<PAGE>
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 June 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 July 31, 1996, there were 4,291,824 shares of the registrant's
Common Stock outstanding.
<PAGE>
DIGNITY PARTNERS, INC.
INDEX
<TABLE>
<CAPTION>
Page #
------
<S> <C>
Part I
- ------
Item 1. Financial Statements:
Consolidated Balance Sheets
June 30, 1996 and December 31, 1995 1
Consolidated Statements of Operations for the
Three Months and Six Months Ended
June 30, 1996 and 1995 2
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1996 and 1995 3
Condensed Notes to Consolidated
Financial Statements 4 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 13
Part II
- -------
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
- ----------
</TABLE>
(i)
<PAGE>
DIGNITY PARTNERS, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 1996 and December 31, 1995
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
ASSETS ------------- -------------
<S> <C> <C>
Cash and cash equivalents (note 2) $ 6,499,714 $ 1,056,611
Restricted cash 5,374,241 4,566,845
Marketable securities (note 2) 4,107,502 ---
Matured policies receivable 1,719,197 1,652,921
Purchased life insurance policies (note 3) 61,861,548 48,938,098
Furniture and equipment, net of accumulated
depreciation of $74,570 and
$61,349, respectively 105,038 130,532
Deferred financing costs, net of accumulated
amortization of $631,527 and
$451,961, respectively 951,975 1,043,541
IPO financing costs (note 2) --- 750,000
Other assets 247,424 87,079
------------ ------------
Total assets $ 80,866,639 $ 58,225,627
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses $ 233,707 $ 329,827
Accounts payable 267,690 377,204
IPO financing costs payable (note 2) --- 306,900
Payable to related party (note 2) --- 1,482,170
Accrued compensation payable (note 2) 111,189 849,148
Unearned income 802,471 715,883
Payable for policies purchased 335,710 376,020
Other short term debt (note 2) --- 1,162,170
Long term notes payable (note 4) 45,480,138 39,105,138
Other long term debt (note 2 and 6a) 2,109,773 1,444,270
Deferred income taxes 899,223 531,711
------------ ------------
Total liabilities 50,239,901 46,680,441
------------ ------------
Minority interest of limited partners in
investment partnership (note 5) --- 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 1,179,270 692,104
------------ ------------
Total stockholders' equity 30,626,738 4,865,604
------------ ------------
Total liabilities and
stockholders' equity $ 80,866,639 $ 58,225,627
============ ============
<FN>
See accompanying condensed notes to consolidated financial statements.
1
</FN>
</TABLE>
<PAGE>
DIGNITY PARTNERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Six Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Income:
Earned discounts on
life insurance policies $1,884,431 $1,699,876 $3,697,032 $3,337,344
Interest income 281,919 68,928 456,913 110,522
Other 35,924 45,448 166,650 77,549
--------- --------- --------- ---------
Total income 2,202,274 1,814,252 4,320,595 3,525,415
Expenses:
Interest expense 967,185 769,224 1,974,938 1,474,904
Compensation and benefits 305,618 191,961 624,653 345,530
Other general and
administrative expenses 446,417 168,944 666,793 306,897
Amortization 91,773 63,923 179,566 125,391
Depreciation 10,018 8,010 19,967 15,797
Consulting fees --- --- --- 9,622
--------- --------- --------- ---------
Total expenses 1,821,011 1,202,062 3,465,917 2,278,141
--------- --------- --------- ---------
Income before income taxes
and minority interest 381,263 612,190 854,678 1,247,274
Income tax expense (187,614) (145,874) (367,512) (280,526)
Minority interest of limited
partners in earnings of
investment partnership (note 5) --- (252,228) --- (619,527)
--------- --------- --------- ---------
Net income $ 193,649 $ 214,088 $ 487,166 $ 347,221
========= ========= ========= =========
Net income per share (note 1) 0.05 0.11 0.13 0.18
Weighted average number of
shares of common stock
and common stock equivalents
outstanding (note 1) 4,291,824 1,901,870 3,686,686 1,901,870
<FN>
See accompanying condensed notes to consolidated financial statements.
2
</FN>
</TABLE>
<PAGE>
DIGNITY PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1996 1995
------------ ------------
<S> <C> <C>
Cash flows for operating activities:
Net income $ 487,166 $ 347,221
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 199,533 141,188
Write-off of furniture and equipment 12,303 ---
Earned discounts on insurance policies (3,697,032) (3,337,344)
Purchase of life insurance policies (19,072,306) (12,371,904)
Collections on life insurance policies 8,730,316 6,543,041
Increase in unearned income 86,588 144,486
Decrease (increase) in other assets (160,345) 1,001
Increase in deferred taxes 367,512 280,526
Increase (decrease) in accrued expenses (96,120) 69,367
Increase (decrease) in accounts payable (109,514) 23,425
Decrease in IPO financing costs payable (306,900) ---
Increase (decrease) in payable to related
party (1,482,170) 297,544
Increase (decrease) in accrued compensation
payable (737,959) 172,500
Income applicable to minority interest --- 619,527
------------ -------------
Net cash used by operating activities (15,778,928) (7,069,422)
------------ ------------
Cash flows used for investing activities:
Purchase of furniture and equipment (6,776) (9,948)
Additions to restricted cash (807,396) (3,418,588)
Additions to marketable securities (4,107,502) ---
------------ ------------
Net cash used for investing activities (4,921,674) (3,428,536)
------------ ------------
Cash flows from financing activities:
Proceeds from long term notes payable 6,375,000 31,366,781
Proceeds from other long term debt 4,275,024 12,911,070
Principal payments on other long term debt (3,609,521) (29,943,015)
Distribution to limited partners (783,313) (2,223,679)
Purchase of limited partners' interest in
investment partnership (4,887,283) ---
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) (570,510)
Reimbursement of IPO financing costs 750,000 ---
------------ ------------
Net cash provided by financing
activities 26,143,705 11,540,647
------------ ------------
Net increase in cash and
cash equivalents 5,443,103 1,042,689
Cash and cash equivalents, beginning of period 1,056,611 30,561
------------ ------------
Cash and cash equivalents, end of period $ 6,499,714 $ 1,073,250
============ ============
Supplemental disclosure of cash flow information:
State taxes paid $ 5,693 $ ---
============ ============
Cash paid for interest $ 2,071,058 $ 1,138,275
============ ============
<FN>
See accompanying condensed notes to consolidated financial statements
3
</FN>
</TABLE>
<PAGE>
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 June
30, 1996 and for the three and six month periods ended June 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 (consisting only of normal
recurring adjustments) considered necessary for a fair presentation, have been
included. Operating results for the six month period ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the entire 1996
fiscal year. 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. The Company received the following proceeds from the offering and,
through June 30, 1996, such proceeds had been applied for the following
purposes:
<TABLE>
<S> <C> <C>
Proceeds:
Proceeds net of underwriters' discount $26,575,933
Less offering expenses 1,301,965
-----------
Net proceeds $25,273,968
===========
Uses:
Policy purchases $13,388,917
Payments to related party 2,191,007
Accrued and unpaid salaries (a) 833,750
Taxes on accrued and unpaid salaries 20,187
Short term debt 1,162,170
Other long term debt 3,234,033
-----------
Total uses $20,830,064
===========
<FN>
(a) 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.
4
</FN>
</TABLE>
<PAGE>
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 the Human
Immunodeficiency Virus (HIV) detectable in the blood of persons previously
diagnosed with HIV and AIDS. On July 16, 1996, following the reports from the
conference, 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 research results
reported at the conference. In excess of 95% of the Company's historical
purchases have involved policies insuring the lives of individuals with HIV or
AIDS. The Company continues to analyze the effects of such research results on
its business and, in particular, purchases by the Company of policies, levels of
expenses, the timing of collections on owned policies and the appropriateness of
the Accrual Periods (as defined in "Management's Discussion and Analysis of
Financial Condition and Results of Operations") over which the Company
recognizes and the methodology the Company uses to recognize income or "earned
discounts." Until such analysis is completed, the Company will not be using the
proceeds remaining from the offering (approximately $4.4 million at June 30,
1996 and $1.4 million at July 31, 1996) or other funds to purchase life
insurance policies insuring the lives of individuals with HIV or AIDS. However,
the Company is continuing to use such proceeds and other funds to purchase
policies insuring individuals with HIV or AIDS for which it has contractual
commitments (which the Company estimates are $4 million at July 31, 1996). The
Company cannot determine what portion of such policies will ultimately not be
purchased, whether because of death, rescission by the client or for other
reasons. The Company is also continuing to use proceeds from the offering and
other funds to purchase policies insuring individuals with other terminal
illnesses. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Recent Developments." Pending a determination as to the
course of action in the light of these recent developments, the Company will
invest any remaining proceeds not otherwise required to be used for policy
purchases or other working capital needs in short term securities (less than
three months) and marketable securities (greater than three months but less than
one year) primarily consisting of grade BBB or better commercial paper,
commercial notes and government securities. Short term securities (included in
cash and cash equivalents) and marketable securities are stated at cost on the
balance sheet. Market values of these securities approximate cost due to the
short maturity periods.
Changes in stockholders' equity during the first half of 1996, which are
due in large part to the initial public offering, reflected the following:
<TABLE>
<CAPTION>
<S> <C>
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 income 487,166
------------
Stockholders' equity, end of period $ 30,626,738
============
<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.
5
</FN>
</TABLE>
<PAGE>
3. PURCHASED LIFE INSURANCE POLICIES
Purchased life insurance policies consist of:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- -----------
<S> <C> <C>
Capitalized costs of purchased
life insurance policies $54,212,109 $41,235,153
Earned discount 8,385,109 7,702,945
Unearned discount for Dignity Viatical (735,670) --
----------- -----------
Purchased life insurance policies $61,861,548 $48,938,098
=========== ===========
</TABLE>
On June 25, 1996, Dignity Partners purchased the limited partnership
interests in Dignity Viatical Settlement Partners, L.P. ("Dignity Viatical")
previously owned by two unaffiliated third parties and became the sole owner of
all of the general and limited partnership interests in Dignity Viatical. See
Note 5. In connection with the purchase, the Company eliminated the minority
interest at a discount. Such discount is reflected on the balance sheet as a
reduction in purchased life insurance policies.
Purchased life insurance policies included in the foregoing table, for
which the discount has been fully earned, but for which the Company has not yet
received notification of the insured's death, consist of :
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- -----------
<S> <C> <C>
Capitalized costs of purchased life
insurance policies $11,986,754 $ 8,272,836
Earned discount 3,767,764 2,498,404
----------- -----------
Included in purchased life
insurance policies $15,754,518 $10,771,240
=========== ===========
</TABLE>
At June 30, 1996, the Company had remaining unearned discounts of
$12,038,210 (excluding discounts of $736,000 on the policies acquired upon the
purchase of the limited partnership interests in Dignity Viatical) to be
recognized as income in future periods, on policies for which the Accrual
Periods end after June 30, 1996. Based on remaining Accrual Periods applicable
as of June 30, 1996, and assuming continued ownership of such policies and no
revision to such Accrual Periods or the methodology used to recognize income
resulting from the matters described above in Note 2 and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Recent Developments" relating to the cessation of the purchase of certain
polices, this income will be recognized in future periods as follows:
<TABLE>
<CAPTION>
Income to be
recognized from
earned discount
in the period (a)
-------------------
<S> <C>
6 month period ending 12/31/96 3,418,421
12 month period ending 12/31/97 4,232,994
12 month period ending 12/31/98 2,092,193
12 month period ending 12/31/99 1,183,031
12 month period ending 12/31/00 603,768
12 month period ending 12/31/01 372,643
12 month period ending 12/31/02 113,354
12 month period ending 12/31/03 21,806
-------------------
Total $ 12,038,210
-------------------
<FN>
(a) These figures have been calculated using the method described in Note
1(d) of the Consolidated Financial Statements included in the Form 10-K and will
change if the methodology for income recognition, Accrual Periods or capitalized
costs change in future periods.
6
</FN>
</TABLE>
4. LONG TERM NOTES PAYABLE
The Senior Viatical Settlement Notes, Series 1995-A, Stated Maturity
March 10, 2005 (the "Securitized Notes") issued by Dignity Partners Funding
Corp. I ("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. The Securitized Notes were scheduled to begin repayment of principal 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 (which are payable solely from collections on
pledged policies and deposited funds) on the Securitized Notes began in July
1996.
5. 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 a total reduction of
minority interest on the balance sheet at June 30, 1996, and the recording of
$736,000 in additional unearned discounts as described in Note 3. This purchase
had no impact on the income statement for the second quarter of 1996.
6. EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE
a. TransAmerica Credit Facility
As described in Note 2 and under "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Recent Developments," 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 $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 constitute an event of default under the TransAmerica
Facility. Although TransAmerica has not given any notice accelerating the due
date of amounts outstanding under the TransAmerica Facility, there can be no
assurance it will not do so. At July 31, 1996, the outstanding principal balance
under the TransAmerica Facility was $3.3 million. The Company anticipates that
it will terminate and prepay the TransAmerica Facility in full in the third
quarter of 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Recent Developments," "-- Interest
Expense" and "-- Liquidity and Capital Resources."
7
<PAGE>
b. Sale of Policies
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
for approximately $4.8 million and two other policies at a sale price of
approximately $584,000. The sale will cause the Company to eliminate the
unearned discounts for such policies which were recorded on the balance sheet as
a reduction in purchased life insurance policies as described in Note 3. The
Company anticipates recognizing a loss (excluding the tax effect) of
approximately $330,000 in connection with such sale. The Company intends to use
the proceeds from such sale to retire the debt outstanding under the
TransAmerica Facility and for other working capital needs.
c. Employee Stock Option Plan
On July 17, 1996, the Compensation Committee of the Board of Directors
canceled Incentive Stock Options covering 145,000 aggregate shares of Common
Stock, which had been granted to certain employees (other than executive
officers) of the Company on February 13, 1996, and granted Incentive Stock
Options covering 145,000 aggregate shares of Common Stock to such employees of
the Company. The exercise price of the options granted in February 1996 was
$12.00. The exercise price of the options granted in July 1996 is equal to the
closing price of the common stock on NASDAQ on July 17, 1996.
8
<PAGE>
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 June 30, 1996 and of the results of operations
for the Company for the three and six months ended June 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.
The Company recognizes 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. The
carrying value for each policy is reflected on the Company's consolidated
balance sheet under "purchased life insurance policies" and consists of the
purchase price, other capitalized costs and the earned discount on the policy
accrued to the balance sheet date. See the Form 10-K for further information
regarding capitalized costs of policies, determination of Accrual Periods and
changes thereto over time.
The Company's financial statements consolidate the assets, liabilities and
operations of DPFC, the Company's wholly-owned special purpose subsidiary
through which the Company issued the Securitized Notes. See Note 4 of Condensed
Notes to Consolidated Financial Statements. In addition, the assets, liabilities
and operations of Dignity Viatical Settlement Partners, L.P. ("Dignity
Viatical") are consolidated with those of the Company in the consolidated
financial statements. Effective June 25, 1996, Dignity Viatical became
wholly-owned by the Company. See Notes 5 and 6b of Condensed Notes to
Consolidated Financial Statements. See the Form 10-K for further information
regarding DPFC and Dignity Viatical.
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
International AIDS Conference in Vancouver, British Columbia, the Company was
temporarily ceasing processing new applications for policies insuring people
afflicted with AIDS and HIV while it further analyzed the research results. The
Company does not believe it has sufficient data to make an adjustment in Accrual
Periods or in the methodology for income recognition, although certain
statistical information in regard to the Company's portfolio (such as a recent
increase in the amount of policies for which the earned discount has been fully
accreted) suggest that further analysis is required. The Company is continuing
to analyze the data regarding the new treatments as well as statistical data
relating to its own portfolio and cannot predict what 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.
9
<PAGE>
RESULTS OF OPERATION
Earned Discounts on Life Insurance Policies. Earned discounts on life
insurance policies increased 10.9% to $1.9 million for the second quarter 1996
from $1.7 million for the second quarter 1995. Although the Company recongnized
income on a larger portfolio of policies in the second quarter of 1996, the
growth in earned discounts was tempered because the Company did not recognize
any discounts in such quarter on policies which were sold at a loss on August 2,
1996. See Note 6b of Condensed Notes to Consolidated Financial Statements. In
addition, such growth was tempered because the larger portion of the policies
purchased in the second quarter of 1996 were acquired in the latter part of such
quarter and were purchased at relatively higher prices due in part to
competitive pressures.
The Company purchased 194 policies with an aggregate face value of $11.9
million during the quarter ended June 30, 1996 compared to the purchase of 114
policies with an aggregate face value of $8.0 million during the quarter ended
June 30, 1995. The weighted average Accrual Period of such policies purchased
was 39.7 months and 25.8 months, respectively, for the second quarter of 1996
and 1995.
In addition, the Company in effect purchased approximately $6 million in
face value of policies when it purchased the limited partnership interests of
the limited partners in Dignity Viatical on June 25, 1996 for a purchase price
of approximately $5.2 million. On August 2, 1996, the Company entered into an
agreement to sell virtually all of the policies for approximately $4.8 million
and two other policies for approximately $584,000. In connection with such sale,
the Company anticipates recognizing a loss (excluding the tax effect) of
approximately $330,000 in the third quarter of 1996.
Earned discounts for the six month period increased 10.8% to $3.7 million
in 1996 from $3.3 million in 1995. The Company purchased 342 policies (excluding
the Dignity Viatical policies acquired in June 1996) with an aggregate face
value of $24.9 million during the first half of 1996 versus 213 policies with an
aggregate face value of $15.9 million during the comparable period in 1995. The
weighted average Accrual Period of such policies was 33.4 months and 25.4
months, respectively, for the first half of 1996 and 1995.
The policies acquired by the Company in the first half of 1996 have
relatively longer weighted average Accrual Periods in part because: (i) the
Company has sought to increase its purchase of policies insuring people with
longer life expectancies; (ii) the Company's medical consultants appear to be
providing relatively longer life expectancy estimates for policies recently
purchased; and (iii) more consumers are seeking out viatical settlements when
they are relatively healthier. Policies which have longer life expectancy
estimates have longer Accrual Periods resulting in a smaller amount of earned
discounts being accrued in any period.
The estimated original yield for policies purchased by the Company during
the second quarter of 1996 was 12.2% compared to 14.7% for the second quarter of
1995. The estimated original yield for policies purchased by the Company during
the first half of 1996 (excluding the Dignity Viatical policies acquired in June
1996) was 12.1% compared to 15.6% for the first half of 1995 and 15.4% for the
full year of 1995.
Interest Income. Interest income increased dramatically (313.4%) for the
first half of 1996 as a result of the investment of the initial public offering
proceeds in short term securities and marketable securities. As such funds are
used to purchase life insurance policies and for other working capital
requirements, interest income will decrease. See Note 2 of Condensed Notes to
Consolidated Financial Statements.
10
<PAGE>
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 half of 1996 due to collections on a larger portfolio
and a $50,000 increase in face value on one policy.
Interest Expense. Interest expense in the first half of 1996 increased
33.9% relative to the first half of 1995 as a result of the higher level of
portfolio purchases and the increase in borrowings used to fund those purchases.
Interest rates on the Securitized Notes decreased to 9.2% in the first half of
1996 from 9.5% in the first half of 1995. However, average borrowings under the
Securitized Notes were $42.6 million in the first half of 1996 compared to $17.8
million in the first half of 1995. Borrowings under the TransAmerica Facility
bore a dollar weighted interest rate of 12.6% and 12.0% in the first half of
1996 and 1995, respectively. However, average borrowings were $0.7 million in
the first half of 1996 compared to $7.4 million in the first half of 1995. See
the Form 10-K, Note 2 and 6a to Condensed Notes to Consolidated Financial
Statements herein and "Liquidity and Capital Resources" below for further
information regarding the Securitized Notes and the TransAmerica Facility. The
Company plans to terminate and prepay the TransAmerica Facility in full in the
third quarter of 1996. To the extent that the Company prepays the TransAmerica
Facility, the Company anticipates that it will incur a charge in the third
quarter of 1996 of approximately $154,000 as a result of the Company's writing
off the remaining unamortized financing charges related to the TransAmerica
Facility.
Compensation and Benefits. Compensation and benefits increased 59.2% in the
second quarter of 1996 over the second quarter of 1995, but decreased 4.2% over
the first quarter of 1996. Compensation and benefits increased 80.8% in the
first half of 1996 compared to the first half 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 growth.
Other General and Administrative Expenses. Other general and administrative
expenses increased 164.2% in the second quarter of 1996 over the second quarter
of 1995 and 117.3% in the first half of 1996 over the first half of 1995
primarily as a result of an increase in the number of medical reviews for
policies being analyzed for potential purchase. Additionally, because the
Company temporarily ceased processing applications for policies insuring people
with AIDS and HIV, approximately $50,000 of medical review costs associated with
such policies in the underwriting process were expensed in the second quarter of
1996. The first half of 1996 also includes $137,000 aggregate increases in
expenses for legal, accounting, insurance, director fees and advertising, in
part as a result of being a public company. In addition, during the first half
of 1996, the Company increased the amount of policies received through
non-broker sources relative to the comparable periods in 1995. In connection
with the review of such policies, certain costs traditionally borne by the
Company's sourcing brokers, such as the costs of obtaining medical records and
insurance information, are borne by the Company. These costs are not capitalized
even if the policy is purchased and are expensed as other general and
administrative expenses.
Income Tax Expense. Income tax expense increased 31.0% from the first half
of 1995 to the first half 1996. The increase is primarily the result of the
Company's increased profitability after minority interest of limited partners in
earnings of investment partnership.
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 half of 1996 compared to $619,527 for the first half 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 offers were sent out
11
<PAGE>
to 2 prospective buyers as well as Dignity Partners in late March 1996.
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 for the purchase of policies. 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.
As of June 30, 1996, the outstanding principal amount of the Securitized
Notes was $45.5 million. Repayments of principal were originally scheduled to
begin in September 1996. An early amortization event occurred in June 1996 when
the Overcollateralization Percentage (as defined in the Form 10-K) was less than
120% on four consecutive weekly calculation dates, with the result that the
maximum lending commitment was reduced to the then outstanding balance ($45.5
million) from $50 million, the Company lost the ability to use proceeds of
policy collections to acquire additional policies and 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.
Following the Company's announcement of its temporary cessation of
processing new applications for policies insuring people with AIDS and HIV,
TransAmerica notified the Company on July 18, 1996, that such action constituted
an event of default under the TransAmerica Facility. TransAmerica elected to
cease making future advances under the TransAmerica Facility. At August 13,
1996, the outstanding principal balance under the TransAmerica Facility was $3.3
million. The Company anticipates terminating or prepaying the TransAmerica
Facility in full in the third quarter of 1996. See Note 6a of Condensed Notes to
Consolidated Financial Statements herein. 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 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.
The Company's cash requirements have been significant in order to finance
its activities. As a result of accruing income on each purchased policy prior to
collecting the face value, the amount of earned discount recognized is not
directly related to the collection of cash by the Company on the policies. Net
cash flows used for operating activities reflect net income adjusted to reflect
purchases of and collections on policies, depreciation and amortization, earned
discounts on life insurance policies, increases or decreases in unearned income,
assets and various expenses and income applicable to minority interest. The
Company's net cash used by operating activities was $15.8 million and $7.1
million for the first half of 1996 and 1995, respectively, reflecting the
Company's growing net investment in life insurance policies. Net cash provided
by financing activities, which includes primarily net proceeds generated from
the issuance of common stock, along with the proceeds and repayments of
indebtedness, was $26.1 million and $11.5 million for the first half of 1996 and
1995, respectively. The increase in 1996 is attributable to the Company's
receipt and partial application of the net proceeds of the initial public
offering. Remaining net proceeds of the offering
12
<PAGE>
have been invested in short term securities and marketable securities. See
Note 2 of Condensed Notes to Consolidated Financial Statements.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
On June 21, 1996, the Company held an Annual Meeting. The election of 2
Board members as set forth in the proxy statements was presented.
Bradley Rotter and Stephen Bow were re-elected to the Board of
Directors for terms expiring in 1999. The voting tallies were:
Director Votes For Votes Withheld/Not Voted
-------- ---------- ------------------------
Bradley N. Rotter 3,695,399 596,425
Stephen T. Bow 3,695,399 596,425
Other directors whose term of office continued after the meeting
included: John Ward Rotter, Alan B. Perper and Paul A. Volberding.
Item 5. Other Information
- ---------------------------
Following the Company's announcement of its temporary cessation of
processing new applications for policies insuring people with AIDS and
HIV, TransAmerica notified the Company on July 18, 1996, that such
action constituted an event of default under the TransAmerica Facility.
TransAmerica elected to cease making future advances thereunder. At
August 13, 1996, the outstanding principal balance under the
TransAmerica Facility was $3.3 million. The Company anticipates
terminating and prepaying the TransAmerica Facility in the third
quarter of 1996.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits.
Number Description
------ -----------
27 Financial Data Schedule
(b) Reports on Form 8-K.
Date Item Reported Matter Reported
---- ------------- ---------------
July 17, 1996 5 Text of Press Release dated July 16, 1996
regarding temporary withdrawal from
market for policies insuring AIDS and HIV
patients.
13
<PAGE>
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: August 14, 1996 S/ ALAN B. PERPER
--------------------------
ALAN B. PERPER
President
(Duly Authorized Officer)
DATED: August 14, 1996 S/ JOHN WARD ROTTER
--------------------------
JOHN WARD ROTTER
Executive Vice President
and Chief Financial
Officer (Principal
Financial and Accounting
Officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FORM 10Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANICAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 11,873,955
<SECURITIES> 4,107,502
<RECEIVABLES> 1,719,197
<ALLOWANCES> 0
<INVENTORY> 61,861,548 <F1>
<CURRENT-ASSETS> 1,199,399
<PP&E> 179,608
<DEPRECIATION> (74,570)
<TOTAL-ASSETS> 80,866,639
<CURRENT-LIABILITIES> 2,649,990
<BONDS> 47,589,911 <F2>
0
0
<COMMON> 42,918
<OTHER-SE> 30,583,820
<TOTAL-LIABILITY-AND-EQUITY> 80,866,639
<SALES> 3,697,032
<TOTAL-REVENUES> 4,320,595
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,490,979
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,974,938
<INCOME-PRETAX> 854,678
<INCOME-TAX> (367,512)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 487,166
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0
<FN>
<F1> INCLUDES PURCHASED LIFE INSURANCE POLICIES.
<F2> REPRESENTS LONG TERM BORROWINGS OF THE COMPANY.
</FN>
</TABLE>
