Latest Results

Peach Holdings, Inc., a US specialty finance company, announces its unaudited interim results for the six months ended 30 June 2006.

 

Highlights Chairman’s Statement & Chief Executive’s Review Combined Balance Sheets Combined Statement of Operations Statement of Changes in Stockholders’ Equity Combined Statement of Cash Flows Notes to the Combined Financial Statements

Download The full results are available to download in PDF format.

 

 

Highlights

• results in line with expectations at IPO
• cash flow and origination levels remain strong
• adjusted revenues decreased 14% to US$43.5 million (2005 US$52.8 million)
• PBT of US$4.3 million, a decrease of 81% (2005: US$22.6 million)
• pre-tax margin on adjusted revenues of 10% (2005: 43%)
• interim dividend of US$7 million (3.5 pence per share)
• cash generative (cash position at 30 June US$45.5 million)
  

Operational Highlights

• leader in personal factoring
• growth in primary business lines
• early success from new product offerings
• new credit facilities of US$250 million to support growth
• completed securitisation in March 2006 and one or more expected second half 2006
• successful AiM listing in March 2006

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Chairman’s Statement & Chief Executive’s Review

We are very pleased to report our unaudited interim financial results for the period ended 30 June 2006. Once again, cash flow and origination levels are in line with management’s expectations. Adjusted revenue of US$43.5 million and pre-tax profit of US$4.3 million were higher than expected principally due to a change in accounting rules impacting our life settlement business (FTB 85-4-1). Consistent with our results, we are pleased to announce an interim dividend of US$7 million or US$0.067128 (3.5 pence) per share, to be paid on 15 November 2006 to shareholders on the register on 6 October 2006.

Implementation of the above-referenced accounting rule has caused a significant portion of life settlement revenues originally expected to be deferred to the second half of 2006 to be recognised in the interim period when such receivables were originated. Consequently, while our overall underlying origination activity was in line with management’s expectations for the period, our revenue and profit before tax are greater than expected. Original management estimates provided for a loss at 30 June 2006 due to the prevailing US GAAP revenue recognition rules. As a result of this rule change, life settlement revenue will be earned more evenly through out the fiscal year, rather than in a ‘lumpy’ manner tied to periodic securitisations.

The revenue recognition rules applicable to our structured settlement business for 2006 result in the deferral of structured settlement revenue until such receivables are securitised, next scheduled for 4 th quarter 2006. In years prior to 2006, the accounting rules permitted Peachtree to recognise revenue as we originated the receivables through out the year. For 2006, we are unable to recognise the revenue until we securitise the underlying receivables, thus making a comparison of our 2005 and 2006 figures at 30 June more difficult. Management estimates that our structured settlement origination activity through 30 June generated approximately US$20 million of deferred revenue that will be recognised when such receivables are securitised in the second half of 2006.

Business Overview

Peachtree is active in various specialty factoring markets, which although similar in some respects, are distinct. The main drivers of revenue were the purchase of structured legal settlement payments and life insurance policies. In addition, Peachtree’s more recently launched pre-settlement funding division has been growing nicely in accordance with management’s expectations.

Structured Settlements

A structured settlement is the settlement of a personal injury claim for a series of instalment payments. The settling party typically purchases a commercial annuity to satisfy the ongoing payment obligation to the injured plaintiff. Often, post-settlement, an individual will desire liquidity and will seek to sell some or all of the future payments due under the structured settlement. Peachtree provides this liquidity to individuals throughout the United States. Each transfer of structured settlement payments must be approved by a court finding that the transfer is in the best interests of the selling party. For the first half of 2006 Peachtree processed approximately 1,000 such transactions. Due to the revenue recognition rules which mandate that gain only be recognised upon term securitisation, no new origination revenue is included in our interim results for 2006. Management expects to conduct a term securitisation in the fourth quarter of 2006 when that revenue will be recognised.

Through continued refinement and focus on our marketing efforts, Peachtree believes it can continue to increase its market penetration in the structured settlement arena. The growing use of structured settlements to resolve litigation means that the total addressable market for this aspect of our business continues to grow.

Life Settlements

A life settlement is the purchase of a life insurance policy that is no longer needed or wanted from an insured age 65 or above.

In the first half of 2006, Peachtree purchased policies with a face value of US$400 million generating gross revenue of US$24 million. In order to maintain strong growth in Life Settlements, Peachtree requires continuous access to significant credit facility capacity. In early September 2006, Peachtree closed on a substantial increase to an existing credit facility for the acquisition of life settlements which is intended to provide capacity sufficient to fund originations through the end of the year. The Company believes that the ability to securitise an existing portfolio of Life Settlements is important to continued access to warehouse financing. Management is working to achieve this but several factors (e.g. rating agency guidance) have caused delays and imposed more uncertainty on the timing for the life settlements securitisation originally projected to occur in the 4 th quarter which may now occur in 2007.

Peachtree’s strategy is to continue expanding its life settlement origination activities through organic marketing and purchasing activities, and expanding penetration with insurance marketing organisations and brokers.

Lottery Prize Payments

Peachtree purchases lottery prize payments from an individual pursuant to a court order transfer process as permitted by state law. This is a mature and competitive business which was projected to have flat growth for 2006, but yet contribute approximately 8% of our total revenue for the year. Unfortunately, lottery revenue has fallen significantly short of expectations thus far in 2006 generating revenue for the period of only US$2.1 million which is less than half of 2005 revenue for the same period. Although the number of lottery transactions closed is actually up for the period, the average transaction size and margin on each transaction is down significantly. Management is in the process of implementing several initiatives to help reverse this trend.

Pre-Settlement Funding

Pre-settlement funding is the purchase of an interest in the proceeds of a pending personal injury case. Peachtree has rapidly grown its pre-settlement origination activity and we currently conduct pre-settlement funding transactions in 16 states. The U.S. tort markets are deep and wide and accordingly present a ripe area for growth. Peachtree believes that it is the lowest cost provider of pre-settlement funding in the U.S.

For the interim period, Peachtree originated nearly 900 transactions for total origination volume of US$5.7 million. Peachtree is in the process of closing a US$50 million credit facility to finance the continued growth of this business.

 

New Initiatives

Senior Leverage Policy Ownership (SLPO)

This is a new business for Peachtree launched in late 2005 and involves the financing of life insurance premiums for high net worth individuals aged 70 and above. For the first six months of 2006, SLPO generated revenue of US$3.6 million on policies with a net death benefit of US$67.45 million. There are, however, significant regulatory and legislative issues appertaining to this area and because of the close relationship SLPO has to life settlements, the prospect that legislative initiatives may adversely impact both SLPO and life settlements is significant.

Class Action Litigation Funding

Certain class action or mass tort settlements present unique opportunities for Peachtree. The inherent complexity of mass tort or class action settlements means that they take time to work their way through the judicial system. Although the dollar amounts of the settlement are typically known, the date of payment is far less clear. Peachtree believes that many individuals holding these settlement rights are interested in immediate cash for all or a portion of their settlement proceeds. Peachtree is presently purchasing certain Exxon gasoline dealer settlements and is evaluating other mass tort/class action settlements.

Leverage Bonus Plan (LBP)

Peachtree’s Leverage Bonus Plan is a solution for firms seeking to provide executive retirement benefits without the complexity, tax and compliance risks which typically come from traditional arrangements. LBP is a turn key solution that uses premium-financed life insurance to emulate traditional retirement arrangements at a fraction of the cost. We have recently identified a particularly strong application for LBP with regard to companies utilising the so called ‘401K safe harbor’ provisions of the tax code to permit greater retirement savings for senior and highly compensated executives. Through the first six months of 2006, revenue has been modest and well below management expectations. We have seen an increase in our pipeline activity over the past 90 days with our new LBP 401K Plus solution and management is optimistic based on this market feedback. However, the timing, actual closing statistics and hence revenue generation are still unknown.

New financing facilities

As referenced above, in early September 2006 the Company closed on an increase to an existing credit facility for US$250 million to facilitate continued purchases of life settlement policies.

Peachtree is near closing on a US$50 million facility to fund its growing pre-settlement funding business. This facility will allow us to refinance and immediately monetise over US$12 million of receivables currently held on balance sheet.

Peachtree is also near closing on a US$50 million facility to financing SLPO premium finance transactions. This facility should allow the Company to refinance and immediately monetise US$8-10 million of receivables currently held on balance sheet and expand its SLPO origination activity.

Taxes

The interim financial results reflect a material book tax expense related to the formation of Peach Holdings, Inc. (“PHI”) consummated in conjunction with the IPO in March of this year. PHI was formed as a taxable entity under US tax laws and, under US GAAP, PHI is required to establish a deferred tax account upon formation. In the aggregate, the formation of PHI resulted in a material net deferred tax asset. However, under US GAAP, the deferred tax liability portion of our deferred tax account is reported in income in the current period. Please reference the notes to the attached financial statements for a detailed analysis of the deferred tax account. As set forth in PHI’s March 2006 admission document, Peachtree typically structures its credit relationships as ‘financings’ for tax purposes. Accordingly, revenue and cash flow from such transactions are generally disregarded for tax purposes as they are characterised as the proceeds of a loan. Consequently, while Peachtree is required to reflect a tax expense for US GAAP purposes, management expects actual cash tax expense to remain relatively low over the next 7-10 years.

Outlook

Peachtree’s rapid growth, particularly in the life settlement area, creates some tension for management to timely add new credit capacity to meet the demands of our distribution networks and origination platform. By continuing to seek broader access to the capital markets with competitive financing rates and terms and by maintaining a high level of service to our customers, Peachtree believes it can continue to be the leader in personal factoring.

We are dedicated to increasing our penetration of key markets (Structured Settlements, Life Settlements) while continuing to innovate (Premium Financing, Pre-Settlements). Although these areas offer good opportunities for growth, legislative and regulatory risks are not insignificant particularly in the Life Settlement and SLPO areas.

Originations in the material lines of business (Structured Settlements, Life Settlements) are in accordance with the Board’s expectations. The Board anticipates one securitisation in the second half of the current year in Structured Settlements. Although possible, a securitisation of Life Settlements in 2006 is looking far less likely and may now occur in 2007. The business remains strongly cash generative.

As previously announced on 12 September 2006 the special committee of the Directors is recommending that Peach Holding’s stockholders approved a merger agreement to be acquired by Orchard Acquisition Company, an affiliate of DLJ Merchant Banking Partners. The Directors anticipate that the proxy statement relating to the transaction will be issued to shareholders in early October.

Dermot Smurfit Chairman

James D. Terlizzi CEO

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Combined Balance Sheets
June 30, 2006 and 2005, and December 31, 2005

	Unaudited June 30 2006	Audited June 30 2005	Audited Dec 31 2005
	US$	US$	US$
ASSETS (note 7)
Cash	45,514,207	20,352,452	5,818,693
Restricted cash	1,704,083	7,631,557	3,232,930
Marketable securities	295,069,292	288,863,533	307,772,266
Finance receivables held for sale, net (note 1)	44,047,879	11,126,297	18,328,064
Finance receivables, net (note 3)	21,547,068	3,077,755	9,950,592
Life Receivables Net (note 2)	161,851,370	-	-
Advances receivable, net (note 3)	964,334	1,788,560	1,082,055
Other receivables	6,107,577	2,257,882	5,492,038
Due from affiliates (note 11)	714,111	4,205,747	1,562,583
Retained interests in receivables sold (note 4)	18,848,943	45,024,773	31,344,950
Equipment and leasehold improvements, net (note 5)	5,447,722	1,952,189	2,929,784
Deferred Taxes (note 10)	13,856,468	-	722,000
Other assets	4,384,321	1,125,567	3,135,126
Total Assets	620,057,375	387,406,312	391,371,081
LIABILITIES & MEMBERS' EQUITY
Liabilities
Accounts payable and accrued expenses	14,718,904	4,742,306	10,564,406
Unremitted asset servicing collections	528,883	2,718,872	994,519
Escrows held on contracts	659,861	528,331	615,156
Swap liabilities (note 8)	191,597	675,362	403,069
Other liabilities	1,205,238	6,195,544	1,173,691
Installment obligations payable (note 6)	295,518,101	288,863,533	308,221,416
Borrowings under lines of credit (note 7)	211,034,553	9,658,957	7,827,430
Total Liabilities	523,857,137	313,382,905	329,799,687
Stockholders' Equity (note 9)
Capital stock (104,277,832 shares issued
with a par value of $.001)	104,278	-	-
Additional paid-in capital	51,953,951	5,201,886	5,201,886
Retained earnings	31,939,725	47,046,196	39,005,610
Accumulated other comprehensive income	12,202,285	21,775,325	17,363,898
Total Stockholders' Equity	96,200,238	74,023,407	61,571,394
Total Liabilities and Stockholders' Equity	620,057,375	387,406,312	391,371,081

 

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Combined Statement of Operations
Six-months ended June 30, 2006 and 2005, and year ended December 31, 2005

	Unaudited June 30 2006	Audited June 30 2005	Audited Dec 31 2005
	US$	US$	US$
Revenues
Gain on sales of receivables (note 4)	7,255,907	25,795,481	54,105,743
Life settlement origination fee income	24,020,319	16,392,906	22,472,421
Other fee income	4,400,399	5,318,296	11,465,421
Interest and dividend income	8,599,674	5,951,271	14,316,822
Net realised and unrealised gains on investments	6,374,010	-	9,650,950
Servicing and other revenue (note 11)	2,438,882	1,065,168	2,711,954
Total Revenues	53,089,191	54,523,122	114,723,311
Operating Expenses
Salaries and related costs	15,524,992	11,046,963	22,587,145
Consulting fees	1,600,000	2,125,000	3,025,000
General and administrative	4,068,310	3,563,621	7,148,021
Professional fees	5,090,425	3,688,080	7,514,716
Broker fee expense	239,554	205,748	205,748
Occupancy	1,144,174	789,107	1,768,695
Marketing and advertising	7,138,475	6,030,897	12,882,198
Postage and courier	357,840	244,904	715,500
Interest expense	3,819,107	470,778	904,265
Provision for loss on receivables	175,003	520,989	384,499
Losses on acquisition of life settlements			1,958,626
Net realised and unrealised losses on investments	-	1,769,104
Installment note expense	9,610,217	1,457,047	18,556,850
Total Operating Expenses	48,768,097	31,912,238	77,651,263
Income before taxes	4,321,094	22,610,884	37,072,048
Provision for income taxes (benefit) (note 10):
Current taxes (benefit)	1,515,919	113,499	(384,751)
Income tax expense recognised in connection
with change in tax status of reporting entity	11,210,000	-	-
Net Income	(8,404,825)	22,610,884	37,456,799

 

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Combined Statement of Changes in Stockholders’ Equity
Six-months ended June 30, 2006 (Unaudited)

			Accum. Other	Total
	Paid-In	Retained	Comprehensive	Stockholders'
	Capital	Earnings	Income	Equity
	US$	US$	US$	US$
Balance, December 31, 2005	5,201,886	39,005,610	17,363,898	61,571,394
Comprehensive income
Net income (loss)	-	(8,404,825)	-	(8,404,825)
Other comprehensive income
Unrealised gain on retained
interest on receivables sold
(note 5)	-	-	(5,161,613)	(5,161,613)
Total comprehensive income				(13,566,438)
Cumulative effect of change in
accounting for life settlements	-	1,338,939	-	1,338,939
Income tax benefit of exercise of stock warrants	26,194,000	-	-	26,194,000
Sale of 4,277,778 shares of common stock (note 8)	20,662,343	-	-	20,662,343
Balance, June 30, 2006	52,058,229	31,939,724	12,202,285	96,200,238

 

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Combined Statement of Cash Flows
Six-months ended June 30, 2006 and 2005, and year ended December 31, 2005

	Unaudited June 30 2006	Audited June 30 2005	Audited Dec 31 2005
Cash flows from operating activities	US$	US$	US$
Net income	(8,404,825)	22,497,385	37,456,799
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortisation	587,391	(1,052,874)	584,992
Provision for losses on receivables and life settlements	286,003	520,989	2,343,125
Mark to market swap accrual	(539,472)	(120,830)	(393,123)
Deferred income taxes	12,337,532	-	(688,000)
Proceeds from sale of finance receivables held for sale	27,445,489	62,068,230	136,787,700
Gain on sale of finance receivables held for sale	(7,255,907)	(25,795,481)	(54,105,744)
Purchase of finance receivables held for sale	(37,843,073)	(31,658,103)	(74,536,484)
Fair value adjustment for life settlements	(22,897,470)	-	-
Increase (decrease) in trading securities	12,702,974	4,398,210	(14,510,523)
Interest accretion on retained interests	(798,026)	-	(2,117,202)
Structured note expense	9,610,217	1,457,047	18,556,850
Net decreases (increases) in assets
Restricted cash	1,528,847	(5,536,230)	(1,137,603)
Advances receivable	110,021	51,829	818,364
Other receivables	(615,539)	36,663	(3,197,493)
Due from affiliates	848,472	1,701,489	4,344,653
Other assets	(1,260,643)	3,412,249	1,531,064
Net increases (decreases) in liabilities
Accounts payable and accrued expenses	4,154,498	(1,425,527)	4,396,573
Unremitted asset servicing collections	(465,636)	962,650	(761,703)
Escrows held on contracts	44,705	16,072	102,897
Other liabilities	31,547	2,901,132	(2,120,721)
Net cash provided by operating activities	(10,392,896)	34,434,900	53,354,421
Cash flows from investing activities
Originations and collections on finance receivables, net	(11,763,779)	(1,652,783)	(9,061,405)
Payment for purchase of presettlement receivables business	-	(3,059,236)	(3,059,236)
Collections of retained interest in receivables sold	-	621,290	621,290
Purchase of life settlements	(136,664,513)	-	(2,121,000)
Purchases of equipment and leasehold improvements	(3,039,233)	(974,164)	(2,324,375)
Net cash used in investing activities	(151,467,525)	(5,064,893)	(15,944,726)
Cash flows from financing activities
Borrowings under lines of credit	233,433,835	25,887,027	27,325,470
Repayments under lines of credit	(30,226,712)	(28,787,655)	(32,057,625)
Issuance of installment notes payable	10,305,330	8,985,095	32,512,980
Repayments of installment notes payable	(32,618,862)	(18,205,808)	(39,475,613)
Cash received for installment notes payable	-	3,369,772	3,369,772
Common stock issued	20,662,343	-	-
Cash distribution to owners	-	(9,000,000)	(32,000,000)
Net cash used in financing activities	201,555,934	(17,751,569)	(40,325,016)
Increase in cash	39,695,514	11,618,438	(2,915,321)
Cash at beginning of year	5,818,693	8,734,014	8,734,014
Cash at end of year	45,514,207	20,352,452	5,818,693

 

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Combined Statement of Cash Flows
Six-months ended June 30, 2006 and 2005, and year ended December 31, 2005

	Unaudited June 30 2006	Audited June 30 2005	Audited Dec 31, 2005
	US$	US$	US$
Supplemental disclosure for cash flow information
Cash paid for interest	2,679,201	452,103	900,377
Cash paid for income taxes	272,000	65,176	92,927
Supplemental disclosure of noncash investing and financing activity:
Retained interests in receivables sold recognised
upon sale of finance receivables	321,876	5,072,225	10,380,031
Adjustment of retained interests in receivables sold
to fair value	(5,161,613)	9,521,222	5,109,795
Recognition of receivables and derecognition of retained
interest from Peachtree Finance Company upon
disqualification of status as qualified special purpose entity	-	-	7,961,274
Income tax benefit of warrant exercise	26,194,000	-	-

 

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Notes

The Notes to the Combined Financial Statements are available in the PDF download