SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
-------------------------
OR
[ ] 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 0-27736
DIGNITY PARTNERS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3165263
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1700 Montgomery Street, Suite 250
San Francisco, California 94111
(Address of principal executive offices) (Zip Code)
(415) 394-9467
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has 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
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
At October 31, 1996, there were 4,291,824 shares of the registrant's Common
Stock outstanding.
DIGNITY PARTNERS, INC.
INDEX
Page #
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Part I
- ------
Item 1. Financial Statements:
Consolidated Balance Sheets
September 30, 1996 and December 31, 1995 1
Consolidated Statements of Operations for the
Three Months and Nine Months Ended
September 30, 1996 and 1995 2
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1996 and 1995 3
Condensed Notes to Consolidated
Financial Statements 4 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 14
Part II
- -------
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
- ----------
(i)
DIGNITY PARTNERS, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and December 31, 1995
September 30, December 31,
ASSETS 1996 1995
----------------- -----------------
Cash and cash equivalents $ 5,902,318 $ 1,056,611
Restricted cash (note 7) 4,760,644 4,566,845
Marketable securities (note 11) 2,090,871 --
Other receivable (note 3) 1,097,519 --
Matured policies receivable (note 7) 1,468,947 1,652,921
Assets held for sale (note 4) 11,887,598 --
Purchased life insurance policies,
net of reserve (note 2 and 5) 35,561,473 48,938,098
Furniture and equipment, net of
accumulated depreciation of
$0 and $61,349, respectively
(note 4) -- 130,532
Deferred financing costs, net of
accumulated amortization of
$323,411 and $451,961,
respectively (note 5 and 8) 740,189 1,043,541
IPO financing costs (note 2) -- 750,000
Other assets 140,284 87,079
----------------- -----------------
Total assets $ 63,649,843 $ 58,225,627
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses $ 208,271 $ 329,827
Accounts payable 242,577 377,204
IPO financing costs payable (note 2) -- 306,900
Payable to related party (note 2) -- 1,482,170
Accrued compensation payable (note 2) 164,200 849,148
Unearned income (note 6) -- 715,883
Payable for policies purchased 39,774 376,020
Other short term debt (note 2) -- 1,162,170
Long term notes payable (note 7) 42,396,219 39,105,138
Other long term debt (note 2 and 8) -- 1,444,270
Deferred income taxes (note 9) 6,000 531,711
----------------- -----------------
Total liabilities 43,057,041 46,680,441
----------------- -----------------
Minority interest of limited partners
in investment partnership
(note 10) -- 6,679,582
----------------- -----------------
Stockholders' equity:
Preferred stock, $0.01 par value;
2,000,000 authorized shares:
Convertible Preferred Stock,
135,000 authorized shares,
0 and 34,880 shares,
respectively, issued and
outstanding (note 2) -- 3,488,013
Common stock, $0.01 par value;
15,000,000 authorized shares,
4,291,824 and 1,589,324 shares,
respectively, issued and
outstanding (note 2) 42,918 15,893
Additional paid-in-capital 29,404,550 669,594
Retained earnings (deficit) (8,854,666) 692,104
----------------- -----------------
Total stockholders' equity 20,592,802 4,865,604
----------------- -----------------
Total liabilities and
stockholders' equity $ 63,649,843 $ 58,225,627
================= =================
<FN>
See accompanying condensed notes to consolidated financial statements.
1
</FN>
DIGNITY PARTNERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Nine Months Ended September 30, 1996 and 1995
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
Income:
Earned discounts on life
insurance policies
(note 6) $ -- $ 1,780,301 $ 3,697,032 $ 5,117,645
Earned discounts on prior
maturities (note 6) 802,471 -- 802,471 --
Earned discounts on matured
policies (note 6) 355,519 -- 355,519 --
Interest income 181,670 85,769 638,583 196,291
Other 115,078 64,966 281,728 142,515
----------- ----------- ----------- -----------
Total income 1,454,738 1,931,036 5,775,333 5,456,451
Expenses:
Interest expense 1,065,486 910,387 3,040,424 2,385,291
Compensation and benefits 318,976 199,168 943,629 544,698
Other general and
administrative expenses 231,244 212,434 898,037 519,331
Amortization (note 8) 211,786 81,930 391,352 207,321
Depreciation (note 4) -- 9,460 19,967 25,257
Consulting fees -- -- -- 9,622
Realized loss on sale of
assets (note 3) 299,718 -- 299,718 --
Provision for loss on sale
of assets (note 4) 3,314,498 -- 3,314,498 --
Valuation provision for
purchased life insurance
policies (note 5) 6,940,189 -- 6,940,189 --
----------- ----------- ----------- -----------
Total expenses 12,381,897 1,413,379 15,847,814 3,691,520
----------- ----------- ----------- -----------
Income (loss) before
income taxes and
minority interest (10,927,159) 517,657 (10,072,481) 1,764,931
Income tax benefit (expense)
(note 9) 893,223 (186,044) 525,711 (466,570)
Minority interest of limited
partners in earnings of
investment partnership
(note 10) -- (84,997) -- (704,524)
----------- ----------- ----------- -----------
Net income (loss) $(10,033,936) $ 246,616 $(9,546,770) $ 593,837
=========== =========== =========== ===========
Net income (loss) per share
(note 1) (2.34) 0.13 (2.49) 0.31
Weighted average number of
shares of common stock and
common stock equivalents
outstanding (note 1) 4,291,824 1,901,870 3,838,548 1,930,283
<FN>
See accompanying condensed notes to consolidated financial statements.
2
</FN>
DIGNITY PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS For the
Nine Months Ended September 30, 1996 and 1995
Nine Months Ended
September 30,
1996 1995
--------------- ---------------
Cash flows for operating activities:
Net income $ (9,546,770) $ 593,837
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 411,319 232,578
Write-off of furniture and equipment 12,303 --
Provisions for loss on sale of assets 3,614,217 --
Valuation provision for purchased life
insurance policies 6,940,189 --
Earned discounts on insurance policies (4,855,023) (5,117,645)
Purchase of life insurance policies (23,914,937) (17,684,027)
Collections on life insurance policies 13,478,494 10,568,726
Increase (decrease) in unearned income (715,883) 193,318
Increase in other assets (53,205) (4,640)
Increase (decrease) in deferred taxes (525,711) 465,752
Increase (decrease) in accrued expenses (121,556) 142,084
Increase (decrease) in accounts payable (134,627) 69,692
Increase (decrease) in IPO financing
costs payable (306,900) 262,579
Increase (decrease) in payable to
related party (1,482,170) 402,383
Increase (decrease) in accrued
compensation payable (684,948) 258,750
Income applicable to minority interest -- 704,524
--------------- ---------------
Net cash used by operating
activities (17,885,208) (8,912,089)
--------------- ---------------
Cash flows from investing activities:
Proceeds from sale of assets 4,266,249 --
Purchase of furniture and equipment (6,776) (30,893)
Additions to restricted cash (193,799) (3,848,555)
Purchase of marketable securities (2,090,871) --
--------------- ---------------
Net cash (used for) provided
by investing activities 1,974,803 (3,879,448)
--------------- ---------------
Cash flows from financing activities:
Proceeds from long term notes payable 6,375,000 35,000,000
Principal payments on long term notes
payable (3,083,919) --
Proceeds from other long term debt 5,540,132 18,311,070
Principal payments on other long term
debt (6,984,402) (35,479,288)
Distribution to limited partners (783,313) (2,720,906)
Purchase of limited partners' interest
in investment partnership (5,081,184) --
Principal payment on loan from
stockholder (1,162,170) --
Net proceeds from issuances of
common stock 25,273,968 --
Increase in financing costs (88,000) (567,439)
Increase in IPO financing costs -- (322,579)
Reimbursement of IPO financing costs 750,000 --
--------------- ---------------
Net cash provided by financing
activities 20,756,112 14,220,858
--------------- ---------------
Net increase in cash and cash
equivalents 4,845,707 1,429,321
Cash and cash equivalents, beginning of
period 1,056,611 30,561
--------------- ---------------
Cash and cash equivalents, end of period $ 5,902,318 $ 1,459,882
=============== ===============
Supplemental disclosure of cash flow
information:
State taxes paid $ 6,066 $ --
=============== ===============
Cash paid for interest $ 3,161,981 $ 856,359
=============== ===============
<FN>
See accompanying condensed notes to consolidated financial statements.
3
</FN>
DIGNITY PARTNERS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited consolidated financial statements of Dignity Partners, Inc.
and its consolidated entities ("Dignity Partners" or the "Company") as of
September 30, 1996 and for the three and nine month periods ended September 30,
1996 and 1995 have been prepared in accordance with generally accepted
accounting principles for interim financial information, in accordance with Rule
10-01 of Regulation S-X. Accordingly, such statements do not include all of the
information and notes thereto that are included in the annual consolidated
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Operating results for the
nine month period ended September 30, 1996 are not indicative of the results
that may be expected for the entire 1996 fiscal year. See Note 4. The balance
sheet as of December 31, 1995 has been derived from the audited financial
statements of the Company. The statements included herein should be read in
conjunction with the audited financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1995
(the "Form 10-K").
Net income per share is calculated on the primary basis using the average
number of Common Stock and Common Stock equivalents outstanding. Common Stock
equivalents include employee stock options and shares issuable upon the
conversion into Common Stock of outstanding shares of the Company's Convertible
Cumulative Pay-in-Kind Preferred Stock (the "Convertible Preferred Stock"). The
outstanding shares of Convertible Preferred Stock were not actually converted
into Common Stock until February 1996. See Note 2.
2. The Initial Public Offering
In February 1996, the Company completed an initial public offering of an
aggregate of 2,702,500 shares of its Common Stock at the public offering price
of $12.00 per share. Of such shares, 2,381,356 shares were issued and sold by
the Company and 321,144 shares (representing all shares issuable and issued
pursuant to the conversion in full of the Convertible Preferred Stock) were sold
by Bradley Rotter, a director and Chairman of the Board of Directors of the
Company. The Company did not receive any proceeds of the shares sold by Bradley
Rotter.
4
The Company received the following proceeds from the offering and, through
September 1996, such proceeds had been applied for the following purposes:
Proceeds:
Proceeds net of underwriters' discount $26,575,933
Less offering expenses (a) 1,301,965
-----------
Net proceeds $25,273,968
===========
Uses:
Policy purchases $17,832,821
Payments to related party (b) 2,191,007
Accrued compensation payable (c) 833,750
Taxes on accrued and unpaid salaries 20,187
Other short term debt (b) 1,162,170
Other long term debt 3,234,033
-----------
Total uses $25,273,968
===========
<FN>
(a) Offering expenses include the payoff of IPO financing costs outstanding as
of December 31, 1995 and additional expenses incurred through February 1996.
(b) The proceeds were used to eliminate these liabilities outstanding as of
December 31, 1995 and additional liabilities incurred through February
1996.
(c) Represents accrued and unpaid salaries owed to executive officers of the
Company for services rendered during 1993, 1994 and the first nine months of
1995. See the Form 10-K for further information.
</FN>
Changes in stockholders' equity during the first nine months of 1996, which
(with the exception of the net loss) are due in large part to the initial public
offering, reflected the following:
Stockholders' equity, beginning of period $ 4,865,604
Conversion of preferred stock (3,488,013) (a)
Issuance of common stock 27,025
Additional paid-in-capital 28,734,956
Net loss (9,546,770)
-----------
Stockholders' equity, end of period $ 20,592,802
===========
<FN>
(a) As a result of the conversion, the amount previously attributable to
Convertible Preferred Stock was transferred to common stock and
additional-paid-in capital.
</FN>
3. Sale Transaction - August, 1996
On August 2, 1996, the Company sold 59 policies held by Dignity Viatical
Settlement Partners, L.P. (Dignity Viatical) and 2 other policies to an
unaffiliated third party. This transaction resulted in a pre-tax loss as
follows:
Capitalized costs $ 4,757,583
Earned discounts 1,641,573
Unearned discount relating to the purchase of
Dignity Viatical minority interest (note 10) (735,670)
-------------
Carrying value 5,663,486
Sale proceeds 5,363,768
-------------
Realized loss on sale of asset $ (299,718)
=============
5
Cash collected from this transaction was used for working capital purposes,
including prepaying debt outstanding under the TransAmerica Facility (as defined
herein). See Note 8. At September 30, 1996, the Company has recorded an Other
Receivable of $1,097,519 related to outstanding proceeds due from this sale.
Payment of such receivable is expected during the fourth quarter of 1996 as
acknowledgments of change in ownership are received from the insurance companies
that issued the sold policies.
4. Assets Held For Sale
At the International AIDS Conference held in Vancouver, British Columbia in
July 1996, the results from a number of studies were reported which appeared to
indicate that treatments involving a combination of various drugs were reducing
substantially, and perhaps eradicating, the levels of HIV detectable in the
blood of a person previously diagnosed with HIV and AIDS. On July 16, 1996, the
Company announced that it was temporarily ceasing the processing of new
applications to purchase policies insuring the lives of individuals diagnosed
with HIV and AIDS while it further analyzed the effects of such research results
on its business. In excess of 95% of the Company's historical purchases have
involved policies insuring the lives of individuals diagnosed with HIV or AIDS.
The Company continues to analyze the effects of such research results and
subsequently reported data from scientific studies on its business and, in
particular, purchases by the Company of policies, levels of expenses, the timing
of collections on policies, the estimated collection dates of policies and its
method of income recognition. In connection with its analysis, the Company has
thus far decided to sell all or substantially all of its assets and to seek
stockholder approval of such sale. As a result, the Company has reclassified all
of its assets other than the assets of Dignity Partners Funding Corp. I ("DPFC")
to a "held-for-sale" category. Accordingly, such assets are recorded on the
balance sheet as of September 30, 1996 at the lower of carrying value or fair
value less cost to sell. In connection therewith, the Company established a
provision for loss on sale of assets during the quarter ended September 30,
1996.
On October 9, 1996, the Company announced that it had executed an agreement
("Sale Agreement") with an unaffiliated viatical settlement company to sell
approximately 197 policies with an aggregate face value of $14.2 million for an
aggregate consideration of approximately $8.7 million. The agreement for the
sale of such policies will be void if stockholder approval to sell all or
substantially all of the Company's assets is not received by December 26,1996.
The Company set up a pre-tax loss provision in the third quarter of 1996 of
$1,792,087 in connection with policies covered by the Sale Agreement.
The Company also announced that it intends to seek stockholder approval to
sell all or substantially all of its assets not the subject of the Sale
Agreement ("Remaining Assets"). The Company set up a pre-tax loss provision for
the Remaining Assets that it intends to sell in the amount of $1,522,411
($1,417,373 related to policies and $105,038 related to furniture and
equipment). For purposes of calculating such loss provision, furniture and
equipment have been valued on the assumption that miscellaneous office equipment
has no sales value.
6
Life insurance policies and furniture and equipment held for
sale consist of:
Life Insurance Policies
-----------------------
Covered by Furniture &
Sale Agreement Held for Sale Equipment Total
-------------- -------------- ------------- -----------
Capitalized costs $ 9,272,132 5,416,912 105,038 14,794,082
Earned discount 221,298 186,716 -- 408,014
Provision for loss
on sale (1,792,087) (1,417,373) (105,038) (3,314,498)
-------------- -------------- ------------- -----------
Assets held for sale $ 7,701,343 4,186,255 0 11,887,598
The calculation of provision for loss on sale of assets for life insurance
policies was calculated based on the life expectancies of the policies in
relation to prices obtained by the Company in connection with other sales. Any
gain or loss due to the difference between actual proceeds (less any back end
sourcing fees) and the carrying value after giving effect to the provision for
loss on sale of assets will be reported as a realized gain or loss.
5. Purchased Life Insurance Policies
As of September 30, 1996, purchased life insurance policies consisted only
of those policies held by DPFC. The sale of policies held by DPFC, all of which
are pledged under the indenture pursuant to which the Securitized Notes (as
defined in Note 7) were issued, requires the consent of all of the holders of
the Securitized Notes ("Noteholders"). No assurance can be given that the
Company will be able to obtain such consent. The Company has discussed potential
sales of DPFC policies with the Noteholders; however, it is too early to
determine whether the Noteholders and the Company will decide to sell such
policies or whether such a sale is feasible. A pre-tax provision for valuation
adjustment has been recorded in the third quarter of 1996 in the amount of $6.9
million to reflect estimated impaired value of the DPFC policies. The estimated
provision for valuation adjustment provides for the possible write-off of
deferred financing costs and the expected unrealized value associated with
purchased life insurance policies.
Only the net assets of DPFC are available to satisfy the Securitized Notes.
Dignity Partners did not guarantee the obligations owed under the Securitized
Notes. To the extent that the net assets of DPFC are insufficient to repay the
Securitized Notes, no provision for valuation was made because the Noteholders
are expected to bear any such loss. This loss is currently estimated to be
approximately $900,000. See Note 11.
6. Earned Discounts and Unearned Income
Earned discounts on life insurance policies reflects the accretion recorded
through June 30, 1996. With the decision to sell all or substantially all of the
Company's assets, unearned income recorded on the balance sheet at June 30, 1996
relating to early maturities on or before June 30, 1996 has now been recorded as
earned discounts on prior maturities. Earned discounts for matured policies
reflects income on policies on which the Company collected the proceeds (either
pursuant to a sale or the death of the insured) during the third quarter. During
the third quarter of 1996, the Company reclassified all of its assets (other
than DPFC assets) to a "held-for-sale" category. The Company also established a
valuation provision for purchased life insurance policies (i.e. DPFC policies)
during the quarter ended September 30, 1996 because of the uncertainties created
by the data presented at the AIDS Conference. As a result, any future income
will be recorded as earned discounts for matured policies only upon receipt of
proceeds of policies (either pursuant to a sale or the death of the insured).
7
7. Long Term Notes Payable
The Senior Viatical Settlement Notes, Series 1995-A, Stated Maturity March
10, 2005 (the "Securitized Notes") issued by DPFC, the Company's wholly-owned
special purpose subsidiary, initially provided for a maximum lending commitment
of $50 million. Borrowings under the Securitized Notes are included on the
balance sheet as long term notes payable. Repayment of principal of the
Securitized Notes was originally scheduled to begin in September 1996. An early
amortization event occurred in June 1996 because the Overcollateralization
Percentage (as defined in the Form 10-K) was less than 120% on four consecutive
weekly calculation dates. As a result, the maximum lending commitment was
reduced to the then outstanding principal amount ($45.5 million) and principal
payments on the Securitized Notes began in July 1996. Payments on the
Securitized Notes are payable solely from collections on pledged policies and
deposited funds. Such deposited funds consist of $4.6 million of restricted cash
as of September 30, 1996, which Dignity Partners is required to maintain in a
cash collateral account for the benefit of the Noteholders. Additionally, such
collections include $865,000 as of September 30, 1996 of matured policies
receivable for policies pledged for the benefit of the Noteholders.
8. TransAmerica Credit Facility
As described in Note 4, on July 16, 1996, the Company announced it was
temporarily ceasing processing new applications for policies insuring people
with AIDS and HIV, while it further analyzed the research results reported at
the International AIDS Conference in Vancouver, British Columbia. On July 18,
1996, TransAmerica Lender Finance ("TransAmerica"), the lender under the
Company's former $20 million senior secured revolving credit facility (the
"TransAmerica Facility"), notified the Company that an event of default had
occurred under the TransAmerica Facility. The notification was based on
TransAmerica's assertion that the Company's action constituted a breach of its
covenant not to make a material change in its operations. TransAmerica also
notified the Company that TransAmerica would not make future advances under the
TransAmerica Facility. The Company does not believe that its actions constituted
an event of default under the TransAmerica Facility. Although TransAmerica did
not give any notice accelerating the due date of amounts outstanding under the
TransAmerica Facility, the Company decided to repay and terminate the facility
on August 29, 1996. The Company repaid principal and accrued interest in the
amount of $3,301,328. In connection with such repayment, Dignity Partners wrote
off $130,000 in unamortized financing costs associated with the TransAmerica
Facility.
9. Deferred Income Taxes
Prior to the three months ended September 30, 1996, the Company had
provided for deferred income taxes related to income accrued on purchased life
insurance policies. Based on the provision for loss on sale of assets and
valuation provision for purchased life insurance policies recorded for the
quarter ended September 30, 1996, the Company believes that it will not have a
federal tax liability related to these assets and has therefore reversed all
related liabilities. The Company has provided for miscellaneous state income
taxes. Valuation allowance has been recorded equivalent to the deferred tax
asset as it is management's opinion that it is more likely than not that the
deferred tax asset will not be realized.
8
10. Minority Interest
On June 25, 1996 Dignity Partners purchased the limited partnership
interests of the limited partners in Dignity Viatical for approximately $5.2
million. This purchase resulted in the elimination of minority interest on the
balance sheet at and after June 30, 1996.
11. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash and cash equivalents, restricted cash, other receivable, matured
policies receivable, accrued expenses, accounts payable, financing costs
payable, payable to related party and payable for policies purchased are stated
at approximate fair value because of the short maturity of these instruments.
All balances have maturities within 60 days of the balance sheet date.
Marketable securities (with maturities greater than three months but less
than one year), consisting of grade BBB or better commercial paper, commercial
notes and government securities, are stated at cost on the balance sheet. Market
values of these securities approximate cost due to the short maturity periods.
Assets held for sale reflect management's estimate of fair market value
based on the life expectancies of these policies in relation to prices obtained
by the Company in connection with other sales.
The portfolio of purchased life insurance policies reflects a pre-tax
provision for the estimated impaired value of DPFC policies. The estimated
provision for valuation adjustment provides for the possible write-off of
deferred financing costs and the expected unrealized value associated with
purchased life insurance policies.
Long term notes payable and other long term debt are stated at fair market
value at December 31, 1995 based on the Company's borrowing capability as a
closely-held private organization and limited capital structure. The Securitized
Notes (long term notes payable) bear an average interest rate of 9.17% and are
equivalent to newly acquired debt at 1% over prime interest rates. At September
30, 1996 the long term notes payable are stated at cost which is approximately
$900,000 greater than the Company's estimate of the fair market value of this
debt due to the nonrecourse nature of such debt and the value of the collateral
securing such debt.
12. Events Subsequent to the Balance Sheet Date
a. Share Repurchase Program
On October 16, 1996, the Board of Directors of the Company approved a share
repurchase program pursuant to which the Company is authorized to purchase from
time to time up to 1 million shares of the Company's common stock at prevailing
market prices.
b. Investment
On November 4, 1996, the Company purchased $3,000,000 of convertible
preferred stock of American Information Company, Inc., a privately held company
which, among other things, provides information services to individuals owning
or purchasing automobiles.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of the consolidated financial
condition of the Company as of September 30, 1996 and of the results of
operations for the Company for the three and nine months ended September 30,
1996 and 1995, and of certain factors that may affect the Company's prospective
financial condition and results of operations. The following should be read in
conjunction with the unaudited consolidated financial statements and related
notes appearing elsewhere herein.
Overview
The Company is a specialty financial services company that provides
viatical settlements for terminally ill persons. A viatical settlement is the
payment of cash in return for an ownership interest in, and the right to receive
the death benefit from, a life insurance policy.
Recent Developments
On July 16, 1996 the Company announced that, in light of the data regarding
new treatments involving combinations of various drugs presented at the AIDS
Conference, the Company was temporarily ceasing processing new applications for
policies insuring people afflicted with AIDS and HIV while it further analyzed
the effects of such research results on its business and its strategic options
in light of the research results. The Company has retained Jefferies & Co. to
assist in such evaluation. The Company continues to analyze the effect of the
research results and data from subsequently reported scientific studies on its
business and, in particular, purchases by the Company of policies, levels of
expenses, the timing of collections on policies, the estimated collection date
of policies and its method of income recognition. In connection with its
analysis, the Company has thus far decided to sell all or substantially all of
its assets and to seek stockholder approval of the Asset Sale. As a result of
such decision, the Company has reclassified all of its assets (other than the
policies held by DPFC) to a "held-for-sale" category. Accordingly, such assets
are accounted for on the lower of carrying value or fair value less cost to
sell. The Company cannot predict what further impact the foregoing may have on
its business, prospects, results of operations or financial position.
Furthermore, the Company has not determined whether or when it will resume
processing applications for policies insuring people afflicted with HIV or AIDS
or the implications of these recent developments on the Company's strategic
direction.
Share Repurchase Program
The Board of Directors of the Company has approved a share repurchase
program pursuant to which the Company is authorized to purchase from time to
time up to 1 million shares of Common Stock at prevailing market prices. The
Company had not repurchased any shares of Common Stock as of October 31, 1996.
Method of Accounting
Through June 30, 1996, the Company recognized income ("earned discount") on
each purchased policy by accruing, over the period between the acquisition date
of the policy and the Company's estimated date of collection of the policy's
face value (the "Accrual Period"), the difference (the "unearned discount")
between (a) the face value of the policy less the amount of fees, if any,
payable to a referral source upon collection of the face value, and (b) the
carrying value of the policy. Through June 30, 1996, the carrying value for each
policy was reflected on the Company's consolidated balance sheet under
"purchased life insurance policies" and consisted of the purchase price, other
capitalized costs and the earned discount on the policy accrued to the balance
sheet date. The Company capitalized as
10
incurred the following costs of a purchased policy: (i) the purchase price paid
for the policy, (ii) policy premiums, if any, paid by the Company, (iii)
amounts, if any, paid to referral sources upon acquisition of the policy and
(iv) amounts paid to Company-retained Consultants who estimated the insured's
life expectancy. The carrying value of a policy changed over time, and was
adjusted quarterly to reflect earned discounts accrued on the policy, amounts
paid for any additional future increases in coverage, any additional premium
payments and any premium refunds if the policy becomes covered by premium waiver
provisions. The length of the Accrual Period was determined by the Company based
upon its estimate of the date on which it would collect the face value of the
policy. Such estimate was based upon the Company's estimate of the life
expectancy of the insured, after review of the medical records of the insured by
one or more Consultants, and was also adjusted to reflect the historical
accuracy of the life expectancies estimated by the Company's Consultants and the
typical period between the date of an insured's death and the date on which the
Company collects the face value of the policy.
The unearned discount was accrued over the Accrual Period using the "level
yield" interest method. Under the "level yield" method, the yield is constant
such that when the yield is applied to the carrying value of the policy on a
compounded basis over the course of the Accrual Period, the unearned discount
will be fully accrued as earned discount by the end of the Accrual Period. Such
yield may differ from the actual yield on a policy depending on whether the
policy is collected earlier or later than expected. See "The Company -- Policy
and Portfolio Information - Yield Analysis."
As a result of the Company's decision to sell all or substantially all of
its assets and to seek stockholder approval of the Asset Sale, the Company has
reclassified all of its assets (other than the policies held by DPFC) to a
"held-for-sale" category. Accordingly, such assets are accounted for on the
lower of carrying value or fair value less cost to sell. In connection
therewith, the Company established a $3.3 million provision for loss on sale of
assets during the quarter ended September 30, 1996. The Company also established
a $6.9 million valuation provision for purchased life insurance policies (i.e.,
DPFC policies) during the quarter ended September 30, 1996 because of the
uncertainties created by the data presented at the AIDS Conference and
subsequently reported data. In addition, beginning in such quarter, the Company
began generally recognizing income upon receipt of proceeds on policies (either
pursuant to a sale or the death of the insured). Such income is equal to the
difference between such proceeds (less any back-end sourcing fees) and the
carrying value of such policies after giving effect to any provision for loss on
the sale of such policies or any valuation provision for purchased life
insurance policies.
Method of Consolidation
The Company's financial statements consolidate the assets, liabilities and
operations of DPFC, the Company's wholly-owned subsidiary through which the
Company issued the Securitized Notes. See Note 7 of Condensed Notes to
Consolidated Financial Statements. In addition, because Dignity Partners
controlled Dignity Viatical, the assets, liabilities and operations of Dignity
Viatical are consolidated with those of the Company in the consolidated
financial statements. Through September 30, 1996, DPFC had purchased 902
policies with an aggregate face value of $67.1 million. Through June 30, 1996,
Dignity Viatical had purchased 169 policies with an aggregate face value of
$13.9 million. The minority interest of limited partners in investment
partnership reflected in the Company's consolidated financial statements
represents the limited partners' interests in the net assets and income of
Dignity Viatical. On June 25, 1996, the Company purchased the limited
partnership interests in Dignity Viatical and became the sole owner of all the
partnership interests therein. On August 2, 1996, the Company entered into an
agreement to sell to an unaffiliated third party virtually all of the policies
owned by Dignity Viatical. See "The Company -- Dignity Viatical and Dignified
One."
11
Three and Nine Months Ended September 30, 1996 Compared to Three and Nine Months
Ended September 30, 1995
Earned Discounts. During the third quarter of 1996, the Company
reclassified all of its assets (other than the policies held by DPFC) to a "held
for sale" category. The Company also established a valuation provision for
purchased life insurance policies (i.e., DPFC policies) during the quarter ended
September 30, 1996 because of the uncertainties created by the data presented at
the AIDS Conference and subsequently reported data. As a result, the Company
began recognizing income only upon receipt of proceeds on policies (either
pursuant to a sale or the death of the insured). Consequently, the Company did
not recognize any earned discounts on life insurance policies during the third
quarter, but instead recognized $356,000 of earned discounts on matured policies
for such quarter. Such income is equal to the difference between the proceeds
the Company received on the policies (less any back end sourcing fees) and the
carrying value of such policies after giving effect to any provision for loss on
the sale of such policies and any valuation provision for purchased life
insurance policies. See Notes 4 and 5 to the Condensed Notes to Consolidated
Financial Statements. In addition, in connection with the decision to sell all
or substantially all of the Company's assets, the Company recognized $802,000 of
earned discounts on prior maturities. Such earned discounts were carried on the
balance sheet at June 30, 1996 as unearned income which related to policies for
which the Company had collected the proceeds prior to the expected collection
date. The Company will not have any earned discounts on prior maturities in any
other period.
Interest Income. Interest income increased dramatically (226%) for the
first nine months of 1996 as a result of the investment of the initial public
offering proceeds in short term securities and marketable securities. Interest
income has decreased since the beginning of 1996 as such funds were used to
purchase life insurance policies and for other working capital purposes. See
Note 2 of Condensed Notes to Consolidated Financial Statements.
Other Income. Components of other income include collections on policies of
dividends, interest, paid-up cash values, increases in face value of matured
policies and reimbursements of premiums on matured policies. Other income
increased during the first nine months of 1996 due to collections on a larger
portfolio and a $80,000 aggregate increase in face value on two policies.
Interest Expense. Interest expense in the first nine months of 1996
increased 27.5% relative to the first nine months of 1995 as a result of the
higher level of portfolio purchases and the increase in borrowings used to fund
those purchases. Average borrowings under the Securitized Notes were $43.0
million in the first nine months of 1996 compared to $23.3 million in the first
nine months of 1995. The interest rate on the Securitized Notes decreased to
9.2% in the first nine months of 1996 from 9.5% in the first nine months of
1995. Borrowings under the TransAmerica Facility bore a dollar weighted interest
rate of 10.9% and 12.1% in the first nine months of 1996 and 1995, respectively.
Average borrowings were $1.1 million in the first nine months of 1996 compared
to $5.1 million in the first half of 1995. See Notes 7 and 8 to Condensed Notes
to Consolidated Financial Statements herein, and "Liquidity and Capital
Resources" and "Description of Securitized Notes" above for further information
regarding the Securitized Notes and the TransAmerica Facility.
Compensation and Benefits. Compensation and benefits increased 73.2% in the
first nine months of 1996 compared to the first nine months of 1995 due to the
hiring of additional personnel to handle the administrative tasks relating to
the Company's increased portfolio and non-broker referral business and to
support the Company's related growth in the latter period. Subsequent to the
AIDS Conference and the cessation of new application processing, the number of
employees has been reduced from 27 (on July 16, 1996) to 17.
12
Other General and Administrative Expenses. Other general and administrative
expenses increased 9.0% in the third quarter of 1996 over the third quarter of
1995, but decreased 48.2% over the second quarter of 1996. This decrease is
directly related to the cessation in processing of new applications on HIV and
AIDS policies. Other general and administrative expenses increased 73.0% in the
first nine months of 1996 over the first nine months of 1995 primarily as a
result of an increase in the number of medical reviews for policies being
analyzed for potential purchase early in 1996. Additionally, because the Company
temporarily ceased processing applications for policies insuring individuals
with AIDS and HIV, approximately $80,000 and $30,000 of medical review costs
associated with such policies in the underwriting process were expensed in the
second and third quarter of 1996, respectively. The first nine months of 1996
also includes a $200,000 aggregate increase in expenses for legal, accounting,
insurance, director fees and advertising, in part as a result of the Company's
status as a public company.
Amortization. Because the TransAmerica Facility was terminated in August
1996, the Company incurred a charge in the third quarter of 1996 of $130,000 as
a result of the Company's writing off the unamortized financing charges related
to the TransAmerica Facility.
Income Tax Expense. Income tax expense decreased in the first nine months
of 1996 over the comparable period in 1995. This was a result of the estimated
loss provision recorded in the third quarter of 1996. The Company assumes there
is no future income tax benefit related to any loss carryforward.
Minority Interest of Limited Partners in Earnings of Investment
Partnership. All earned discounts attributable to the limited partners of
Dignity Viatical had been fully accrued by December 31, 1995 and, therefore,
minority interest of limited partners in earnings of investment partnership was
zero for the first nine months of 1996 compared to $705,000 for the first nine
months of 1995. In February 1996, the Company entered into an agreement with the
limited partners of Dignity Viatical to use best efforts to sell on terms
reasonably acceptable to the limited partners, the policies owned by Dignity
Viatical. Requests for closed bids were sent out in late March 1996 to Dignity
Partners and two other prospective buyers. Dignity Partners was the successful
bidder purchasing, effective June 25, 1996, the limited partnership interests of
the limited partners for approximately $5.2 million.
Liquidity and Capital Resources
The Company's primary need for capital has been the funding of policy
purchases. The purchase of life insurance policies requires significant capital
resources and assuming a resumption of policy purchases, the Company's future
operating results will be directly related to the availability and cost of its
capital funds. Prior to its initial public offering, the amount of policies that
the Company was able to purchase, and the timing of such purchases, was
determined primarily by the availability and cost of external financing. The
major source of funding since the initial public offering has been the net
proceeds of the initial public offering. The Company does not currently have an
external funding source. The TransAmerica Facility was terminated in the third
quarter of 1996. The Securitized Notes no longer provide funds with which to
purchase policies. At October 31, 1996, the Company had $8.2 million in short
term assets (excluding assets of DPFC), of which $3.0 million was used in early
November to purchase the equity investment in AIC. The $8.2 million included
$7.8 million in cash and cash equivalents and $400,000 million of receivables.
The Company is analyzing its current and future needs for additional financing
and has been in discussions with several lending institutions and investment
banks. There can be no assurance that the Company will be successful in
obtaining additional financing on satisfactory terms assuming it determines it
needs additional funds. However, the Company at present
13
anticipates having sufficient liquidity to meet its working capital and
operational needs through 1996, but as the Company continues to analyze its
strategic direction such needs may change.
As of September 30, 1996, the outstanding principal amount of the
Securitized Notes was $42.4 million. Principal repayments on the Securitized
Notes began in July 1996. Principal repayments on the Securitized Notes are made
from collections on policies pledged to secure the payment thereof and do not
require the Company to expend cash or obtain financing to satisfy such principal
repayments.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits.
Number Description
------ -----------
10 Master Agreement for Purchase of Life Insurance
Policies dated September 27, 1996
27 Financial Data Schedule
(b) Reports on Form 8-K.
Date Item Reported Matter Reported
- --------------- ------------- ---------------
October 9, 1996 5 Text of Press Release dated October 9, 1996
regarding agreement to sell portion of portfolio.
November 5, 1996 5 Text of Press Release dated October 18, 1996
regarding share repurchase program .
November 5, 1996 5 Text of Press Release dated November 4, 1996
regarding investment in American Information
Company, Inc.
15
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIGNITY PARTNERS, INC.
DATED: November 14, 1996 S/ ALAN B. PERPER
---------------------------
ALAN B. PERPER
President
(Duly Authorized Officer)
DATED: November 14, 1996 S/ JOHN WARD ROTTER
-------------------------
JOHN WARD ROTTER
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
16