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 March 31, 1997
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 April 30, 1997, there were 3,653,324 shares of the registrant's Common Stock
outstanding.
<PAGE>
DIGNITY PARTNERS, INC.
----------------------
INDEX
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Page #
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Part I
=====
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets
March 31, 1997 and December 31, 1996 1
Consolidated Statements of Operations for the
Three Months Ended March 31, 1997 and 1996 2
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1997 and 1996 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 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures
- - ---------- 15
(i)
<PAGE>
DIGNITY PARTNERS, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 1997 and December 31, 1996
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1997 1996
-------------------- --------------------
<S> <C> <C>
Cash and cash equivalents $ 14,182,081 $ 6,586,447
Restricted cash (note 6) 4,335,177 4,625,663
Investment securities (fair value: $2,205,000) (note 2) 2,275,583 --
Matured policies receivable (note 6) 305,115 1,181,513
Assets held for sale (note 3) 3,365,846 11,520,103
Purchased life insurance policies (note 4) 39,017,973 41,246,239
Investment in convertible preferred shares (note 5) 1,864,128 3,000,000
Deferred financing costs, net of accumulated amortization of
$440,116 and $381,690, respectively (note 4 and 6) 628,484 681,910
Other assets 211,322 102,598
-------------------- --------------------
Total assets $ 66,185,709 $ 68,944,473
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses $ 195,678 $ 190,894
Accounts payable 678,058 320,577
Accrued compensation payable 64,971 186,390
Payable for policies purchased -- 427,553
Reserve for equity interest in wholly owned financing
subsidiary (note 4) 5,256,839 6,452,589
Long term notes payable (note 6) 39,084,011 41,218,205
Deferred income taxes (note 7) 6,000 6,000
-------------------- --------------------
Total 45,285,557 48,802,208
liabilities
-------------------- --------------------
Stockholders' equity:
Common stock, $0.01 par value; 15,000,000 authorized shares,
4,291,824 and 4,291,824 shares, respectively,
issued and outstanding 42,918 42,918
Additional paid-in-capital 29,496,720 29,496,720
Retained earnings (deficit) (7,912,173) (9,007,373)
Treasury stock, 273,500 and 145,000 shares,
respectively (note 8) (727,313) (390,000)
-------------------- --------------------
Total stockholders' equity 20,900,152 20,142,265
-------------------- --------------------
Total liabilities and stockholders' equity $ 66,185,709 $ 68,944,473
==================== ====================
<FN>
See accompanying condensed notes to consolidated financial statements.
</FN>
</TABLE>
1
<PAGE>
DIGNITY PARTNERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 1997 and 1996
<TABLE>
<CAPTION>
Three Months Ended
March 31,
<S> <C> <C>
1997 1996
---------------- ----------------
Income:
Earned discounts on life insurance policies (note 9) -- 1,812,601
Earned discounts on matured policies (note 9) 184,286 --
Interest income 207,636 174,994
Gain on sale of convertible preferred shares (note 5) 699,665 --
Net gain on assets sold (note 3) 870,641 --
Other 31,194 130,726
---------------- ---------------
Total income 1,993,422 2,118,321
Expenses:
Interest expense 938,470 1,007,753
Compensation and benefits 270,283 319,035
Other general and administrative expenses 565,736 220,376
Amortization 58,426 87,793
Depreciation -- 9,949
---------------- ----------------
Total expenses 1,832,915 1,644,906
---------------- ----------------
Income before income taxes and net loss in
wholly owned financing subsidiary charged to
reserve for equity interest 160,507 473,415
Income tax expense (note 7) -- (179,898)
Net loss in wholly owned financing subsidiary charged
to reserve for equity interest (note 4) 934,693 --
================ ================
Net income $ 1,095,200 $ 293,517
================ ================
Net income per share (note 8) 0.27 0.10
Weighted average number of shares of common stock
and common stock equivalents outstanding (note 8) 4,108,991 3,089,467
<FN>
See accompanying condensed notes to consolidated financial statements.
</FN>
</TABLE>
2
<PAGE>
DIGNITY PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1997 and 1996
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
--------------------- --------------------
<S> <C> <C>
Cash flows for operating activities:
Net income $ 1,095,200 $ 293,517
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 58,426 97,742
Write-off of furniture and equipment -- 12,303
Net gain on assets sold (870,641) --
Gain on sale of convertible preferred shares (699,665) --
Earned discounts on policies (184,286) (1,812,601)
Purchase of life insurance policies (666,217) (9,640,408)
Collections on matured life insurance policies 3,217,810 4,610,856
Increase in unearned income -- 71,662
Increase in other assets (108,723) (180,046)
Increase in deferred taxes -- 179,898
Increase in accrued expenses 4,784 1,021
Increase (decrease) in accounts payable 357,481 (178,654)
Increase in IPO financing costs payable -- 193,100
Decrease in payable to related party -- (1,482,170)
Decrease in accrued compensation payable (121,419) (798,668)
Decrease in reserve for equity interest in wholly
owned financing subsidiary (934,693) --
--------------------- --------------------
Net cash provided by (used in) operating activities 1,148,057 (8,632,448)
--------------------- --------------------
Cash flows from investing activities:
Proceeds from sale of assets held for sale 9,073,644 --
Purchase of furniture and equipment -- (5,994)
Decrease (increase) in restricted cash 290,486 (530,592)
Increase in marketable securities (2,275,583) (4,210,229)
Proceeds from sale of convertible preferred shares 1,835,537 --
--------------------- --------------------
Net cash provided by (used in) investing activities 8,924,084 (4,746,815)
--------------------- --------------------
Cash flows from financing activities:
Proceeds from long term notes payable -- 4,900,000
Principal payments on long term notes payable (2,134,194) --
Proceeds from other long term debt -- 2,065,025
Principal payments on other long term debt -- (3,509,295)
Distribution to limited partners -- (534,347)
Principal payment on loan from stockholder -- (1,162,170)
Proceeds from issuances of common stock -- 25,362,790
Purchase of treasury stock (337,313) --
Increase in financing costs (5,000) (10,000)
Reimbursement of IPO financing costs -- 750,000
--------------------- --------------------
Net cash provided by (used in) financing activities (2,476,507) 27,862,003
--------------------- --------------------
Net increase in cash and cash equivalents 7,595,634 14,482,740
Cash and cash equivalents, beginning of period 6,586,447 1,056,611
--------------------- --------------------
Cash and cash equivalents, end of period $ 14,182,081 $ 15,539,351
===================== ====================
Supplemental disclosure of cash flow information:
State taxes paid $ 23,136 $ 5,693
===================== ====================
Cash paid for interest $ 933,686 $ 1,006,732
===================== ====================
<FN>
See accompanying condensed notes to consolidated financial statements.
</FN>
</TABLE>
3
<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
March 31, 1997 and for the three month periods ended March 31, 1997 and 1996
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 three month period
ended March 31, 1997 are not indicative of the results that may be expected for
the entire 1997 fiscal year. The balance sheet as of December 31, 1996 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, 1996 (the "Form 10-K").
2. Investment Securities
- - -- ----------------------
The Company classifies securities for which it has the positive intent
and ability to hold to maturity as held-to-maturity securities. Such securities
are reported at amortized cost. As of March 31, 1997 all investment securities
were classified as held-to-maturity securities.
3. Assets Held for Sale and Related Sale Agreements
- - -- ------------------------------------------------
As a result of the Company's decision in 1996 to sell all or
substantially all of its assets, it reclassified all of its assets other than
the assets of its wholly-owned special purpose subsidiary, Dignity Partners
Funding Corp. I ("DPFC"), to a "held-for-sale" category. Accordingly, such
assets are recorded on the balance sheet as of March 31, 1997 and December 31,
1996 at the lower of carrying value or fair value less estimated cost to sell.
In connection with the decision to sell assets, the Company established a
reserve for loss on sale of assets during 1996. Assets held for sale consist of:
<TABLE>
Assets Held for Sale
====================
<CAPTION>
March 31, 1997 December 31, 1996
-------------- -----------------
<S> <C> <C>
Capitalized costs $ 4,278,537 14,089,124
Earned discounts on life
insurance policies 192,554 380,692
Reserve for loss on sale (1,105,245) (2,949,713)
------------ ------------
Assets held for sale $ 3,365,846 11,520,103
============ ===========
</TABLE>
The calculation of reserve for loss on sale of assets for life
insurance policies held for sale was calculated based on the life expectancies
of the insureds under 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 reserve for loss on sale of assets will be reported as a
realized gain or loss on assets sold at the time sale proceeds are received.
4
<PAGE>
On September 27, 1996, the Company entered into an agreement with an
unaffiliated viatical settlement company to sell 197 policies with an aggregate
face value of $14.2 million for an aggregate consideration of approximately $8.7
million. The Company established a reserve in the third quarter of 1996 of
$1,792,087 in connection with policies covered by the sale agreement. Through
March 31, 1997, 182 policies with an aggregate face value of $13.3 million had
been sold, of which 46 policies with an aggregate face value of $1.9 million
were sold in the fourth quarter of 1996 (resulting in a realized gain of
$120,000) and 136 policies with an aggregate face value of $11.4 million were
sold in the first quarter of 1997 (resulting in a realized gain of $426,000).
Seven policies covered by the sale agreement were not sold because the insured
died prior to the issuing insurance company's acknowledgment of transfer of
ownership of the policy and the Company collected the death benefit instead of
selling those policies. As of March 31, 1997, the remaining eight policies (with
a face value of $420,000) were pending acknowledgment of transfer of ownership.
On January 16, 1997 Dignity Partners entered into an agreement with an
unaffiliated viatical settlement company to sell 18 policies with an aggregate
face value of $1.0 million for approximately $710,000. Such policies were
carried on the balance sheet at December 31, 1996 at approximately $590,000
after giving effect to the reserve for loss on sale of assets. In the first
quarter of 1997, the Company completed the sale of 17 policies with an aggregate
face value of $990,000 and realized a gain of $121,000 associated with these
policies. As of March 31, 1997, the remaining policy with a face value of
$25,000 was pending acknowledgment of transfer of ownership.
On February 10, 1997 Dignity Partners entered into an agreement with an
unaffiliated viatical settlement company to sell 67 policies with an aggregate
face value of $4.5 million for approximately $3.0 million. Such policies were
carried on the balance sheet at December 31, 1996 at approximately $2.2 million
after giving effect to the reserve for loss on sale of assets. In the first
quarter of 1997, the Company completed the sale of 35 policies with an aggregate
face value of $1.7 million and realized a gain of $295,000 associated with these
policies. As of March 31, 1997, the remaining 32 policies with a face value of
$2.8 million were pending acknowledgment of transfer of ownership.
On March 24, 1997 Dignity Partners entered into an agreement with an
unaffiliated viatical settlement company to sell 31 policies with a face value
of $2.9 million for approximately $1.7 million. Such policies were carried on
the balance sheet at March 31, 1997 at approximately $1.5 million after giving
effect to the reserve for loss on sale of assets.
The policies representing "assets held for sale" consist of the
policies under the aforementioned sales agreements for which the Company is
awaiting the acknowledgment of the transfer of ownership by the applicable
insurance company and the payment therefore by the applicable purchaser.
4. Purchased Life Insurance Policies
- - -- ---------------------------------
Effective July 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 6) were issued, requires the consent of all of the holders of
the Securitized Notes ("Noteholders") and the Company. The Company has discussed
potential sales of DPFC policies with the Noteholders; however, the Company
cannot determine whether the Noteholders and the Company will decide to sell
such policies or whether such a sale is feasible. A reserve was recorded in 1996
to reflect the estimated loss of the Company's equity interest in DPFC. As of
March 31, 1997 the reserve was $5.3 million. The reserve provides for the
write-off of deferred financing costs and the unrealized residual value
associated with DPFC.
5
<PAGE>
5. Investment In Convertible Preferred Shares
- - -- -------------------------------------------
On November 4, 1996, the Company purchased 21,517,100 convertible
preferred shares for $3.0 million (representing approximately 30% of the fully
converted common equity interest) in American Information Company, Inc.
("American Information"), a privately held company which, among other things,
provides information services to individuals owning or purchasing automobiles.
The Company has an option, through September 1997, to purchase for approximately
$1.1 million 8.2 million additional shares of common stock of American
Information. On March 18, 1997, the Company, following conversion of 8.2 million
shares of convertible preferred stock into 8.2 million shares of common stock of
American Information, sold such shares (approximately 38% of the Company's 30%
equity investment in American Information) to an unaffiliated third party for
$1.83 million. The Company recognized a $700,000 pre-tax gain on this
transaction in the first quarter of 1997. At March 18, 1997 the Company owned
approximately 14.7% of the equity of American Information and the shares which
the Company is entitled to purchase under the option represented approximately
9.0% of the equity of American Information. The Company accounts for its
investment using the cost method. If the equity method had been applied Dignity
Partners would have recorded a loss associated with the investment in the first
quarter of 1997 of $279,000 which is equivalent to the Company's pro rata share
on an as if converted basis in American Information's first quarter loss.
6. Long Term Notes Payable
- - -- -----------------------
The Senior Viatical Settlement Notes, Series 1995-A, Stated Maturity
March 10, 2005 (the "Securitized Notes") issued by DPFC initially provided for a
maximum lending commitment of $50 million. As a result of an early amortization
event in June 1996, 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. Principal and interest Payments on the
Securitized Notes are payable solely from collections on pledged policies and
deposited funds. The Securitized Notes are reported on the balance
sheet as long term notes payable. The Securitized Notes bear a fixed interest
rate of 9.17% per annum.
The Securitized Notes represent the obligations solely of DPFC. The
Company's consolidated financial statements include the assets, liabilities and
operations of DPFC; however, the assets of DPFC are not available to pay
creditors of Dignity Partners, Inc. The assets of DPFC are the beneficial
ownership interests in the life insurance policies and funds which secure the
Securitized Notes. To the extent that the book value of assets of DPFC become
less than the outstanding balance of the Securitized Notes, generally accepted
accounting principles nonetheless would require a loss to be recorded. Upon the
retirement or maturity of the Securitized Notes, under generally accepted
accounting principles the Company would recognize a gain equal to any such
losses previously recognized. At March 31, 1997, the carrying value of the
assets of DPFC were $43.5 million (consisting of $39.0 million in purchased life
insurance policies, $4.2 million in restricted cash on deposit with a trustee
for the benefit of the Noteholders and $250,000 in matured policies receivable).
Dignity Partners is the servicer of the policies pledged under the
indenture pursuant to which the Securitiezed Notes were issued and incurs
servicing expenses (which are reimbursed, subject to certain priority payments)
in connection therewith.
6
<PAGE>
7. Deferred Income Taxes
- - -- ----------------------
Prior to September 30, 1996, the Company had provided for deferred
income taxes related to income accrued on purchased life insurance policies.
Because these policies had been sold, or were anticipated to be sold, at a loss,
the Company determined that the deferred tax liability associated with these
policies is not required. The Company has provided for miscellaneous state
income tax liabilities expected to be incurred. For the year ended December 31,
1996, the Company had a deferred tax asset resulting primarily from tax net
operating loss carryforwards. A valuation allowance was established to reduce
the amount of the gross deferred tax asset to that amount deemed more likely
than not to be utilized.
In the quarter ended March 31, 1997, the Company's provision for income
taxes was offset by a reduction in the valuation allowance previously
established. The valuation allowance has been reduced to reflect that portion of
the deferred tax asset which will more likely than not be utilized based on
anticipated earnings for the year ending December 31, 1997.
8. Common Stock
- - -- -------------
Changes in stockholders' equity during the first three months of 1997
reflected the following:
<TABLE>
<S> <C>
Stockholders' equity, beginning of period $ 20,142,265
Net income 1,095,200
Treasury stock (337,313)
-------------
Stockholders' equity, end of period $ 20,900,152
==============
</TABLE>
In October 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 Common Stock at prevailing market prices.
Through March 31, 1997, the Company had purchased 273,500 shares of Common Stock
pursuant to the program at a weighted average price of $2.66 per share. See also
Note 10b.
The Company will implement the provisions of Statement of Financial
Accounting Standards No. 128, Earnings per Share ("Statement 128"), which will
be effective for interim and annual financial statements issued for periods
ending after December 15, 1997. Statement 128 simplifies the previous standards
for computing earnings per share ("EPS"), replacing the presentation of primary
EPS with a presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures, which applies to the Company.
9. Earned Discounts
- - -- -----------------
Earned discounts on life insurance policies reflects the amount of
accretion recorded in the first quarter of 1996. As a result of the decision to
sell all or substantially all of the Company's assets any income is recorded as
earned discounts for matured policies only and recorded upon receipt of proceeds
of policies (pursuant to the death of the insured). Earned discounts for matured
policies reflects the first quarter income in 1997 on policies on which the
Company collected the proceeds (pursuant to the death of the insured).
7
<PAGE>
10. Events Subsequent to the Balance Sheet Date
- - -- --------------------------------------------
a. Portfolio Sales
During the second quarter of 1997, the Company expects to collect all
proceeds on the remaining eight policies under the sale agreement dated
September 27, 1996 and the one remaining policy under the sale agreement dated
January 16, 1997, each described in Note 3. The estimated pre-tax gain under
these agreements in the second quarter of 1997 is $18,000. The Company also
expects to collect during the second quarter of 1997 all proceeds on the
remaining 32 policies under the sale agreement dated February 10, 1997 and the
remaining 30 policies under the sale agreement dated March 24, 1997, each
described in Note 3. The estimated pre-tax gain under these agreements in the
second quarter of 1997 is $430,000 and $190,000, respectively. Actual gains may
vary materially from estimated gains based on, among other things, the actual
timing of the transfer of ownership of the policies and actual versus estimated
proceeds.
b. Share Repurchase
In the month of April 1997, the Company purchased 365,000 shares of its
common stock pursuant to its previously authorized share repurchase program at a
weighted average price of $2.59 per share. See Note 8.
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 March 31, 1997 and of the results of
operations for the Company for the three months ended March 31, 1997 and 1996,
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. For the reasons set forth below (including the
reclassification into "assets held for sale" of a substantial portion of the
Company's assets in 1996 and related accounting consequences), the Company's
results of operations and cash flows for the quarter ended March 31, 1997 are
not comparable to those for the quarter ended March 31, 1996.
Overview
- - --------
Dignity Partners is a specialty financial services company. 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 the Form 10-K and
Notes 4 and 6 of the Condensed Notes to Consolidated Financial Statements
(contained herein) for further information regarding DPFC.
Cessation of Viatical Settlement Business; Sale of Assets
- - ---------------------------------------------------------
The principal business activity of the Company through February 1997 was
to provide viatical settlements for terminally ill persons. A viatical
settlement is the payment of cash in return for an ownership interest in, and
right to receive the death benefit (face value) from, a life insurance policy.
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 held in Vancouver, British Columbia in July
1996 (the "AIDS Conference"), the Company was temporarily ceasing processing new
applications for policies insuring individuals afflicted with AIDS and HIV while
it further analyzed the effects of such research results on its business and its
strategic options. See the Form 10-K for further information regarding the AIDS
Conference.
The Company decided in the third quarter of 1996 to sell all or
substantially all of its assets. As a result of such decision, the Company
reclassified all of its assets (other than the policies held by DPFC) to a
"held-for-sale" category during the third quarter of 1996. Accordingly, such
assets are accounted for at the lower of carrying value or fair value less cost
to sell.
The Company sought and received on December 1996 stockholder approval
to sell all or substantially all of its assets.
Based on the Company's evaluation of the effects of the research
results reported at the AIDS Conference and subsequent reports and other
information, the Board of Directors in February 1997 approved the cessation of
the viatical settlement business and the sale by the Company of its non-AIDS
policies, consisting of approximately 31 policies with a face value of $2.9
million. If the Company is successful in selling such policies, the only
remaining policies will be those held by DPFC.
9
<PAGE>
Through March 31, 1997 the Company had sold or entered into agreements
to sell 373 policies, representing $29.2 million in aggregate face value, for an
aggregate purchase price of $19.5 million. As a result of these sales, the
Company reported a pre-tax loss of $180,000 in 1996 and a pre-tax gain of
$871,000 in the first quarter of 1997 (see "Results of Operations -- Three
Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996 -- Net
gain on assets sold") and expects to report a pre-tax gain of $638,000 in the
second quarter of 1997.
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. 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. See the Form
10-K for further information regarding capitalized costs of policies,
determination of Accrual Periods and changes thereto over time.
As a result of the Company's decision to sell all or substantially all
of its assets, the Company established a reserve in 1996 for loss on sale of
assets. The Company also established a reserve for loss of the Company's equity
interest in DPFC during 1996 because of the uncertainties created by the data
presented at the AIDS Conference and subsequent reports of the efficacy of new
treatments for AIDS/HIV. As of March 31, 1997, such reserves were $1.1 million
and $5.3 million, respectively. In addition, beginning in the third quarter of
1996, the Company began generally recognizing income on policies only upon
receipt of proceeds on policies (either pursuant to 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 reserve for loss on the sale of such policies or any reserve for
loss of the Company's equity interest in DPFC. See the Form 10-K and Note 4 and
6 of the Condensed Notes to Consolidated Financial Statements for further
information regarding the reserve for loss on sale of assets.
Certain Accounting Implications for DPFC
- - ----------------------------------------
Under generally accepted accounting principles, to the extent that the
carrying value of the assets of DPFC are less than the carrying value of its
liabilities, the Company would be required to recognize a loss equal to the
amount of such difference, notwithstanding the non-recourse nature of the
Securitized Notes. At March 31, 1997, the carrying value of the assets of DPFC
were $43.5 million (consisting of purchased life insurance policies, restricted
cash and a portion of matured policies receivable) and its liabilities were
$39.1 million (consisting of long term notes payable, i.e. the Securitized
Notes).
Although the Securitized Notes had an expected life of 2.1 years when
the aggregate maximum principal amount of the Securitized Notes was increased
from $35 million to $50 million in September 1995, the Company does not believe
that the Securitized Notes will be retired through collections by October 1997.
The Company believes that, if the Securitized Notes are not retired by late
2001, the assets of DPFC will become less than its liabilities because the costs
of carrying the Securitized Notes, including interest and servicing and trustee
fees, will deplete collections available to repay principal. In the event that
the collection experience for DPFC policies is substantially delayed, the assets
of DPFC may become less than its liabilities before late 2001.
10
<PAGE>
Additionally, if the collection experience for the DPFC policies is
substantially delayed, the value of the assets of DPFC may erode further for
some of the following reasons. First, a decision to discontinue paying premiums
on some policies may be made because the present value of the expected death
benefit on some policies may be less than expected future premiums to be paid on
such policies. Second, the face value of certain policies (especially group
term) may begin to decrease as the people whose lives are insured thereunder
reach specified age levels (often 65). Finally, policies for which the insurance
was continued under a disability provision may be uneconomical to convert given
the insured's age and life expectancy if such insured person is no longer
considered disabled. The Company cannot determine at present which, if any,
policies held by DPFC would be so affected.
In light of the foregoing, the Company believes that it is possible
that the Company may, in the future under generally accepted accounting
principles, be required to recognize a further loss to the extent that the
carrying value of the assets of DPFC is less than its liabilities. However, when
the Securitized Notes are finally discharged or mature, the Company under
generally accepted accounting principles would recognize a gain in an amount
equal to the aggregate amount of any such losses recognized. The Securitized
Notes represent the obligations solely of DPFC. The company did not guarantee
repayment of the Securitiezed Notes and is not required to fund any principal or
interest deficiencies thereunder.
Share Repurchase Program
- - -------------------------
In October 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 Common Stock at prevailing market prices.
Through April 30, 1997, 638,500 shares had been repurchased pursuant to the
program at a weighted average price of $2.62 per share.
Results of Operations
- - ---------------------
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996
- - -------------------------------------------------------------------------------
Earned Discounts. The Company currently recognizes earned discount only
upon receipt of proceeds on policies (pursuant to the death of the insured).
Consequently, the Company did not recognize any earned discounts on life
insurance policies during the first quarter of 1997, but instead recognized
$184,000 of earned discounts on matured policies for such period. 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 reserve for loss on the sale of such
policies. See "Method of Accounting."
In the first quarter of 1996 the Company recognized earned discount on
each purchased policy by accruing, over the Accrual Period, the difference
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. Earned discounts on life insurance policies was
$1.8 million for the quarter ended March 31, 1996. See "Method of Accounting."
The Company purchased only three policies (outstanding commitments as
of December 31, 1996) with an aggregate face value of $145,000 during the
quarter ended March 31, 1997 compared to the purchase of 148 policies with an
aggregate face value of $13.0 million during the quarter ended March 31, 1996.
See "Cessation of Viatical Settlement Business; Sales of Assets."
11
<PAGE>
Interest Income. Interest income increased 18.7% in the first quarter
of 1997 compared to the first quarter of 1996 as a result of the investment of
the proceeds from the sale of policies in short term securities and marketable
securities. Interest income generated in the first quarter of 1996 was
essentially the result of the investment of the initial public offering proceeds
in the second half of the quarter.
Gain on sale of convertible preferred shares. In the first quarter of
1997 the Company recognized a $700,000 gain on the sale of a portion of its
investment in American Information Company, Inc. On March 18, 1997 the Company
converted 8.2 million shares of convertible preferred stock into 8.2 million
shares of common stock of American Information and sold such shares to an
unaffiliated third party for $1.83 million. The carrying value of such shares
was $1.1 million. See Note 5 of the Condensed Notes to Consolidated Financial
Statements.
Net gain on assets sold. During the first quarter of 1997, the Company
collected the sales proceeds on 188 policies. See Note 3 of the Condensed Notes
to Consolidated Financial Statements. The total net gain recorded in the first
quarter of 1997 in connection with these sales was $871,000. The realized gain
was calculated based on the difference between the sale proceeds and the
carrying value after giving effect to the reserve for loss on sale of assets.
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 refunds of premiums on matured policies. Other income
decreased 76.1% during the first quarter of 1997 compared to the first quarter
of 1996 due to the sale of policies and a decrease in the number of matured
policies. A $50,000 increase in face value on one policy was also recorded
during the first quarter of 1996.
Interest Expense. Interest expense in the first quarter of 1997
decreased 6.9% relative to the first quarter of 1996 due mainly to the repayment
of the Company's revolving credit facility in the second half of 1996. Average
borrowings under the Securitized Notes were $40.7 million in the first three
months of 1997 compared to $40.1 million in the first three months of 1996.
The interest rate on the Securitized Notes was 9.17% in both periods.
Compensation and Benefits. Compensation and benefits decreased 15.3% in
the first quarter of 1997 compared to the first quarter of 1996. This was due to
the reduction in staff from 20 to 15 with the cessation of application
processing of new policies.
Other General and Administrative Expenses. Other general and
administrative expenses increased 156.7% in the first quarter of 1997 over the
first quarter of 1996. The increase is primarily a result of a $250,000 legal
reserve in the first quarter of 1997 in connection with federal and state class
action lawsuits filed against the Company and its officers and directors. This
amount represents the retention limit under the Company's insurance coverage.
The first three months of 1997 also includes a $150,000 aggregate increase in
expenses for general legal and professional fees to support the activities of a
public company and the analysis of strategic options.
Income Tax Expense. In the first quarter of 1997 the Company did not
record an income tax expense on the income statement because the deferred tax
asset of $3,225,130 was available to offset any tax liability. The Company
adjusted its deferred tax asset, liability and related allowance to reflect the
tax effect on the earnings for the quarter ended March 31, 1997.
12
<PAGE>
Net loss in wholly owned financing subsidiary charged to reserve for
equity interest. At December 31, 1996 the reserve to reflect the estimated loss
of the Company's entire equity interest in DPFC was $6.5 million. In the first
quarter of 1997, the DPFC net loss of $934,693 was included in the Company's net
loss before income taxes and net loss in wholly owned financing subsidiary
charged to reserve for equity interest. This loss was charged against the
reserve for equity interest in wholly owned financing subsidiary.
Liquidity and Capital Resources
- - --------------------------------
The Company does not currently have an external funding source. The
Securitized Notes do not provide funds with which to fund operations. At March
31, 1997, cash and cash equivalents was $14.2 million. The Company is analyzing
its current and future needs for financing, which will be dependent on its
strategic direction. There can be no assurance that the Company will be
successful in obtaining external 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 1997, using the cash generated by the sale of policies
(See Notes 3 and 10a of Condensed Notes to Consolidated Financial Statements)
and by the partial sale of the convertible preferred shares of American
Information (See Note 5 of Condensed Notes to Consolidated Financial
Statements). Such needs may change significantly depending on strategic options.
As of March 31, 1997, the outstanding principal amount of the
Securitized Notes was $39.1 million. Principal repayments on the Securitized
Notes began in July 1996. Principal and interest payments on the Securitized
Notes are payable solely 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 and interest obligations.
Forward Looking Statements
- - --------------------------
This report includes forward looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. All statements made herein
which are not based on historical facts are forward looking and, accordingly,
involve risks and uncertainties that could cause actual results to differ
materially from those discussed. Such forward looking statements include those
under "Management's Discussion and Analysis Of Financial Condition and Results
of Operations" relating to (i) expected gains to be reported in the second
quarter of 1997 on policies subject to sales agreements (see the last paragraph
under "Cessation of Viatical Settlements Business; Sale of Assets"), (ii)
expectations regarding whether and the time at which the carrying value of the
assets of DPFC will be less than the carrying value of its liabilities (see
"Certain Accounting Implications for DPFC"), and (iii) sufficiency of the
Company's liquidity and capital resources (see "Liquidity and Capital
Resources"). Such statements are based on management's belief, judgment and
analysis as well as assumptions made by and information available to management
at the date hereof. In addition to any assumptions and cautionary factors
referred to specifically in this report in connection with such forward looking
statements, factors that could cause actual results to differ materially from
those contemplated by the forward looking statements include (i) the amount and
timing of actual collections of sales proceeds, (ii) the amount and timing of
actual collections of DPFC policies following the death of the insured, (iii)
the results of the Company's consideration of strategic options and any costs
associated with a chosen option, and (iv) availability and cost of capital.
13
<PAGE>
PART II. OTHER INFORMATION
- - ---------------------------
Item 1. Legal Proceedings
- - ---------------------------
On February 13, 1997, a complaint was filed in the Superior Court of
California, City and County of San Francisco (Docket No. 984643) against Dignity
Partners, Inc., and each of its executive officers and The Echelon Group of
Companies LLC (the Company's largest stockholder) by an individual purporting to
act on behalf of himself and an alleged class consisting of all purchasers of
the Company's common stock during the period February 14, 1996 to July 16, 1996.
The complaint alleges that the defendants violated section 25400 of the
California Corporate Code and seeks to recover damages. The allegations are
based on alleged misstatements, concealment and/or misrepresentations and
omissions of allegedly material information in connection with the Company's
initial public offering and subsequent disclosures. The Company and each of the
defendants intend to defend the action vigorously.
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
---- ------------- ----------------
12/19/96 5 A complaint was filed against Dignity
Partners, Inc. and each of its directors by
three individuals purporting to act on behalf
of themselves and an alleged class consisting
of purchasers of the Company's common stock
during the period February 14, 1996 to July
16, 1996.
14
<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: May 15, 1997 /S/ ALAN B. PERPER
--------------------------------
ALAN B. PERPER
President
(Duly Authorized Officer)
DATED: May 15, 1997 /S/ JOHN WARD ROTTER
--------------------------------
JOHN WARD ROTTER
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001002813
<NAME> Dignity Partners, Inc.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Mar-31-1997
<CASH> 18,517,258
<SECURITIES> 4,139,711
<RECEIVABLES> 305,115
<ALLOWANCES> 0
<INVENTORY> 42,383,819 <F1>
<CURRENT-ASSETS> 839,806
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 66,185,709
<CURRENT-LIABILITIES> 6,201,546
<BONDS> 39,084,011 <F2>
0
0
<COMMON> 42,918
<OTHER-SE> 20,857,234
<TOTAL-LIABILITY-AND-EQUITY> 66,185,709
<SALES> 184,286
<TOTAL-REVENUES> 1,993,422
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 894,445
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 938,470
<INCOME-PRETAX> 160,507
<INCOME-TAX> 0
<INCOME-CONTINUING> 160,507
<DISCONTINUED> 0
<EXTRAORDINARY> 934,693
<CHANGES> 0
<NET-INCOME> 1,095,200
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0
<FN>
<F1>INCLUDES ASSETS HELD FOR SALE AND PURCHASED LIFEINSURANCE POLICY.
<F2>REPRESENTS LONG TERM BORROWINGS OF THE COMPANY.
</FN>
</TABLE>
