SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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) 394-9469
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's common stock, $.01 par value,
held by nonaffiliates of the registrant as of February 28, 1997 was
approximately $6,072,500.
The number of shares of the registrant's common stock, $.01 par value,
outstanding as of February 28, 1997 was 4,018,324.
Documents Incorporated by Reference:
The registrant's proxy statement (to be filed) related to its 1997 annual
meeting of stockholders is incorporated by reference in Part III.
<PAGE>
DIGNITY PARTNERS, INC.
Form 10-K Annual Report
For the Fiscal Year Ended December 31, 1996
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
PART I Page
Item 1. Business................................................... 1
Item 2. Properties................................................. 8
Item 3. Legal Proceedings.......................................... 9
Item 4. Submission of Matters to a Vote of Security Holders........ 9
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters.......................... 10
Item 6. Selected Financial Data.................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................ 12
Item 8. Financial Statements and Supplementary Data................ 21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................. 21
PART III
Item 10. Directors and Executive Officers of the Registrant......... 44
Item 11. Executive Compensation..................................... 44
Item 12. Security Ownership of Certain Beneficial Owners
and Management........................................... 44
Item 13. Certain Relationships and Related Transactions............. 44
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.............................................. 44
Signatures.............................................................. 48
</TABLE>
i
<PAGE>
Unless indicated otherwise, all information contained herein gives effect to the
Reorganization and the Reverse Stock Split (each as defined herein). Unless the
context otherwise requires, all references to the "Company" or "Dignity
Partners" refer to Dignity Partners, Inc. and its consolidated entities.
PART I
------
ITEM 1--BUSINESS
- ----------------
General
- -------
Dignity Partners is a specialty financial services company. Until
February 1997, the Company provided 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 face value of, a life insurance
policy. In connection with a viatical settlement, the policyholder assigns his
or her policy to the Company, which becomes the holder, owner or certificate
holder of the policy and the beneficiary thereunder and receives from the
insurance company the face value payable under the policy following the death of
the insured. The amount paid by the Company for a policy was determined by the
Company based on various factors, including the Company's estimated life
expectancy of the insured, the estimated premiums payable by the Company under
the policy over the expected life of the insured and certain other costs of the
viatical settlement. Through December 31, 1996, the Company purchased 1,527
policies with an aggregate face value of $113.9 million, of which $36.6 million
had been collected on 522 policies upon death of the insured. In addition,
through December 31, 1996, the Company had received proceeds of $6.5 million on
106 policies sold to third parties (representing $8.5 million in aggregate face
value).
On July 16, 1996, in response to accounts of the research results
reported at the International AIDS Conference held in Vancouver, British
Columbia in July 1996 (the "AIDS 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 effects on its business of such research results. In excess of 95%
of the Company's purchases involved policies insuring the lives of individuals
diagnosed with HIV and AIDS. Results from a number of studies were reported
which appear to indicate that the treatments involving a combination of various
drugs were reducing substantially, and perhaps eradicating, the levels of HIV
detectable in the blood of persons previously diagnosed with HIV and AIDS.
Subsequent reports appear to confirm the reports from the AIDS Conference.
Further analysis resulted in the Company's concluding that the efficacy
of the treatments reported at the AIDS Conference and subsequently reported
treatments have increased the risks of purchasing and holding policies insuring
the lives of individuals diagnosed with HIV or AIDS, especially those
individuals with longer life expectancies. As a result, the Company decided in
the third quarter of 1996 to sell all or substantially all of its assets. Such
decision had many material accounting implications. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Method of
Accounting." The Company sought and obtained in December 1996 stockholder
approval to sell all or substantially all of its assets. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Cessation of Viatical Settlement Business; Sale of Assets."
The Company believes that it is not viable to continue to operate a
viatical settlement business solely for non-AIDS policies while a market for
non-AIDS policies develops, if it develops at all. As a result, the Board of
Directors in February 1997 decided to cease immediately the Company's viatical
settlement business and
1
<PAGE>
approved the sale of the Company's non-AIDS policies, consisting of
approximately 31 policies with a face value of $2.9 million.
To date the Company has sold or entered into agreements to sell
approximately 373 policies with an aggregate face value of $29.2 million. See
"Asset Sales -- Terms of Sale Agreements." If the ownership of the policies
subject to such agreements are successfully transferred pursuant to the terms of
such agreements, the only remaining policies held by the Company will be those
held by DPFC and pledged as security for the Securitized Notes as defined under
"The Company -- DPFC."
The Company
- -----------
General
-------
Dignity Partners was incorporated in Delaware in September 1992,
commenced operations on January 2, 1993 and commenced purchasing activities in
April 1993. The Company's principal executive offices are located at 1700
Montgomery Street, Suite 250, San Francisco, California 94111, and its telephone
number is (415) 394-9469. The Company purchased life insurance policies both
directly and indirectly through Dignity Partners Funding Corp. I ("DPFC"),
Dignity Viatical Settlement Partners, L.P. ("Dignity Viatical") and Dignified
One, L.P. ("Dignified One").
DPFC
----
DPFC is a wholly-owned subsidiary formed for the limited purpose of
issuing Senior Viatical Settlement Notes, Series 1995-A, Stated Maturity March
10, 2005 (the "Securitized Notes") and purchasing (with funds provided by the
Securitized Notes) and holding beneficial ownership of the policies that are
pledged as collateral for the Securitized Notes. DPFC is deemed a bankruptcy
remote entity. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
" -- Method of Consolidation." DPFC has purchased 902 policies with an
aggregate face value of $67.1 million and will not purchase any more policies.
At December 31, 1996, DPFC owned 627 policies with an aggregate
face value of $47.6 million. The ownership interest in policies purchased by
DPFC is nominally held by an unaffiliated third party trustee under the
indenture pursuant to which the Securitized Notes were issued (the "Indenture")
but the policies are beneficially owned by DPFC. The Company accounts for
this securitization as a debt financing and not as a sale of assets, which
is in accordance with the accounting literature in effect for bankruptcy remote
entities with non-recourse debt. The assets, liabilities
and operations of DPFC are consolidated with those of Dignity
Partners in the Company's consolidated financial statements. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" and " -- Description of Securitized Notes" and
Note 9 of Notes to Consolidated Financial Statements.
Dignity Viatical and Dignified One
----------------------------------
Dignity Viatical is a limited partnership formed during 1993 to fund
purchases of life insurance policies. Through June 1996, Dignity Partners served
as the sole general partner, and persons not affiliated with the Company were
limited partners. The assets, liabilities and operations of Dignity Viatical
were consolidated with those of the Company in the Company's consolidated
financial statements. On June 25, 1996, Dignity Partners purchased the limited
partnership interests in Dignity Viatical and became the sole owner of all of
the partnership interests therein. On August 2, 1996, Dignity Partners entered
into an agreement to sell to an unaffiliated third party virtually all of the
policies owned by Dignity Viatical (representing $5.9 million in face value). As
of December 31, 1996, the cash proceeds of such sale (approximately $4.7
million) had all been collected by the
2
<PAGE>
Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Method of Consolidation" and Notes 3 and 7
of Notes to Consolidated Financial Statements.
Dignified One is a limited partnership formed in 1994 to fund purchases
of life insurance policies. Dignified One has purchased 26 policies, with an
aggregate face value of $1.8 million and will not purchase any more policies.
Due to its immateriality, Dignified One is treated as an investment for
accounting purposes. Therefore, the policies purchased by Dignified One are not
reflected in the Company's consolidated financial statements or in the Company's
operating or consolidated financial data presented herein. All of the policies
owned by Dignified One have been sold pursuant to a sale agreement substantially
similar to the September Sale Agreement (as defined herein).
The Reorganization and the Reverse Stock Split
----------------------------------------------
On September 30, 1995, the Company and its then sole stockholder, The
Echelon Group Inc. ("Echelon") entered into a series of transactions
(collectively, the "Reorganization") to separate the business of Dignity
Partners from Echelon's other business interests. Echelon, which was owned by
Bradley N. Rotter, Alan B. Perper and John Ward Rotter, the only executive
officers of the Company (collectively, the "Executive Officers"), conducted a
number of financial services businesses in addition to the business conducted by
Dignity Partners. As part of the Reorganization, the Executive Officers created
a newly formed limited liability company, The Echelon Group of Companies, LLC
("New Echelon LLC"), and contributed to New Echelon LLC the shares of common
stock of Echelon owned by them in return for equity interests in New Echelon
LLC. Echelon then sold to New Echelon LLC, at fair market value as determined in
part by an independent third party appraiser and in part by the face value or
depreciated book value, substantially all of its assets (including amounts
previously owed by Dignity Partners to Echelon for expenses incurred by Echelon
on behalf of Dignity Partners and interest on loans made by Echelon to Dignity
Partners prior to the Reorganization) other than the then outstanding shares of
common stock of Dignity Partners (the "Echelon Asset Sale"). The consideration
for the Echelon Asset Sale, which equaled approximately $3.54 million, consisted
of (i) $700,000 in cash, (ii) the cancellation of outstanding debt of Echelon
owed to New Echelon LLC (representing funds advanced by Bradley and John Ward
Rotter to Echelon, the right to receive payment thereunder having been
previously assigned by them to New Echelon LLC), in an aggregate amount,
including accrued interest, of $2.7 million, and (iii) a $144,000 promissory
note which New Echelon LLC subsequently paid in full. In addition, New Echelon
LLC assumed the liabilities of Echelon unrelated to Dignity Partners.
Following the Echelon Asset Sale, Echelon was merged with and into
Dignity Partners (the "Merger"). Pursuant to the Merger, the authorized
capitalization of Dignity Partners was increased from 1,000 shares of common
stock to 17 million shares, consisting of 15 million shares of Common Stock and
two million shares of Preferred Stock (the "Serial Preferred Stock") issuable in
series. Of the authorized Serial Preferred Stock, 135,000 shares were designated
as Convertible Cumulative Pay-in-Kind Preferred Stock ("Convertible Preferred
Stock"). Pursuant to the Merger, each outstanding share of common stock of
Dignity Partners was canceled, each outstanding share of Echelon common stock
was converted into 15,893 shares of Common Stock of Dignity Partners, and the
outstanding shares of preferred stock of Echelon (all of which were owned by
Bradley Rotter, Chairman of the Board and a director of the Company) were
converted into an aggregate of 34,880.13 shares of Convertible Preferred Stock.
On December 1, 1995, a dividend, consisting of 379.8059 shares of Convertible
Preferred Stock, was paid on the outstanding shares of Convertible Preferred
Stock. Each outstanding share of Convertible Preferred Stock (and shares of
Convertible Preferred Stock issuable in respect of accrued and unpaid dividends
thereon) were converted into Common Stock and sold by Bradley Rotter in the
Company's initial public offering in February 1996. See " -- The Initial Public
Offering." The Merger had no material impact on the Company's operations.
3
<PAGE>
On January 12, 1996, the Company effected a reverse stock split
pursuant to which each outstanding share of Common Stock was converted into
.7175 of a share of Common Stock (the "Reverse Stock Split").
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. The Company did not receive any proceeds from the sale of
shares by Bradley Rotter. The net proceeds to the Company from the offering were
approximately $25.3 million after deducting the underwriters' discount and
estimated offering expenses. Approximately $7.4 million of such proceeds were
used to repay indebtedness of the Company and amounts owed by the Company to
affiliates with respect to prior operating expenses and debt. See Note 2 of
Notes to Consolidated Financial Statements.
Asset Sales
- -----------
Introduction and Reasons for Asset Sale
---------------------------------------
The Company believes that the efficacy of the treatments reported at
the AIDS Conference and subsequently reported treatments have increased the
risks of holding policies insuring the lives of individuals diagnosed with HIV
or AIDS, especially those individuals with longer life expectancies. If the
experimental treatments are proven effective and become widely available, the
actual life expectancies of a significant number of insureds could substantially
exceed the Company's original estimates of their life expectancies, thereby
materially adversely affecting the Company's results of operations, cash flows
and yields. In light of the uncertainties attendant to the continued
ownership of the Company's portfolio, the Board of Directors believed that
it was in the best interests of the Company to attempt to minimize risk and
to provide working capital while the Company evaluates its strategic options.
The holders of Common Stock have authorized the Board of Directors to
sell all or substantially all of the assets of the Company on terms that the
Board of Directors deems expedient and in the best interests of the Company. The
Board of Directors has authorized the sale of all or substantially all of the
Company's policies. However, the sale of policies held through DPFC, all of
which are pledged as security for the Securitized Notes, will require the
consent of all of the holders of the Securitized Notes and the Company.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Description of Securitized Notes." 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 holders of the Securitized
Notes; however, it is too early to determine whether the holders of the
Securitized Notes and the Company will decide to sell such policies or whether
such a sale is feasible.
Terms of Sale Agreements
- ------------------------
Through March 1997 the Company has entered into several agreements to
sell portions of its portfolio of policies. None of the purchasers
thereunder is affiliated with the Company or any of its directors or officers.
The following is a summary of the material terms and provisions of the
agreements.
4
<PAGE>
Sale agreement dated as of September 27, 1996
("September Sale Agreement")
The Company entered into the September Sale Agreement, which
provided for the sale of 197 HIV/AIDS policies having an aggregate face
value of approximately $14.2 million. Under the September Sale
Agreement, a policy will not be sold if the insured dies prior to the
issuing insurance company's acknowledgment of transfer of ownership of
the policy.
The purchase price of each policy was 61.86% of its face value
plus 100% of prepaid premiums ($8.7 million in aggregate purchase
price). The estimated aggregate purchase price was placed in escrow
prior to the time that change in ownership and/or beneficiary forms
were sent to the insurance companies that issued the policies. Under
the September Sale Agreement, the purchase price for each policy is to
be delivered to the Company after the issuing insurance company
acknowledges in writing the transfer of ownership of the policy to the
purchaser. If such acknowledgment for a policy is not received within
90 days after the date the documents are delivered to the insurance
company, the sale of such policy may be rescinded.
The agreement contained cross indemnity provisions pursuant to
which the Company and the purchaser agreed to indemnify each other
against losses, liabilities or damages arising in connection with a
claim under any policy or with any breach of any representation or
warranty made by the breaching party in the agreement.
Of the policies subject to the September Sale Agreement,
ownership of 145 policies (representing $11.9 million in face amount)
had not yet been transferred at December 31, 1996. Such policies were
carried on the balance sheet at December 31, 1996 at $6.9 million after
giving effect to the reserve for loss on assets held for sale.
Through December 31, 1996, the Company had collected $1.2 million in
sale proceeds under the September Sale Agreement and had collected an
additional $6.7 million in sales proceeds through March 17, 1997.
See "Notes 3, 4 and 17a of Notes to Consolidated Financial
Statements".
Sale agreement dated as of January 16, 1997
The Company entered into an agreement dated January 16, 1997,
to sell 18 HIV/AIDS policies having an aggregate face value of
approximately $1.0 million. The sale price is approximately $710,000
plus interest at the rate of 4.5% per annum from the date of such
agreement to the date of payment for the policy. The purchaser is also
required to reimburse the Company for any premiums paid on or after the
date of such agreement. A policy sale may be rescinded if the issuing
insurance company does not acknowledge within 60 days of the date of
the agreement the transfer of ownership to the purchaser.
The agreement contains cross indemnity provisions pursuant to
which the Company and the purchaser have agreed to indemnify each other
against losses, liabilities or damages arising in connection with a
breach of any covenant, representation or warranty made by the
breaching party.
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 assets held for sale. Through March 17, 1997, the Company
had collected $700,000 in sale proceeds under the agreement
(representing the sale proceeds in excess of 95% in number and face
value of the policies subject to this agreement).
5
<PAGE>
Sale agreement dated February 10 , 1997
The Company entered into an agreement dated February 10, 1997,
which provides for the sale of 67 HIV/AIDS policies having an aggregate
face value of approximately $4.5 million. Under the agreement, a policy
will not be sold if the insured dies prior to the issuing insurance
company's acknowledgment of transfer of ownership of the policy.
The purchase price of each policy equals 66% of its face value
plus 100% of prepaid premiums ($3.0 million in aggregate purchase
price). The estimated aggregate purchase price is required to be placed
in escrow prior to the time that change in ownership forms are sent to
the insurance companies that issued the policies. Under the agreement,
the purchase price for each policy is to be delivered to the Company
after the issuing insurance company acknowledges in writing the
transfer of ownership of the policy to the purchaser. If such
acknowledgment for a policy is not received within 30 days after the
date the documents are delivered to the insurance company, the sale of
such policy may be rescinded.
The agreement contains cross indemnity provisions pursuant to
which the Company and the purchaser have agreed to indemnify each other
against losses, liabilities or damages arising in connection with a
claim under any policy or with any breach of any representation or
warranty made by the breaching party in the agreement.
The policies subject to the agreement were carried on the
balance sheet at December 31, 1996 at $2.2 million after giving effect
to the reserve for loss on assets held for sale. Through March 17,
1997, the Company had collected $800,000 in sale proceeds under the
agreement (representing 22 of the number and $540,000 in carrying value
of the policies subject to the agreement).
Sale agreement dated March 24 , 1997
The Company entered into an agreement dated March 24, 1997,
which provides for the sale of 31 non-AIDS policies having an aggregate
face value of approximately $2.9 million. Under the agreement, a policy
will not be sold if the insured dies prior to the issuing insurance
company's acknowledgment of transfer of ownership of the policy.
The purchase price of each policy equals 59% of its face value
plus 100% of prepaid premiums ($1.7 million in aggregate purchase
price). The estimated aggregate purchase price is required to be placed
in escrow prior to the time that change in ownership forms are sent to
the insurance companies that issued the policies. Under the agreement,
the purchase price for each policy is to be delivered to the Company
after the issuing insurance company acknowledges in writing the
transfer of ownership of the policy to the purchaser. If such
acknowledgment for a policy is not received within 30 days after the
date the documents are delivered to the insurance company, the sale of
such policy may be rescinded.
The agreement contains cross indemnity provisions pursuant to
which the Company and the purchaser have agreed to indemnify each other
against losses, liabilities or damages arising in connection with a
claim under any policy or with any breach of any representation or
warranty made by the breaching party in the agreement.
The policies subject to the agreement were carried on the
balance sheet at December 31, 1996 at $1.5 million after giving effect
to the reserve for loss on assets held for sale.
6
<PAGE>
Consideration of Strategic Options
- ----------------------------------
In September 1996, the Company, in light of the uncertainties
facing its viatical settlement business, engaged Jefferies & Company, Inc. to
assist the Company in its evaluation of its strategic direction. The Board of
Directors has not fully evaluated all options and has not determined which
option is in the best interests of the Company and its stockholders. There can
be no assurance that a feasible option other than liquidation will be found or
that any option, if selected and pursued, will be profitable. Although the Board
of Directors continues to consider various strategic options, the Board has
decided that disposition of assets in the circumstances is prudent and a proper
means to reduce risk of further deterioration in the value of the Company's
portfolio. The Board has also decided that it is not viable to continue to
operate a viatical settlement business solely for non-AIDS policies while a
market for that type of policy develops, if it develops at all. As a result, 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 ownership of the policies subject to the sale agreements described under
"Asset Sales -- Terms of Sale Agreements" are successfully transferred pursuant
to the terms of such agreements, the only remaining policies will be those held
by DPFC (with a face value of $47.6 million at December 31, 1996).
On November 4, 1996, the Company made a strategic equity investment of
$3.0 million in convertible preferred stock and an option to buy 8.2 million
shares of common stock (approximately 11.4% of the common stock at November 4,
1996) of American Information Company, Inc. ("American Information"), a
privately held company which, among other things, provides information services
to individuals owning or purchasing automobiles. On March 18, 1997, the Company,
following conversion of 8.2 million shares of convertible preferred stock into
8.2 million shares of shares of common stock, 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 estimated pre-tax gain on this
transaction is $700,000 which will be recognized 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 represent approximately 9.0% of the equity of American
Information. The Company accounts for this investment using the cost method. See
"Note 6 of Notes to Consolidated Financial Statements".
Viatical Settlement Business
- ----------------------------
The Company's viatical settlement business involved the following
principal steps: (a) origination of policy purchases through a referral network,
(b) underwriting, which included evaluating the terms of a policy and, with the
assistance of one or more independent physicians or other medical consultants,
estimating the life expectancy of the insured, (c) closing the transaction,
which included execution of a sale agreement, releases of beneficiaries and an
insurance policy assignment as well as payment of the purchase price; (d)
monitoring the insured and the policy; and (e) collecting the policy proceeds
following the insured's death. Each of these steps is described in more detail
in the Company's Form 10-K for the fiscal year ended December 31, 1995 (the
"1995 10-K"). The Company has ceased purchasing policies and, therefore,
monitoring and collection activities are the only steps that continue.
Monitoring
----------
Following the purchase of a life insurance policy, the insured is
regularly monitored to obtain timely information concerning the insured so that
proceeds may be collected as promptly as possible following the death of the
insured. In addition to tracking the medical status and location of an insured,
the Company also monitors the policy to ensure it does not lapse because
of a failure to timely pay premiums. Some protection against the
7
<PAGE>
failure to pay premiums is provided by statutory or policy provisions that
require insurance companies to provide written notice before terminating a
policy for failure to pay premiums. As owner of record of the policy, the
Company generally receives such notice directly. Furthermore, the Company
monitors the policy to ensure that premium waivers are renewed and that, when
required, the policy is converted (e.g., from a group term policy to an
individual whole life policy) in a timely manner.
Collection
----------
Once an insured has died, a request for a copy of the death certificate
is filed in the appropriate governmental office. Often the insured's family or
companion also submits a copy of the death certificate to the Company. The
Company then files the death certificate with the insurance company and requests
payment of the policy proceeds. The Company monitors the collection status until
it receives the face value of the policy. Monitoring of collection status is
assisted by the Company's management information system. Insurance companies
have an incentive to pay promptly on policies because most states require
insurance companies to pay interest on claims which take more than 30 days to
settle. Actual collections generally occur within 30 to 55 days following the
death of the insured. However, in certain states (e.g., New York) actual
collections take a longer period of time due to delays in processing of
documents by state authorities.
Policy and Portfolio Information
- --------------------------------
As of December 31, 1996, excluding policies subject to a pending sale
agreement, the Company owned 754 policies on the lives of 578 individuals
(including policies owned by DPFC). Information with respect to the types of
policies the Company has purchased, the geographic location of the individuals
insured thereunder, the obligors which issued such policies and statistical data
with respect to the historical performance of the Company's portfolio was
provided in the Company's 1995 10-K. Since the Company is no longer purchasing
policies and has sold or entered into contracts to sell all or substantially all
of its policies (other that those held by DPFC), the Company does not believe
such information is meaningful or comparable to that previously provided.
However, because generally accepted accounting principles require the Company to
recognize a loss to the extent that the carrying value of the assets of DPFC
become less than the carrying value of its liabilities, notwithstanding the
non-recourse nature of the Securitized Notes, the Company has included a
discussion regarding certain information about DPFC's portfolio under
"Management's Discussion and Analysis -- Certain Accounting Implications for
DPFC."
Employees
- ---------
As of December 31, 1996, the Company employed 15 individuals (including
the Executive Officers), two of whom (in addition to the Executive Officers)
also perform services on behalf of New Echelon. None of the Company's employees
is a member of a labor union. The Company believes that it maintains good
relations with its employees.
ITEM 2--PROPERTIES
- ------------------
The Company currently leases approximately 5,900 square feet of office
space in San Francisco which it shares with New Echelon LLC. The Company, which
is the lessee under the lease, charges New Echelon LLC for 35% of the rent of
the entire office space. See "Certain Relationships and Related Transactions."
The Company believes that its current office space will be adequate for its
purposes through the expiration of the lease in 1999. The Company also maintains
an office in Incline Village, Nevada.
8
<PAGE>
ITEM 3--LEGAL PROCEEDINGS
- -------------------------
From time to time, the Company is involved in routine legal proceedings
incidental to its business, including litigation in connection with the
collection of amounts owed by insurance company obligors. The Company does not
expect that these proceedings, individually or in the aggregate, will have a
material adverse effect on the Company's financial position, liquidity or
results of operations.
On December 19, 1996, a complaint was filed in the United States
District Court, Northern District of California (Docket No. C96-4558) 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 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 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Section 11 of the
Securities Act of 1933 and seeks, among other things, compensatory damages,
interest, fees and costs. The allegations are based on alleged
misrepresentations in and omissions from the Company's registration statement
and prospectus related to its initial public offering and certain documents
filed by the Company under the Exchange Act. The Company and each of the
defendants intend to defend the action vigorously.
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 New Echelon 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 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
At a special stockholders' meeting held on December 16, 1996, the
stockholders of Dignity Partners, Inc. approved a proposal to authorize the
Company's Board of Directors to sell all or substantially all of the Company's
assets. The voting tallies were 2,674,338 votes for, 10,885 votes against and
1,606,601 withheld/not voted.
9
<PAGE>
PART II
ITEM 5--MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
- -------------------------------------------------------------
STOCKHOLDERS MATTERS
--------------------
The Company's Common Stock is listed on The Nasdaq Stock Market's
National Market System under the symbol "DPNR". As of March 10, 1997, there were
approximately 15 holders of record of Common Stock, including banks, brokerage
firms and other nominees. A substantial portion of the publicly-held shares of
Common Stock are held in book-entry form. The following table sets forth, for
the fiscal quarters indicated, the high and low sales prices for the common
stock on the National Market System. The Company's initial public offering
occurred in February 1996.
<TABLE>
<CAPTION>
<S> <C> <C>
1996 High Low
First Quarter (beginning February 14, 1996) .........$ 14 1/2 $ 11 1/8
Second Quarter ...................................... 13 3/4 6 1/2
Third Quarter ....................................... 9 1
Fourth Quarter ...................................... 3 15/32 2 1/8
</TABLE>
The Company has never declared or paid any cash dividends on its
capital stock. The Indenture limits the Company's ability to pay dividends by
restricting, prior to repayment in full of the Securitized Notes, the Company's
access to cash generated through the collection of pledged policies. The Company
currently intends to retain its future earnings, if any, to finance its review
of strategic options and any new business that may result from such review.
Therefore, the Company does not anticipate paying cash dividends on the Common
Stock for the foreseeable future.
10
<PAGE>
ITEM 6--SELECTED FINANCIAL DATA
- -------------------------------
The data presented below should be read in conjunction with the
consolidated financial statements and notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere herein. For the reasons set forth in "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Method of
Accounting," information for 1996 and as of December 31, 1996 is not comparable
to prior periods. In addition, the expected collection period information
presented below under "Operating Data" represents the period originally
established by the Company at the time of purchase of each policy and has not
---
been adjusted to reflect the uncertainty resulting from new treatments for AIDS
and HIV.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1995 1994 1993(1)
---- ---- ---- ------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Statement of Operations Data:
- -----------------------------
Earned discounts on life
insurance policies (2) .............. $ 3,697 $ 6,933 $ 4,240 $ 420
Earned discounts on prior maturities
and matured policies (2) ............ 1,782 -- -- --
Total income .......................... 6,584 7,389 4,443 437
Interest expense ...................... 3,984 3,352 1,115 52
Net loss on assets sold ............... 180 -- -- --
Provision for loss on assets held for
sale ................................ 3,140 -- -- --
Loss on investment in wholly owned
financing subsidiary ................ 6,940 -- -- --
Total expenses ........................ 17,297 5,394 2,279 776
Income (loss) before income taxes,
minority interest, equity in loss of
unconsolidated subsidiary and net
loss in wholly owned financing
subsidiary charged to reserve for
equity interest ..................... (10,713) 1,996 2,163 (339)
Income tax benefit (expense) .......... 526 (625) (137) 229
Minority interest of limited partners
in earnings of investment
partnership (3) ..................... -- 568 1,791 236
Net loss in wholly owned financing
subsidiary charged to reserve for
equity interest ..................... 488 -- -- --
Net income (loss) ..................... (9,699) 803 235 (347)
Net income (loss) per common share (4). $ (2.46) $ 0.42 $ 0.19 $(10.15)
Weighted average number of common and
common equivalent shares outstanding
(in thousands) (4) .................. 3,942 1,902 1,211 34
Operating Data:
- ---------------
Number of policies purchased during
period .............................. 475 386 469 197
Number of policies sold during
period (5) .......................... 257 -- -- --
Number of policies outstanding,
end of period (6) ................... 754 749 548 188
Aggregate purchase price of policies
purchased during period (7) ......... $24,099 $21,757 $25,449 $ 9,476
Aggregate face value of policies
purchased during period ............. $33,132 $29,688 $35,555 $15,490
Aggregate face value of policies sold
during period (5) ................... $20,810 -- -- --
Aggregate face value of portfolio of
policies, end of period (6) ......... $56,792 $59,744 $43,205 $14,785
Weighted average expected collection
period for policies purchased during
period (8) .......................... 36.9 mos. 26.2 mos. 23.4 mos. 20.6 mos.
Weighted average remaining expected
collection period (9) ............... 11.1 mos. 14.0 mos. 15.8 mos. 16.7 mos.
11
<PAGE>
Balance Sheet Data (at period end):
- ------------------
Cash and cash equivalents ............. $ 6,586 $ 1,057 $ 31 $ 1,073
Assets held for sale .................. 11,520 -- -- --
Purchased life insurance policies ..... 41,246 48,938 32,916 11,446
Total assets .......................... 68,944 58,226 35,433 13,967
Reserve for equity interest in wholly
owned financing subsidiary .......... 6,453 -- -- --
Long-term notes payable ............... 41,218 39,105 -- --
Other long term debt .................. -- 1,444 18,447 --
Total liabilities ..................... 48,802 46,680 22,176 594
Minority interest of limited partners
in investment partnership (3) ....... -- 6,680 9,195 10,035
Total stockholders' equity ............ 20,142 4,866 4,062 3,339
<FN>
(1) The Company commenced operations on January 2, 1993 and commenced
purchasing life insurance policies on April 4, 1993.
(2) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Method of Accounting."
(3) The minority interest represents the interest of the former limited
partners of Dignity Viatical in the net assets and income of Dignity
Viatical. See "The Company - Dignity Viatical and Dignified One"
and "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
(4) Reflects the Reorganization, the Reverse Stock Split and the conversion
of shares of Convertible Preferred Stock outstanding during the periods
presented into shares of Common Stock as if such transactions had
occurred at the beginning of each period presented. See Note 14 of Notes
to Consolidated Financial Statements.
(5) Represents policies sold or covered by a sale agreement executed during
1996. The aggregate sales price does not represent the cash actually
received by the Company during 1996 for the sale of such policies.
(6) Includes policies categorized as "assets held for sale," "purchased life
insurance policies" and "matured policies receivable."
(7) Consists of the purchase price and additional costs capitalized through
the end of the period. The aggregate purchase prices shown in the
respective periods do not necessarily represent the cash actually paid
for the policies in such periods as reflected in the Company's
consolidated statements of cash flows. The purchase prices include
amounts paid or payable in a subsequent period for the face values
acquired in the periods shown. In addition, the aggregate purchase price
for 1993 includes the purchase price of policies contributed to the
Company by Echelon in exchange for common stock.
(8) Represents the average original expected collection period weighted by
the face value of each policy purchased during the period.
(9) Represents the average remaining expected collection period (based on the
original expected collection period and the time elapsed) weighted by the
face value of each policy for "assets held for sale," "purchased life
insurance policies" and "matured policies receivable" at the end of the
period.
</FN>
</TABLE>
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -------------------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
The following is a discussion and analysis of the consolidated
financial condition and results of operations for the Company for the years
ended December 31, 1996, 1995 and 1994, 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 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 the third quarter of 1996 and
related accounting consequences) the Company's results of operations and cash
flows for 1996 are not comparable to prior periods.
12
<PAGE>
Overview
- --------
Dignity Partners, Inc. is a specialty financial services company. 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. The Company was formed
in September 1992 as a wholly-owned subsidiary of Echelon, commenced operations
on January 2, 1993 and commenced purchasing life insurance policies in April
1993. Effective September 30, 1995, Echelon was merged with and into Dignity
Partners as part of the Reorganization. See "The Company -- The Reorganization
and the Reverse Stock Split." The Merger had no material impact on the Company's
financial condition or results of operations except for the effect on per share
calculations. See Note 14 of Notes to Consolidated Financial Statements.
Cessation of Viatical Settlement Business; Sale of Assets
- ---------------------------------------------------------
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 individuals afflicted with AIDS and HIV while
it further analyzed the effects of such research results on its business and its
strategic options. Further analysis resulted in the Company's concluding that
the efficacy of the treatments reported at the AIDS Conference and subsequently
reported treatments have increased the risks of purchasing and holding policies
insuring the lives of individuals diagnosed with HIV and AIDS, especially those
individuals with longer life expectancies. 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 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.
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 Company believes that it is extremely difficult to predict
accurately life expectancy of people afflicted with HIV and AIDS. Further, the
Company decided that it is not viable to continue to operate a viatical
settlement business solely for non-AIDS policies while a market for non-AIDS
policies develops, if it develops at all. As a result, 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.
Through March 24, 1997 the Company had sold or entered into agreements
to sell approximately 373 policies with an aggregate purchase price of $19.5
million, representing $29.2 million in aggregate face value. The Company
reported a pre-tax loss of $179,548 in 1996 and expects to report a pre-tax gain
of $1.5 million in the first half of 1997 in connection with the policies sold
pursuant to these sale agreements. See "Year Ended December 31, 1996 Compared to
Year Ended December 31, 1995 -- Net loss on assets sold."
13
<PAGE>
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 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 Consultants
(i.e., independent physicians or other medical consultants retained for the
purpose of estimating 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
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.
As a result of the Company's decision to sell all or substantially all
of its assets, the Company established a reserve for loss on sale of assets
during the quarter ended September 30, 1996. The Company also established a
reserve for loss of the Company's equity interest in DPFC during the quarter
ended September 30, 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 December 31, 1996, such reserves were $2.9
million and $6.5 million, respectively. In addition, beginning in the third
quarter of 1996, the Company began generally recognizing income 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. The calculation of the reserve for loss
on assets 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.
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 9 of Notes to Consolidated
Financial Statements. DPFC has purchased 902 policies with an aggregate face
value of $67.1 million and will not purchase any more policies. The carrying
value of the policies held by DPFC was $41.2 million at December 31, 1996. In
addition, because Dignity Partners controlled Dignity Viatical, the assets,
14
<PAGE>
liabilities and operations of Dignity Viatical have been consolidated with those
of the Company in the consolidated financial statements. Through June 30, 1996,
Dignity Viatical had purchased 169 policies with an aggregate face value of
$13.9 million. The minority interest of former 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."
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 December 31, 1996 and February 28, 1997, the carrying
value of the assets of DPFC were $47.2 million and $45.2 million, respectively
(consisting of purchased life insurance policies, restricted cash and a portion
of matured policies receivables) and its liabilities were $41.2 million and
$40.0 million , respectively (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.
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 and were not guaranteed by the Company. Therefore,
the Company is not required to fund any principal deficiencies.
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
15
<PAGE>
prevailing market prices. Through December 31, 1996, 145,000 shares had been
repurchased at a weighted average price of $2.69 per share.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
- ---------------------------------------------------------------------
Earned Discounts. The Company purchased 475 policies with an aggregate
face value of $33.1 million during the year ended December 31, 1996 compared to
the purchase of 386 policies with an aggregate face value of $29.7 million
during 1995. Of the 475 policies purchased in 1996, 133 policies with an
aggregate face value of $8.1 million were purchased in the second half of the
year. Earned discounts on life insurance policies decreased 46.4% from $6.9
million during 1995 to $3.7 million through June 30, 1996.
Effective June 30, 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 reserve to reflect estimated loss of the Company's
equity interest in DPFC because of the uncertainties created by the data
presented at the AIDS Conference and subsequently reported data. As a result,
beginning on July 1, 1996, the Company began recognizing income 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 second half of 1996, but instead recognized
$980,000 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 and any reserve for loss of the Company's equity interest in DPFC. See
Notes 1d, 1e, 4 and 5 to the Notes to Consolidated Financial Statements. In
addition, in connection with the decision to sell all or substantially all of
the Company's assets, in the third quarter of 1996 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 has not had earned discounts on prior
maturities since the third quarter of 1996 and will have none in future periods.
Interest Income. Interest income increased dramatically (193%) in 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 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 1996 due mainly to collections on a larger portfolio and
a $80,000 aggregate increase in face value on two policies.
Interest Expense. Interest expense increased 17.6% to $4.0 million in
1996 from $3.4 million in 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 $42.7 million in 1996 compared to
$26.7 million in 1995. The interest rate on the Securitized Notes decreased to
9.2% in October 1995 from 9.5%. Borrowings under the Company's revolving credit
facility bore a dollar weighted interest rate of 12.1% and 13.6% in 1996 and
1995, respectively. Average borrowings were $800,000 in 1996 compared to $4.2
million in 1995. See "Notes 8 and 9 of Notes to Consolidated Financial
Statements", and "Liquidity and Capital Resources" and "Description of
Securitized Notes" below for further information regarding the Securitized
Notes and revolving credit facility.
Compensation and Benefits. Compensation and benefits increased 41.8% in
1996 compared to 1995 due to the hiring of additional personnel to handle the
administrative tasks relating to the Company's relatively larger
16
<PAGE>
portfolio and non-broker referral business and to support the Company's relative
growth in the first six months of 1996. Subsequent to the AIDS Conference and
the cessation of new application processing, the number of employees decreased
from 27 on July 16, 1996 to 15 at December 31, 1996.
Other General and Administrative Expenses. Other general and
administrative expenses increased 56.0% to $1,388,000 in 1996 from $890,000 in
1995. Expenses for legal, accounting, insurance, director fees and advertising
increased in 1996 an aggregate of $483,000, in part as a result of the Company's
status as a public company, activities related to the special meeting of
stockholders of the Company held in December 1996 and new business development
activities. Additionally, because the Company ceased processing applications for
policies insuring individuals with AIDS and HIV, approximately $110,000 of
medical review costs associated with such policies in the underwriting process
were expensed in 1996. The Company also recorded in 1996, a one-time expense of
$92,000 to recognize the fair value of warrants issued to Jefferies & Company to
purchase up to 300,000 shares of Common Stock. See Note 16 of Notes to
Consolidated Financial Statements.
Amortization. Because the Company prepaid its revolving credit facility
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 that facility.
Net loss on assets sold. The total net loss recorded in 1996 on assets
sold was $180,000. On August 2, 1996, the Company sold 58 policies held by
Dignity Viatical and two other policies to an unaffiliated third party. This
transaction resulted in a pre-tax loss in the amount of approximately $300,000.
Also recorded in 1996, was a gain totaling $120,000 on proceeds collected in
respect to policies sold pursuant to the September Sale Agreement. The realized
gain was calculated based on the difference between the sale value and the
carrying value after giving effect to the provision for loss on sale of assets.
Provision for loss on assets held for sale. The Company recorded in
1996 a provision for loss on sale of assets totaling $3.1 million based on
management's estimate of proceeds from the sale of policies. The provision
equals the difference between the carrying value of policies and those
estimates. The estimates are based on the life expectancies of the insureds
covered by the policies, the estimated sale period and the prices obtained by
the Company in connection with other sales of policies. For purposes of
calculating such loss provisions, furniture and equipment have been valued on
the assumption that miscellaneous office equipment has no sales value.
Loss on investment in wholly owned financing subsidiary. As of June 30,
1996, the Company had an initial capital investment recorded of $2.9 million
and, through consolidation, an additional $3.3 million of increased equity
attributable to the earnings of DPFC. A reserve has been recorded in 1996 in the
amount of $6.9 million to reflect the estimated loss of the Company's entire
equity interest in DPFC. This reserve includes the write-off of deferred
financing costs in an amount equal to approximately $740,000. See "-- Certain
Accounting Implications for DPFC."
Income Taxes. Income tax expense decreased in 1996 over the comparable
period in 1995. This decrease was a result of the loss provision on assets held
for sale and equity loss of wholly owned financing subsidiary recorded in 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 former 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 1996 compared to $568,000 for 1995. Dignity Partners purchased,
effective June 25, 1996, the limited partnership interests of the former limited
partners for approximately $5.2 million.
17
<PAGE>
Net loss in wholly owned financing subsidiary charged to reserve for equity
interest. In the fourth quarter of 1996, the DPFC net loss of $488,000 was
included in the Company's net loss before income taxes, minority interest and
net loss in wholly owned financing subsidiary charged to reserve for equity
interest. This loss was charged against the initial reserve for equity interest
in wholly owned financing subsidiary which was recorded in the third quarter of
1996. For a description of the composition of such reserve, see "Loss on
investment in wholly owned financing subsidiary" above.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994.
- ----------------------------------------------------------------------
Earned Discounts on Life Insurance Policies. The Company purchased 386
policies with an aggregate face value of $29.7 million during the year ended
December 31, 1995 compared to the purchase of 469 policies with an aggregate
face value of $35.5 million during 1994. The purchase of policies during 1995
was adversely impacted by capital constraints (particularly in the latter half
of 1995 as compared to the latter half of 1994) and rising purchase prices as a
result of increased competition during 1995. Earned discounts on life insurance
policies increased 63.5% from $4.2 million during 1994 to $6.9 million in 1995,
primarily as a result of the Company recognizing income over the 1995 period on
a larger portfolio of policies. The Company began 1995 with purchased life
insurance policies of $32.9 million, which was 188% larger than that at the
beginning of 1994. To a lesser extent, the increase in earned discounts
reflected a decrease in the weighted average remaining Accrual Period of the
portfolio of purchased life insurance policies to 15.8 months at the beginning
of 1995 from 16.7 months at the beginning of 1994; accordingly, the earned
discount was accrued at a faster rate in 1995 than that in 1994. Competition
also resulted in increased purchase prices, thereby reducing the earned discount
in 1995 relative to the earned discount in 1994 on policies with comparable
Accrual Periods.
Interest Expense. Interest expense increased from $1.1 million for 1994
to $3.4 million for 1995. This increase was primarily attributable to increased
debt obtained through advances of Securitized Note proceeds during 1995 which
were used to fund policy purchases. In addition, interest rates were generally
higher in 1995, though this factor was offset somewhat by the issuance in
February 1995 of the Securitized Notes, which bear interest at a fixed rate
(9.5% until, and 9.2% after, September 30, 1995) compared to a floating interest
rate ranging from 8.8% to 13.8% applicable to borrowings under the Company's
revolving credit facility during 1994. Interest expense increased at a faster
rate than the increase in the aggregate cost of policies purchased through
December 31, 1995 due to the increased leverage in 1995.
Compensation and Benefits. Compensation and benefits increased from
$619,000 for 1994 to $844,000 for 1995. This 36.2% increase was due to the
hiring of additional personnel during 1995 to handle the administrative tasks
relating to the Company's increased portfolio and non-broker referral business.
Other General and Administrative Expenses. Other general and
administrative expenses for 1994 were $302,000, compared to $890,000 for 1995.
To the extent the Company reviews a policy which it does not purchase, costs
associated with the review of the policy, such as fees paid to Consultants, are
not capitalized, but are expensed as other general and administrative expenses.
During 1995, the Company purchased a lower percentage of policies reviewed due
to competition and to a smaller percentage of reviewed policies meeting the
Company's underwriting standards. As a result, other general and administrative
expenses increased disproportionately to the growth in the Company's portfolio.
In addition, during 1995, the Company purchased more policies originated through
non-broker sources. Under these circumstances, certain costs traditionally borne
by the Company's sourcing brokers, such as the costs of obtaining medical
records and insurance information, were incurred by the Company. These
additional costs were not capitalized even if the policy was purchased and were
expensed as other general and administrative expenses. Finally, the Company
reserved approximately $125,000
18
<PAGE>
and incurred an additional $135,000 more (approximately) in legal fees in
connection with two Dignity Viatical collection disputes (one of which has been
awarded in favor of the Company and one of which is on appeal) compared to 1994.
Income Taxes. Income tax expense increased from $137,000 for
1994 to $625,000 for 1995. The increase is primarily the result of the
Company's increased profitability in 1995 relative to 1994.
Minority Interest of Limited Partners in Earnings of Investment
Partnership. The minority interest of limited partners in earnings of investment
partnership (which is derived primarily from earned discounts on policies
acquired by Dignity Viatical) decreased from $1.8 million for 1994 to $568,000
for 1995. The decrease was due to the timing of the acquisition of policies by
Dignity Viatical and the Accrual Periods applicable to those policies (and hence
the recognition of earned discounts on those policies). The decrease also
resulted from incurrence by the Company of legal expenses described above under
"--Other General and Administrative Expenses."
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
December 31, 1996, cash and cash equivalents was $6.6 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
as described in "Asset Sales -- Terms of Sale Agreements" and by the partial
sale of convertible preferred shares of American Information as described in
"Condideration of Strategic Options." Such needs may change significantly
depending on strategic options.
As of December 31, 1996, the outstanding principal amount of the
Securitized Notes was $41.2 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.
Description of Securitized Notes
- ---------------------------------
The Securitized Notes were issued in 1995 pursuant to the Indenture,
which provided for a maximum lending commitment of $50.0 million, subject to
reduction of the commitment amount or early amortization in April 1996 if the
outstanding principal balance of the Securitized Notes was less than $50.0
million. Funds advanced under the Securitized Notes were used primarily to
purchase eligible policies which are pledged as collateral under the Indenture.
Prior to the Amortization Date, proceeds from collected policies pledged under
the Indenture were available to purchase additional policies. Repayments of
principal were originally scheduled to begin in September 1996. An early
amortization event occurred in June 1996 with the result that the maximum
lending commitment was reduced to the then outstanding balance ($45.5 million)
from $50.0 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. The Securitized Notes bear interest at a
fixed annual rate of 9.2%.
The principal amount of the Securitized Notes to be repaid in any month
is equal to proceeds of policies collected during the preceding month less
certain required monthly payments (such as interest and servicing and trustee
fees) to be paid on such date. The Indenture does not permit the sale of any of
the policies pledged
19
<PAGE>
thereunder. An amendment of this prohibition on sales would require the consent
of all of the holders of the Securitized Notes and the Company.
The Indenture also contains certain covenants restricting the
activities of DPFC. Such covenants include provisions which (i) prohibit DPFC
from incurring debt other than trade payables and expense accruals and granting
liens unless such action would not cause S&P to downgrade or withdraw the rating
it assigned to the Securitized Notes, and (ii) prohibit DPFC from engaging in
any business other than the acquisition, ownership, sale and pledging of the
Pool and the other trust estate, the issuance and sale of the Securitized Notes
and activities incidental to the foregoing. In addition, DPFC is required to
maintain in an account under the Indenture (the "Liquidity Account") a balance
of 10% of the outstanding principal balance of the Securitized Notes. Subject to
certain restrictions, funds in the Liquidity Account may be used to pay, among
other things, servicing and trustee fees, principal and interest and taxes.
Events of default under the Indenture include (i) a default in payment of
principal or interest on the Securitized Notes when due, (ii) a default by DPFC
in the performance of any material covenant or a material breach of a
representation or warranty of DPFC which is not cured within 30 days, and (iii)
certain events of bankruptcy, insolvency and reorganization involving DPFC.
The Company acts as servicer under the Indenture pursuant to a
Contribution, Sale and Servicing Agreement (the "Servicing Agreement") and
receives monthly, pursuant and subject to the terms of the Indenture, a fee of
$36,000 until the earlier to occur of collection of the face value of the last
policy in the Pool or payment in full of the Securitized Notes. The Company is
required under the Servicing Agreement to monitor each policy and to cause the
collection and remittance to the trustee of the face value of matured policies.
the Company pays all expenses related to its monitoring and collection services,
including paying premiums and back-end fees, and is reimbursed for certain
expenses. All amounts owed to the Company pursuant to the monitoring and
collecting activities are subject to availability of cash after payment of other
priority amounts as provided in the Indenture. The Servicing Agreement contains
certain covenants restricting the Company's activities, including (i)
restrictions on mergers, (ii) provisions related to respecting the separate
legal status of DPFC, (iii) a requirement that no person will own a greater
percentage of the aggregate voting power of equity securities of the Company
entitled to vote in the election of directors than the percentage collectively
beneficially owned by the Executive Officers and no person other than the
Executive Officers will own more than 20% of such aggregate voting power, (iv) a
requirement that the Executive Officers constitute a majority of the Board of
Directors of Dignity Partners, and (v) a requirement that the Company employ at
least two of the Executive Officers (or such other personnel reasonably
acceptable to the holders of the Securitized Notes) in their respective current
capacities. An event of default will occur under the Servicing Agreement if,
among other things, (i) an event of default occurs under the Indenture, or (ii)
certain events of bankruptcy, insolvency or reorganization occur with respect to
the Company. If an event of default occurs under the Servicing Agreement, the
Company can be replaced as servicer under the Indenture. The back-up servicer is
the trustee under the Indenture.
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 first half
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
20
<PAGE>
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.
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
See pages 22 through 43 .
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- --------------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
None other than the Change in accountants as previously reported.
21
<PAGE>
KPMG Peat Marwick LLP
Three Embarcadero Center
San Francisco, CA 94111
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Stockholders of
Dignity Partners, Inc.:
We have audited the accompanying consolidated balance sheets of Dignity
Partners, Inc. as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Dignity Partners,
Inc. as of December 31, 1996 and 1995 and the results of their operations and
their cash flows for each of the years in the three-year period ended December
31, 1996, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
March 26, 1997
22
<PAGE>
DIGNITY PARTNERS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
December 31, December 31,
ASSETS 1996 1995
---------------- ---------------
<S> <C> <C>
Cash and cash equivalents $ 6,586,447 $ 1,056,611
Restricted cash (note 9) 4,625,663 4,566,845
Matured policies receivable (note 1m) 1,181,513 1,652,921
Assets held for sale (note 1d and 4) 11,520,103 --
Purchased life insurance policies (note 1e) 41,246,239 48,938,098
Investment in convertible preferred shares
(note 6) 3,000,000 --
Furniture and equipment, net of accumulated
depreciation of $0 and $61,349,
respectively (note 1f and 4) -- 130,532
Deferred financing costs, net of
accumulated amortization of $381,690
and $451,961, respectively (note 9) 681,910 1,043,541
IPO financing costs (note 2) -- 750,000
Other assets 102,598 87,079
---------------- ---------------
Total assets $ 68,944,473 $ 58,225,627
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses $ 190,894 $ 329,827
Accounts payable 320,577 377,204
IPO financing costs payable (note 2) -- 306,900
Payable to related party (note 2) -- 1,482,170
Accrued compensation payable (note 2) 186,390 849,148
Unearned income (note 1m and 5) -- 715,883
Payable for policies purchased (note 1m) 427,553 376,020
Other short term debt (note 2) -- 1,162,170
Reserve for equity interest in wholly owned
financing subsidiary (note 1e) 6,452,589 --
Long term notes payable (note 9) 41,218,205 39,105,138
Other long term debt (note 2 and 8) -- 1,444,270
Deferred income taxes (note 10) 6,000 531,711
---------------- ---------------
Total liabilities 48,802,208 46,680,441
---------------- ---------------
Minority interest of limited partners
in investment partnership (note 7) -- 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 29,496,720 669,594
Retained earnings (deficit) (9,007,373) 692,104
Treasury stock, 145,000 and 0 shares,
respectively (note 2) (390,000) --
---------------- ---------------
Total stockholders' equity 20,142,265 4,865,604
---------------- ---------------
Total liabilities and
stockholders' equity $ 68,944,473 $ 58,225,627
================ ===============
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
DIGNITY PARTNERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Income:
Earned discounts on life
insurance policies (note 5) $ 3,697,032 $ 6,933,318 $ 4,239,995
Earned discounts on prior
maturities (note 5) 802,471 -- --
Earned discounts on matured
policies (note 5) 979,611 -- --
Interest income 783,115 266,979 118,079
Other 322,141 189,079 84,579
------------ ------------ ------------
Total income 6,584,370 7,389,376 4,442,653
Expenses:
Interest expense 3,983,606 3,352,178 1,115,167
Compensation and benefits 1,196,291 843,646 619,250
Other general and administrative
expenses 1,388,338 889,816 301,984
Amortization (note 8 and 9) 449,631 273,543 166,723
Depreciation (note 1f) 19,967 34,653 25,074
Consulting fees -- -- 50,956
Net loss on assets sold (note 3) 179,548 -- --
Provision for loss on assets
held for sale (note 1d and 4) 3,139,588 -- --
Loss on investment in wholly owned
financing subsidiary (note 1e) 6,940,189 -- --
------------ ------------ ------------
Total expenses 17,297,158 5,393,836 2,279,154
------------ ------------ ------------
Income (loss) before income
taxes, minority interest
and net loss in wholly owned
financing subsidiary
charged to reserve for equity
interest (10,712,788) 1,995,540 2,163,499
Income tax benefit (expense) (note 10) 525,711 (624,510) (136,906)
Minority interest of limited partners
in earnings of investment
partnership (note 7) -- (567,831) (1,791,130)
Net loss in wholly owned financing
subsidiary charged to reserve for
equity interest (note 1e) 487,600 -- --
------------ ------------ ------------
Net income (loss) $ (9,699,477) $ 803,199 $ 235,463
============ ============ ============
Net income (loss) per share
(note 1k) (2.46) 0.42 0.19
Weighted average number of shares
of common stock and common stock
equivalents outstanding (note 1k) 3,942,166 1,902,482 1,211,367
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
DIGNITY PARTNERS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Retained
Preferred Stock Common Stock Additional earnings Treasury
--------------------- --------------------
Shares Amount Shares Amount paid-in-capital (deficit) Stock Total
-------- ----------- ---------- ---------- --------------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January 1, 1994 34,880 $3,488,013 457,148 $ 4,571 $ 192,600 $ (346,558) $ -- $ 3,338,626
Issuances of common stock
(April 30, 1994) -- -- 445,878 4,459 187,851 -- -- 192,310
Issuances of common stock
(September 30, 1994) -- -- 360,465 3,605 151,866 -- -- 155,471
Issuances of common stock
(October 31, 1994) -- -- 325,833 3,258 137,277 -- -- 140,535
Net income -- -- -- -- -- 235,463 -- 235,463
-------- ----------- ---------- ---------- --------------- ------------ ---------- -----------
Balances at December 31, 1994 34,880 $3,488,013 1,589,324 $ 15,893 $ 669,594 $ (111,095) $ -- $ 4,062,405
Issuance of preferred stock
dividend 380 -- -- -- -- -- -- -- --
Net income -- -- -- -- -- 803,199 -- 803,199
-------- ----------- ---------- ---------- --------------- ------------ ---------- -----------
Balances at December 31, 1995 35,260 $3,488,013 1,589,324 $ 15,893 $ 669,594 $ 692,104 $ -- $ 4,865,604
Issuance of preferred stock
dividend 580 -- -- -- -- -- -- --
Issuances of common stock
(February 1996) (35,840) (3,488,013) 2,702,500 27,025 28,734,956 -- -- 25,273,968
Purchase of treasury stock -- -- -- -- -- -- (390,000) (390,000)
Grant of warrants
(September 1996) -- -- -- -- 92,170 -- -- 92,170
Net loss -- -- -- -- -- (9,699,477) -- (9,699,477)
======== =========== ========== ========== =============== ============ ========== ===========
Balances at December 31, 1996 -- $ -- 4,291,824 $ 42,918 $ 29,496,720 $(9,007,373) $(390,000) $20,142,265
======== =========== ========== ========== =============== ============ ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
DIGNITY PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows for operating activities:
Net income (loss) $(9,699,477) $ 803,199 $ 235,463
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 469,599 308,196 191,797
Write-off of furniture and
equipment 12,303 -- --
Net loss on assets sold 179,548 -- --
Provision for loss on assets held
for sale 3,139,587 -- --
Warrants granted to consultants 92,170 -- --
Increase in accounts receivable -- (6,036) --
Earned discounts on insurance
policies (5,479,114) (6,933,318) (4,239,995)
Purchase of life insurance
policies (23,912,464) (22,276,717) (25,449,110)
Collections on matured life
insurance policies 15,523,569 13,103,920 7,151,802
Increase (decrease) in
unearned income (715,883) 86,175 438,589
Decrease (increase) in
other assets (15,519) (76,251) 8,686
Increase (decrease) in
deferred taxes (525,711) 623,690 136,907
Increase (decrease) in
accrued expenses (138,933) 149,827 155,510
Increase (decrease) in
accounts payable (56,627) 343,839 8,365
Increase (decrease) in IPO
financing costs payable (306,900) 306,900 --
Increase (decrease) in payable
to related party (1,482,170) 769,475 470,671
Increase (decrease) in accrued
compensation payable (662,758) 274,148 345,000
Increase in reserve for equity
interest in wholly owned
financing subsidiary 6,452,589 -- --
Income applicable to minority
interest -- 567,329 1,791,130
------------ ------------ ------------
Net cash used by operating
activities (17,126,191) (11,955,624) (18,755,185)
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of assets
held for sale 6,533,523 -- --
Purchase of furniture and equipment (6,776) (37,235) (58,570)
Additions to restricted cash (58,818) (4,459,832) (104,211)
Purchase of investment in
convertible preferred stock (3,000,000) -- --
------------ ------------ ------------
Net cash provided by (used in)
investing activities 3,467,929 (4,497,067) (162,781)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from long term
notes payable 6,375,000 39,105,138 --
Principal payments on long term
notes payable (4,261,933) -- --
Proceeds from other long term debt 5,540,132 22,701,070 21,730,819
Principal payments on other long
term debt (6,984,402) (39,703,752) (3,283,868)
Sale of limited partnership interests -- -- 280,473
Distribution to limited partners (783,313) (3,083,171) (2,911,000)
Purchase of limited partners'
interest in investment partnership (5,081,184) -- --
Loan from stockholder -- -- 1,162,170
Principal payment on loan from
stockholder (1,162,170) -- --
Proceeds from issuances of
common stock 25,273,968 -- 488,316
Purchase of treasury stock (390,000) -- --
Increase in financing costs (88,000) (790,544) (254,004)
IPO financing costs -- (750,000) --
Reimbursement of IPO financing costs 750,000 -- --
------------ ------------ ------------
Net cash provided by
financing activities 19,188,098 17,478,741 17,212,906
------------ ------------ ------------
Net increase in cash and
cash equivalents 5,529,836 1,026,050 (1,705,060)
Cash and cash equivalents,
beginning of period 1,056,611 30,561 1,735,621
------------ ------------ ------------
Cash and cash equivalents,
end of period $ 6,586,447 $ 1,056,611 $ 30,561
============ ============ ============
Supplemental disclosure of cash flow information:
State taxes paid $ 6,389 $ 3,367 $ 1,821
============ ============ ============
Cash paid for interest $ 4,113,703 $ 2,901,685 $ 798,658
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
DIGNITY PARTNERS, INC.
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
1. Summary of Significant Accounting Policies
- ---------------------------------------------------
a. General Description
The principal business activity of Dignity Partners, Inc. (Dignity
Partners or 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. Upon a viatical settlement,
the policyholder assigns his or her policy to the Company, which becomes the
holder, owner or certificate holder of the policy and the beneficiary thereunder
and receives from the insurance company the face value payable under the policy
following the death of the insured.
On July 16, 1996, in response to accounts of the research results
reported at the International AIDS Conference held in Vancouver, British
Columbia in July 1996 (the "AIDS 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 effects on its business of such research results. Results from a
number of studies were reported which appear to indicate that the treatments
involving a combination of various drugs were reducing substantially, and
perhaps eradicating, the levels of HIV detectable in the blood of persons
previously diagnosed with HIV and AIDS. Subsequent reports appear to confirm the
reports from the AIDS Conference. On December 16, 1996, the Company obtained
stockholder approval to sell all or substantially all of its assets. Dignity
Partners has sold or is pursuing the sale of all of its policies other than
those held by DPFC (as defined herein). Although the Company is continuing to
analyze its strategic direction, the Company believes that it is not viable to
continue to operate a viatical settlement business solely for non-AIDS policies
while a market for non-AIDS policies develops, if it develops at all. As a
result, the Board of Directors in February 1997 decided to cease immediately the
Company's viatical settlement business.
Dignity Partners was incorporated in the state of Delaware on September
8, 1992. The Company commenced operations on January 2, 1993 and commenced
purchasing life insurance policies on April 4, 1993.
b. Accounting Principles
The consolidated financial statements are presented on the accrual
basis of accounting in conformity with generally accepted accounting principles.
The Company has not presented the viatical settlement business as a
discontinued operations since at December 31, 1996 substantially all of the
the Company's assets are related to the viatical settlement business
The secured funding arrangement described in Note 9 has been accounted
for as a financing.
c. Principles of Consolidation
Through June 1996, the Company was the sole general partner of a
limited partnership, Dignity Viatical Settlement Partners, L.P. (Dignity
Viatical). The partnership, a separate and distinct legal entity from the
Company, had separate assets, liabilities and operations. However, for
accounting purposes, because the Company controlled the partnership (see Note
7), the assets, liabilities and operations of the partnership were consolidated
with the assets, liabilities and operations of the Company, and the interests of
the former limited partners were reflected as a minority interest in the
accompanying financial statements through December 31, 1995. On June 25, 1996,
Dignity Partners purchased all of the limited partnership interests in Dignity
Viatical for approximately $5.2 million which
27
<PAGE>
DIGNITY PARTNERS, INC.
Notes to Consolidated Financial Statements
resulted in an elimination of the minority interest on the balance sheet.
The Company also consolidates the assets, liabilities and operations of its
wholly owned financing subsidiary, Dignity Partners Funding Corp. I (DPFC)
(see Note 9).
d. Assets Held For Sale
As a result of the Company's decision to sell all or substantially all
of its assets, the Company reclassified during the third quarter of 1996 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 December 31, 1996 at the lower of carrying value or fair value less
cost to sell. In connection therewith, the Company established a reserve for
loss on sale of assets during the quarter ended September 30, 1996 and
reevaluated the reserve at December 31, 1996. (See Notes 3 and 4).
e. Purchased Life Insurance Policies
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 face
value of the policy (the Accrual Period), the difference (the unearned discount)
between (a) the death benefit payable (face value) under 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. The Company capitalized as 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
physicians or other medical consultants (Consultants) who estimated the
insured's life expectancy. 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 also took into account the historical
accuracy of the life expectancies estimated by the Company's Consultants and the
typical period (collection 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 was
held constant such that when the yield was applied to the carrying value of
the policy on a compounded basis over the course of the Accrual Period, the
unearned discount was fully accrued as earned discount by the end of the
Accrual Period. Beginning in the third quarter of 1996, the Company began
generally recognizing income upon receipt of proceeds on policies (either
pursuant to sale or the death of the insured).
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 10) were issued, requires the consent of all of the holders of
the Securitized Notes ("Noteholders") and the Company. The Company has
discussed briefly 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 reserve
was recorded in the third quarter of 1996 in the amount of $6.9 million to
reflect the estimated loss of the Company's equity interest in DPFC. The
reserve provides for the write-off of deferred financing costs and the
unrealized residual value associated with DPFC.
28
<PAGE>
DIGNITY PARTNERS, INC.
Notes to Consolidated Financial Statements
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. However, 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 recognized.
f. Furniture and Equipment
As of December 31, 1995, furniture and equipment are stated at
purchased cost net of accumulated depreciation. Through June 1996, depreciation
was provided on a straight-line basis over the estimated useful lives of the
assets, which were generally five years. As a result of the Company's
announcement to sell all or substantially all of its assets, furniture and
equipment at December 31, 1996 have been valued on the assumption that
miscellaneous office equipment has no sales value. See Note 4.
g. Deferred Financing Costs
Costs were incurred to obtain debt financing for the acquisition of
insurance policies. These costs have been deferred and are amortized
straight-line over the respective terms of the financing arrangements.
At December 31, 1996 the deferred financing cost was $682,000.
h. Income Taxes
The Company accounts for income taxes using the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis (temporary
differences). Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date of the tax change.
Deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carryforwards, and then a valuation allowance
is established to reduce that deferred tax asset if it is "more likely than not"
that the related tax benefits will not be realized in future years.
Prior to 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 a reserve for the loss to
equity interest in DPFC recorded in the period ended December 31, 1996, the
Company believes that it will not have a federal tax liability related to these
assets and has therefore reversed the related liabilities. The Company has
provided for miscellaneous state income taxes. A valuation allowance has also
been recorded equivalent to the portion of the deferred tax asset for which
management cannot conclude that it is more likely than not that the deferred tax
asset will be realized. See Note 10.
i. Cash and Cash Equivalents
The Company considers as cash equivalents all highly liquid investments
with an original maturity of three months or less.
29
<PAGE>
DIGNITY PARTNERS, INC.
Notes to Consolidated Financial Statements
j. Concentration of Credit Risk
Financial instruments that subject the Company to concentration of
credit risk consist primarily of receivables from insurance companies which are
the obligors under insurance policies purchased by the Company. As of December
31, 1996, the aggregate face value of policies issued by any one insurer with
respect to the Company's portfolio of insurance policies did not exceed 12.9% of
total assets.
k. Net Income Per Share
Net income per share is calculated on the primary basis using the
average number of Common Stock and Common Stock equivalents outstanding.
Earnings per share for 1996 do no not include stock equivalents due to the
anti-dilutive effect. Common Stock equivalents include employee stock
options and shares issued 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 actually converted into Common Stock in February 1996.
See Note 2.
l. Cost of Policies Reviewed But Not Purchased
To the extent the Company reviewed a policy which it did not purchase,
costs associated with the review of the policy, such as fees paid to
Consultants, were not capitalized, but were expensed as other general and
administrative expenses.
m. Terminology
Matured policies receivable represents policies for which the Company
has received notification that the insured has died and for which the Company is
awaiting collection of the face value.
Payable for policies purchased represents policies for which the
Company has become the holder, owner or certificate holder of the policy, and
the beneficiary thereunder, but at the request of the insured or a related party
payment is deferred for a short period.
Unearned income represents the remaining unearned discount on policies
for which the Company collected proceeds earlier than expected.
n. Profit Sharing Plan
The Company has a profit sharing plan (the Plan) for its employees.
Each employee hired after January 1, 1993 and who has been employed for at least
one year becomes a participant in the Plan. The Plan provides for discretionary
annual contributions by the Company for the account of each participant. In any
year in which the Plan is "top-heavy" within the meaning of the Internal Revenue
Code (the Code), the Plan requires, consistent with the Code, that a minimum
contribution be made for non-key employees. The contribution is allocated among
participants based on their compensation under an allocation formula integrated
with Social Security. Participants vest 20% in their Plan accounts after two
years of service (excluding any service prior to 1993) and an additional 20%
after each of the next four years of service. Upon termination following
permanent disability or on retirement at age 65, all amounts credited to a
participant's account are distributed, in a lump sum or in installments, as
directed by the participant. Upon death, all amounts credited to a
participant's account become fully vested and are distributed to the
participant's surviving spouse or designated beneficiary. Each year, profit
sharing contributions, if any, are determined by the Board of Directors. The
Company's plan
30
<PAGE>
DIGNITY PARTNERS, INC.
Notes to Consolidated Financial Statements
contribution expenses, which are included in compensation and
benefits during 1996, 1995 and 1994 were $70,190, $89,505 and $68,925,
respectively.
o. Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
p. Stock-Based Employee Compensation
The Company applies APB Opinion No. 25 in accounting for its two stock
compensation plans. No compensation cost has been recognized for these plans.
See Note 16.
2. Common Stock
- ---------------------
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. (See also Note 14).
The Company received the following proceeds from the offering and
such proceeds had been applied in 1996 for the following purposes:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
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 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. (See Note 11).
(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 Note 11).
</FN>
</TABLE>
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 Common Stock at prevailing market
prices. Through December 31, 1996, the Company had purchased 145,000 shares
of Common Stock at a weighted average price of $2.69 per share.
(See also Note 17c).
31
<PAGE>
DIGNITY PARTNERS, INC.
Notes to Consolidated Financial Statements
3. Sale Agreements
- ------------------------
On August 2, 1996, the Company sold 58 policies held by Dignity
Viatical and two other policies owned by the Company (with an aggregate face
value of $6.6 million) to an unaffiliated third party. This transaction resulted
in a pre-tax loss of $299,718. The $5,363,768 proceeds of this transaction were
used to prepay a portion of debt outstanding under the Company's revolving
credit facility and for working capital. See Note 8. At December 31, 1996, the
Company had collected all proceeds related to this sale.
On September 27, 1996, the Company entered into an agreement (the "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 was conditioned on the Company's receipt of stockholder
approval to sell all or substantially all of the Company's assets. Such approval
was received on December 16, 1996. The Company established a reserve in the
third quarter of 1996 of $1,792,087 in connection with policies covered by the
Sale Agreement. Pursuant to the Sale Agreement, 6 policies with an aggregate
face value of $400,000 will not be sold since the insured died prior to the
issuing insurance company's acknowledgment of transfer of ownership of the
policy. As of December 31, 1996, the Company completed the sale of 46 policies
with an aggregate face value of $1.9 million and realized a gain of $120,000
associated with these policies in the fourth quarter. As of December 31, 1996,
there were 145 outstanding policies under the Sale Agreement with an aggregate
face value of $11.9 million. As of March 17, 1997, the Company completed the
sale of 130 policies under the Sale Agreement and received $6.7 million in
proceeds. As of March 17, 1997, 14 policies with a face value of $1.0 million
were pending acknowledgment.
4. Assets Held For Sale
- -----------------------------
As a result of the Company's decision in the third quarter of 1996 to
sell all or substantially all of its assets, it reclassified all of its assets
other than the assets of DPFC to a "held-for-sale" category. Accordingly, such
assets are recorded on the balance sheet as of 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 the quarter ended September 30, 1996 and reevaluated such
reserve at December 31, 1996. For purposes of calculating such reserve,
furniture and equipment have been valued on the assumption that miscellaneous
office equipment has no sales value.
Life insurance policies and furniture and equipment held for sale as of
December 31, 1996 consist of:
<TABLE>
<CAPTION>
Life Insurance Policies
-----------------------
Not Covered
Covered by by a Furniture &
Sale Agreement Sale Agreement Equipment Total
-------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Capitalized costs $ 7,870,436 6,113,650 105,038 14,089,124
Earned discounts 194,914 185,778 -- 380,692
Reserve for loss
on sale (1,150,064) (1,694,611) (105,038) (2,949,713)
-------------- ------------- ----------- ------------
Assets held for sale $ 6,915,286 4,604,817 0 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 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
32
<PAGE>
DIGNITY PARTNERS, INC.
Notes to Consolidated Financial Statements
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.
5. Earned Discounts and Unearned Income
- ---------------------------------------------
Earned discounts on life insurance policies reflects the respective
amounts of accretion recorded in 1994, 1995 and from January 1, 1996 through
June 30, 1996. With the decision to sell all or substantially all of the
Company's assets, the amount of unearned discount recorded on the balance sheet
at June 30, 1996 relating to those policies collected prior to June 30, 1996,
but expected to be collected after June 30, 1996 was recorded in 1996 as earned
discounts on prior maturities. Earned discounts for matured policies reflects
income on policies on which the Company collected the proceeds (pursuant to the
death of the insured) during the second half of 1996. As a result of the
decision to sell all or substantially all of the Company's assets any future
income will be recorded as earned discounts for matured policies only and will
be recorded upon receipt of proceeds of policies (pursuant to the death of the
insured).
6. 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 Company"), 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 (which at November 4,
1996 represented approximately 11.4% of the fully diluted common equity
interest) of American Company. The Company accounts for this investment using
the cost method. If the equity method had been applied Dignity Partners would
have recorded a loss in 1996 of $104,221 which is equivalent to a pro rata share
on an as if converted basis in American Company's fourth quarter loss. See
Note 17b.
7. General Partner Interests in Dignity Viatical Settlement Partners, L.P.
- -------------------------------------------------------------------------------
In 1993, the Company formed Dignity Viatical, a limited partnership,
for the purpose of financing the purchase of additional life insurance policies.
The capital contributions to Dignity Viatical aggregated approximately $10.1
million. The Company, as the general partner, had a 1% interest in Dignity
Viatical. In addition, the Company was entitled to a preference in distributions
of $233,597 for providing management services (management fee) during the life
of the partnership (estimated to be approximately four years from formation).
Management fees were allocated to the Company as follows: For the years ended
December 31, 1996, 1995 and 1994 -- $89,753, $59,848 and $59,818, respectively.
After the general and limited partners would have received distributions equal
to their initial capital contributions and a 4% compounded annual return, the
Company was entitled to a 20% participation in the distributions. The assets,
liabilities and operations of Dignity Viatical have been consolidated with those
of the Company for presentation in the consolidated financial statements. The
Company, as the general partner of Dignity Viatical, controls the operations of
the partnership. The minority interest reflected in the financial statements
represents the former limited partners' interest in the net assets and income of
Dignity Viatical. On June 25, 1996 Dignity Partners purchased all of 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. Summarized
financial information with respect to Dignity Viatical for the
years ended December 31, 1996 and
33
<PAGE>
DIGNITY PARTNERS, INC.
Notes to Consolidated Financial Statements
1995, follows:
<TABLE>
<CAPTION>
December 31 December 31
1996 1995
<S> <C> <C>
Purchased insurance policies, face value
of $0 and $6,886,193, respectively ... $ -- $6,595,552
Other assets ........................... -- 615,614
Liabilities ............................ -- (229,772)
----------- -----------
Net assets................ $ -- $6,981,394
=========== ===========
Total income .................. $ 269,300 $1,024,402
Total expense ................ (137,110) (301,027)
----------- -----------
Net income ............... $ 132,190 $ 723,375
=========== ============
</TABLE>
8. Revolving Credit Facility
- ----------------------------------
At December 31, 1995, the Company had a revolving credit facility with
a total amount outstanding of $1,444,270. Advances under the credit facility
were collateralized by a security interest in substantially all of the Company's
assets (including policies), except those securing the Securitized Notes of DPFC
described in Note 9. Interest under the credit facility accrued on outstanding
advances at the lender's governing rate (8.50% at December 31, 1995) plus 5.25
percent for amounts not in excess of $2,000,000 and at the lender's governing
rate plus 2.75 percent for amounts in excess of $2,000,000. Interest was payable
monthly. The Company terminated the facility on August 29, 1996 at which time it
repaid principal and accrued interest in the amount of $3,301,328. In connection
with such repayment, Dignity Partners wrote off by amortizing $130,000 of
unamortized financing costs associated therewith. In the course of obtaining the
credit facility, the Company incurred and deferred total financing charges of
$671,008 which were subsequently reduced to $519,904 in February 1995, with the
issuance of the Senior Viatical Settlement Notes. Of this deferred amount,
$94,042, $118,617 and $165,552 has been amortized in the periods ended December
31, 1996, 1995 and 1994, respectively.
9. Senior Viatical Settlement Notes
- -----------------------------------------
On February 1, 1995 the Company issued $35 million of Senior Viatical
Settlement Notes, Series 1995-A, Stated Maturity March 10, 2005 (the Securitized
Notes), through DPFC, a wholly owned special purpose subsidiary, in order to
finance the purchase of life insurance policies. On September 29, 1995, DPFC
issued amended and restated Securitized Notes in the principal amount of $50.0
million. The Securitized Notes represent the obligations solely of DPFC. The
Company's consolidated financial statements include 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. Dignity Partners was the originator and is the servicer of
the policies pledged under the indenture.
DPFC is required to maintain a balance of 10% of the outstanding
principal balance of the Securitized Notes in a liquidity account held under the
indenture for the payment of servicing and origination fees, principal and
interest payments, tax payments, agents fees and premiums. The amount held in
the liquidity account at December 31, 1996, which is included in restricted
cash, was $4,139,896.
34
<PAGE>
DIGNITY PARTNERS, INC.
Notes to Consolidated Financial Statements
Funds advanced under the Securitized Notes must be used to purchase
policies which meet the criteria set forth in, and are pledged as collateral
under, the indenture pursuant to which the Securitized Notes were issued. The
policies purchased with proceeds of the Securitized Notes are pledged to secure
obligations under the Securitized Notes. Bankers Trust Company, as agent and
trustee under the indenture relating to the Securitized Notes, has legal title
to those policies. At December 31, 1996, the principal amount of advances
outstanding was $41,218,205. As of such date, the face value of these policies
was $47,612,356. Repayment of principal of the Securitized Notes was originally
scheduled to begin in September 1996. An early amortization event occurred in
June 1996. 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 $4.5 million of restricted cash as of December 31,
1996, which Dignity Partners is required to maintain in a cash collateral
account for the benefit of the Noteholders.
In the course of obtaining the financing arrangement, DPFC incurred and
deferred charges of $88,002, $941,651 and $33,947 in 1996, 1995 and 1994,
respectively. Of these deferred amounts, $225,592, $154,927 and $1,171 has been
amortized in the periods ended December 31, 1996, 1995 and 1994, respectively.
Until September 30, 1995, the Securitized Notes bore interest at the
fixed rate of 9.54% per annum and since such date have borne interest at the
fixed rate of 9.17% per annum. The Securitized Notes have a stated maturity of
March 10, 2005.
10. Income Taxes
- ---------------------
The components of the provision for income tax included in the
statements of operations for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Federal:
Deferred (benefit) expense $ (210,113) $ 432,196 $ 90,978
State:
Deferred (benefit) expense (315,598) 192,314 45,928
------------ ------------ ------------
Total tax (benefit) expense $ (525,711) $ 624,510 $ 136,906
============ ============ ============
</TABLE>
35
<PAGE>
DIGNITY PARTNERS, INC.
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
December 31, are presented below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Revenue and expenses recognized on the
cash basis for tax purposes ........... $ 451,718 $1,653,831
Depreciation, amortization and other .... 22,717 22,717
Provision for assets held for sale ...... 1,260,168 --
Provision for loss on investment
in subsidiary ......................... 2,785,653 --
Net operating loss carryforwards ........ 2,135,875 439,035
---------- ----------
6,656,131 2,115,583
Valuation allowance ..................... (3,431,001) --
---------- ----------
Deferred tax assets net of valuation
allowance ............................. 3,225,130 2,115,583
Deferred tax liabilities:
Accretion recognized on a cash basis
for tax purposes ...................... 3,231,130 2,647,294
---------- ----------
3,231,130 2,647,294
---------- ----------
Net deferred tax asset (liability) ........ $ 6,000 $ 531,711
========== ==========
</TABLE>
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 the
reserve to reflect estimated loss of the Company's equity interest in DPFC
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. A valuation allowance has been recorded equivalent to the
portion of the deferred tax asset for which management cannot conclude that it
is more likely than not that the deferred tax asset will be realized.
The difference between the statutory income tax rate and the Company's
effective tax rate for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Tax expense at
statutory rate (34%) .... $(3,476,564) $ 678,484 $ 735,590
State taxes net of
federal benefits ........ (627,622) 126,927 30,312
Minority interest of
limited partners ........ -- (193,063) (608,984)
Change in valuation
allowance ............... 3,431,001 -- --
Other ..................... 147,474 12,162 (20,012)
Total tax (benefit) ----------- ------------ ------------
expense $ (525,711) $ 624,510 $ 136,906
=========== ============ =============
</TABLE>
At December 31, 1996, the Company has an estimated federal tax net
operating loss carryforward of $5,768,141 expiring in the years 2008 to 2011,
and a California tax net operating loss carryforward of approximately $2,846,312
expiring in the years 1998 to 2001.
36
<PAGE>
DIGNITY PARTNERS, INC.
Notes to Consolidated Financial Statements
11. Related Party Transactions
- -----------------------------------
a. Payable to related party
Prior to the Reorganization (as defined in Note 14), The Echelon Group
Inc. ("Echelon"), the Company's majority stockholder, paid expenses on behalf of
Dignity Partners, represented by a payable to related party, and, until the
initial public offering, Echelon loaned funds to the Company on a short term
basis at an interest rate ranging from 8% to 9.75% per annum (See note 14b). On
January 1, 1995, the payable to related party was $712,695. Amounts accrued by
the Company in 1995, were $285,949 for personnel costs, $35,810 for office
expenses, $12,000 for consulting services, $105,716 for interest and $330,000
for short term borrowings. Amounts accrued by the Company from January 1, 1996
through February 13, 1996 were $8,837 for interest and $700,000 for short term
borrowings. On February 14, 1996, proceeds from the initial public offering were
used to pay the aggregate payable to related party of $2,191,007. See Note 2.
b. Accrued compensation payable
Dignity Partners accrued executive officers' compensation (consisting
solely of salaries) of $274,148 and $345,000 in 1995 and 1994, respectively.
These accrued amounts were paid with proceeds of the initial public offering.
See Note 2. Accrued compensation payable for 1996 was $186,390 consisting of
$70,190 for the profit sharing plan, $80,500 for executive officers'
compensation, $29,989 for payroll tax and $5,711 for worker's compensation
insurance.
c. Other short term debt
Prior to February 14, 1996, the Company periodically borrowed funds
from Echelon at an interest rate of 9% compounded monthly. See Note 14b. The
outstanding principal balance at September 30, 1995 was $1,162,170. On October
12, 1995, in connection with the Reorganization, the Company replaced the
$1,162,170 loan from Echelon with a bank working line of credit. The working
capital line bore interest at the lender's prime rate (8.50% at December 31,
1995) plus 1%. The facility expired on February 26, 1996.
12. Commitments
- --------------------
At December 31, 1996, the Company was obligated to purchase $ 96,812 in
policies which had not been assigned to the Company at that date. The Company
records a purchase of a life insurance policy at the time of assignment of the
policy.
The Company has a lease obligation for its California office space of
approximately 5,900 sq. ft. The lease expires on May 31, 1999, and the monthly
rent is $8,062, of which the Company pays $5,240 and New Echelon pays $2,822.
Additionally, the Company has a lease obligation for its Nevada office space of
600 sq. ft. The lease expires on September 30, 1997 and the monthly rent is
$905.
37
<PAGE>
DIGNITY PARTNERS, INC.
Notes to Consolidated Financial Statements
Future minimum rental payments (less amounts to be paid by New Echelon)
at December 31, 1996, under operating leases with an initial term of one year or
more, are as follows:
<TABLE>
<S> <C>
Year ended December 31, 1997 .......... $ 71,029
Year ended December 31, 1998 .......... 62,884
Year ended December 31, 1999 .......... 26,202
Year ended December 31, 2000 .......... --
----------
Total ................................. 160,115
</TABLE>
13. Litigation
- -------------------
From time to time, the Company is involved in routine legal proceedings
incidental to its business, including litigation in connection with the
collection of amounts owed by insurance company obligors. The Company does not
expect that these proceedings, individually or in the aggregate, will have a
material adverse effect on the Company's financial position, liquidity or
results of operations.
On December 19, 1996, a complaint was filed in the United States
District Court, Northern District of California (Docket No. C96-4558) 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 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 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Section 11 of the
Securities Act of 1933 and seeks, among other things, compensatory damages,
interest, fees and costs. The allegations are based on alleged
misrepresentations in and omissions from the Company's registration statement
and prospectus related to its initial public offering and certain documents
filed by the Company under the Exchange Act. The Company and each of the
defendants intend to defend the action vigorously.
On February 13, 1997, a second 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 New
Echelon by one 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.
14. Reverse Stock Split and Reorganization
- -----------------------------------------------
a. Reverse Stock Split
On January 12, 1996, in contemplation of an initial public offering of
its common stock, the Company effected a reverse stock split (the Split),
wherein each issued and outstanding share of common stock was converted into
0.7175 of share of common stock. The Company has restated its common stock
capitalization for all periods presented in the accompanying financial
statements to give effect to the Split.
38
<PAGE>
DIGNITY PARTNERS, INC.
Notes to Consolidated Financial Statements
b. Reorganization (See note 2)
On September 30, 1995, Dignity Partners and its then sole stockholder,
Echelon, entered into a series of transactions (the Reorganization). In the
Reorganization, Echelon sold to a newly-formed limited liability company, The
Echelon Group of Companies, LLC ("New Echelon LLC"), substantially all of its
assets and liabilities other than the outstanding shares of the common stock of
Dignity Partners. These assets were sold for a purchase price equal to their
fair market value. New Echelon LLC is owned by the former shareholders of
Echelon. Following this sale of assets, Echelon was merged with and into Dignity
Partners.
Pursuant to the merger, the authorized capital of Dignity Partners was
increased from 1,000 shares of common stock to 17 million shares, consisting of
15 million shares of common stock and two million shares of preferred stock. Of
the preferred stock 135,000 shares were designated as Convertible Cumulative
Pay-in-Kind Preferred Stock (Convertible Preferred Stock). Further, each
outstanding share of common stock of Dignity Partners was canceled, each
outstanding share of Echelon common stock was converted into 15,893 (after
giving effect to the Split) shares of common stock of Dignity Partners, and the
outstanding shares of preferred stock of Echelon were converted into an
aggregate of 34,880 shares of Convertible Preferred Stock.
As a result, the Company has restated its capitalization for all
periods presented in the accompanying financial statements to reflect the
Reorganization and such preferred stock and common stock. At the time of the
Reorganization, the equity of Dignity Partners exceeded that of Echelon by
$1,162,170. This amount represents the extent to which Echelon, the former
parent, funded its investment in Dignity Partners with debt. The Company has
restated stockholders' equity to reflect the historic equity of Echelon related
to Dignity Partners, and the debt that was effectively used in the
capitalization of Dignity Partners, for each of the periods presented. Interest
on such debt (of $104,107 and $128,354 for 1995 and 1994, respectively) is
included in interest expense in the respective consolidated statements of
operations.
On October 12, 1995, in connection with the Reorganization, the Company
replaced the $1,162,170 loan from Echelon with a bank working capital line of
credit. The working capital line bore interest at the lender's prime rate (8.50%
at December 31, 1995) plus 1% and the facility expired on February 26, 1996.
Prior to the Company's initial public offering, a director held all
outstanding shares of Convertible Preferred Stock. Pursuant to the
Reorganization, 34,880 shares of Convertible Preferred Stock were issued. The
holder of Convertible Preferred Stock received, beginning October 13, 1995,
dividends on each share at an annual rate of 8% of the per share liquidation
amount of $100. Such dividends are paid in additional shares of Convertible
Preferred Stock. On December 1, 1995, 380 shares of Convertible Preferred Stock
were issued pursuant to the payment of dividends on the outstanding shares.
The Company has reflected in its calculation of earnings per share the
effect of the Reorganization as if it had occurred during each of the periods
presented. For purposes of 1994 and 1995, the Company assumed the conversion of
the outstanding shares of Convertible Preferred Stock issuable in respect of
accrued but unpaid dividends thereon through December 31, 1995. The number of
shares issuable upon conversion was calculated by dividing the aggregate
liquidation value of the appropriate number of shares of Convertible Preferred
Stock ($100 per share) by the difference between the per share initial public
offering price ($12.00) and the underwriters' discount ($0.84). On the effective
date of the Company's registration statement related to the initial public
offering (February 13, 1996), the outstanding shares of Convertible Preferred
Stock (and shares of Convertible Preferred Stock issuable in respect to accrued
and unpaid dividends thereon through such date) were automatically converted
into 321,144 shares of common stock which were sold by the holder in the
offering.
39
<PAGE>
DIGNITY PARTNERS, INC.
Notes to Consolidated Financial Statements
The computation of income per share in each period is based on the
weighted average number of common shares outstanding, after giving effect to the
conversion of the Convertible Preferred Stock in connection with the initial
public offering, but without giving effect to the primary offering by the
Company of Common Stock. See Note 2.
As a result of the Reorganization, the Company has restated capital
contributions to reflect the underlying capital of Echelon, its former parent,
as follows:
<TABLE>
<CAPTION>
Loan from Common Preferred Net Assets
Echelon (1) Stock (2) Stock (3) Contributed (4)
------------ ---------- ------------ ----------------
<S> <C> <C> <C> <C>
April 4, 1993 ...... $ -- $ 1,000 $ -- $ 1,000
December 6, 1993 ... -- 196,171 3,488,013 3,684,184
April 30, 1993 ..... 458,176 192,310 -- 650,486
September 30, 1994 . 369,529 155,471 -- 525,000
October 31, 1994 ... 334,465 140,535 -- 475,000
------------ ---------- ------------ ----------------
Total at
December 31, 1995 $ 1,162,170 $ 685,487 $ 3,488,013 $ 5,335,670
============ ========== ============ ================
<FN>
(1) See Note 2.
(2) Common stock reflects the net value of assets contributed
after giving effect to the Convertible Preferred Stock and
loans from stockholders.
(3) Represents amounts attributable to the Convertible Preferred Stock.
(4) Represents amounts contributed by Echelon for the five shares of
common stock of Dignity Partners that were canceled in the
merger.
</FN>
</TABLE>
15. 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.
Assets held for sale reflect management's estimate of fair market value
based on prices obtained by the Company in connection with other sales.
The portfolio of purchased life insurance policies net of reserve for
equity interest in wholly owned financing subsidiary is stated at fair market
value based on management's estimates. This reserve was recorded in the third
quarter of 1996 to reflect estimated loss of the Company's equity interest in
DPFC.
Other short term debt represents bank debt and is stated at market
value based on the short term maturity date. The debt was paid in full in
February, 1996.
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 December 31, 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.
40
<PAGE>
DIGNITY PARTNERS, INC.
Notes to Consolidated Financial Statements
16. Stock-Based Compensation
- ---------------------------------
The Company has two stock option plans. Under the 1995 Employee Stock
Option Plan ("Employee Plan"), the Company may grant options to its employees
for up to 350,000 shares of common stock. Under the Stock Option Plan For
Non-Employee Directors ("Director Plan"), the Company may grant up to 75,000
shares of common stock. Under both plans, the exercise price of each option
equals the market price of the Company's stock on the date of grant, with an
expiration of ten years after grant date. Under the Employee Plan, options vest
20% per year over five years. Under the Director Plan, initially, each new
Non-Employee Director is granted 10,000 options that vest over 3 years and then
5,000 options are granted at each annual meeting that vest after one year.
The fair value of each option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 (no grants in 1995): expected
volatility of 20% ; risk-free interest rates of 6.3% for the Employee Plan
and 6.0% for the Director Plan; expected life of 6.5 years for the Employee
Plan and 3.5 years for the Director Plan.
<TABLE>
<CAPTION>
Weighted-Average
Shares Exercise Price
---------- ------------------
<S> <C> <C>
Outstanding at beginning of year,
January 1, 1996 -- --
Granted 407,000 $ 8.18
Exercised -- --
Forfeited (75,000) $ 12.18
Canceled (151,000) $ 12.01
---------
Outstanding at end of year,
December 31, 1996 181,000 $ 3.33
=========
Options exercisable at year-end 6,667 $ 13.50
Weighted-average fair value of
options granted during the year $ 3.11
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Number of shares
Outstanding at Remaining
December 31, 1996 Exercise Price Contractual Life
----------------- -------------- ----------------
<C> <C> <C>
151,000 $ 1.38 9 years
20,000 $13.50 9 years
10,000 $12.38 9 years
</TABLE>
41
<PAGE>
DIGNITY PARTNERS, INC.
Notes to Consolidated Financial Statements
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its fixed stock option plan. Had compensation cost for the Company's two
stock-based compensation plans been determined consistent with FASB Statement
No. 123, the Company's net loss and net loss per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996
----
<S> <C> <C>
Net loss As reported $ (9,699,477)
Pro forma $ (9,881,226)
Primary loss per share As reported $ (2.46)
Pro forma $ (2.51)
</TABLE>
In addition to the above mentioned stock option plans, on September
16, 1996 Dignity Partners granted 300,000 warrants at a purchase price of $6.00
per share to Jefferies & Company, Inc. These warrants are exercisable
immediately and expire on September 16, 2001. The expense for these warrants was
determined consistent with FASB Statement No. 123, and the Company's net income
was reduced by $92,167. The fair value of each warrant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: expected volatility of 20%; risk-free interest
rate of 6.2%; expected life of 5 years.
17. Events Subsequent to the Balance Sheet Date
- ----------------------------------------------------
a. Portfolio Sales
During the first half of 1997, the Company is expecting to collect all
proceeds on the remaining 145 policies under the sale agreement dated September
27, 1996. The estimated pre-tax gain on these sale proceeds to be recognized in
the first half of 1997 is $400,000 (unaudited). Actual gains may vary
materially from estimated gains based on among other things, the
successful transfer of ownership of the policies and actual versus estimated
proceeds.
On January 16, 1997 Dignity Partners entered into a contract with an
unaffiliated viatical settlement company to sell approximately $1.0 million in
face value of policies 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. The estimated pre-tax gain
in the first quarter of 1997 is $120,000 (unaudited). Actual gains may vary
materially from estimated gains based on among other things, the
successful transfer of ownership of the policies and actual versus estimated
proceeds.
On February 10, 1997 Dignity Partners entered into a contract with an
unaffiliated viatical settlement company to sell approximately $4.5 million in
face value of policies 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. Through March 17, 1997, the
Company had collected $800,000 in sale proceeds under the agreement. The
estimated pre-tax gain in the first half of 1997 is $770,000 (unaudited).
Actual gains may vary materially from estimated gains based on among other
things, the successful transfer of ownership of the policies and actual versus
estimated proceeds.
42
<PAGE>
DIGNITY PARTNERS, INC.
Notes to Consolidated Financial Statements
On March 24, 1997 Dignity Partners entered into a contract with an
unaffiliated viatical settlement company to sell approximately $2.9 million in
face value of policies for approximately $1.7 million. Such policies were
carried on the balance sheet at December 31, 1996 at approximately $1.5
million after giving effect to the reserve for loss on sale of assets. The
estimated pre-tax gain in the first half of 1997 is $200,000 (unaudited).
Actual gains may vary materially from estimated gains based on among other
things, the successful transfer of ownership of the policies and actual versus
estimated proceeds.
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 Company believes that it is extremely difficult to predict
accurately life expectancy of people afflicted with HIV and AIDS. Further, the
Company believes that it is not viable to continue to operate a viatical
settlement business solely for non-AIDS policies while a market for non-AIDS
policies develops, if it develops at all. As a result, the Board of Directors in
February 1997 determined to cease immediately the Company's viatical settlement
business and to sell its non-AIDS policies, consisting of approximately 31
policies with a face value of $2.9 million. The sale agreement dated March 24,
1997 covers such policies.
b. Partial Sale of Investment in Convertible Preferred Shares
On March 18, 1997, the Company converted 8.2 million shares of
convertible preferred shares of American Company into 8.2 million shares of
common stock and sold such shares to an unaffiliated third party for $1.83
million. An estimated pre-tax gain of $700,000 (unaudited) resulting from
such sale will be recognized in the first quarter of 1997.
c. Share Repurchase
In the month of January 1997, the Company purchased 128,500 shares of
common stock at a weighted average price of $2.63 per share.
43
<PAGE>
PART III
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
Information regarding directors of the Company and the Executive
Officers (each of whom is a director) will be set forth under the captions
"Security Ownership of Certain Beneficial Owners and Management" and "Election
of Directors" in Dignity Partners' proxy statement related to the Company's 1997
annual meeting of stockholders (the "Proxy Statement") and is incorporated
herein by reference. Information required by Item 405 of Regulation S-K will be
set forth under caption "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement and is incorporated herein by reference.
ITEM 11--EXECUTIVE COMPENSATION
- -------------------------------
Information required by this item will be set forth under the caption
"Executive Compensation" in the Proxy Statement and, except for the information
under the captions "Executive Compensation -- Report on Executive Compensation"
and "Executive Compensation -- Performance Graph," is incorporated herein by
reference.
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- ------------------------------------------------------------
MANAGEMENT
----------
Information required by this item will be set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement and is incorporated herein by reference.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
Information regarding certain relationships and related transactions of
directors and executive officers will be set forth under the captions "Executive
Compensation -- Compensation Committee Interlocks and Insider Participation" and
"Related Transactions" in the Proxy Statement and is incorporated herein by
reference.
PART IV
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
- ---------------------------------------------------------------
FORM 8-K
--------
(a) 1. The following designated financial statements and
the report thereon of KPMG Peat Marwick, LLP dated
March 26, 1997 are included herein at pages 22
through 43:
Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 1996
and 1995.
Consolidated Statements of Operations for
the years ended December 31, 1996, 1995 and
1994.
Consolidated Statements of Stockholders'
Equity for the years ended December 31,
1996, 1995 and 1994.
44
<PAGE>
Consolidated Statements of Cash Flows for
the years ended December 31, 1996, 1995 and
1994.
Notes to Consolidated Financial Statements.
2. All schedules are omitted because the required
information is not presented or is not present in
amounts sufficient to require submission of the
schedule, or because the required information is
included in the consolidated financial statements or
notes thereto.
3. Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
<S> <C>
3.1 Second Amended and Restated Certificate of
Incorporation of the Company (Incorporated by
reference to Exhibit 3.1 of the Company's
Registration Statement on Form S-1 (Registration No.
33-98708) (the "Registration Statement")).
3.2 Amended and Restated Bylaws of the Company
(Incorporated by reference to Exhibit 3.2 of the
Registration Statement).
4.1 Specimen certificate for the Common Stock,
$.01 par value per share, of the Company
(Incorporated by reference to Exhibit 4.1 of the
Registration Statement).
4.2 Indenture, dated as of February 1, 1995 (the
"Indenture") among the Company, as Servicer,
Dignity Partners Funding Corp. I ("DPFC") as
Issuer, and Bankers Trust Company as Indenture
Trustee ("Bankers Trust") (Incorporated by
reference to Exhibit 10.12 of the Registration
Statement).
4.3 Amendment No. 1 to the Indenture (Incorporated
by reference to Exhibit 10.13 of the
Registration Statement).
10.1* 1995 Stock Option Plan (Incorporated by
reference to Exhibit 10.1 of the Registration
Statement).
10.2* Stock Option Plan for Non-Employee Directors
(Incorporated by reference to Exhibit 10.2 of the
Registration Statement).
10.3 Office Lease/Francisco Bay Office Park by and
between HHC Investments, Ltd. and Echelon
(Incorporated by reference to Exhibit 10.3 of the
Registration Statement).
10.4 Assignment and Assumption Agreement dated
September 30, 1995 (Incorporated by reference to
Exhibit 10.16 of the Registration Statement).
10.5 Agreement between the Company and New Echelon LLC
regarding allocation of costs (Incorporated by
reference to Exhibit 10.4 of the Registration
Statement).
45
<PAGE>
10.6 Profit Sharing Plan (Incorporated by reference to
Exhibit 10.5 of the Registration Statement).
10.7 Contribution, Sale and Servicing Agreement
("Servicing Agreement") dated as of February 1, 1995
among the Company, DPFC and Bankers Trust
(Incorporated by reference to Exhibit 10.14 of the
Registration Statement).
10.8 Amendment No. 1 to Servicing Agreement
(Incorporated by reference to Exhibit 10.15 of
the Registration Statement).
10.9 Amendment No. 2 to the Servicing Agreement
(Incorporated by reference to Exhibit 10.10 of the
Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995).
10.10 Master Agreement for Purchase of Life Insurance
Policies dated September 27, 1996 (Incorporated by
reference to Exhibit 10 of the Company's Quarterly
Report on Form 10-Q for the quarter ended
September 30, 1996).
10.11 Amendment dated as of November 12, 1996 to Master
Agreement for Purchase of Insurance Policies
dated as of September 27, 1996.
10.12 Purchase and Sale Agreement dated as of
January 16, 1997.
10.13 Second Master Agreement for Purchase of Insurance
Policies dated as of February 10, 1997.
10.14 Third Master Agreement for Purchase of Insurance
Policies dated as of March 24, 1997.
10.15 Indemnification Agreement, dated September 30,
1995, between the Company (as successor to
Echelon) and New Echelon LLC (Incorporated by
reference to Exhibit 10.18 of the Registration
Statement).
21.1 Subsidiary of the Company
23.1 Consent of Independent Certified Public Accountants
24.1 Powers of Attorney
27 Financial Data Schedule
</TABLE>
*Management contract or compensation plan or arrangement.
46
<PAGE>
(b) Reports on Form 8-K:
<TABLE>
<CAPTION>
Date Item Reported Matter Reported
---- ------------- ---------------
<S> <C> <C>
October 9, 1996 5 On September 17, 1996, the Company issued a
press release announcing the retention of a
financial advisor to assist in the analysis of
strategic options.
On October 9, 1996, the Company issued a press
release announcing an agreement to sell a
portion of its portfolio.
November 5, 1996 5 On October 18, 1996, the Company issued a
press release announcing a share repurchase
program.
On November 4, 1996, the Company issued a
press release announcing an investment in
American Information Company, Inc.
December 16, 1996 2 The stockholders of Dignity Partners, Inc.
approved a proposal to authorize the Company's
Board of Directors to sell all or
substantially all of the Company's assets.
December 19, 1996 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.
</TABLE>
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated March 31, 1997 DIGNITY PARTNERS, INC.
/s/Alan B. Perper
------------------------------
Alan B. Perper
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 31, 1997:
/s/ Alan B. Perper *
- ----------------------------- -----------------------------
Alan B. Perper John Ward Rotter
President and Director Executive Vice President,
(Principal Executive Officer) Chief Financial Officer
and Director
(Principal Financial and
Accounting Officer)
* *
- ----------------------------- -----------------------------
Bradley N. Rotter Stephen T. Bow
Chairman of the Board and Director Director
*
- -----------------------------
Paul A. Volberding, M.D.
Director
* The undersigned by signing his name hereunto has hereby signed this
report on behalf of the above-named directors, on March 31, 1997,
pursuant to a power of attorney executed on behalf of each such director
and filed with the Securities and Exchange Commission as Exhibit 24.1 to
this report.
By: /s/ Alan B. Perper
-----------------------------
Alan B. Perper
48
<PAGE>
Exhibit Index
-------------
<TABLE>
<CAPTION>
Sequential
<S> <C>
Exhibit Page
Number Description of Document Number
--------- ----------------------- -----------
3.1 Second Amended and Restated Certificate of
Incorporation of the Company (Incorporated
by reference to Exhibit 3.1 of the Company's
Registration Statement on Form S-1
(Registration No. 33-98708) (the
"Registration Statement")).
3.2 Amended and Restated Bylaws of the Company
(Incorporated by reference to Exhibit 3.2 of
the Registration Statement).
4.1 Specimen certificate for the Common Stock,
$.01 par value per share, of the Company
(Incorporated by reference to Exhibit 4.1 of the
Registration Statement).
4.2 Indenture, dated as of February 1, 1995 (the
"Indenture") among the Company, as Servicer,
Dignity Partners Funding Corp. I ("DPFC") as
Issuer, and Bankers Trust Company as Indenture
Trustee ("Bankers Trust") (Incorporated by
reference to Exhibit 10.12 of the Registration
Statement).
4.3 Amendment No. 1 to the Indenture
(Incorporated by reference to Exhibit 10.13
of the Registration Statement).
10.1* 1995 Stock Option Plan (Incorporated by
reference to Exhibit 10.1 of the
Registration Statement).
10.2* Stock Option Plan for Non-Employee Directors
(Incorporated by reference to Exhibit 10.2 of
the Registration Statement).
10.3 Office Lease/Francisco Bay Office Park by and
between HHC Investments, Ltd. and Echelon
(Incorporated by reference to Exhibit 10.3 of the
Registration Statement).
10.4 Assignment and Assumption Agreement dated
September 30, 1995 (Incorporated by reference
to Exhibit 10.16 of the Registration Statement).
10.5 Agreement between the Company and New
Echelon LLC regarding allocation of costs
(Incorporated by reference to Exhibit 10.4
of the Registration Statement).
10.6 Profit Sharing Plan (Incorporated by reference to
Exhibit 10.5 of the Registration Statement).
49
<PAGE>
10.7 Contribution, Sale and Servicing Agreement
("Servicing Agreement") dated as of February 1,
1995 among the Company, DPFC and Bankers Trust
(Incorporated by reference to Exhibit 10.14 of
the Registration Statement).
10.8 Amendment No. 1 to Servicing Agreement
(Incorporated by reference to Exhibit 10.15
of the Registration Statement).
10.9 Amendment No. 2 to the Servicing Agreement
(Incorporated by reference to Exhibit 10.10 of
the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995).
10.10 Master Agreement for Purchase of Life Insurance
Policies dated September 27, 1996
(Incorporated by reference to Exhibit 10 of the
Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996).
10.11 Amendment dated as of November 12, 1996 to Master
Agreement for Purchase of Insurance Policies
dated as of September 27, 1996.
10.12 Purchase and Sale Agreement dated as of
January 16, 1997.
10.13 Second Master Agreement for Purchase of Insurance
Policies dated as of February 10, 1997.
10.14 Third Master Agreement for Purchase of Insurance
Policies dated as of March 24, 1997.
10.15 Indemnification Agreement, dated September 30,
1995, between the Company (as successor to
Echelon) and New Echelon LLC (Incorporated by
reference to Exhibit 10.18 of the Registration
Statement).
21.1 Subsidiary of the Company
23.1 Consent of Independent Certified Public Accountants
24.1 Powers of Attorney
27 Financial Data Schedule
</TABLE>
*Management contract or compensation plan or arrangement.
50
Exhibit 10.11
AMENDMENT TO MASTER AGREEMENT FOR PURCHASE OF INSURANCE POLICIES
THIS AMENDMENT TO AGREEMENT FOR PURCHASE OF INSURANCE POLICIES (the "Amendment")
is dated as of November 12, 1996, by and between Dignity Partners, Inc., a
Delaware corporation (the "Seller"), with an office at 917 Tahoe Boulevard,
Suite 204A, P.O. Box 8819, Incline Village, NV 89452, Mutual Benefits Corp., a
Florida corporation (the "Purchaser"), with an office at 2881 E. Oakland Park
Boulevard, Suite 200, Fort Lauderdale, FL 33306 and Brinkley, McNerney, Morgan,
Solomon & Tatum LLP ("Escrow Agent").
WHEREAS, Purchaser and Seller desire to extend the time period set forth in
Section 1(c) of the Agreement.
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, the parties hereby agree as follows:
1. Section 1(b) of the Agreement is hereby amended in its entirety to
read as follows:
(b) On or before September 23, 1996, the Seller shall provide to the
Purchaser copies of all policies or handbooks, if available, medical
records and blank assignment and beneficiary forms to be used in naming
Purchaser or its designee as assignee or owner and beneficiary, or both if
applicable, and shall use reasonable efforts to cause Medical Escrow
Society to provide to Purchaser updated verifications of coverage. At or
before the Closing Date (as hereinafter defined) Seller shall provide
Purchaser all "Closing Documents." "Closing Documents" shall mean all
documents in Seller's possession relating to Seller's acquisition and
ownership of any Policy and include, but are not limited to, (i) originals
of all documentation and agreements executed or received in connection with
Seller's initial acquisition of each Policy, including original medical
records, medical releases, consent forms, insurance releases, the purchase
or letter agreement, letter of mental competency of the insured under and
of the original seller of such Policy, insurance questionnaire completed by
the applicable insurance company or group administrator or employer,
viator's statement, disclosure statement required under applicable law, and
correspondence since original acquisition, (ii) resolution of legal
authority of the corporate officer signing on behalf of Seller and (iii)
original of policy or copy of handbook, if available.
2. Section 1(c) of the Agreement is hereby amended in its entirety to
read as follows:
(c) On or before the date Seller prints the Proxy Statement (which is
anticipated to be November 15, 1996), the Purchaser shall complete the
assignment of ownership and change of beneficiary documents and return them
to the Seller to be signed, held and delivered by Seller pursuant to
paragraph 1(e) in respect of Policies with an aggregate face value of not
less than 50% of the face value of Policies set forth in Exhibit A. On or
before December 6, 1996, the Purchaser shall complete the assignment of
ownership and change of beneficiary documents and return them to the Seller
to be signed, held and delivered by Seller pursuant to
1
<PAGE>
paragraph 1(e) in respect of the remaining Policies set forth in Exhibit A.
The Purchaser shall have the right at any time prior to the receipt of the
Corporate Approval Documents (as herein defined) to substitute with the
Seller revised change of beneficiary documents provided that the Escrow
Agent simultaneously verifies that it is holding an amount not less than
the agreed Purchase Price (as hereinafter defined) for all of the Policies.
3. The first sentence of Section 1(e) is hereby amended to read as
follows:
Within two business days of receipt of corporate approval pursuant to
paragraph 4(b) of this Agreement, the Seller shall deliver to the
applicable insurance company or other party properly executed assignments
of ownership and changes of beneficiaries necessary to cause such insurance
companies or other applicable parties to designate Purchaser or its
designee, except as set forth in Section 3 of this Agreement, (A) if an
individual policy, (i) the owner or absolute assignee and (ii) the sole
beneficiary under the Policy and (B) if a group policy, (i) the absolute
assignee or (ii) the irrevocable beneficiary under the Policy.
4. Section 1(h) of the Agreement is hereby added to read as follows:
(h) Notwithstanding any failure on the part of Purchaser to perform
pursuant to the second sentence of paragraph 1(c), the Escrow Agent shall
hold all moneys on deposit and disburse such moneys pursuant to this
Agreement.
5. The last sentence of Section 12 is hereby amended to read as
follows:
Seller understands that the Law Firm of Brinkley, McNerney,
Morgan, Solomon
& Tatum, LLP, Escrow Agent, is not rendering any legal advice to Seller and
has no responsibility with regard to the transaction contemplated in this
Agreement other than to comply with the terms of the provisions of
paragraphs 1(d), 1(f), 1(g), 1(h), 11 and 12 of this Agreement.
6. The preamble preceding the signature of the Escrow Agent is
hereby amended to read as follows:
This Agreement is executed by Brinkley, McNerney, Morgan,
Solomon & Tatum
LLP solely as Escrow Agent and Escrow Agent has no responsibility with
regard to the transaction contemplated in this Agreement other than to
comply with the terms of the provisions of paragraphs 1(d), 1(f), 1(g),
1(h), 11 and 12 of this Agreement.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be duly executed as of the day and year first written above.
ATTEST PURCHASER
MUTUAL BENEFITS CORP.
By: /s/Les Steinger
- ----------------------------- ---------------------------
Typed or Printed Name Les Steinger, President
ATTEST SELLER
MUTUAL BENEFITS CORP.
By: By:/s/Alan B. Perper
--------------------------- ---------------------------
Typed or Printed Name Alan B. Perper, President
ATTEST ESCROW AGENT
BRINKLEY, MCNERNEY, MORGAN,
SOLOMON & TATUM LLP
By: By:/s/Michael J. McNerney
--------------------------- ---------------------------
Typed or Printed Name Michael J. McNerney
Exhibit 10.12
PURCHASE AND SALE AGREEMENT
This Purchase And Sale Agreement is made as of January 16, 1997, by and
between Viaticus, Inc., a Delaware corporation the address of which is 200 South
Wacker Drive, Chicago, Illinois 60606 ("Viaticus"), and Dignity Partners, Inc.,
a Delaware corporation the address of which is 1700 Montgomery Street, Suite
250, San Francisco, California 94111 ("Seller").
WHEREAS, Seller wishes to sell, and Viaticus wishes to purchase, the
Portfolio (as defined in Section 1.16).
NOW, THEREFORE, in consideration of the foregoing premise, the mutual
covenants, representations and warranties set forth in this Agreement, and other
good and valuable consideration, the receipt and sufficiency of which are
expressly acknowledged by each of the parties to this Agreement, the parties to
this Agreement hereby agree as follows:
1. Definitions
The capitalized terms used in this Agreement shall have the meanings set
forth in this Section 1.
1.1 Acknowledgment. The term "Acknowledgment" shall mean, as to each Policy: (i)
confirmation from an Insurer, in a written form reasonably acceptable to
Viaticus, stating that Viaticus has been named exclusive owner and beneficiary
of the Policy, and that those changes have been received and duly recorded by
the Insurer that has written such Policy; and (ii) written confirmation from an
Insurer, on a form provided to such Insurer by Viaticus, of pertinent policy
information for the Policy, from which Viaticus reasonably concludes that it
will have the ability to collect the death benefits payable on the Policy.
1.2 Assignment Documents. The term "Assignment Documents" shall mean all
documents, in forms satisfactory to Viaticus and each respective Insurer,
necessary to: (i) assign each Policy to Viaticus; and (ii) designate Viaticus as
beneficiary of each Policy.
1.3 Broker Back-End Fees. The term "Broker Back-End Fees" shall mean any fees
due brokers upon collection of death benefits of any Policy, as set forth in
Exhibit "A" to this Agreement, each of which is based upon a percentage of the
death benefit payable pursuant to the applicable Policy.
1.4 Confidential Information. The term "Confidential Information" shall mean all
information or material which: (i) is proprietary to the disclosing party,
designated as Confidential Information by the disclosing party and not generally
known other than by the disclosing party; or (ii) the disclosing party obtains
from any third party which the disclosing party treats as proprietary and has
designated as Confidential Information, whether or not owned by the disclosing
party. "Confidential Information" shall not include information which the
receiving party can show is or was: (i) known by the receiving party at the time
of receipt from the disclosing party and not subject to any other nondisclosure
agreement between the parties to this Agreement; (ii) now, or which hereafter
becomes, generally known to the industry through no fault of the receiving
party; (iii) published or generally disclosed to the public by the disclosing
party; (iv) otherwise lawfully and independently developed by the receiving
party; or (v) lawfully acquired by the receiving party from a third party
without any obligation of confidentiality. With respect to information
concerning the
1
<PAGE>
Policies, the Portfolio, the Persons insured under the Policies and Viators, all
such information shall be deemed the Confidential Information of Seller until
the Delivery Date of each such Policy, and, thereafter, on a Policy by Policy
basis, the Confidential Information of Viaticus.
1.5 Delivery Date. The term "Delivery Date" shall mean, with respect to
each Policy, the date upon which an Acknowledgment relative to such Policy is
delivered to Viaticus by the Insurer which issued such Policy.
1.6 Effective Date. The term "Effective Date" shall mean the date
first set forth above, which, upon execution of this Agreement, shall be the
effective date of this Agreement.
1.7 includes and including. The terms "includes" and "including" shall
mean, except where followed directly by the word "only", "includes, but is not
limited to", and "including, but not limited to," respectively, it being the
intention of the parties to this Agreement that any listing following thereafter
is illustrative and not exhaustive.
1.8 Insurer. The term "Insurer" shall mean, as to each Policy: (i) the
insurance company that issued the Policy at issue; and (ii) such other party as
may have the authority, in the reasonable discretion of Viaticus, to confirm to
Viaticus that Viaticus is the owner and beneficiary of such Policy (e.g., the
employer of a Person insured under a Policy).
1.9 Knowledge. The term "Knowledge" shall mean actual knowledge or
knowledge ascertainable after prudent investigation.
1.10 Licenses. The term "Licenses" shall mean all licenses, franchises,
permits, approvals, authorizations, exemptions, classification, consents,
registrations, certificates (including certificates of authority) and/or similar
documents or instruments.
1.11 Lien The term "Lien" shall mean any mortgage, pledge, assessment,
security interest, lease, sublease, lien, adverse claim, levy, charge and/or
other encumbrance of any kind, or any conditional sale contract, title retention
contract and/or other contract to give or to refrain from giving any of the
foregoing.
1.12 Net Face Amount. The term "Net Face Amount" shall mean the net
face amount of death benefits payable pursuant to a Policy, as set forth in
Exhibit "A" to this Agreement, in the column marked "Net Death Benefit."
1.13 Percentage Amount The term "Percentage Amount" shall mean, on a
Policy by Policy basis, a sum equal to that percentage of the Net Face Amount of
such Policy, as indicated on Exhibit "A" to this Agreement, in the column marked
"Price."
1.14 Person. The term "Person" shall mean any natural person, corporation,
insurance company, general partnership, limited partnership, proprietorship,
trust, union, association, court, tribunal, agency, government, department,
commission, self-regulatory organization, arbitrator, board, bureau,
instrumentality and/or other entity, enterprise, authority and/or business
organization.
2
<PAGE>
1.15 Policy. The term "Policy" shall mean, individually, each life
insurance policy in the Portfolio.
1.16 Portfolio. The term "Portfolio" shall mean the entirety of the group
of Policies identified in Exhibit "A" to this Agreement as being purchased by
Viaticus pursuant to this Agreement.
1.17 Viator. The term "Viator" shall mean a Person who has sold a
Policy to Seller.
2. Portfolio Purchase
2.1 Purchase And Sale. Subject to the conditions subsequent set
forth in this Agreement, Seller hereby sells to Viaticus, and Viaticus hereby
purchases from Seller, the Portfolio.
2.2 Delivery Of Assignment Documents. Within five (5) days of the
Effective Date, Seller shall deliver to Viaticus Assignment Documents sufficient
to: (i) assign and/or change ownership of each Policy to Viaticus, using a form
of assignment reasonably satisfactory to Viaticus and satisfactory to each
respective Insurer; and (ii) designate Viaticus as beneficiary of each Policy,
using a designation of beneficiary reasonably satisfactory to Viaticus and
satisfactory to each respective Insurer.
2.3 Delivery Of Files. Within five (5) days of the Effective Date,
Seller shall deliver to Viaticus all files of Seller relating to the Portfolio,
and each Policy, including underwriting and administrative files.
2.4 Request For Assignment. Upon receipt by Viaticus of all Assignment
Documents, as required by Section 2.2, and the files of Seller relating to the
Portfolio, as required by Section 2.3, Viaticus shall promptly forward to each
Insurer the Assignment Documents, accompanied by a request that the Insurer
provide an Acknowledgment relative to such Policy.
2.5 Payment To Seller Of Percentage Amount. Promptly upon receipt by
Viaticus of Acknowledgment for each Policy, Viaticus shall pay to Seller the
Percentage Amount for such Policy, along with interest on the Percentage Amount
at the rate of four and one-half percent (4.5%) per annum from the Effective
Date to the date upon which such payment is made to Seller.
2.6 Payment Of Broker Back-End Fees. Promptly upon receipt by Viaticus of
the death benefits payable under each Policy, Viaticus shall pay, to the
broker(s) identified in Exhibit "A" to this Agreement, the Broker Back-End Fees
on such Policy, as set forth in Exhibit "A" to this Agreement. Notwithstanding
the foregoing, it is expressly agreed by the parties to this Agreement that: (i)
such payment obligation runs from Viaticus to Seller; (ii) Viaticus shall have
no obligation, covenant, representation or warranty directly to any such broker
whatsoever; and (iii) no such broker shall be a third party beneficiary to, or
otherwise have any rights arising out of, this Agreement.
2.7 Failure Of Acknowledgment. Either party to this Agreement shall have
the right to demand and cause the reassignment of any Policy (or Policies) to
Seller, and this Agreement shall be completed as if such Policy (or Policies)
had not been included in the Portfolio, in the event that: (i) any Insurer shall
fall or refuse to provide Acknowledgment relative to such Policy (or Policies)
for a period of sixty (60) days following the Effective Date; (ii) Viaticus
receives Acknowledgment relative to any Policy (or Policies) which Viaticus
determines, in its reasonable discretion, is unacceptable, provided that payment
by Viaticus of the Percentage
3
<PAGE>
Amount by Viaticus pursuant to Section 2.5 shall be deemed acceptance of
Acknowledgment; (iii) Viaticus determines, in its good faith discretion, that it
will not be possible for Viaticus to obtain Acknowledgment relative to such
Policy (or Policies); or (iv) Viaticus determines, in its good faith discretion
within sixty (60) days of the Effective Date, that it will not be possible for
Viaticus to collect the death benefits payable on such Policy (or Policies). In
the event that either party to this Agreement provides written notice to the
other party to this Agreement of a demand for reassignment of any Policy (or
Policies) to Seller as set forth in this Section 2.7, Viaticus shall: (i)
request from the Insurer the return of and, upon receipt from the Insurer
deliver to Seller, the Assignment Documents for such Policy (or Policies); and
(ii) have no obligation to pay either the Percentage Amount or the Broker
Back-End Fees on such Policy (or Policies). In the event that either party to
this Agreement provides written notice to the other party to this Agreement of a
demand for reassignment of any Policy (or Policies) to Seller as set forth in
this Section 2.7, and Viaticus has Knowledge at the time of such demand that the
Person insured pursuant to such Policy (or Policies) has died, Viaticus shall:
(i) in the event that the death benefits payable pursuant to such Policy have
not been paid to Viaticus, take all action, and execute all documents,
reasonably necessary to cause such death benefits to be paid to Seller; and (ii)
in the event that the death benefits payable pursuant to such Policy have been
paid to Viaticus, be deemed to be holding the entire amount of such death
benefits in trust for Seller, and shall immediately remit to Seller the full
amount of such death benefits.
2.8 Alteration Of Percentage Amount And Broker Back-End Fees In The Event
Of Inaccuracy Of Net Face Amount. In the event that, within sixty (60) days of
the Effective Date, the Net Face Amount of any Policy is confirmed by Viaticus
to be different from the Net Face Amount set forth in Exhibit "A" to this
Agreement, the Percentage Amount under this Agreement shall be adjusted to equal
the percentage of the Net Face Amount, reflected in Exhibit "A" to this
Agreement, of the confirmed Net Face Amount for such Policy, and the Broker
Back-End Fees shall be adjusted pro rata. In the event that: (i) the Net Face
Amount of any Policy is so confirmed by Viaticus to be less than the Net Face
Amount set forth in Exhibit "A" to this Agreement, and such confirmation by
Viaticus takes place prior to disbursement to Seller of the Percentage Amount
for such Policy, Viaticus shall have the right to adjust the Percentage Amount
and the Broker Back-End Fees for such Policy, prior to disbursement to Seller;
(ii) the Net Face Amount of any Policy is confirmed by Viaticus to be less than
the Net Face Amount set forth in Exhibit "A" to this Agreement, and such
confirmation by Viaticus takes place subsequent to disbursement to Seller of the
Percentage Amount for such Policy, Seller shall be deemed to be holding the
entire excess amount of the Percentage Amount paid by Viaticus on such Policy in
trust for Viaticus, and shall immediately remit to Viaticus the full amount of
such excess amount(s), and, in the event that Seller shall fail or refuse, for
any reason whatsoever, to immediately remit to Viaticus the full amount of such
excess amount(s), Viaticus shall have the right, without limiting any other
rights and remedies which Viaticus may have, to withhold from Seller any further
payment(s) which may be due to Seller under this Agreement (including payment of
the Percentage Amount and/or the Broker Back-End Fees on any Policy, and
reimbursement pursuant to Section 3), up to the amount of the excess amount(s)
which Seller has failed or refused to remit to Viaticus; (iii) the Net Face
Amount of any Policy is confirmed by Viaticus to be greater than the Net Face
Amount set forth in Exhibit "A" to this Agreement, and such confirmation by
Viaticus takes place prior to disbursement to Seller of the Percentage Amount
for such Policy, Viaticus shall adjust the Percentage Amount and/or the Broker
Back-End Fees for such Policy, as applicable, prior to disbursement to Seller;
and (iv) the Net Face Amount of any Policy is confirmed by Viaticus to be
greater than the Net Face Amount set forth in Exhibit "A" to this Agreement, and
such confirmation by Viaticus takes place subsequent to disbursement to Seller
of the Percentage Amount for such Policy, Viaticus shall immediately remit to
Seller the full amount of such excess amount(s).
4
<PAGE>
2.9 Alteration Of Percentage Amount In The Event Of Material Inaccuracy Of
Information Other Than Of Net Face Amount In the event that, within sixty (60)
days of the Effective Date, any material information concerning any Policy other
than Net Face Amount is confirmed by Viaticus to be materially inaccurate (e.g.,
information contained in Exhibit "A" to this Agreement other than Net Face
Amount; information provided by an Insurer, on the form provided to such Insurer
by Viaticus, of pertinent policy information for the Policy, from which Viaticus
reasonably concludes that it will have the ability to collect the death benefits
payable on the Policy; etc.), the parties to this Agreement shall negotiate in
good faith to adjust the Percentage Amount to take into account the material
inaccuracy, and the amount at which the Percentage Amount would have been set in
the event that the parties to this Agreement had each known of such material
inaccuracy as of the Effective Date. In the event that the good faith
negotiations required by the preceding sentence of this Section 2.9 do not
result in agreement within fifteen (15) days of commencement, Viaticus shall
have the right, upon written notice to Seller, to have this Agreement completed
as if the Policy (or Policies) as to which such material inaccuracy pertains had
not been included in the Portfolio. In the event that Viaticus provides such
written notice to Seller as set forth in this Section 2.9, and such written
notice is given prior to receipt from the Insurer of Acknowledgment, Viaticus
shall: (i) request from the Insurer the return of and, upon receipt from the
Insurer deliver to Seller, the Assignment Documents for such Policy (or
Policies); and (ii) have no obligation to pay either the Percentage Amount or
the Broker Back-End Fees on such Policy (or Policies). Accordingly: (i) with
respect to such Policies with regard to which no sum has been paid by Viaticus
as of the date such notice is effective, Viaticus shall have no obligation to
pay any sum whatsoever to Seller, including the Percentage Amount on such Policy
(or Policies), the Broker Back-End Fees on such Policy (or Policies) and/or any
reimbursement pursuant to Section 3; and (ii) with respect to such Policies with
regard to which any sum has been paid by Viaticus as of the date such notice is
effective, Seller shall be deemed to be holding all amounts paid by Viaticus
pursuant to this Agreement relative to such Policies, including the amount of
each Percentage Amount and/or each of the Broker Back-End Fees and/or amounts
paid pursuant to Section 3, in trust for Viaticus, and shall immediately remit
to Viaticus an amount equal to the sum total of all amounts paid by Viaticus
pursuant to this Agreement relative to such Policies. In the event that Viaticus
provides such written notice to Seller as set forth in this Section 2.9, and
such written notice is given subsequent to receipt from the Insurer of
Acknowledgment, Viaticus shall take all reasonable action necessary to cause the
Insurer on such Policy to return the ownership and beneficiary designation on
such Policy to the state at which such ownership and beneficiary designation
existed prior to such Acknowledgment, or such other state as may be reasonably
requested by Seller and/or take all action, and execute all documents,
reasonably necessary to cause such death benefits to be paid to Seller. In the
event that Viaticus provides such written notice to Seller as set forth in this
Section 2.9, and the death benefits payable pursuant to such Policy have been
paid to Viaticus, Viaticus shall be deemed to be holding the entire amount of
such death benefits in trust for Seller, and shall immediately remit to Seller
the full amount of such death benefits.
2.10 Death Of Insured Prior To Effective Date. In the event that any
Person insured pursuant to any Policy has died at any time prior to the
Effective Date, the death benefits payable under the terms of such Policy shall
be payable to Viaticus. Accordingly: (i) in the event that the parties to this
Agreement have Knowledge of such death prior to payment to Seller of such death
benefits, Seller shall take all action, and execute all documents, necessary to
cause such death benefits to be paid to Viaticus; and (ii) in the event that the
parties to this Agreement have Knowledge of such death subsequent to payment to
Seller of such death benefits, Seller shall be deemed to be holding such death
benefits in trust for Viaticus, and shall immediately remit to Viaticus the full
amount of such death benefits. In the event that any Person insured pursuant to
any
5
<PAGE>
Policy has died at any time prior to the Effective Date, and Seller shall fail
or refuse, for any reason whatsoever, to either cause such death benefits to be
paid to Viaticus or remit to Viaticus the full amount of such death benefits, as
applicable, Viaticus shall have the right, without limiting any other rights and
remedies which Viaticus may have, to withhold from Seller any further payment(s)
which may be due to Seller under this Agreement (including payment of the
Percentage Amount and/or the Broker Back-End Fees on any Policy, and
reimbursement pursuant to Section 3), up to the amount of the death benefits
which Seller has failed or refused to either cause to be paid to Viaticus or
remit to Viaticus, as applicable. In the event that either party to this
Agreement obtains Knowledge that any Person insured pursuant to any Policy has
died at any time prior to the Effective Date, such party to this Agreement shall
immediately provide written notice of such Knowledge to the other party to this
Agreement.
2.11 Death Of Insured Between Effective Date And Receipt Of
Acknowledgment.
2.11.1 In the event that Seller provides Viaticus with written
notice, prior to the earlier of the sixtieth (60th) day subsequent to the
Effective Date or the date upon which Acknowledgment on a particular Policy is
received by Viaticus, that the Person insured pursuant to such Policy has died
at any time between the Effective Date and the date upon which Acknowledgment on
such Policy is received by Viaticus, the death benefits payable under the terms
of such Policy shall be payable to Seller, and this Agreement shall be completed
as if such Policy (or Policies) had not been included in the Portfolio. In the
event that Seller provides Viaticus with such notice: (i) and such notice is
given prior to payment to Viaticus of such death benefits, Viaticus shall take
all action, and execute all documents, necessary to cause such death benefits to
be paid to Seller; (ii) and such notice is given subsequent to payment to
Viaticus of such death benefits, Viaticus shall be deemed to be holding such
death benefits in trust for Seller, and shall immediately remit to Seller the
full amount of such death benefits; (iii) Viaticus shall have no obligation to
pay any sum whatsoever to Seller, including the Percentage Amount on such Policy
(or Policies), the Broker Back-End Fees on such Policy (or Policies) and/or any
reimbursement pursuant to Section 3; and (iv) with respect to such Policies with
regard to which any sum has been paid by Viaticus as of the date such notice is
effective, Seller shall be deemed to be holding all amounts paid by Viaticus
pursuant to this Agreement relative to such Policies, including the amount of
each Percentage Amount and/or each of the Broker Back-End Fees and/or amounts
paid pursuant to Section 3, in trust for Viaticus, and shall immediately remit
to Viaticus an amount equal to the sum total of all amounts paid by Viaticus
pursuant to this Agreement relative to such Policies.
2.11.2 The death benefits payable under the terms of all Policies
not reassigned to Seller by Viaticus pursuant to Section 2.7, the Persons
insured under which die between the Effective Date and the date upon which
Acknowledgment on such Policy is received by Viaticus (i.e., such Policies
regarding which Seller does not provide Viaticus with written notice, prior to
the earlier of the sixtieth (60th) day subsequent to the Effective Date or the
date upon which Acknowledgment on a particular Policy is received by Viaticus)
shall be payable to Viaticus. Accordingly: (i) with respect to each such Policy,
in the event that the parties to this Agreement have Knowledge of such death
prior to payment to Seller of such death benefits, Seller shall take all action,
and execute all documents, necessary to cause such death benefits to be paid to
Viaticus; and (ii) in the event that the parties to this Agreement have
Knowledge of such death subsequent to payment to Seller of such death benefits,
Seller shall be deemed to be holding such death benefits in trust for Viaticus,
and shall immediately remit to Viaticus the full amount of such death benefits.
In the event that any Person insured pursuant to any Policy has died at any time
prior to the Effective Date, and Seller shall fail or refuse, for any reason
whatsoever, to either cause such death benefits to be paid to Viaticus or remit
to Viaticus the
6
<PAGE>
full amount of such death benefits, as applicable, Viaticus shall have the
right, without limiting any other rights and remedies which Viaticus may have,
to withhold from Seller any further payment(s) which may be due to Seller under
this Agreement (including payment of the Percentage Amount and/or the Broker
Back-End Fees on any Policy, and reimbursement pursuant to Section 3), up to the
amount of the death benefits which Seller has failed or refused to either cause
to be paid to Viaticus or remit to Viaticus, as applicable.
3. Maintenance Of Portfolio
From the Effective Date through the date upon which the Percentage Amount
is disbursed to Seller pursuant to Section 2.5, Seller shall use its best
efforts to keep each Policy in full force and effect, including by paying the
premiums due on each Policy. Viaticus shall promptly reimburse to Seller the
actual and reasonable cost of performance under this Section 3 with respect to
Policies which Viaticus purchases pursuant to this Agreement, upon written
request from Seller, which written request shall be accompanied by documentation
evidencing such actual and reasonable cost. Notwithstanding the foregoing,
Seller shall: (i) provide written notice to Viaticus of any necessity to pay any
single such cost in excess of Five Thousand Dollars ($5,000), not less than
three (3) days prior to the last date for paying such cost; and (ii) not be
required to incur any single such cost in excess of Five Thousand Dollars
($5,000), nor be entitled to reimbursement for any single such cost, unless
Viaticus provides Seller with written approval to incur such cost within the
three (3) day notice period
4. Confidentiality
4.1 No Disclosure. Except as may be required by law (including the
Securities Act of 1933 and the Securities Exchange Act of 1934, in each case as
such Act has been or may hereafter be amended) or legal process, each party to
this Agreement shall: (i) hold in confidence, and not disclose or reveal to any
Person or entity, any Confidential Information disclosed under this Agreement
without the clear and express prior written consent of a duly authorized
representative of the disclosing party; and(ii) not use or disclose any of the
Confidential Information for any purpose at any time, other than for the limited
purpose of performance under this Agreement
4.2 Seller Obligation To Have Personnel Execute Nondisclosure Agreements.
Seller hereby represents and warrants to Viaticus that all personnel of Seller
who may receive Confidential Information of Viaticus, including such personnel
who may have had access to information regarding the Policies, the Portfolio,
the Persons insured under the Policies and/or the Viators, which information
shall be deemed the Confidential Information of Viaticus as of the Delivery Date
for each Policy, shall have executed a written nondisclosure agreement: (i)
standard in the viatical settlement industry; and (ii) acceptable to Viaticus,
in its reasonable discretion.
5. Representations And Warranties Of Seller
Seller represents and warrants to Viaticus, as set forth in this Section
5.
5.1 Existence. As of the date of this Agreement and, with respect to each
Policy, on the Delivery Date for such Policy, Seller is duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization, and has full power and authority to own, operate and lease its
assets and to
7
<PAGE>
carry on its business as now being conducted and as it shall be conducted upon
consummation of the transactions contemplated by this Agreement.
5.2 Power And Authority. As of the date of this Agreement and, with
respect to each Policy, on the Delivery Date for such Policy, Seller has the
requisite power and authority to execute and deliver this Agreement and to
perform its obligations under this Agreement, and the consummation by Seller of
the transaction memorialized by this Agreement has been duly and validly
authorized by all necessary action on the part of Seller.
5.3 Licensing. As of the date of this Agreement and, with respect to each
Policy, on the Delivery Date for such Policy, Seller owns or otherwise validly
holds, or has taken all action reasonably necessary to own or otherwise validly
hold, all Licenses that were required for it to conduct its business, operations
and affairs in all material respects at the time that it acquired each Policy,
including all such Licenses as may be required to conduct viatical settlement
business in each State within the United States. To the best of Seller's
knowledge, no proceeding is pending or threatened for the denial, revocation,
withdrawal or termination of any such License. No Policy in the Portfolio has
been owned at any point in time by any Person which did not own or otherwise
validly hold, or had taken all action reasonably necessary to own or otherwise
validly hold, all Licenses that were required for such Person to conduct its
business, operations and affairs in all material respects at the time that such
Person acquired each Policy, including all such Licenses as may be required to
conduct viatical settlement business in each State within the United States.
5.4 Ownership Of Policies. As of the date of this Agreement and, with
respect to each Policy, on the Delivery Date for such Policy, Seller is the sole
owner and beneficiary of such Policy, or otherwise has the right, power and
authority with respect to such Policy to sell such Policy to Viaticus pursuant
to this Agreement and to grant to Viaticus all of the rights set forth in this
Agreement.
5.5 Performance Under Viatical Settlement Contracts. As of the date of
this Agreement and, with respect to each Policy, on the Delivery Date for such
Policy, Seller has performed in all material respects the obligations required
to be performed by it to date under, and is not in default under any of the
conditions or agreements contained in, any contract pursuant to which Seller
acquired any interest in any Policy. Seller has no unperformed obligations to
any Viator with respect to any Policy.
5.6 No Claims. As of the date of this Agreement and, with respect to each
Policy, on the Delivery Date for such Policy, there are no claims, actions,
suits, investigations, writs, judgments, decrees, orders or proceedings pending,
or threatened, against Seller or its assets and properties (including the
Portfolio and/or any Policy), at law or in equity, by any Person that have or
may reasonably be expected to have a material adverse effect on: (i) the
validity or enforceability of this Agreement; (ii) the ability of Seller to
perform its obligations under this Agreement; and/or (ii) the value of the
Portfolio and/or any Policy.
5.7 No Liens. With respect to each Policy, on the Delivery Date
for such Policy, there will exist no Lien against the Portfolio and/or any
Policy.
5.8 No Breach Of Other Agreements. As of the date of this Agreement
and, with respect to each Policy, on the Delivery Date for such Policy,
neither the execution and delivery of this Agreement by Seller, the
performance by Seller of its obligations under this Agreement nor the
consummation by Seller of the
8
<PAGE>
transactions contemplated under this Agreement shall: (i) require the consent of
any Person, other than consents which have been both obtained and disclosed to
Viaticus; or (ii) contravene any other contract or obligation of Seller,
including, to the best of Seller's knowledge, such contracts or other
obligations (including statutory obligations) through which Seller has or may
have a duty to keep confidential information concerning the Policies, the
Portfolio, the Persons insured under the Policies and Viators.
5.9 No Misrepresentation. As of the date of this Agreement and, with
respect to each Policy, on the Delivery Date for such Policy, no covenant,
representation or warranty by Seller contained in this Agreement contains any
untrue statement of a material fact, or omits to state a material fact necessary
to make the covenants, representations and warranties set forth in this
Agreement not misleading in light of the circumstances under which such
statements were made.
6. Representations And Warranties Of Viaticus
Viaticus represents and warrants to Seller, as set forth in this Section
6, as of the date of this Agreement.
6.1 Corporate Existence. Viaticus is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation and has full corporate power and authority to own, operate and
lease its assets and to carry on its business as now being conducted and as it
shall be conducted upon consummation of the transactions contemplated by this
Agreement.
6.2 Corporate Power And Authority. Viaticus has the requisite power and
authority to execute and deliver this Agreement and to perform its obligations
under this Agreement, and the consummation by Viaticus of the transaction
memorialized by this Agreement has been duly and validly authorized by all
necessary action on the part or Viaticus.
6.3 Licensing. Viaticus owns or otherwise validly holds, or has taken all
action reasonably necessary to own or otherwise validly hold, all Licenses that
are required for it to conduct its business, operations and affairs in all
material respects at the time that it acquires each Policy pursuant to this
Agreement, including all such Licenses as may be required to conduct viatical
settlement business in each State within the United States. To the best of
Viaticus' knowledge, no proceeding is pending or threatened for the denial,
revocation, withdrawal or termination of any such License.
6.4 No Claims. There are no claims, actions, suits, investigations, writs,
judgments, decrees, orders or proceedings pending, or threatened, against
Viaticus, or its assets and properties, at law or in equity, by any Person that
have or may reasonably be expected to have a material adverse effect on: (i) the
validity or enforceability of this Agreement; and/or (ii) the ability of
Viaticus to perform its obligations under this Agreement.
6.5 Compliance With Policy Documentation. Viaticus shall comply with the
following system of Seller used to monitor Persons insured under Policies, as
set forth in the files to be provided to Viaticus: (i) not more frequently than
approximately every six weeks, such Persons are mailed, in a blank envelope, a
postage prepaid return postcard inquiring whether the Person has changed status
(including address, employment and health care provider); and (ii) only in the
event such Person does not return such card within
9
<PAGE>
a reasonable time, and cannot be reached telephonically, may Persons set forth
in the contact list for such Person be contacted.
6.6 No Breach Of Other Agreements. Neither the execution and delivery of
this Agreement by Viaticus, the performance by Viaticus of its obligations under
this Agreement nor the consummation by Viaticus of the transactions contemplated
under this Agreement shall: (i) require the consent of any Person; or (ii)
contravene any other contract or obligation of Viaticus, including, to the best
of Viaticus' knowledge, such contracts or other obligations (including statutory
obligations) through which Viaticus has or may have a duty to keep confidential
information concerning the Policies, the Portfolio, the Persons insured under
the Policies and Viators.
6.7 No Misrepresentation. No covenant, representation or warranty by
Viaticus contained in this Agreement contains any untrue statement of a material
fact, or omits to state a material fact necessary to make the covenants,
representations and warranties set forth in this Agreement not misleading in
light of the circumstances under which such statements were made.
7. Termination
7.1 Termination Of This Agreement. This Agreement may not be terminated by
either party to this Agreement except in accordance with this Section 7. Any
termination of this Agreement pursuant to this Section 7 shall be only with
respect to those Policies as to which Viaticus has not paid Seller the
Percentage Amount as of the effective date of such termination. In the event of
any such termination, Viaticus shall: (i) take all action, and execute all
documents, reasonably necessary to cause the return of ownership and beneficiary
designation on any such Policies that Viaticus shall not purchase pursuant to
this Agreement to the state at which such ownership and beneficiary designation
existed prior to any Acknowledgment, or such other state as may be reasonably
requested by Seller; and (ii) take all action, and execute all documents,
reasonably necessary, to cause the death benefits under any such Policies that
Viaticus shall not purchase pursuant to this Agreement to be paid to Seller and,
in the event that Viaticus has received payment of any death benefits under any
such Policy, Viaticus shall be deemed to be holding such death benefits in trust
for Seller and shall immediately remit to Seller the full amount of such death
benefits. Accordingly: (i) with respect to Policies that Viaticus shall not
purchase pursuant to this Agreement with regard to which no sum has been paid by
Viaticus as of the date such termination is effective, Viaticus shall have no
obligation to pay any sum whatsoever to Seller, including the Percentage Amount
on such Policy (or Policies), the Broker Back-End Fees on such Policy (or
Policies) and/or any reimbursement pursuant to Section 3; and (ii) with respect
to Policies that Viaticus shall not purchase pursuant to this Agreement with
regard to which any sum has been paid by Viaticus as of the date such
termination is effective, Seller shall be deemed to be holding all amounts paid
by Viaticus pursuant to this Agreement, including the amount of each Percentage
Amount and/or each of the Broker Back-End Fees and/or amounts paid pursuant to
Section 3, in trust for Viaticus, and shall immediately remit to Viaticus an
amount equal to the sum total of all such amounts paid by Viaticus pursuant to
this Agreement.
7.2 Termination For Cause. Either party to this Agreement shall have the
right to terminate this Agreement at any time, effective upon written notice of
termination to the other party to this Agreement, in the event that such other
party to this Agreement materially fails to perform any of its material
obligations under this Agreement and such failure continues unremedied for a
period of ten (10) days after written notice
10
<PAGE>
of such failure from the party to this Agreement alleging such failure.
Notwithstanding the foregoing, in the event of a termination of this Agreement
pursuant to this Section 7.2, all executory payment obligations of Viaticus
pursuant to Section 2.5 and Section 2.6 shall survive such termination.
7.3 Automatic Termination. This Agreement shall terminate automatically,
with no further act or action required of either party to this Agreement, in the
event that: (i) a receiver is appointed for Seller or its property; (ii) Seller
makes an assignment for the benefit of its creditors; (iii) any proceedings are
commenced by, for or against Seller under any bankruptcy or insolvency for
debtor's relief law; or (iv) Seller is liquidated or dissolved. Notwithstanding
the foregoing, this Agreement shall not automatically so terminate in the event
that Viaticus provides Seller with written notice, within thirty (30) days of
notice to Viaticus of an event which would effect an automatic termination of
this Agreement pursuant to this Section 7.3, that Viaticus desires to keep this
Agreement in full force and effect. Notwithstanding the foregoing, in the event
of a termination of this Agreement pursuant to this Section 7.3, all executory
payment obligations of Viaticus pursuant to Section 2.5 and Section 2.6 shall
survive such termination.
7.4 No Damages Or Indemnification For Termination. Neither party to this
Agreement shall be liable to the other party to this Agreement for damages of
any kind, including incidental or consequential damages, or for indemnification,
solely on account of the lawful termination of this Agreement, even if informed
of the possibility of such damages. Neither party to this Agreement shall be
liable to the other party to this Agreement by reason of termination of this
Agreement for compensation, reimbursement or damages on account of any loss of
prospective profits on anticipated sales or on account of expenditures,
investments, leases or other commitments relating to the business or goodwill of
either party to this Agreement, notwithstanding any law to the contrary.
7.5 Survival. The provisions of this Agreement that by their sense and
context are intended to survive termination of this Agreement, including
provisions regarding confidentiality, shall so survive this Agreement.
8. Indemnity And Actions
8.1 Mutual Indemnity. Each party to this Agreement shall defend, at its
sole expense, any claim, suit or proceeding brought against the other party to
this Agreement, insofar as such claim, suit or proceeding is based upon a claim
by a third party alleging facts or circumstances that, if true, would constitute
a breach of any covenant, representation or warranty in this Agreement of the
party from whom indemnity is sought, provided the party seeking indemnity gives
written notice of any such suit or proceeding promptly upon first learning of
such suit or proceeding, and provides the party from which indemnity is sought,
at no cost, with such assistance and cooperation as such party may reasonably
request in the defense thereof. The indemnifying party shall pay any damages and
costs assessed against the party entitled to indemnity (or paid or payable by
such party pursuant to a settlement agreement or any other resolution, formal or
informal, provided that such settlement agreement or other resolution is
approved by the indemnifying party, which approval shall not be unreasonably
withheld or delayed) in connection with such claim, suit or proceeding. The
party providing indemnity shall indemnify and hold the party entitled to
indemnity harmless from and with respect to any such loss or damage (including
reasonable attorneys' fees and costs).
11
<PAGE>
8.2 Other Indemnity By Seller. Seller shall defend and indemnify Viaticus
(including reasonable attorneys' fees and costs of litigation) against and hold
Viaticus harmless from, any and all claims by any third party resulting from the
acts, omissions or misrepresentations of Seller, regardless of the form of
action.
8.3 Handling Of Actions. In the event of any claim, action or proceeding
against Viaticus based upon allegations that if true would constitute a breach
of any of the representations, covenants or warranties made by Seller under this
Agreement, Viaticus shall have the right to defend any such claim, action or
proceeding through counsel of its own choice and to make Seller a party to such
action or proceeding.
9. Miscellaneous
9.1 Time Of The Essence. Time is of the essence with respect to
the performance of every Section of this Agreement with regard to which time
of performance is a factor.
9.2 Notices. Except as specifically provided in this Agreement, all
notices required under this Agreement shall be in writing and shall be given by
personal delivery, national overnight courier service or U.S. mail, certified or
registered, postage prepaid, return receipt requested, to the parties to this
Agreement at their respective addresses first set forth above, or to any party
to this Agreement at such other address(es) as shall be specified in writing by
such party to this Agreement to the other party to this Agreement in accordance
with the terms and conditions of this Section 9.2. All notices shall be deemed
effective upon personal delivery, one (1) business day following deposit with
any national overnight courier service in accordance with this Section 9.2, or
three (3) days following deposit in the United States mail in accordance with
this Section 9.2.
9.3 Entire Agreement. This Agreement constitutes the entire understanding
and agreement, and supersedes any and all prior or contemporaneous
representations, understandings and agreements, between the parties to this
Agreement with respect to the subject matter of this Agreement, all of which are
merged in this Agreement. Notwithstanding the foregoing, any confidentiality
agreements between the parties to this Agreement are separate from this
Agreement and, except as expressly stated in this Agreement, nothing contained
in this Agreement shall be construed as affecting the rights or obligations of
either party to this Agreement set forth in any such agreement. It is expressly
understood and agreed that no employee, agent or other representative of either
party to this Agreement has any authority to bind such party to this Agreement
with regard to any statement, representation, warranty or other expression
unless the same is specifically set forth or incorporated by reference in this
Agreement. It is expressly understood and agreed that, there being no
expectation of the contrary between the parties to this Agreement, no usage of
trade or custom and practice within the industry, and no regular practice or
method of dealing between the parties to this Agreement, shall be used to
modify, interpret, supplement or alter in any manner the express terms of this
Agreement or any part of this Agreement.
9.4 Further Assurances Seller shall execute and deliver any and all
additional papers and documents necessary to effectuate, do any and all acts
reasonably necessary in connection with the performance of the obligations of
Seller under, and carry out the intent of the parties to, this Agreement.
Without limiting the generality of the foregoing, Seller shall use reasonable
efforts to assist Viaticus in communicating with Viators, Persons insured under
the Policies and/or Insurers, as deemed necessary by Viaticus in its reasonable
discretion.
12
<PAGE>
9.5 Independent Parties. Nothing contained m this Agreement shall be
deemed to create, or be construed as creating, a joint venture or partnership
between the parties to this Agreement. Neither party to this Agreement is, by
virtue of this Agreement or otherwise, authorized as an agent or legal
representative of the other party to this Agreement. Neither party to this
Agreement is granted any right or authority to assume or to create any
obligation or responsibility, express or implied, on behalf or in the name of
the other party to this Agreement, or to bind such other party to this Agreement
in any manner.
9.6 No Third Party Beneficiary. Nothing contained in this Agreement shall
be deemed to create, or be construed as creating, any third party beneficiary
right of action upon any third party or entity whatsoever, in any manner
whatsoever.
9.7 Waiver. No waiver of any provision of this Agreement, or any rights or
obligations of either party to this Agreement under this Agreement, shall be
effective, except pursuant to a written instrument signed by the party or
parties to this Agreement waiving compliance, and any such waiver shall be
effective only in the specific instance and for the specific purpose stated in
such writing.
9.8 Amendments. All amendments or modifications of this Agreement shall be
binding upon the parties to this Agreement despite any lack of consideration so
long as such amendments or modifications are in writing and executed by the
parties to this Agreement.
9.9 Severability. In the event that any provision of this Agreement is
found invalid or unenforceable pursuant to judicial decree or decision, the
remainder of this Agreement shall remain valid and enforceable according to its
terms.
9.10 Assignment. Either party to this Agreement shall have the right to
assign or transfer this Agreement (including rights and duties of performance)
to any entity: (i) which owns more than fifty percent (50%) of the issued and
outstanding voting stock of such party; (ii) in which such party owns more than
fifty percent (50%) of the issued and outstanding voting stock; (iii) which
acquires all or substantially all of the operating assets of such party; or (iv)
into which such party is merged or reorganized pursuant to any plan of merger or
reorganization. Notwithstanding the foregoing, or any other provision of this
Agreement, nothing in this Agreement, or otherwise, shall be deemed as a
prohibition on alienation of any kind by Viaticus of any Policy. This Agreement
shall be binding upon and inure to the benefit of each of the parties to this
Agreement and their respective legal successors and permitted assigns.
9.11 Extension Of Benefits To Viaticus Affiliates. All rights and benefits
to Viaticus under this Agreement shall be deemed to extend, and inure to the
benefit, of any parent, subsidiary or affiliate of Viaticus. Notwithstanding the
foregoing, and except with respect to an entity to which this Agreement is
assigned by Viaticus pursuant to Section 9.10, no parent, subsidiary or
affiliate of Viaticus shall have any obligation or duty to Seller whatsoever,
such obligations and duties resting solely with Viaticus.
9.12 No Breach Without Notice. Neither party to this Agreement shall be
deemed to be in material breach of any of its obligations under this Agreement
unless and until such party to this Agreement shall have been given written
notice of the nature of such breach, and shall have failed to cure such breach
within thirty (30) days after receipt of such written notice.
13
<PAGE>
9.13 Forum And Jurisdiction. This Agreement was entered into in the State
of California, and its validity, construction, interpretation and legal effect
shall be governed by the laws and judicial decisions of the State of California
applicable to contracts entered into and performed entirely within the State of
California. Notwithstanding the foregoing, any action at law or in equity
arising under this Agreement shall be filed only in an appropriate State or
Federal Court located in the County of Cook, State of Illinois. The parties to
this Agreement hereby consent and submit to the personal jurisdiction of such
courts for the purposes of litigating any such action.
9.14 Attorneys' Fees. In the event any litigation or other proceeding is
brought by either party to this Agreement in connection with this Agreement, the
prevailing party in such litigation or other proceeding shall be entitled to
recover from the other party all costs, attorneys' fees and other expenses
incurred by such prevailing party in such litigation.
9.15 No Election Of Remedies. Resort to any one or more rights or remedies
contained in this Agreement by either party to this Agreement shall not preclude
that party to this Agreement from subsequently resorting to any or all other
available legal rights or remedies.
9.16 Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original and all of which together shall constitute one
and the same instrument.
IN WITNESS WHEREOF the parties to this Agreement have hereunto set their
hands on the day and year first above written.
VIATICUS, INC. DIGNITY PARTNERS, INC
By: By:
--------------------------- ---------------------------
Name: Name:
------------------------- -------------------------
Title: Title:
------------------------ ------------------------
Exhibit 10.13
SECOND MASTER AGREEMENT FOR
PURCHASE OF INSURANCE POLICIES
--------------------------------------------------------------------
THIS AGREEMENT FOR PURCHASE OF INSURANCE POLICIES (the "Agreement") is dated as
of February 10, 1997, by and between Dignity Partners, Inc., a Delaware
corporation (the "Seller"), with an office at 917 Tahoe Boulevard, Suite 204A,
P.O. Box 8819, Incline Village, NV 89452, Mutual Benefits Corp., a Florida
corporation (the "Purchaser"), with an office at 2881 E. Oakland Park Boulevard,
Suite 200, Fort Lauderdale, FL 33306 and Brinkley, McNerney, Morgan, Solomon &
Tatum LLP ("Escrow Agent").
WHEREAS, Purchaser desires to purchase from Seller, and Seller desires to sell,
all right, title and interest in and to the life insurance policies set forth in
Exhibit A hereto (each a "Policy" and collectively the "Policies"), including
but not limited to the right to designate the beneficiary or beneficiaries
entitled to receive the death benefits payable pursuant to the Policies set
forth in Exhibit A, as amended from time to time (the "Proceeds"), to reflect
the prepaid premiums as of each Closing Date (as hereinafter defined) and the
net death benefit as set forth in the verifications of coverage.
WHEREAS, title to the policies listed on Exhibit A is held by Bankers Trust
Company as the owner and/or beneficiary pursuant to the Agency Agreement dated
as of November 13, 1993, among Seller, and Bankers Trust Company, and;
WHEREAS, the parties hereto desire the Law Firm of Brinkley, McNerney, Morgan,
Solomon & Tatum, LLP to act and it has agreed to act as Escrow Agent as set
forth below.
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, the parties hereby agree as follows:
1. Purchase and Sale of Policy. (A) Subject to the terms and conditions set
forth herein, Seller agrees to sell, transfer, convey, assign and deliver to
Purchaser and Purchaser agrees to purchase from Seller, all Seller's right,
title and interest in and to the Policies, including the right to designate the
beneficiaries thereunder. Seller agrees that Seller, subject to Section 1(I)
hereof, shall have no further right, title and interest in and to the Policies
and the Proceeds of the Policies as of the Closing Date as hereinafter defined.
(B) "Closing Documents", as hereinafter referenced, shall mean all documents in
Seller's possession relating to Seller's acquisition and ownership of any policy
and include, but are not limited, (i) originals of all documentation and
agreements executed or received in connection with Seller's initial acquisition
of each Policy, including original medical records, medical releases, consent
forms, insurance releases, the purchase or letter agreement, letter of mental
competency of the insured under and of the original seller of such Policy,
insurance questionnaire completed by the applicable insurance company or groups
administrator or employer, viator's statement, disclosure statement required
under applicable law, and correspondence since original acquisition, (ii)
resolution of legal authority of the corporate officer signing on behalf of
Seller, (iii) original of policy or copy of handbook, if available, (iv)
corporate approval documents, as defined in paragraph 4(B) below.
(C) On or before February 13, 1997, the Seller shall provide to the Purchaser:
(i) copies of all blank assignment and beneficiary forms to be used in naming
Purchaser or its designeee as assignee or owner and beneficiary, or both if
applicable, (ii) verification of insurance coverage, (iii) copies of the
insurance policies.
(D) On or before February 28, 1997, the Purchaser shall complete all of the
assignment of ownership and change of beneficiary documents and return them to
the Seller to be signed, held and delivered by Seller pursuant to paragraph
1(E).
(E) At the time that the Purchaser delivers, pursuant to paragraph 1(D), to the
Seller the assignment and/or the change in beneficiary forms for each policy,
the Purchaser shall deposit with the Escrow Agent and the Escrow Agent shall
acknowledge to the Seller that the Escrow Agent is holding in escrow an amount
not less than the aggregate Purchase Price for each Policy.
(F) Within two business days of receipt of the Escrow Agent's acknowledgement of
holding the funds for a particular policy, the Seller shall deliver to the
applicable insurance company, or other party, properly executed assignments of
ownership and changes of beneficiaries necessary to cause such insurance
companies or other applicable parties to designate Purchaser or its designee,
(i) if an individual policy, (a) the owner or absolute assignee and (b) the sole
beneficiary under the Policy and (ii) if a group policy, (a) the absolute
assignee or (b) the irrevocable beneficiary under the Policy and the "Corporate
Approval Documents."
(G) Upon receipt of written acknowledgment from the applicable insurance company
or other party of the assignment of ownership and/or change of beneficiaries on
each Policy, (the "Closing Date") the Escrow Agent shall disburse by wire
transfer the Purchase Price for that Policy to the Seller within two business
days provided that in the event more than 20 such acknowlegements are received
in any one day Escrow Agent shall have reasonable a time to disburse the
Purchase Price for such policies. Upon receipt of the Purchase Price for any
Policy, Seller shall deliver to Purchaser the remaining Closing Documents.
(H) Notwithstanding any failure on the part of the Purchaser to perform pursuant
to Section 1(D), the Escrow Agent shall hold all monies on deposit and disburse
such monies pursuant to this Agreement.
(I) In the event of the death of a person insured under a Policy before the
change of beneficiaries is acknowledged by the insurance company or other party;
or in the event the Escrow Agent has not received the written acknowledgement
required under paragraph 1(G) for any policy within 30 days of the date the
assignment and/or beneficiary form was delivered pursuant to paragraph 1(E), the
purchase and sale of such Policy shall be rescinded and both parties shall take
all reasonable action in order to place the other party in the position it would
have been in prior to such purchase and sale. Such action on the part of
Purchaser shall include, but not be limited to, reassigning such Policy and the
beneficiary rights thereunder to Seller and returning any death benefits
Purchaser may have received for such Policy. Such action on the part of the
Seller shall include, but not be limited to, returning the purchase price paid
in respect of such Policy, together with any interest thereon, and any premiums
Purchaser may have paid on such Policy. Purchaser shall have a reasonable time
to distribute the purchaser price for such policies.
2. Purchase Price. In consideration of the sale, transfer, conveyance,
assignment and delivery of each Policy, Purchaser shall, in full payment
thereof, pay to the Seller a total, hereinafter defined Purchase Price equal to
(A) 66% of the aggregate net death benefits shown in Exhibit A for each Policy
and (B) the pro rata amount of any prepaid premium paid by Seller as of the
Closing Date . In the event any Policy listed on Exhibit A is not transferred to
the Purchaser or its assign, the Purchase Price shall be reduced by an amount
equal to 66% of the aggregate net benefits and the pro rata amount of any
prepaid premium set forth in Exhibit A for any Policy not transferred. The
Seller shall be responsible for the payment of any premiums that are due under
the normal terms and conditions of the Policy, on or before the Closing Date for
any of the Policies listed on Exhibit "A".
3. Disbursement Procedures. (A) Upon receipt of corporate approval pursuant to
paragraph 4(B) of this Agreement, the Closing shall occur when the Seller has
delivered to the Purchaser or the Escrow Agent the original of all Closing
Documents, including the properly executed assignments of ownership and changes
of beneficiaries and the "Corporate Approval Documents." Upon receipt of all
documents, Purchaser shall deliver all assignment of ownership and/or change of
beneficiary forms to the insurance companies which issued the applicable
Policies or other applicable parties necessary to cause such insurance companies
or other applicable parties to designate Purchaser or its designee (A) if an
individual policy, (i) the owner or absolute assignee and (ii) the sole
beneficiary under the Policy and (B) if a group policy, (i) the absolute
assignee or (ii) the irrevocable beneficiary under the Policy;
4. Covenants, Representations and Warranties of Seller. Seller hereby
covenants, represents and warrants to Purchaser as follows:
(A) Organization. Seller is a corporation duly organized, validly existing and
in good standing under the laws of the state of Delaware.
(B) Authorization and Approval of Closing Documents. Seller has obtained Board
of Director and shareholder approval for this transaction and shall provide
written evidence of said approvals reasonably satisfactory to the Purchaser
("Corporate Approval Documents") in the form of copies of such corporate
resolutions of the Seller duly authorized, certified and executed by the
Secretary of Seller showing shareholder and Board of Director approval of this
sale.
(C) Execution, Delivery and Performance of Closing Documents; Authority. Neither
the execution, delivery nor performance of this Agreement or any other Closing
Document by Seller will, with or without the giving of notice or the passage of
time, or both, conflict with, result in a default, right to accelerate or loss
of rights under, or result in the creation of any lien, charge or encumbrance
pursuant to any mortgage, deed of trust, lease, license, agreement, law, rule or
regulation or any order, judgment or decree to which Seller is a party or by
which Seller may be bound or affected. Seller has full power and authority to
enter this Agreement and this Agreement constitutes a valid and binding
obligation of the Seller.
(D) Original Acquisition of Policies. To the best of Seller's knowledge after
due inquiry, Seller has complied with all applicable laws in connection with its
original acquisition and ongoing servicing of each Policy. Each purchase or
letter agreement executed in connection with the Seller's original acquisition
of each respective Policy was validly authorized by the Seller and is
enforceable in accordance with its respective terms.
(E) Title to Policy. To the best of Seller's knowledge after due inquiry, each
Policy, when issued, was validly issued, is enforceable in accordance with its
terms, Seller is the named owner or acting on behalf of the named owner of the
Policy, and Seller has the legal right to either (i) assign ownership or (ii)
designate the beneficiary thereunder. Neither the Policy nor the Proceeds, to
the best of Seller's knowledge after due inquiry, is subject to any mortgage,
pledge, charge, security interest, encumbrance or adverse claim of any nature
whatsoever, direct or indirect, whether accrued, absolute contingent or
otherwise, including without limitation, claims of lien holders, collateral
assignees and irrevocable beneficiaries, except as may be set forth in Exhibit
A. To the best of Seller's knowledge after due inquiry, there exists no material
fact which would impair the validity or enforceability of or amount payable
under any Policy.
(F) Litigation. There is no litigation against Seller that could have an adverse
effect on this transaction or any Policy.
(G) Undertakings. Seller shall, to the extent it has knowledge, promptly notify
Purchaser of: (i) a change from the insured's current address, telephone number
or employment (if any); (ii) a change in the insured's attending physician(s);
(iii) any change regarding the diagnosis, treatment and prognosis of the current
mental and physical condition of the insured; and (iv) the death of any person
insured under a Policy. Further, Seller shall notify Purchaser of and forward
correspondence received in connection with any Policy and shall cause the
execution and delivery of any document, certificate or other written statement
required to be executed by Seller or Banker's Trust Company to activate or
maintain any disability waiver of premium provision on any Policy. Nothing in
this Section (4)(G) creates an affirmative duty to obtain or inquire as to any
of the foregoing. Seller agrees to take any and all actions, or cause such
action to be taken, reasonably requested by Purchaser, including the execution
and delivery of additional documents or information, in connection with the
consummation of the transaction contemplated by this Agreement, or reasonably
requested by Purchaser.
5. Representations and Warranties of Purchaser. Purchaser hereby
represents and warrants to Applicant as follows:
(A) Organization. Purchaser is a corporation duly organized, validly existing
and in good standing under the laws of Florida and has full power and authority
to enter into this Agreement and to carry out the transactions contemplated by
this Agreement and the other Closing Documents. This Agreement and the other
Closing Documents constitute valid and binding obligations of Purchaser.
(B) Authorization and Approval of Closing Documents. All proceedings or
corporate action necessary to be taken by Purchaser to authorize the execution
and delivery of this Agreement and the other Closing Documents have been taken.
(C) Execution, Delivery and Performance of Closing Documents; Authority. Neither
the execution, delivery or performance of this Agreement or any other Closing
Document by Purchaser will, with or without the giving of notice or the passage
of time, or both, conflict with, result in a default, right to accelerate or
loss of rights under, or result in the creation of any lien, charge or
encumbrance pursuant to any provision of Purchaser's Certificate of
Incorporation or By-laws, mortgage, deed of trust, lease, license, agreement,
law, rule or regulation or any order, judgment or decree to which Purchaser is a
party or by which it may be bound or affected.
(D) Undertakings. Purchaser shall, to the extent it has knowledge, promptly
notify Seller of the death occurring prior to the Closing Date of any person
insured under a Policy.
(E) Litigation. There is no pending or threatened litigation against Purchaser
that could have an adverse effect on this transaction or any Policy.
(F) Acquisition of Policies. To the best of Purchaser's knowledge after due
inquiry, Purchaser has complied with all applicable laws in connection with its
acquisition of each Policy.
6. Indemnification.
(A) Seller Indemnity.
(I) Seller hereby indemnifies and agrees to defend and hold Purchaser and
its affiliates and respective directors, shareholders, employees and controlling
persons harmless from any, against and in respect of (and shall on demand
reimburse Purchaser for):
(i) any and all loss, liability or damage suffered or incurred by
Purchaser in respect of or in connection with any claim arising under any
Policy in connection with the breach of any representation or warranty by
Purchaser or the ownership and servicing by the Purchaser or its
affiliates occurring prior to the Closing Date or relating to the
business or activities of the Purchaser; and
(ii) any and all actions, suits, proceedings, claims, demands,
assessments judgments, costs and expenses, including without limitation,
legal fees and expenses, incident to any of the foregoing or incurred in
investigating or attempting to avoid the same or oppose to the imposition
thereof, or in enforcing this indemnity.
(II) In case a claim shall be made or any action shall be brought against
the Purchaser based upon Section 6(A)(I.) of this Agreement and in respect to
which indemnity can be sought against the Seller pursuant thereof, the Purchaser
shall promptly notify the Seller in writing, and the Seller shall promptly
assume the defense thereof, including the employment of counsel chosen by the
Seller and approved by the Purchaser (provided that such approval by the
Purchaser shall not be unreasonably withheld), the payment of all expenses and
the right to negotiate and consent to settlement. If the Purchaser is advised in
a written opinion of counsel that there may be legal defenses available to it
which are adverse to or in conflict with those available to the Seller, or that
the defense of the Purchaser should be handled by separate counsel, the Seller
shall not have the right to assume the defense of the Purchaser, but shall be
responsible for the fees and expenses of counsel retained by the Purchaser, and
provided also that, if the Seller shall have failed to assume the defense of
such action or to retain counsel reasonably satisfactory to the Purchaser within
a reasonable time after notice of the commencement of such action, the fees and
expenses of counsel retained by the Purchaser. Notwithstanding, and in addition
to, any of the foregoing, the Purchaser shall have the right to employ separate
counsel with respect to any such claim or in any such action and to participate
in the defense thereof, but the fees and expenses of such counsel shall be paid
by the Purchaser unless the employment of such counsel has been specifically
authorized, in writing, by the Seller. The Seller shall not be liable for any
settlement of any such action effected without its consent, but if settled with
the consent of the Seller or if there be a final judgment for the plaintiff in
any such action with or without consent, the Seller agrees to indemnify and hold
harmless the Purchaser from and against any loss or liability by reason of such
settlement or judgment.
(B) Purchaser Indemnity.
(I) Purchaser hereby agrees to indemnify, defend and hold Seller harmless
and its affiliates and respective directors, shareholders, employees and
controlling persons harmless from and against, and in respect of (and shall on
demand reimburse Seller for):
(i) any and all loss, liability or damage suffered or incurred by Seller
in respect of or in connection with any claim arising under any Policy in
connection with the breach of any representation or warranty by the
Purchaser or the ownership and servicing by the Purchaser or its
affiliates occurring on or after the Closing Date or relating to the
business or activities of the Purchaser; and
(ii) any and all actions, suits, proceedings, claims, demands,
assessments, judgments, costs and expenses, including, without
limitation, legal fees and expense, incident to any of the foregoing or
incurred in investigating or attempting to avoid the same or to oppose
the imposition thereof, or in enforcing this indemnity.
(II) In case a claim shall be made or any action shall be brought against
the Seller based upon Section 6(B)(I) of this Agreement and in respect of which
indemnity can be sought against the Purchaser pursuant thereto, the Seller shall
promptly notify the Purchaser in writing, and the Purchaser shall promptly
assume the defense thereof, including the employment of counsel chosen by the
Purchaser and approved by the Seller (provided that such approval by the Seller
shall not be unreasonably withheld), the payment of all expenses and the right
to negotiate and consent to settlement. If the Seller is advised in a written
opinion of counsel that there may be legal defenses available to it which are
adverse to or in conflict with those available to the Purchaser, or that the
defense of the Seller should be handled by separate counsel, the Purchaser shall
not have the right to assume the defense of the Seller, but shall be responsible
for the fees and expenses of counsel retained by the Seller, and provided also
that, if the Purchaser Seller shall have failed to assume the defense of such
action or to retain counsel reasonably satisfactory to the Seller within a
reasonable time after notice of the commencement of such action, the fees and
expenses of counsel retained by the Seller. Notwithstanding, and in addition to,
any of the foregoing, the Seller shall have the right to employ separate counsel
with respect to any such claim or in any such action and to participate in the
defense thereof, but the fees and expenses of such counsel shall be paid by the
Seller unless the employment of such counsel has been specifically authorized,
in writing, by the Purchaser. The Purchaser shall not be liable for any
settlement of any such action effected without its consent, but if settled with
the consent of the Purchaser or if there be a final judgment for the plaintiff
in any such action with or without consent, the Purchaser agrees to indemnify
and hold harmless the Seller from and against any loss or liability by reason of
such settlement or judgment.
7. Survival of Representations, Warranties and Covenants. Each statement,
representation, warranty, indemnity, covenant and agreement in this Agreement or
in any information document, certificate or other instrument delivered by or on
behalf of Seller pursuant or as incident to this Agreement shall survive the
consummation of the transaction contemplated by this Agreement.
8. Notices. Any and all notices or other communications required or permitted to
be given under any provisions of this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by overnight courier
addressed to the party at the addresses set forth in the preamble (or at such
other address as either party may specify by notice to the other party given as
aforesaid).
9. Legal And Other Costs. In the event that any party (the "Defaulting Party")
defaults under this Agreement and, as a result thereof, the other party (the
"Non-Defaulting Party") seeks to legally enforce rights hereunder against the
Defaulting Party, then, in addition to all damages and other remedies to which
the Non-Defaulting Party is entitled by reason of such default, the Defaulting
Party shall promptly pay to the Non-Defaulting Party an amount equal to all
costs and expenses (including reasonable attorneys' fees) paid or incurred by
the Non-Defaulting Party in connection with such enforcement.
10. Miscellaneous
(A) Entire Agreement. This writing constitutes the entire agreement of the
parties with respect to the subject matter hereof and may not be modified,
amended or terminated except by written agreement specifically referring to this
Agreement signed by the parties hereto.
(B) Waiver. No waiver of any breach or default hereunder shall be valid unless
in writing and signed by the party giving such waiver, and no such waiver shall
be deemed a waiver of any subsequent breach or default of the same or similar
nature.
(C) Successors and Assigns. This Agreement shall be binding upon and inure to
the benefit of (i) Purchaser and its successors and assigns, and (ii) Seller and
its successors and assigns.
(D) Section Headings. The Section headings contained herein are for the purposes
of convenience only and are not intended to define or limit the contents of the
Sections.
(E) Cooperation. Each party hereto shall cooperate, shall take such further
action and shall execute and deliver such further documents as may be reasonably
requested by any other party in order to carry out any of the provisions and
purposes of this Agreement.
(F) Counterparts. This Agreement may be executed in one or more counterparts,
all of which taken together shall be deemed an original.
(G) Governing Law and Jurisdiction. This Agreement and all amendments thereof
shall be governed by and construed in accordance with the laws of the State of
Florida. Notwithstanding the foregoing, any action at law or in equity shall be
filed in any appropriate State or Federal court located in Broward County,
Florida. The parties to this Agreement hereby consent and submit to the personal
jurisdiction of such courts for the purposes of litigating any such action.
11. Purchaser and Seller appoint Brinkley, McNerney, Morgan, Solomon & Tatum LLP
as Escrow Agent hereunder for the purpose of holding funds for the purchase of
policies. The Escrow Agent shall hold and release monies pursuant to paragraph 1
of this Agreement. In those cases where the ownership of a policy is not being
transferred pursuant to Paragraph 1(I), the Escrow Agent shall return the
Purchase Price of that policy to the Purchaser after reviewing written
notification from the Seller.
12. In performing its duties as Escrow Agent, Brinkley, McNerney, Morgan,
Solomon & Tatum LLP shall not incur any liability to Seller or to Purchaser for
any damages, losses or expenses which either party may sustain or incur, unless
the same is a direct result of the breach of this Agreement, negligence or
intentional misconduct of Escrow Agent. Escrow Agent shall be entitled to rely
on any document(s) which Escrow Agent reasonably believes satisfy the terms and
conditions of the escrow. Seller and Purchaser each hereby agree to indemnify
and hold harmless Escrow Agent from and against all losses, claim, damages,
liabilities and expenses which it may sustain or incur hereunder, including,
without limitation, reasonable attorney's fees, which may be imposed upon Escrow
Agent or incurred by Escrow Agent in connection with the performance of its
duties herein, except for such losses, claims, damages, liabilities and expenses
related to Escrow Agent's breach of this Agreement, negligence or intentional
misconduct. Seller understands that the Law Firm of Brinkley, McNerney, Morgan,
Solomon & Tatum, LLP, Escrow Agent, is not rendering any legal advice to Seller
and has no responsibility with regard to this transaction contemplated in this
Agreement other than to comply with the terms of the provisions of paragraphs
1(E), 1(G), 1(H), 1(I), 11 and 12 of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
ATTEST PURCHASER
MUTUAL BENEFITS CORP.
By: By:/s/Les Steinger
--------------------------- ---------------------------
Typed or Printed Name of Witness Les Steinger, President
ATTEST SELLER
DIGNITY PARTNERS, INC.
By: By:/s/Alan B. Perper
------------------------------ --------------------------------
Typed or Printed Name of Witness Alan B. Perper, President
This Agreement is executed by Brinkley, McNerney, Morgan, Solomon & Tatum LLP
solely as Escrow Agent and Escrow Agent has no responsibility with regard to the
transaction contemplated in this Agreement other than to comply with the terms
of the provisions of paragraphs 1(E), 1(G), 1(H), 1(I), 11 and 12 of this
Agreement.
ATTEST ESCROW AGENT
BRINKLEY, MCNERNEY, MORGAN,
SOLOMON & TATUM LLP
By: By:/s/Michael J. McNerney
------------------------------ --------------------------------
Typed or Printed Name of Witness Michael J. McNerney
Exhibit 10.14
THIRD MASTER AGREEMENT FOR
PURCHASE OF INSURANCE POLICIES
--------------------------------------------------------------------
THIS AGREEMENT FOR PURCHASE OF INSURANCE POLICIES (the "Agreement") is dated as
of March 24, 1997, by and between Dignity Partners, Inc., a Delaware corporation
(the "Seller"), with an office at 917 Tahoe Boulevard, Suite 204A, P.O. Box
8819, Incline Village, NV 89452, Mutual Benefits Corp., a Florida corporation
(the "Purchaser"), with an office at 2881 E. Oakland Park Boulevard, Suite 200,
Fort Lauderdale, FL 33306 and Brinkley, McNerney, Morgan, Solomon & Tatum LLP
("Escrow Agent").
WHEREAS, Purchaser desires to purchase from Seller, and Seller desires to sell,
all right, title and interest in and to the life insurance policies set forth in
Exhibit A hereto (each a "Policy" and collectively the "Policies"), including
but not limited to the right to designate the beneficiary or beneficiaries
entitled to receive the death benefits payable pursuant to the Policies set
forth in Exhibit A, as amended from time to time (the "Proceeds"), to reflect
the prepaid premiums as of each Closing Date (as hereinafter defined) and the
net death benefit as set forth in the verifications of coverage.
WHEREAS, title to the policies listed on Exhibit A is held by Bankers Trust
Company as the owner and/or beneficiary pursuant to the Agency Agreement dated
as of November 13, 1993, among Seller, and Bankers Trust Company, and;
WHEREAS, the parties hereto desire the Law Firm of Brinkley, McNerney, Morgan,
Solomon & Tatum, LLP to act and it has agreed to act as Escrow Agent as set
forth below.
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, the parties hereby agree as follows:
1. Purchase and Sale of Policy. (A) Subject to the terms and conditions set
forth herein, Seller agrees to sell, transfer, convey, assign and deliver to
Purchaser and Purchaser agrees to purchase from Seller, all Seller's right,
title and interest in and to the Policies, including the right to designate the
beneficiaries thereunder. Seller agrees that Seller, subject to Section 1(I)
hereof, shall have no further right, title and interest in and to the Policies
and the Proceeds of the Policies as of the Closing Date as hereinafter defined.
(B) "Closing Documents", as hereinafter referenced, shall mean all documents in
Seller's possession relating to Seller's acquisition and ownership of any policy
and include, but are not limited, (i) originals of all documentation and
agreements executed or received in connection with Seller's initial acquisition
of each Policy, including original medical records, medical releases, consent
forms, insurance releases, the purchase or letter agreement, letter of mental
competency of the insured under and of the original seller of such Policy,
insurance questionnaire completed by the applicable insurance company or groups
administrator or employer, viator's statement, disclosure statement required
under applicable law, and correspondence since original acquisition, (ii)
resolution of legal authority of the corporate officer signing on behalf of
Seller, (iii) original of policy or copy of handbook, if available, (iv)
corporate approval documents, as defined in paragraph 4(B) below.
(C) On or before March 27, 1997, the Seller shall provide to the Purchaser: (i)
copies of all blank assignment and beneficiary forms to be used in naming
Purchaser or its designeee as assignee or owner and beneficiary, or both if
applicable, (ii) verification of insurance coverage, (iii) the copies of the
insurance policies.
(D) On or before April 18, 1997, the Purchaser shall complete all of the
assignment of ownership and change of beneficiary documents and return them to
the Seller to be signed, held and delivered by Seller pursuant to paragraph
1(E).
(E) At the time that the Purchaser delivers, pursuant to paragraph 1(D), to the
Seller the assignment and/or the change in beneficiary forms for each policy,
the Purchaser shall deposit with the Escrow Agent and the Escrow Agent shall
acknowledge to the Seller that the Escrow Agent is holding in escrow an amount
not less than the aggregate Purchase Price for each Policy.
(F) Within two business days of receipt of the Escrow Agent's acknowledgement of
holding the funds for a particular policy, the Seller shall deliver to the
applicable insurance company, or other party, properly executed assignments of
ownership and changes of beneficiaries necessary to cause such insurance
companies or other applicable parties to designate Purchaser or its designee,
(i) if an individual policy, (a) the owner or absolute assignee and (b) the sole
beneficiary under the Policy and (ii) if a group policy, (a) the absolute
assignee or (b) the irrevocable beneficiary under the Policy and the "Corporate
Approval Documents."
(G) Upon receipt of written acknowledgment from the applicable insurance company
or other party of the assignment of ownership and/or change of beneficiaries on
each Policy, (the "Closing Date") the Escrow Agent shall disburse by wire
transfer the Purchase Price for that Policy to the Seller within two business
days provided that in the event more than 20 such acknowlegements are received
in any one day Escrow Agent shall have reasonable a time to disburse the
Purchase Price for such policies. Upon receipt of the Purchase Price for any
Policy, Seller shall deliver to Purchaser the remaining Closing Documents.
(H) Notwithstanding any failure on the part of the Purchaser to perform pursuant
to Section 1(D), the Escrow Agent shall hold all monies on deposit and disburse
such monies pursuant to this Agreement.
(I) In the event of the death of a person insured under a Policy before the
change of beneficiaries is acknowledged by the insurance company or other party;
or in the event the Escrow Agent has not received the written acknowledgement
required under paragraph 1(G) for any policy within 30 days of the date the
assignment and/or beneficiary form was delivered pursuant to paragraph 1(E), the
purchase and sale of such Policy shall be rescinded and both parties shall take
all reasonable action in order to place the other party in the position it would
have been in prior to such purchase and sale. Such action on the part of
Purchaser shall include, but not be limited to, reassigning such Policy and the
beneficiary rights thereunder to Seller and returning any death benefits
Purchaser may have received for such Policy. Such action on the part of the
Seller shall include, but not be limited to, returning the purchase price paid
in respect of such Policy, together with any interest thereon, and any premiums
Purchaser may have paid on such Policy. Purchaser shall have a reasonable time
to distribute the purchaser price for such policies.
2. Purchase Price. In consideration of the sale, transfer, conveyance,
assignment and delivery of each Policy, Purchaser shall, in full payment
thereof, pay to the Seller a total, hereinafter defined Purchase Price equal to
(A) 59% of the aggregate net death benefits shown in Exhibit A for each Policy
and (B) the pro rata amount of any prepaid premium paid by Seller as of the
Closing Date . In the event any Policy listed on Exhibit A is not transferred to
the Purchaser or its assign, the Purchase Price shall be reduced by an amount
equal to 59% of the aggregate net benefits and the pro rata amount of any
prepaid premium set forth in Exhibit A for any Policy not transferred. The
Seller shall be responsible for the payment of any premiums that are due under
the normal terms and conditions of the Policy, on or before the Closing Date for
any of the Policies listed on Exhibit "A".
3. Disbursement Procedures. (A) Upon receipt of corporate approval pursuant to
paragraph 4(B) of this Agreement, the Closing shall occur when the Seller has
delivered to the Purchaser or the Escrow Agent the original of all Closing
Documents, including the properly executed assignments of ownership and changes
of beneficiaries and the "Corporate Approval Documents." Upon receipt of all
documents, Purchaser shall deliver all assignment of ownership and/or change of
beneficiary forms to the insurance companies which issued the applicable
Policies or other applicable parties necessary to cause such insurance companies
or other applicable parties to designate Purchaser or its designee (A) if an
individual policy, (i) the owner or absolute assignee and (ii) the sole
beneficiary under the Policy and (B) if a group policy, (i) the absolute
assignee or (ii) the irrevocable beneficiary under the Policy;
4. Covenants, Representations and Warranties of Seller. Seller hereby
covenants, represents and warrants to Purchaser as follows:
(A) Organization. Seller is a corporation duly organized, validly existing and
in good standing under the laws of the state of Delaware.
(B) Authorization and Approval of Closing Documents. Seller has obtained Board
of Director and shareholder approval for this transaction and shall provide
written evidence of said approvals reasonably satisfactory to the Purchaser
("Corporate Approval Documents") in the form of copies of such corporate
resolutions of the Seller duly authorized, certified and executed by the
Secretary of Seller showing shareholder and Board of Director approval of this
sale.
(C) Execution, Delivery and Performance of Closing Documents; Authority. Neither
the execution, delivery nor performance of this Agreement or any other Closing
Document by Seller will, with or without the giving of notice or the passage of
time, or both, conflict with, result in a default, right to accelerate or loss
of rights under, or result in the creation of any lien, charge or encumbrance
pursuant to any mortgage, deed of trust, lease, license, agreement, law, rule or
regulation or any order, judgment or decree to which Seller is a party or by
which Seller may be bound or affected. Seller has full power and authority to
enter this Agreement and this Agreement constitutes a valid and binding
obligation of the Seller.
(D) Original Acquisition of Policies. To the best of Seller's knowledge after
due inquiry, Seller has complied with all applicable laws in connection with its
original acquisition and ongoing servicing of each Policy. Each purchase or
letter agreement executed in connection with the Seller's original acquisition
of each respective Policy was validly authorized by the Seller and is
enforceable in accordance with its respective terms.
(E) Title to Policy. To the best of Seller's knowledge after due inquiry, each
Policy, when issued, was validly issued, is enforceable in accordance with its
terms, Seller is the named owner or acting on behalf of the named owner of the
Policy, and Seller has the legal right to either (i) assign ownership or (ii)
designate the beneficiary thereunder. Neither the Policy nor the Proceeds, to
the best of Seller's knowledge after due inquiry, is subject to any mortgage,
pledge, charge, security interest, encumbrance or adverse claim of any nature
whatsoever, direct or indirect, whether accrued, absolute contingent or
otherwise, including without limitation, claims of lien holders, collateral
assignees and irrevocable beneficiaries, except as may be set forth in Exhibit
A. To the best of Seller's knowledge after due inquiry, there exists no material
fact which would impair the validity or enforceability of or amount payable
under any Policy.
(F) Litigation. There is no litigation against Seller that could have an adverse
effect on this transaction or any Policy.
(G) Undertakings. Seller shall, to the extent it has knowledge, promptly notify
Purchaser of: (i) a change from the insured's current address, telephone number
or employment (if any); (ii) a change in the insured's attending physician(s);
(iii) any change regarding the diagnosis, treatment and prognosis of the current
mental and physical condition of the insured; and (iv) the death of any person
insured under a Policy. Further, Seller shall notify Purchaser of and forward
correspondence received in connection with any Policy and shall cause the
execution and delivery of any document, certificate or other written statement
required to be executed by Seller or Banker's Trust Company to activate or
maintain any disability waiver of premium provision on any Policy. Nothing in
this Section (4)(G) creates an affirmative duty to obtain or inquire as to any
of the foregoing. Seller agrees to take any and all actions, or cause such
action to be taken, reasonably requested by Purchaser, including the execution
and delivery of additional documents or information, in connection with the
consummation of the transaction contemplated by this Agreement, or reasonably
requested by Purchaser.
5. Representations and Warranties of Purchaser. Purchaser hereby
represents and warrants to Applicant as follows:
(A) Organization. Purchaser is a corporation duly organized, validly existing
and in good standing under the laws of Florida and has full power and authority
to enter into this Agreement and to carry out the transactions contemplated by
this Agreement and the other Closing Documents. This Agreement and the other
Closing Documents constitute valid and binding obligations of Purchaser.
(B) Authorization and Approval of Closing Documents. All proceedings or
corporate action necessary to be taken by Purchaser to authorize the execution
and delivery of this Agreement and the other Closing Documents have been taken.
(C) Execution, Delivery and Performance of Closing Documents; Authority. Neither
the execution, delivery or performance of this Agreement or any other Closing
Document by Purchaser will, with or without the giving of notice or the passage
of time, or both, conflict with, result in a default, right to accelerate or
loss of rights under, or result in the creation of any lien, charge or
encumbrance pursuant to any provision of Purchaser's Certificate of
Incorporation or By-laws, mortgage, deed of trust, lease, license, agreement,
law, rule or regulation or any order, judgment or decree to which Purchaser is a
party or by which it may be bound or affected.
(D) Undertakings. Purchaser shall, to the extent it has knowledge, promptly
notify Seller of the death occurring prior to the Closing Date of any person
insured under a Policy.
(E) Litigation. There is no pending or threatened litigation against Purchaser
that could have an adverse effect on this transaction or any Policy.
(F) Acquisition of Policies. To the best of Purchaser's knowledge after due
inquiry, Purchaser has complied with all applicable laws in connection with its
acquisition of each Policy.
6. Indemnification.
(A) Seller Indemnity.
(I) Seller hereby indemnifies and agrees to defend and hold Purchaser and
its affiliates and respective directors, shareholders, employees and controlling
persons harmless from any, against and in respect of (and shall on demand
reimburse Purchaser for):
(i) any and all loss, liability or damage suffered or incurred by
Purchaser in respect of or in connection with any claim arising under any
Policy in connection with the breach of any representation or warranty by
Purchaser or the ownership and servicing by the Purchaser or its
affiliates occurring prior to the Closing Date or relating to the
business or activities of the Purchaser; and
(ii) any and all actions, suits, proceedings, claims, demands,
assessments judgments, costs and expenses, including without limitation,
legal fees and expenses, incident to any of the foregoing or incurred in
investigating or attempting to avoid the same or oppose to the imposition
thereof, or in enforcing this indemnity.
(II) In case a claim shall be made or any action shall be brought against
the Purchaser based upon Section 6(A)(I.) of this Agreement and in respect to
which indemnity can be sought against the Seller pursuant thereof, the Purchaser
shall promptly notify the Seller in writing, and the Seller shall promptly
assume the defense thereof, including the employment of counsel chosen by the
Seller and approved by the Purchaser (provided that such approval by the
Purchaser shall not be unreasonably withheld), the payment of all expenses and
the right to negotiate and consent to settlement. If the Purchaser is advised in
a written opinion of counsel that there may be legal defenses available to it
which are adverse to or in conflict with those available to the Seller, or that
the defense of the Purchaser should be handled by separate counsel, the Seller
shall not have the right to assume the defense of the Purchaser, but shall be
responsible for the fees and expenses of counsel retained by the Purchaser, and
provided also that, if the Seller shall have failed to assume the defense of
such action or to retain counsel reasonably satisfactory to the Purchaser within
a reasonable time after notice of the commencement of such action, the fees and
expenses of counsel retained by the Purchaser. Notwithstanding, and in addition
to, any of the foregoing, the Purchaser shall have the right to employ separate
counsel with respect to any such claim or in any such action and to participate
in the defense thereof, but the fees and expenses of such counsel shall be paid
by the Purchaser unless the employment of such counsel has been specifically
authorized, in writing, by the Seller. The Seller shall not be liable for any
settlement of any such action effected without its consent, but if settled with
the consent of the Seller or if there be a final judgment for the plaintiff in
any such action with or without consent, the Seller agrees to indemnify and hold
harmless the Purchaser from and against any loss or liability by reason of such
settlement or judgment.
(B) Purchaser Indemnity.
(I) Purchaser hereby agrees to indemnify, defend and hold Seller harmless
and its affiliates and respective directors, shareholders, employees and
controlling persons harmless from and against, and in respect of (and shall on
demand reimburse Seller for):
(i) any and all loss, liability or damage suffered or incurred by Seller
in respect of or in connection with any claim arising under any Policy in
connection with the breach of any representation or warranty by the
Purchaser or the ownership and servicing by the Purchaser or its
affiliates occurring on or after the Closing Date or relating to the
business or activities of the Purchaser; and
(ii) any and all actions, suits, proceedings, claims, demands,
assessments, judgments, costs and expenses, including, without
limitation, legal fees and expense, incident to any of the foregoing or
incurred in investigating or attempting to avoid the same or to oppose
the imposition thereof, or in enforcing this indemnity.
(II) In case a claim shall be made or any action shall be brought against
the Seller based upon Section 6(B)(I) of this Agreement and in respect of which
indemnity can be sought against the Purchaser pursuant thereto, the Seller shall
promptly notify the Purchaser in writing, and the Purchaser shall promptly
assume the defense thereof, including the employment of counsel chosen by the
Purchaser and approved by the Seller (provided that such approval by the Seller
shall not be unreasonably withheld), the payment of all expenses and the right
to negotiate and consent to settlement. If the Seller is advised in a written
opinion of counsel that there may be legal defenses available to it which are
adverse to or in conflict with those available to the Purchaser, or that the
defense of the Seller should be handled by separate counsel, the Purchaser shall
not have the right to assume the defense of the Seller, but shall be responsible
for the fees and expenses of counsel retained by the Seller, and provided also
that, if the Purchaser Seller shall have failed to assume the defense of such
action or to retain counsel reasonably satisfactory to the Seller within a
reasonable time after notice of the commencement of such action, the fees and
expenses of counsel retained by the Seller. Notwithstanding, and in addition to,
any of the foregoing, the Seller shall have the right to employ separate counsel
with respect to any such claim or in any such action and to participate in the
defense thereof, but the fees and expenses of such counsel shall be paid by the
Seller unless the employment of such counsel has been specifically authorized,
in writing, by the Purchaser. The Purchaser shall not be liable for any
settlement of any such action effected without its consent, but if settled with
the consent of the Purchaser or if there be a final judgment for the plaintiff
in any such action with or without consent, the Purchaser agrees to indemnify
and hold harmless the Seller from and against any loss or liability by reason of
such settlement or judgment.
7. Survival of Representations, Warranties and Covenants. Each statement,
representation, warranty, indemnity, covenant and agreement in this Agreement or
in any information document, certificate or other instrument delivered by or on
behalf of Seller pursuant or as incident to this Agreement shall survive the
consummation of the transaction contemplated by this Agreement.
8. Notices. Any and all notices or other communications required or permitted to
be given under any provisions of this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by overnight courier
addressed to the party at the addresses set forth in the preamble (or at such
other address as either party may specify by notice to the other party given as
aforesaid).
9. Legal And Other Costs. In the event that any party (the "Defaulting Party")
defaults under this Agreement and, as a result thereof, the other party (the
"Non-Defaulting Party") seeks to legally enforce rights hereunder against the
Defaulting Party, then, in addition to all damages and other remedies to which
the Non-Defaulting Party is entitled by reason of such default, the Defaulting
Party shall promptly pay to the Non-Defaulting Party an amount equal to all
costs and expenses (including reasonable attorneys' fees) paid or incurred by
the Non-Defaulting Party in connection with such enforcement.
10. Miscellaneous
(A) Entire Agreement. This writing constitutes the entire agreement of the
parties with respect to the subject matter hereof and may not be modified,
amended or terminated except by written agreement specifically referring to this
Agreement signed by the parties hereto.
(B) Waiver. No waiver of any breach or default hereunder shall be valid unless
in writing and signed by the party giving such waiver, and no such waiver shall
be deemed a waiver of any subsequent breach or default of the same or similar
nature.
(C) Successors and Assigns. This Agreement shall be binding upon and inure to
the benefit of (i) Purchaser and its successors and assigns, and (ii) Seller and
its successors and assigns.
(D) Section Headings. The Section headings contained herein are for the purposes
of convenience only and are not intended to define or limit the contents of the
Sections.
(E) Cooperation. Each party hereto shall cooperate, shall take such further
action and shall execute and deliver such further documents as may be reasonably
requested by any other party in order to carry out any of the provisions and
purposes of this Agreement.
(F) Counterparts. This Agreement may be executed in one or more counterparts,
all of which taken together shall be deemed an original.
(G) Governing Law and Jurisdiction. This Agreement and all amendments thereof
shall be governed by and construed in accordance with the laws of the State of
Florida. Notwithstanding the foregoing, any action at law or in equity shall be
filed in any appropriate State or Federal court located in Broward County,
Florida. The parties to this Agreement hereby consent and submit to the personal
jurisdiction of such courts for the purposes of litigating any such action.
11. Purchaser and Seller appoint Brinkley, McNerney, Morgan, Solomon & Tatum LLP
as Escrow Agent hereunder for the purpose of holding funds for the purchase of
policies. The Escrow Agent shall hold and release monies pursuant to paragraph 1
of this Agreement. In those cases where the ownership of a policy is not being
transferred pursuant to Paragraph 1(I), the Escrow Agent shall return the
Purchase Price of that policy to the Purchaser after reviewing written
notification from the Seller.
12. In performing its duties as Escrow Agent, Brinkley, McNerney, Morgan,
Solomon & Tatum LLP shall not incur any liability to Seller or to Purchaser for
any damages, losses or expenses which either party may sustain or incur, unless
the same is a direct result of the breach of this Agreement, negligence or
intentional misconduct of Escrow Agent. Escrow Agent shall be entitled to rely
on any document(s) which Escrow Agent reasonably believes satisfy the terms and
conditions of the escrow. Seller and Purchaser each hereby agree to indemnify
and hold harmless Escrow Agent from and against all losses, claim, damages,
liabilities and expenses which it may sustain or incur hereunder, including,
without limitation, reasonable attorney's fees, which may be imposed upon Escrow
Agent or incurred by Escrow Agent in connection with the performance of its
duties herein, except for such losses, claims, damages, liabilities and expenses
related to Escrow Agent's breach of this Agreement, negligence or intentional
misconduct. Seller understands that the Law Firm of Brinkley, McNerney, Morgan,
Solomon & Tatum, LLP, Escrow Agent, is not rendering any legal advice to Seller
and has no responsibility with regard to this transaction contemplated in this
Agreement other than to comply with the terms of the provisions of paragraphs
1(E), 1(G), 1(H), 1(I), 11 and 12 of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
ATTEST PURCHASER
MUTUAL BENEFITS CORP.
By: By:/s/Les Steinger
-------------------------------- --------------------------------
Typed or Printed Name of Witness Les Steinger, President
ATTEST SELLER
DIGNITY PARTNERS, INC.
By: By:/s/Alan B. Perper
-------------------------------- --------------------------------
Typed or Printed Name of Witness Alan B. Perper, President
This Agreement is executed by Brinkley, McNerney, Morgan, Solomon & Tatum LLP
solely as Escrow Agent and Escrow Agent has no responsibility with regard to the
transaction contemplated in this Agreement other than to comply with the terms
of the provisions of paragraphs 1(E), 1(G), 1(H), 1(I), 11 and 12 of this
Agreement.
ATTEST ESCROW AGENT
BRINKLEY, MCNERNEY, MORGAN,
SOLOMON & TATUM LLP
By: By:/s/Michael J. McNerney
---------------------------- ------------------------------
Typed or Printed Name of Witness Michael J. McNerney
Exhibit 21.1
SUBSIDIARIES
Dignity Partners Funding Corp. I, a Delaware Corporation
Exhibit 23.1
Consent of Independent Auditors
The Board of Directors and Stockholders of
Dignity Partners, Inc.:
We consent to incorporation by reference in the registration statement Nos.
33-21825 and 33-21827 on Form S-8 of Dignity Partners, Inc. of our report dated
March 26, 1997, relating to the consolidated balance sheets of Dignity Partners,
Inc. as of December 31, 1996 and 1995, and the related consolidated statements
of operations, shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1996, which report appears in the December
31, 1996, annual report on Form 10-K of Dignity Partners, Inc.
/s/KPMG Peat Marwick LLP
March 26, 1997
Exhibit 24.1
POWER OF ATTORNEY
The undersigned, as a director and/or an officer of Dignity partners,
Inc. (the "Company"), does hereby constitute and appoint Alan B. Perper as his
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and his name, place and stead, in any and all
capacities, to sign the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996 and any and all amendments thereto, and to file the
same, with exhibits and schedules thereto, and other documents therewith, with
the Securities and Exchange Commission, granting unto each said attorney-in-fact
full power and authority to do and perform each and every act and thing
necessary or desirable to be done in and about the premises, as fully to all
intents and purposes as be might or could do in person, thereby ratifying and
confirming all that any said attorney-in-fact, or his substitute, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 27 day of March,
1997.
/s/ Bradley N. Rotter
-----------------------------
Bradley N. Rotter
<PAGE>
Exhibit 24.1
POWER OF ATTORNEY
The undersigned, as a director and/or an officer of Dignity partners,
Inc. (the "Company"), does hereby constitute and appoint Alan B. Perper as his
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and his name, place and stead, in any and all
capacities, to sign the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996 and any and all amendments thereto, and to file the
same, with exhibits and schedules thereto, and other documents therewith, with
the Securities and Exchange Commission, granting unto each said attorney-in-fact
full power and authority to do and perform each and every act and thing
necessary or desirable to be done in and about the premises, as fully to all
intents and purposes as be might or could do in person, thereby ratifying and
confirming all that any said attorney-in-fact, or his substitute, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 27 day of March,
1997.
/s/ John Ward Rotter
-----------------------------
John Ward Rotter
<PAGE>
Exhibit 24.1
POWER OF ATTORNEY
The undersigned, as a director and/or an officer of Dignity partners,
Inc. (the "Company"), does hereby constitute and appoint Alan B. Perper as his
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and his name, place and stead, in any and all
capacities, to sign the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996 and any and all amendments thereto, and to file the
same, with exhibits and schedules thereto, and other documents therewith, with
the Securities and Exchange Commission, granting unto each said attorney-in-fact
full power and authority to do and perform each and every act and thing
necessary or desirable to be done in and about the premises, as fully to all
intents and purposes as be might or could do in person, thereby ratifying and
confirming all that any said attorney-in-fact, or his substitute, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 27 day of March,
1997.
\s\ Stephen T. Bow
---------------------------
Stephen T. Bow
Exhibit 24.1
POWER OF ATTORNEY
The undersigned, as a director and/or an officer of Dignity partners,
Inc. (the "Company"), does hereby constitute and appoint Alan B. Perper as his
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and his name, place and stead, in any and all
capacities, to sign the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996 and any and all amendments thereto, and to file the
same, with exhibits and schedules thereto, and other documents therewith, with
the Securities and Exchange Commission, granting unto each said attorney-in-fact
full power and authority to do and perform each and every act and thing
necessary or desirable to be done in and about the premises, as fully to all
intents and purposes as be might or could do in person, thereby ratifying and
confirming all that any said attorney-in-fact, or his substitute, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 27 day of March,
1997.
\s\ Paul A. Volberding
---------------------------
Paul A. Volberding
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-K FOR THE ANNUAL PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANICAL STATEMENTS.
</LEGEND>
<CIK> 0001002813
<NAME> Dignity Partners, Inc.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Dec-31-1996
<CASH> 11,212,110
<SECURITIES> 3,000,000
<RECEIVABLES> 1,181,513
<ALLOWANCES> 0
<INVENTORY> 52,766,342 <F1>
<CURRENT-ASSETS> 784,508
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 68,944,473
<CURRENT-LIABILITIES> 7,584,003
<BONDS> 41,218,205 <F2>
0
0
<COMMON> 42,918
<OTHER-SE> 20,099,347
<TOTAL-LIABILITY-AND-EQUITY> 68,944,473
<SALES> 5,479,114
<TOTAL-REVENUES> 6,584,370
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,233,775
<LOSS-PROVISION> 10,079,777
<INTEREST-EXPENSE> 3,983,606
<INCOME-PRETAX> (10,712,788)
<INCOME-TAX> 525,711
<INCOME-CONTINUING> (10,187,077)
<DISCONTINUED> 0
<EXTRAORDINARY> 487,600
<CHANGES> 0
<NET-INCOME> (9,699,477)
<EPS-PRIMARY> (2.46)
<EPS-DILUTED> 0
<FN>
<F1> INCLUDES ASSETS HELD FOR SALE AND PURCHASED LIFE INSURANCE POLICIES.
<F2> REPRESENTS LONG TERM BORROWINGS OF THE COMPANY.
</FN>
</TABLE>
