,506,495.
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 $6,212,150, $2,139,183, and $2,255,698 during fiscal 2011, 2010 and 2009, respectively.
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 2010, 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.
Recent accounting pronouncements have been issued including ASC 320, 810, 820, 825, and ASU 2010-06 and 2010-09. For a discussion of these pronouncements, refer to Note 3 of our Consolidated Financial Statements.
We have restated our Consolidated Financial Statements for fiscal 2010 and fiscal 2009. The restatements relate to timing issues for revenue and related brokerage fees, impairment expense for owned policies, deferred policy monitoring costs, executive bonus expense, income recognition from an investment in a trust, and state franchise tax expense. The adjustments for these items affected our deferred income tax provision, which was also restated for the proper periods.
Revenue and related brokerage fees were restated due to our change in the date of revenue recognition from the date that purchasers commit to buy policies to the date that policy closings are funded. This adjustment increased reported earnings before income taxes by $0.1 million and decreased reported earnings before income taxes by $2.1 million, for fiscal 2009 and 2010, respectively.
We improved the method by which we calculate impairment on Investment in Policies. Impaired value is based on estimates of life expectancy and the effect of that determination on future premiums and the date of expected receipt of proceeds from policy maturities. We improved our methodology for estimating life expectancies by adding more actuarial data, and our application of the improved methodology generally increased life expectancies for the policies we held for investment. The restatement reduced reported earnings before income taxes by $2.1 million and $1.9 million for fiscal 2009 and 2010, respectively.
In other adjustments, we moved $0.4 million of gains from maturities within Investment in Trust from fiscal 2010 to fiscal 2009 to reflect more accurately the maturity dates of the underlying instruments.
Demand for life settlements generally is supported by a desire to diversify investment portfolios and avoid economically sensitive investments. Returns on life settlements are linked to the lives of the insureds. As such, settlements function independently from, and are not correlated to, traditional equity and debt markets and commodity investments. The industry benefits from the investment community searching for returns higher than what is currently available in the traditional marketplace. The financial markets have remained somewhat unsteady following the 2008 financial crisis. While this would appear to benefit the life settlement market, the market declines in 2009 and 2010 suggest retreating investor capital and a lack of confidence in the industry.
Demand for our services was especially hurt by the critical new articles and the uncertainty related to the SEC investigations, which affected 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. We expect that we can gradually repair our client base and restore demand, but anticipate that the declines from these events will continue to adversely affect our operating results in fiscal 2012.
Brokerage and referral fees generally increase or decrease with revenues, face values of policies transacted and the volume of transactions, although the exact ratio may vary according to a number of factors. Brokers may adjust their fees with the individual policyholders whom they represent. In some instances, several brokers may compete for representation of the same seller, which will 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 policy owner is not represented by a broker and presents a policy to us directly.
Operating Expense - General and administrative expenses increased by 0.5%, or $56,427, from $11,758,896 in fiscal 2010 to $11,815,323 in fiscal 2011. General and administrative expenses increased by 8.0%, or $871,507, from $10,887,389 in fiscal 2009 to $11,758,896 in fiscal 2010.
We must make estimates of the collectability of these premium advances. We recorded an allowance against the premium advances at the time of the advance and treated reimbursements as a reduction of the allowance. Until fiscal 2010, due to the uncertainty of the outcome of a relevant court case, we were unable to estimate the amount of any future advances we may elect to make or the timing of the amount of reimbursements we were likely to receive. Within fiscal 2010, issues were resolved that enabled us to better estimate the collectability of premium advances. 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 has enabled us to build a body of evidence by which we can demonstrate full collectability of the remaining balance of advanced premiums. To date, we have ultimately been fully reimbursed when we have made an advance and the policy has matured. As a result, we eliminated $6.4 million of the allowance on the advanced premiums account in the fourth quarter of fiscal 2010.
Interest Income and Expense - Net interest and other income decreased $659,414, from $1,493,464 in fiscal 2010 to $834,050 in fiscal 2011. Net interest and other income decreased $310,826 from $1,804,290 in fiscal 2009 to $1,493,464 in fiscal 2010. The decrease in net interest and other income in fiscal 2010 and 2011 corresponded to lower interest rates, as well as reduced gains from maturities on owned policies. Fiscal 2009 had higher paying interest rates. Interest expense was $61,182, $46,988 and $1,505 in fiscal 2009, 2010 and 2011, respectively. Interest expense related primarily to the long-term debt financing on our property, which was retired on April 28, 2009. There were maturities on policies, gains and distributions from our investment in the life settlements trust in fiscal 2010 and 2009, resulting in $222,186 of gains in 2010 vs. $362,658 in fiscal 2009. Interest and other income was $1,804,290 in fiscal 2009, primarily relating to higher investment balances earning higher interest rates.
Income Taxes - Income tax expense decreased by $4,410,635, or 25.6%, from $17,197,268 in fiscal 2010 to $12,786,633 in fiscal 2011. Income tax expense increased by $3,069,988, or 21.7%, from $14,127,280 in fiscal 2009 to $17,197,268 in fiscal 2010. Income tax expense is in direct correlation to pretax earnings, taxed at 35% at the Federal level. In fiscal 2010, we had an additional accrual of $831,233 of Texas Margin Tax; $402,104 for an estimated assessment due to non-deductibility of certain payments in past and current periods, included in our calculation of the Texas Margin, and $429,129 for the current year taxes due in May of 2011. Income tax expense was also affected by the impact of establishing a $611,298 allowance within the deferred income tax asset account. This allowance was established to recognize the uncertainty of netting future capital gains against a current capital loss. Increased income tax in fiscal 2009 was a direct result of the increase in pre-tax earnings.
Investing and Financing Activities - We used cash of $3,615,737 in investing activities in fiscal 2011 versus $12,590,680 in fiscal 2010 and $15,878,496 in fiscal 2009. We used available cash to purchase policy interests for our own account. We purchased policies of $3,654,183 in fiscal 2011, $7,863,520 in fiscal 2010, and $8,013,324 in fiscal 2009. Of the policies purchased in fiscal 2010 and 2009, $6,441,625 and $6,318,665, respectively, represented policies that we acquired in connection with a settlement with the state of Colorado. The terms of the settlement afforded us the opportunity to purchase a large number of policy interests from existing clients on terms that provided value to us as well as our clients. We have continued to acquire policy interests on a discretionary basis as those opportunities are presented to us by existing clients and on terms that are agreeable to both parties. We believe that we will profit from the investment in these policies when they mature. We also used cash to make net premium advances, which were $2,954,289 in fiscal 2011, $3,549,912 in fiscal 2010, and zero in 2009. Before fiscal 2010, premium advances were reserved 100%. In fiscal 2010, we invested $1,227,484 in a life settlements trust, which acquired life settlement interests. Our investment followed an earlier investment of $5 million in the life settlements trust in fiscal 2009. In addition to investing, we acted as a non-exclusive purchasing agent for the trust and its predecessor partnership. The trust is no longer acquiring life settlements and we do not anticipate further investments. The trust owns a portfolio of life insurance settlements with an initial face value of $706 million, which we anticipate will mature over the next few years. The trust has experienced some maturities during fiscal 2011 and 2010, which paid us $464,796 in fiscal 2011 and $420,743 in fiscal 2010.
We used $19,375,650 in financing activities in 2011 versus $14,003,685 in fiscal 2010 and $4,418,125 in fiscal 2009. Financing activities in 2011 were solely for dividends. We paid dividends of $19,375,650, $13,224,612 and $3,331,675 in fiscal 2011, 2010 and 2009, respectively. We paid off our long-term debt in fiscal 2010 at a cost of $779,073. Payments on the line of credit and long-term debt in fiscal 2009 were $2,387,399. We received proceeds from loans of zero in fiscal 2011 and 2010, and $2,000,000 in fiscal 2009. We made no treasury share purchases in fiscal 2011 and 2010. We purchased shares on the open market for $699,051 in fiscal 2009.
Working Capital and Capital Availability - As of February 28, 2011, we had working capital of $27,962,710. Our cash during fiscal 2011 increased by $7,741,836 compared with an increase of $4,607,511 in fiscal 2010 and $8,148,670 in fiscal 2009. To facilitate our short-term cash flow management and operating capital requirements, we maintained two credit lines until fiscal 2010. One credit line was secured by cash and securities on deposit. As of February 28, 2010, it carried an interest rate at the Wall Street Journal Prime Rate of 3.25% and had a borrowing base of $2.9 million. There was no outstanding balance on this line of credit in any year presented; this line of credit was discontinued in March 2010. The other line of credit was secured by a certificate of deposit. This line of credit carried an interest rate of 5.55% and had a borrowing base of $1 million. There was no outstanding balance on this line for any year presented. We closed this line in fiscal 2010 when the collateralized certificate of deposit matured.