SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 0-27736
POINT WEST CAPITAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 94-3165263
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1700 Montgomery Street, Suite 250
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San Francisco, California 94111
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(Address of principal executive offices) (Zip Code)
(415) 394-9467
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(Registrant's telephone number, including area code)
DIGNITY PARTNERS, INC.
----------------------
(Former name, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
At July 31, 1997, there were 3,253,324 shares of the registrant's Common Stock
outstanding.
<PAGE>
POINT WEST CAPITAL CORPORATION
-------------------------------
(Formerly known as Dignity Partners, Inc.)
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INDEX
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Page #
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Part I
======
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets
June 30, 1997 and December 31, 1996 1
Consolidated Statements of Operations for the
Three Months and Six Months Ended
June 30, 1997 and 1996 2
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1997 and 1996 3
Condensed Notes to Consolidated Financial Statements 4-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-15
Part II
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16-17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures
- ---------- 18
(i)
<PAGE>
POINT WEST CAPITAL CORPORATION
(Formerly known as Dignity Partners, Inc.)
CONSOLIDATED BALANCE SHEETS
June 30, 1997 and December 31, 1996
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1997 1996
-------------------- --------------------
<S> <C> <C>
Cash and cash equivalents $ 14,762,007 $ 6,586,447
Restricted cash (note 6) 4,130,519 4,625,663
Investment securities (fair value: $2,281,250) (note 2) 2,275,551 -
Matured policies receivable (note 6) 577,702 1,181,513
Assets held for sale (note 3) 1,258,451 11,520,103
Purchased life insurance policies (note 4) 37,915,436 41,246,239
Investment in convertible preferred shares (note 5) 1,678,478 3,000,000
Deferred financing costs, net of accumulated amortization of
$498,836 and $381,690, respectively (note 4 and 6) 569,764 681,910
Other assets 203,602 102,598
-------------------- --------------------
Total assets $ 63,371,510 $ 68,944,473
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses $ 188,268 $ 190,894
Accounts payable 883,858 320,577
Accrued compensation payable 99,971 186,390
Payable for policies purchased - 427,553
Reserve for equity interest in wholly owned financing
subsidiary (note 4) 4,306,880 6,452,589
Long term notes payable (note 6) 38,900,690 41,218,205
Deferred income taxes (note 7) 6,000 6,000
------------------- --------------------
Total liabilities 44,385,667 48,802,208
-------------------- --------------------
Stockholders' equity:
Common stock, $0.01 par value; 15,000,000 authorized shares,
4,291,824 and 4,291,824 shares, respectively, issued,
3,253,324 and 4,146,824 shares, respectively, outstanding 42,918 42,918
Additional paid-in-capital 29,496,720 29,496,720
Retained earnings (deficit) (7,679,763) (9,007,373)
Treasury stock, 1,038,500 and 145,000 shares,
respectively (note 8) (2,874,032) (390,000)
-------------------- --------------------
Total stockholders' equity 18,985,843 20,142,265
-------------------- --------------------
Total liabilities and stockholders' equity $ 63,371,510 $ 68,944,473
==================== ====================
<FN>
See accompanying condensed notes to Consolidated financial statements
</FN>
</TABLE>
1
<PAGE>
POINT WEST CAPITAL CORPORATION
(Formerly known as Dignity Partners, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Income:
Earned discounts on life insurance policies (note 9) - 1,884,431 - 3,697,032
Earned discounts on matured policies (note 9) 101,691 - 285,977 -
Interest income 337,574 281,919 545,210 456,913
Gain on sale of convertible preferred shares (note 5) - - 699,665 -
Net gain on assets sold (note 3) 492,217 - 1,362,858 -
Other 38,681 35,924 69,875 166,650
------------- ------------- ------------- -------------
Total income 970,163 2,202,274 2,963,585 4,320,595
Expenses:
Interest expense 885,789 967,185 1,824,259 1,974,938
Compensation and benefits 283,825 305,618 554,108 624,653
Other general and administrative expenses 459,377 446,417 1,025,113 666,793
Amortization 58,720 91,773 117,146 179,566
Depreciation - 10,018 - 19,967
------------- ------------- ------------- -------------
Total expenses 1,687,711 1,821,011 3,520,626 3,465,917
------------- ------------- ------------- -------------
Income (loss) before income taxes and net loss in
wholly owned financing subsidiary charged to
reserve for equity interest (717,548) 381,263 (557,041) 854,678
Income tax expense (note 7) - (187,614) - (367,512)
Net loss in wholly owned financing subsidiary charged
to reserve for equity interest (note 4) 949,958 - 1,884,651 -
------------- ------------- -------------- ---------------
Net income $ 232,410 $ 193,649 $ 1,327,610 $ 487,166
============= ============= ============= =============
Net income per share (note 8) 0.06 0.05 0.34 0.13
Weighted average number of shares of common stock
and common stock equivalents outstanding (note 8) 3,597,732 4,291,824 3,848,254 3,686,686
<FN>
See accompanying condensed notes to consolidated financial statements
</FN>
</TABLE>
2
<PAGE>
POINT WEST CAPITAL CORPORATION
(Formerly known as Dignity Partners, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1997 1996
--------------------- ---------------------
<S> <C> <C>
Cash flows for operating activities:
Net income $ 1,327,610 $ 487,166
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 117,146 199,533
Write-off of furniture and equipment - 12,303
Net gain on assets sold (1,362,858) -
Gain on sale of convertible preferred shares (699,665) -
Earned discounts on policies (285,977) (3,697,032)
Purchase of life insurance policies (915,272) (19,072,306)
Collections on matured life insurance policies 4,215,074 8,730,316
Increase in unearned income - 86,588
Increase in other assets (101,004) (160,345)
Increase in deferred taxes - 367,512
Decrease in accrued expenses (2,626) (96,120)
Increase (decrease) in accounts payable 563,281 (109,514)
Decrease in IPO financing costs payable - (306,900)
Decrease in payable to related party - (1,482,170)
Decrease in accrued compensation payable (86,419) (737,959)
Decrease in reserve for equity interest in wholly
owned financing subsidiary (1,884,651) -
--------------------- --------------------
Net cash provided by (used in) operating activities 884,639 (15,778,928)
--------------------- --------------------
Cash flows from investing activities:
Proceeds from sale of assets held for sale 11,856,688 -
Purchase of furniture and equipment - (6,776)
Decrease (increase) in restricted cash 495,144 (807,396)
Increase in marketable securities (2,275,551) (4,107,502)
Proceeds from sale of convertible preferred shares 2,021,187 -
--------------------- ---------------------
Net cash provided by (used in) investing activities 12,097,468 (4,921,674)
--------------------- ---------------------
Cash flows from financing activities:
Proceeds from long term notes payable - 6,375,000
Principal payments on long term notes payable (2,317,515) -
Proceeds from other long term debt - 4,275,024
Principal payments on other long term debt - (3,609,521)
Distribution to limited partners - (783,313)
Purchase of limited partners' interest in investment partnership - (4,887,283)
Principal payment on loan from stockholder - (1,162,170)
Proceeds from issuances of common stock - 25,273,968
Purchase of treasury stock (2,484,032) -
Increase in financing costs (5,000) (88,000)
Reimbursement of IPO financing costs - 750,000
--------------------- --------------------
Net cash provided by (used in) financing activities (4,806,547) 26,143,705
--------------------- ---------------------
Net increase in cash and cash equivalents 8,175,560 5,443,103
Cash and cash equivalents, beginning of period 6,586,447 1,056,611
--------------------- ---------------------
Cash and cash equivalents, end of period $ 14,762,007 $ 6,499,714
===================== =====================
Supplemental disclosure of cash flow information:
State taxes paid $ 31,456 $ 5,693
===================== =====================
Cash paid for interest $ 1,826,885 $ 2,071,058
===================== =====================
<FN>
See accompanying condensed notes to consolidated financial statements
</FN>
</TABLE>
3
<PAGE>
POINT WEST CAPITAL CORPORATION
-------------------------------
(Formerly known as Dignity Partners, Inc.)
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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1. General Description
- -- --------------------
The unaudited consolidated financial statements of Point West Capital
Corporation (formerly known as Dignity Partners, Inc.) and its consolidated
entities ("Point West"or the "Company") as of June 30, 1997 and for the three
and six month periods ended June 30, 1997 and 1996 have been prepared in
accordance with generally accepted accounting principles for interim financial
information, in accordance with Rule 10-01 of Regulation S-X. Accordingly, such
statements do not include all of the information and notes thereto that are
included in the annual consolidated financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included. Operating results for the three and six month periods ended June
30, 1997 are not indicative of the results that may be expected for the entire
1997 fiscal year. The balance sheet as of December 31, 1996 has been derived
from the audited financial statements of the Company. The statements included
herein should be read in conjunction with the audited financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996 (the "Form 10-K").
Point West is a specialty financial services company. Until February 1997
the Company provided viatical settlements for terminally ill persons. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Cessation of Viatical Settlement Business; Sale of Assets."On
June 3, 1997 the Company formed a limited partnership called Fourteen Hill
Capital, L.P. ("Fourteen Hill Capital") and a wholly-owned limited liability
company called Fourteen Hill Management, LLC ("Fourteen Hill Management").
Fourteen Hill Management is the general partner of Fourteen Hill Capital and, at
present, Point West is the only limited partner. Fourteen Hill Capital has filed
an application with the Small Business Administration to become a small business
investment company. The Company also continues to analyze other strategic
options and to explore its overall strategic direction.
2. Investment Securities
- -- ----------------------
The Company classifies securities for which it has the positive intent and
ability to hold to maturity as held-to-maturity securities. Such securities are
reported at amortized cost. As of June 30, 1997 all investment securities were
classified as held-to-maturity securities.
4
<PAGE>
3. Assets Held for Sale and Related Sale Agreements
- -- -------------------------------------------------
As a result of the Company's decision in 1996 to sell all or substantially
all of its assets, it reclassified all assets owned as of such date, other than
the assets of its wholly-owned special purpose subsidiary, Dignity Partners
Funding Corp. I ("DPFC"), to a "held-for-sale" category. Accordingly, such
assets are recorded on the balance sheet as of June 30, 1997 and December 31,
1996 at the lower of carrying value or fair value less estimated cost to sell.
In connection with the decision to sell assets, during 1996 the Company
established a reserve for loss on sale of assets. Assets held for sale consist
of:
<TABLE>
Assets Held for Sale
=====================
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
<S> <C> <C>
Capitalized costs $ 1,547,549 14,089,124
Earned discounts on life insurance policies 59,977 380,692
Reserve for loss on sale (349,075) (2,949,713)
--------------- ------------
Assets held for sale $ 1,258,451 11,520,103
================ =============
</TABLE>
The calculation of reserve for loss on sale of assets for life insurance
policies held for sale was calculated based on the life expectancies of the
insureds under the policies in relation to prices obtained by the Company in
connection with other sales. Any gain or loss due to the difference between
actual proceeds (less any back end sourcing fees) and the carrying value after
giving effect to the reserve for loss on sale of assets will be reported as a
realized gain or loss on assets sold at the time sale proceeds are received.
On September 27, 1996, the Company entered into an agreement with an
unaffiliated viatical settlement company to sell 197 policies with an aggregate
face value of $14.2 million for an aggregate consideration of approximately $8.7
million. The Company established a reserve in the third quarter of 1996 of
$1,792,087 in connection with policies covered by the sale agreement. Through
June 30, 1997, 186 policies with an aggregate face value of $13.5 million had
been sold, of which 46 policies with an aggregate face value of $1.9 million
were sold in the fourth quarter of 1996 (resulting in a realized gain of
$120,000), 136 policies with an aggregate face value of $11.4 million were sold
in the first quarter of 1997 (resulting in a realized gain of $426,000) and 4
policies with an aggregate face value of $175,000 were sold in the second
quarter of 1997 (resulting in a realized loss of $5,000). Seven policies covered
by the sale agreement were not sold because the insured died prior to the
issuing insurance company's acknowledgment of transfer of ownership of the
policy and the Company collected the death benefit instead of selling those
policies. As of June 30, 1997, the remaining four policies (with a face value of
$245,000) were pending acknowledgment of transfer of ownership.
On January 16, 1997 the Company entered into an agreement with an
unaffiliated viatical settlement company to sell 18 policies with an aggregate
face value of $1.0 million for approximately $710,000. Such policies were
carried on the balance sheet at December 31, 1996 at approximately $590,000
after giving effect to the reserve for loss on sale of assets. In the first
quarter of 1997, the Company completed the sale of 17 policies with an aggregate
face value of $990,000 and realized a gain of $121,000 associated with these
policies. As of June 30, 1997, the remaining policy with a face value of $25,000
was pending acknowledgment of transfer of ownership.
On February 10, 1997 the Company entered into an agreement with an
unaffiliated viatical settlement company to sell 67 policies with an aggregate
face value of $4.5 million for approximately $3.0 million. Such policies were
carried on the balance sheet at December 31, 1996 at approximately
5
<PAGE>
$2.2 million after giving effect to the reserve for loss on sale of assets.
Through June 30, 1997, 60 policies with an aggregate face value of $3.8 million
had been sold, of which 35 policies with an aggregate face value of $1.7 million
were sold in the first quarter of 1997 (resulting in a realized gain of
$295,000) and 25 policies with an aggregate face value of $2.1 million were sold
in the second quarter of 1997 (resulting in a realized gain of $343,000). As of
June 30, 1997, the remaining 7 policies with a face value of $684,000 were
pending acknowledgment of transfer of ownership.
On March 24, 1997 the Company entered into an agreement with an
unaffiliated viatical settlement company to sell 31 policies with a face value
of $2.9 million for approximately $1.7 million. Such policies were carried on
the balance sheet at March 31, 1997 at approximately $1.5 million after giving
effect to the reserve for loss on sale of assets. In the second quarter of 1997,
the Company completed the sale of 22 policies with an aggregate face value of
$2.1 million and realized a gain of $133,000 associated with these policies. One
policy covered by the sale agreement was not sold because the insured died prior
to the issuing insurance company's acknowledgment of transfer of ownership of
the policy and the Company collected the death benefit instead of selling this
policy. As of June 30, 1997, the remaining 8 policies with a face value of
$861,000 were pending acknowledgment of transfer of ownership.
The policies representing "assets held for sale" consist of the policies
under the aforementioned sales agreements for which the Company is awaiting the
acknowledgment of transfer of ownership by the applicable insurance company and
the payment therefor by the applicable purchaser. The Company is experiencing
delays or difficulties in transferring the ownership of certain policies and, if
it is unsuccessful in transferring the ownership of such policies, due to
contractual provisions in the related sales agreements the sales will not be
consummated.
4. Purchased Life Insurance Policies
- -- ----------------------------------
Effective July 1996, purchased life insurance policies consisted only of
those policies held by DPFC. The sale of policies held by DPFC, all of which are
pledged under the indenture pursuant to which the Securitized Notes (as defined
in Note 6) were issued, requires the consent of all of the holders of the
Securitized Notes ("Noteholders") and the Company. The Company has discussed
potential sales of DPFC policies with the Noteholders; however, the Company
cannot determine whether the Noteholders and the Company will decide to sell
such policies or whether such a sale is feasible. A reserve was recorded in the
third quarter of 1996 to reflect the estimated loss of the Company's equity
interest in DPFC. As of June 30, 1997 the reserve was $4.3 million. The reserve
provides for the write-off of deferred financing costs and the unrealized
residual value associated with DPFC.
5. Investment In Convertible Preferred Shares
- -- -------------------------------------------
On November 4, 1996, the Company purchased 21,517,100 convertible preferred
shares for $3.0 million (representing approximately 30% of the fully converted
common equity interest) in American Information Company, Inc. ("American
Information"), a privately held company which, among other things, provides
information services to individuals owning or purchasing automobiles. The
Company has an option, through September 1997, to purchase for approximately
$1.1 million 8.2 million additional shares of common stock of American
Information. On March 18, 1997, the Company, following conversion of 8.2 million
shares of convertible preferred stock into 8.2 million shares of common stock of
American Information, sold such shares (approximately 38% of the Company's 30%
equity investment in American Information) to an unaffiliated third party for
$1.83 million. The Company recognized a $700,000 pre-tax gain on this
transaction in the first quarter of 1997. At June 30, 1997 the Company owned
approximately 13.2% of the equity of American Information and the shares which
the Company is entitled to purchase under the option represented
6
<PAGE>
approximately 8.0% of the equity of American Information. The Company
accounts for its investment using the cost method. If the equity method had been
applied Dignity Partners would have recorded a loss associated with the
investment in the first half of 1997 of $490,000 which is equivalent to the
Company's pro rata share on an as if converted basis in American Information's
loss for the first half of 1997.
6. Long Term Notes Payable
- -- ------------------------
The Senior Viatical Settlement Notes, Series 1995-A, Stated Maturity March
10, 2005 (the "Securitized Notes") issued by DPFC initially provided for a
maximum lending commitment of $50 million. As a result of an early amortization
event in June 1996, the maximum lending commitment was reduced to the then
outstanding principal amount ($45.5 million) and principal payments on the
Securitized Notes began in July 1996. Principal and interest payments on the
Securitized Notes are payable solely from collections on pledged policies and
deposited funds. The Securitized Notes are reported on the balance sheet as long
term notes payable. The Securitized Notes bear a fixed interest rate of 9.17%
per annum.
The Securitized Notes represent the obligations solely of DPFC. The
Company's consolidated financial statements include the assets, liabilities and
operations of DPFC; however, the assets of DPFC are not available to pay
creditors of Point West Capital Corporation. The assets of DPFC are the
beneficial ownership interests in the life insurance policies and funds which
secure the Securitized Notes. To the extent that the book value of assets of
DPFC become less than the outstanding balance of the Securitized Notes,
generally accepted accounting principles nonetheless would require a loss to be
recorded. Upon the retirement or maturity of the Securitized Notes, under
generally accepted accounting principles the Company would recognize a gain
equal to any such losses previously recognized. At June 30, 1997, the carrying
value of the assets of DPFC were $42.4 million (consisting of $37.9 million in
purchased life insurance policies, $4.0 million in restricted cash on deposit
with a trustee for the benefit of the Noteholders and $527,000 in matured
policies receivable).
Point West is the servicer of the policies pledged under the indenture
pursuant to which the Securitized Notes were issued and incurs servicing
expenses (which are reimbursed, subject to certain priority payments) in
connection therewith.
7. Deferred Income Taxes
- -- ----------------------
Prior to September 30, 1996, the Company had provided for deferred income
taxes related to income accrued on purchased life insurance policies. Because
these policies have been sold, or are anticipated to be sold, at a loss, the
Company determined that the deferred tax liability associated with these
policies is not required. The Company has provided for miscellaneous state
income tax liabilities expected to be incurred. For the year ended December 31,
1996, the Company had a deferred tax asset resulting primarily from tax net
operating loss carryforwards. A valuation allowance was established to reduce
the amount of the gross deferred tax asset to that amount deemed more likely
than not to be utilized.
In the first half of 1997, the Company's provision for income taxes was
offset by a reduction in the valuation allowance previously established. The
valuation allowance has been reduced to reflect that portion of the deferred tax
asset which will more likely than not be utilized based on anticipated earnings
for the year ending December 31, 1997.
7
<PAGE>
8. Common Stock
- -- ------------
Changes in stockholders' equity during the first six months of 1997
reflected the following:
<TABLE>
<S> <C>
Stockholders' equity, beginning of period $ 20,142,265
Net income 1,327,610
Treasury stock (2,484,032)
--------------
Stockholders' equity, end of period $ 18,985,843
---------------
</TABLE>
In October 1996, the Board of Directors of the Company approved a share
repurchase program pursuant to which the Company was authorized to purchase from
time to time up to 1 million shares of Common Stock at prevailing market prices.
In June 1997 such authority was increased to 1.04 million shares of Common
Stock. In June 1997, the Company completed the share repurchase program, having
repurchased an aggregate of 1.04 million shares at a weighted average price of
$2.77 per share.
The Company will implement the provisions of Statement of Financial
Accounting Standards No. 128, Earnings per Share ("Statement 128", which will
be effective for interim and annual financial statements issued for periods
ending after December 15, 1997. Statement 128 simplifies the previous standards
for computing earnings per share ("EPS"), replacing the presentation of primary
EPS with a presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures, which applies to the Company.
9. Earned Discounts
- -- -----------------
Earned discounts on life insurance policies reflects the amount of
accretion recorded in the first half of 1996. As a result of the decision to
sell all or substantially all of the Company's assets, any income since the
third quarter of 1996 have been recorded as earned discounts for matured
policies only and recorded upon receipt of proceeds of policies (pursuant to the
death of the insured). Earned discounts for matured policies reflects the income
during the relevant period in 1997 on policies on which the Company collected
the proceeds (pursuant to the death of the insured).
10. Events Subsequent to the Balance Sheet Date
- -- --------------------------------------------
a. Name Change Amendment
Since the Company no longer engages in the viatical settlement business,
the Board of Directors determined that a change in the Company's name would be
appropriate. The Company sought and received in June 1997 stockholder approval
to amend the Company's certificate of incorporation to change its name from
Dignity Partners, Inc. to Point West Capital Corporation. The name change was
effective August 1, 1997.
b. Litigation
On December 19, 1996, a complaint was filed in the United States District
Court, Northern District of California (the "Court") (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 alleged 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 were based on alleged
misrepresentations in and omissions from the Company's registration statement
and
8
<PAGE>
prospectus related to its initial public offering and certain documents
filed by the Company under the Exchange Act. On July 18, 1997, the Court granted
the defendants' motion to dismiss the complaint. However, the Court gave the
plaintiffs permission to file an amended complaint. Such amended complaint will
need to be filed by September 8, 1997 or such later date as the Court permits.
The Company and each of the defendants intend to continue 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.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
------------------------------------
The following is a discussion and analysis of the consolidated financial
condition of the Company as of June 30, 1997 and of the results of operations
for the Company for the three and six months ended June 30, 1997 and 1996, and
of certain factors that may affect the Company's prospective financial condition
and results of operations. The following should be read in conjunction with the
unaudited consolidated financial statements and related notes appearing
elsewhere herein. For the reasons set forth below (including the
reclassification into "assets held for sale" of a substantial portion of the
Company's assets in 1996 and related accounting consequences), the Company's
results of operations and cash flows for the three and six months ended June 30,
1997 are not comparable to those for the three and six months ended June 30,
1996.
Overview
- ---------
Point West is a specialty financial services company. The Company's
financial statements consolidate the assets, liabilities and operations of DPFC,
the Company's wholly-owned special purpose subsidiary through which the Company
issued the Securitized Notes. See the Form 10-K and Notes 4 and 6 of the
Condensed Notes to Consolidated Financial Statements (contained herein) for
further information regarding DPFC.
Until February 1997 the Company provided viatical settlements for
terminally ill persons. See "Cessation of Viatical Settlement Business; Sale of
Assets." On June 3, 1997 the Company formed a limited partnership called
Fourteen Hill Capital, L.P. ("Fourteen Hill Capital") and a wholly-owned limited
liability company called Fourteen Hill Management, LLC ("Fourteen Hill
Management"). Fourteen Hill Management is the general partner of Fourteen Hill
Capital and, at present, Point West is the only limited partner. Fourteen Hill
Capital has filed an application with the Small Business Administration to
become a small business investment company. The Company also continues to
analyze other strategic options and to explore its overall strategic direction.
Cessation of Viatical Settlement Business; Sale of Assets
- ----------------------------------------------------------
The principal business activity of the Company through February 1997 was to
provide viatical settlements for terminally ill persons. A viatical settlement
is the payment of cash in return for an ownership interest in, and right to
receive the death benefit (face value) from, a life insurance policy.
On July 16, 1996 the Company announced that, in light of the data regarding
new treatments involving combinations of various drugs presented at the
International AIDS Conference held in Vancouver, British Columbia in July 1996
(the "AIDS Conference"), the Company was temporarily ceasing processing new
applications for policies insuring individuals afflicted with AIDS and HIV while
it further analyzed the effects of such research results on its business and its
strategic options. See the Form 10-K for further information regarding the AIDS
Conference.
The Company decided in the third quarter of 1996 to sell all or
substantially all of its assets. As a result of such decision, the Company
reclassified all of its assets (other than the policies held by DPFC) to a
"held-for-sale" category during the third quarter of 1996. Accordingly, such
assets are accounted for at the lower of carrying value or fair value less cost
to sell.
The Company sought and received in December 1996 stockholder approval to
sell all or substantially all of its assets.
10
<PAGE>
Based on the Company's evaluation of the effects of the research results
reported at the AIDS Conference and subsequent reports and other information,
the Board of Directors in February 1997 approved the cessation of the viatical
settlement business and the sale by the Company of its non-AIDS policies,
consisting of approximately 31 policies with a face value of $2.9 million.
Through June 30, 1997 the Company had sold or entered into agreements to
sell 373 policies, representing $29.2 million in aggregate face value, for an
aggregate purchase price of $19.5 million. As a result of these sales, the
Company reported a pre-tax loss of $180,000 in 1996 and a pre-tax gain of $1.4
million in the first six months of 1997 (see "Results of Operations -- Three and
Six Months Ended June 30, 1997 Compared to Three and Six Months Ended June 30,
1996 -- Net gain on assets sold"). Although the Company previously reported an
expectation to report a $638,000 pre-tax gain for the three months ended June
30, 1997 ($1.5 million pre-tax gain for the six months ended June 30, 1997), the
Company has experienced delays or difficulties in transferring the ownership of
certain policies. The Company believes that policies with an aggregate face
value ranging from $803,000 to $1.0 million are unlikely to be transferred and
sold because of such difficulties. If the Company is unsuccessful in
transferring the ownership on such policies, due to contractual provisions in
the related sales agreements the sales will not be consummated. The Company
believes, taking into consideration the policies for which the ownership is not
likely to be transferred, that its pre-tax gain from the sale of policies in the
third quarter of 1997 will likely range from $16,000 to $43,000 and that the
Company will at the end of such quarter continue to own policies with a face
value ranging from $803,000 to $1.0 million and a carrying value ranging from
$410,000 to $536,000.
Name Change Amendment
- ----------------------
Since the Company no longer engages in the viatical settlement business,
the Board of Directors determined that a change in the Company's name would be
appropriate. The Company sought and received in June 1997 stockholder approval
to amend the Company's certificate of incorporation to change its name from
Dignity Partners, Inc. to Point West Capital Corporation. The name change was
effective August 1, 1997.
Method of Accounting
- ---------------------
Through June 30, 1996, the Company recognized income ("earned discount") on
each purchased policy by accruing, over the period between the acquisition date
of the policy and the Company's estimated date of collection of the policy's
face value (the "Accrual Period"), the difference (the "unearned discount")
between (a) the face value of the policy less the amount of fees, if any,
payable to a referral source upon collection of the face value, and (b) the
carrying value of the policy. The carrying value for each policy was reflected
on the Company's consolidated balance sheet under "purchased life insurance
policies" and consisted of the purchase price, other capitalized costs and the
earned discount on the policy accrued to the balance sheet date. See the Form
10-K for further information regarding capitalized costs of policies,
determination of Accrual Periods and changes thereto over time.
As a result of the Company's decision to sell all or substantially all of
its assets, the Company established a reserve in 1996 for loss on sale of
assets. The Company also established a reserve for loss of the Company's equity
interest in DPFC during 1996 because of the uncertainties created by the data
presented at the AIDS Conference and subsequent reports of the efficacy of new
treatments for AIDS/HIV. As of June 30, 1997, such reserves were $349,000 and
$4.3 million, respectively. In addition, beginning in the third quarter of 1996,
the Company began generally recognizing income on
11
<PAGE>
policies only upon receipt of proceeds on policies (either pursuant to sale
or the death of the insured). Such income is equal to the difference between
such proceeds (less any back-end sourcing fees) and the carrying value of such
policies after giving effect to any reserve for loss on the sale of such
policies or any reserve for loss of the Company's equity interest in DPFC. See
the Form 10-K and Note 4 and 6 of the Condensed Notes to Consolidated Financial
Statements for further information regarding the reserve for loss on sale of
assets.
Certain Accounting Implications for DPFC
- -----------------------------------------
Under generally accepted accounting principles, to the extent that the
carrying value of the assets of DPFC are less than the carrying value of its
liabilities, the Company would be required to recognize a loss equal to the
amount of such difference, notwithstanding the non-recourse nature of the
Securitized Notes. At June 30, 1997, the carrying value of the assets of DPFC
were $42.4 million (consisting of purchased life insurance policies, restricted
cash and a portion of matured policies receivable) and its liabilities were
$38.9 million (consisting of long term notes payable, i.e. the Securitized
Notes).
Although the Securitized Notes had an expected life of 2.1 years when the
aggregate maximum principal amount of the Securitized Notes was increased from
$35 million to $50 million in September 1995, the Company does not believe that
the Securitized Notes will be retired through collections by October 1997. The
Company believes that, if the Securitized Notes are not retired by late 2001,
the assets of DPFC will become less than its liabilities because the costs of
carrying the Securitized Notes, including interest and servicing and trustee
fees, will deplete collections available to repay principal. The Company
reported in its Form 10-Q for the quarterly period ended March 31, 1997, that 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. Because of recent delays and variability in collections, the Company
cannot predict at what point in time the assets of DPFC may become less than the
liabilities.
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 how many, if any,
policies held by DPFC would be so affected.
In light of the foregoing, the Company believes that it is possible that
the Company may in the future under generally accepted accounting principles be
required to recognize a further loss to the extent that the carrying value of
the assets of DPFC is less than its liabilities. However, when the Securitized
Notes are finally discharged or mature, the Company under generally accepted
accounting principles would recognize a gain in an amount equal to the aggregate
amount of any such losses recognized. The Securitized Notes represent the
obligations solely of DPFC. The Company did not guarantee repayment of the
Securitized Notes and is not required to fund any principal or interest
deficiencies thereunder.
Share Repurchase Program
- ------------------------
In October 1996, the Board of Directors of the Company approved a share
repurchase program pursuant to which the Company was authorized to purchase from
time to time up to 1 million shares of Common Stock at prevailing market prices.
In June 1997 such authority was increased to 1.04 million
12
<PAGE>
shares of Common Stock. In June 1997, the Company completed the share
repurchase program, having repurchased an aggregate of 1.04 million shares at a
weighted average price of $2.77 per share.
Results of Operations
- ---------------------
Three and Six Months Ended June 30, 1997 Compared to Three and Six Months
- ---------------------------------------------------------------------------
Ended June 30, 1996
- -------------------
Earned Discounts. The Company currently recognizes earned discount only
upon receipt of proceeds on policies (pursuant to the death of the insured).
Consequently, the Company did not recognize any earned discounts on life
insurance policies during the first half of 1997, but instead recognized
$102,000 and $286,000 of earned discounts on matured policies for the three and
six months ended June 30, 1997, respectively. 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 sale of such policies. See "Method of
Accounting."
In the first half of 1996 the Company recognized earned discount on each
purchased policy by accruing, over the Accrual Period, the difference between
(a)~the face value of the policy less the amount of fees, if any, payable to a
referral source upon collection of the face value, and (b)~the carrying value of
the policy. Earned discounts on life insurance policies was $1.9 million and
$3.7 million for the three and six months ended June 30, 1996. See "Method of
Accounting."
The Company purchased only four policies (outstanding commitments as of
December 31, 1996) with an aggregate face value of $155,000 during the first
half of 1997 compared to the purchase of 342 policies with an aggregate face
value of $24.9 million during the first half of 1996. See "Cessation of Viatical
Settlement Business; Sales of Assets."
Interest Income. Interest income increased 19.7% in the second quarter of
1997 over the second quarter of 1996 and 19.3% in the first half of 1997 over
the first half of 1996 as a result of the investment of the proceeds from the
sale of policies in short term securities and marketable securities. Interest
income generated in the first half of 1996 was essentially the result of the
investment of the initial public offering proceeds.
Gain on sale of convertible preferred shares. In the first quarter of 1997
the Company recognized a $700,000 gain on the sale of a portion of its
investment in American Information. In March 1997 the Company converted 8.2
million shares of convertible preferred stock into 8.2 million shares of common
stock of American Information and sold such shares to an unaffiliated third
party for $1.83 million. The carrying value of such shares was $1.1 million. See
Note 5 of the Condensed Notes to Consolidated Financial Statements.
Net gain on assets sold. The Company collected the sales proceeds on 51
policies during the second quarter of 1997 and 239 policies during the first
half of 1997. See Note 3 of the Condensed Notes to Consolidated Financial
Statements. The total net gain recorded in the second quarter and first half of
1997 in connection with these sales was $492,000 and $1.4 million, respectively.
The realized gain was calculated based on the difference between the sale
proceeds and the carrying value after giving effect to the reserve for loss on
sale of assets. See "Cessation of Viatical Settlement Business; Sale of Assets.
Other Income. Components of other income include collections on policies of
dividends, interest, paid-up cash values, increases in face value of matured
policies, refunds of premiums on matured policies and capital gains on
investments securities. Other income increased 7.7% in the second
13
<PAGE>
quarter of 1997 over the second quarter of 1996 due to gains on investment
securities. Other income decreased 58.1% during the first half of 1997 compared
to the first half of 1996 due to the sale of policies and a decrease in the
number of matured policies. A $50,000 increase in face value on one policy was
also recorded during the first quarter of 1996.
Interest Expense. Interest expense decreased 8.4% in the second quarter of
1997 over the second quarter of 1996 and 7.6% in the first half of 1997 over the
first half of 1996 due mainly to the repayment of the Company's revolving credit
facility in the second half of 1996. Average borrowings under the Company's
revolving credit facility was $0.7 million in the first half of 1996. Average
borrowings under the Securitized Notes were $39.6 million in the first six
months of 1997 compared to $42.6 million in the first six months of 1996. The
interest rate on the Securitized Notes was 9.17% in both periods.
Compensation and Benefits. Compensation and benefits decreased 7.1% in the
second quarter of 1997 compared to the second quarter of 1996 and 11.3% in the
first half of 1997 compared to the first half of 1996. This decrease was due
mainly to the reduction in staff from 25 to 14 with the cessation of application
processing of new policies. Partially offsetting the staff reduction was the
increase in compensation and benefits for remaining employees (including
executive officers) in early 1997.
Other General and Administrative Expenses. Other general and administrative
expenses increased 2.9% in the second quarter of 1997 compared to the second
quarter of 1996 and 53.7% in the first half of 1997 compared to the first half
of 1996. The increase in the first half of 1997 is primarily the result of a
$357,000 legal reserve recorded in the first half of 1997 in connection with
federal and state class action lawsuits filed against the Company and its
officers and directors. The first six months of 1997 also includes a $150,000
aggregate increase in expenses for professional fees to support the analysis of
strategic options.
Income Tax Expense. In the first half of 1997 the Company did not record an
income tax expense on the income statement because the deferred tax asset of
$3,225,130 was available to offset any tax liability. The Company adjusted its
deferred tax asset, liability and related allowance to reflect the tax effect on
the earnings for the six months ended June 30, 1997.
Net loss in wholly owned financing subsidiary charged to reserve for equity
interest. At December 31, 1996 the reserve to reflect the estimated loss of the
Company's entire equity interest in DPFC was $6.5 million. The DPFC net loss of
950,000 and $1.9 million recorded in the three and six months ended June 30,
1997, respectively, was included in the Company' net loss before income taxes
and net loss in wholly owned financing subsidiary charged to reserve for equity
interest. This loss was charged against the reserve for equity interest in
wholly owned financing subsidiary.
Liquidity and Capital Resources
- -------------------------------
The Company does not currently have an external funding source. The
Securitized Notes do not provide funds with which to fund operations. At June
30, 1997, cash and cash equivalents was $14.8 million and investment securities
was $2.3 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 current cash and cash
14
<PAGE>
equivalents and investment securities and any additional cash generated by
the sale of policies. Such needs may change significantly depending on strategic
options selected.
As of June 30, 1997, the outstanding principal amount of the Securitized
Notes was $38.9 million. Principal repayments on the Securitized Notes began in
July 1996. Principal and interest payments on the Securitized Notes are payable
solely from collections on policies pledged to secure the payment thereof and do
not require the Company to expend cash or obtain financing to satisfy such
principal and interest obligations.
Forward Looking Statements
- --------------------------
This report includes forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. All statements made herein
which are not based on historical facts are forward looking and, accordingly,
involve risks and uncertainties that could cause actual results to differ
materially from those discussed. Such forward looking statements include those
under "Management's Discussion and Analysis Of Financial Condition and Results
of Operations" relating to (i) expected gains to be reported in the third
quarter of 1997 on policies subject to sales agreements and expected face and
carrying values of policies expected to be owned by the Company at September 30,
1997 (see the last paragraph under "Cessation of Viatical Settlements Business;
Sale of Assets"), (ii) expectations regarding whether and the time at which the
carrying value of the assets of DPFC will be less than the carrying value of its
liabilities (see "Certain Accounting Implications for DPFC"), and (iii)
sufficiency of the Company's liquidity and capital resources (see "Liquidity and
Capital Resources"). Such statements are based on management's belief, judgment
and analysis as well as assumptions made by and information available to
management at the date hereof. In addition to any assumptions and cautionary
factors referred to specifically in this report in connection with such forward
looking statements, factors that could cause actual results to differ materially
from those contemplated by the forward looking statements include (i) the
ability of the Company to transfer ownership of policies; (ii) the amount and
timing of actual collections of sales proceeds, (iii) the amount and timing of
actual collections of DPFC policies following the death of the insured, (iv) the
results of the Company's consideration of strategic options and any costs
associated with a chosen option, and (v) availability and cost of capital.
15
<PAGE>
PART II. OTHER INFORMATION
- ----------------------------
Item 1. Legal Proceedings
- --------------------------
On December 19, 1996, a complaint was filed in the United States
District Court, Northern District of California (the "Court" (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 alleged 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 were
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. On July 18, 1997, the Court granted the defendants'
motion to dismiss the complaint. However, the Court gave the
plaintiffs permission to file an amended complaint. Such amended
complaint will need to be filed by September 8, 1997 or such later
date as the Court permits. The Company and each of the defendants
intend to continue 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
- -------------------------------------------------------------
On June 9, 1997, the Company held an Annual Meeting of its
stockholders. The election of two directors and the name change
amendment as set forth in the proxy statements were presented.
Alan B. Perper and Paul A. Volberding were re-elected to the Board of
Directors for terms expiring in 2000. The voting tallies were:
Director Votes For Votes Withheld
-------- ---------- ---------------
Alan B. Perper 2,608,172 17,800
Paul A. Volberding 2,608,172 17,800
The other directors whose term of office continued after the meeting
are: John Ward Rotter (term expiring in 1998), Bradley N. Rotter
(term expiring in 1999) and Stephen T. Bow (term expiring in 1999).
16
<PAGE>
The name change amendment was also approved. The Company' new name,
effective August 1, 1997, is Point West Capital Corporation. The
voting tallies were:
Broker
Votes For Votes Against Votes Abstain Non-Votes
--------- ------------- ------------- ---------
Name Change Amendment 2,609,622 16,350 0 0
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) Exhibits.
Number Description
------- -----------
3 Composite of Second Amended and Restated Certificate
of Incorporation, as amended through August 1, 1997
10 Amendment No. 3 to the Indenture, dated as of
February 1, 1995 among the Company, as Servicer, DPFC
as Issuer and Bankers Trust Company as Indenture
Trustee
27 Financial Data Schedule
(b) Reports on Form 8-K.
Date Item Reported Matter Reported
---- ------------- ---------------
5/5/97 5 The Company issued a press release regarding
its results of operations for the first
quarter of 1997.
6/9/97 5 The Company issued a press release
announcing completion of stock repurchase
program, re-election of two directors, name
change and NASDAQ trading symbol change.
6/27/97 5 The Company issued a press release
announcing the effective date of the name
change and NASDAQ trading symbol change.
17
<PAGE>
SIGNATURES
===========
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
POINT WEST CAPITAL CORPORATION
(Formerly known as Dignity Partners, Inc.)
DATED: August 7, 1997 /S/ ALAN B. PERPER
--------------------------------------
ALAN B. PERPER
President
(Duly Authorized Officer)
DATED: August 7, 1997 /S/ JOHN WARD ROTTER
--------------------------------------
JOHN WARD ROTTER
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
18
Exhibit 3
[COMPOSITE VERSION AS AMENDED
THROUGH AUGUST 1, 1997]
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
POINT WEST CAPITAL CORPORATION
(F/K/A DIGNITY PARTNERS, INC.)
Pursuant to Sections 242 and 245 of the General Corporation Law of the
State of Delaware, Point West Capital Corporation (f/k/a Dignity Partners,
Inc.), a Delaware corporation (the "Company"), does hereby certify as follows:
1. The original Certificate of the Company was filed in the
Office of the Secretary of State of the State of Delaware on September 8, 1992.
2. This Second Amended and Restated Certificate of Incorporation
Of the Company has been duly adopted in accordance with Sections 242 and 245
of the DGCL.
3. The text of the Certificate of Incorporation of the Company
is hereby amended and restated in its entirety to read as follows:
ARTICLE I
==========
The name of the corporation (the "Corporation") is Point West
Capital Corporation.
ARTICLE II
==========
The address of the Corporation's registered office in the
State of Delaware is Chemical Bank Plaza, Suite 1600, 1201 N. Market Street,
City of Wilmington, County of New Castle, 19801. The name of the Corporation's
registered agent at such address is Registered Agents, Ltd.
ARTICLE III
============
The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware (the "DGCL").
ARTICLE IV
============
The total number of shares of all classes of capital stock
which the Corporation shall have authority to issue is seventeen million
(17,000,000) shares of capital stock comprised of (i) fifteen million
(15,000,000) shares of Common Stock, par value $.01 per share (the
"Common Stock"), and (ii) two million (2,000,000) shares of Preferred Stock,
par value $.01 per share (the "Preferred Stock").
-1-
<PAGE>
ARTICLE V
===========
The Preferred Stock may be issued in one or more series. The Board of
Directors of the Corporation is hereby authorized to issue the shares of
Preferred Stock in such series and to fix from time to time before issuance the
number of shares to be included in any such series and the designation, relative
powers, preferences, and rights and qualifications, limitations, or restrictions
of all shares of such series. The authority of the Board of Directors of the
Corporation with respect to each such series will include, without limiting the
generality of the foregoing, the determination of any or all of the following:
(a) the number of shares of any series and the designation to distinguish
the shares of such series from the shares of all other series;
(b) the voting powers, if any, of such series and whether such voting
powers are full or limited;
(c) the redemption provisions,if any,applicable to such series, including
the redemption price or prices to be paid;
(d) whether dividends, if any, will be cumulative or noncumulative, the
dividend rate (or the manner of determining the same) of such series,
the form and manner of, and conditions to, payment of dividends on
such series, and the dates and preferences of dividends on such
series;
(e) the rights of such series upon the voluntary or involuntary
dissolution of, or upon any distribution of the assets of, the
Corporation;
(f) the provisions, if any, pursuant to which the shares of such series
are convertible into, or exchangeable for, shares of any other class
or classes or of any other series of the same or any other class or
classes of stock, or any other security, of the Corporation or any
other corporation or other entity, and the price or prices or rates of
exchange (or the manner of determining the same) applicable thereto;
(g) the right, if any, to subscribe for or to purchase any securities of
the Corporation or any other corporation or other entity;
(h) the sinking fund provisions, if any, applicable to such series; and
(i) any other relative, participating, optional, or other special powers,
preferences, rights, qualifications, limitations, or restrictions
thereof;
all as may be determined from time to time by the Board of Directors of the
Corporation and stated in the resolution or resolutions providing for the
issuance of such series of Preferred Stock (each a "Preferred Stock
Designation").
Convertible Cumulative Pay-in-Kind Preferred Stock
--------------------------------------------------
The following is a statement of the powers, preferences, rights,
qualifications, limitations and restrictions of the series, consisting of
135,000 shares, $.01 par value, of the Convertible Cumulative Pay-in-Kind
Preferred Stock.
-2-
<PAGE>
1. Designation and Amount. The shares of such series of Preferred Stock
------------------------
shall be designated as "Convertible Cumulative Pay-in-Kind Preferred Stock" (the
"Convertible Preferred Stock"), and the number of shares constituting such
series shall be 35,000, plus up to 100,000 additional shares of Convertible
Preferred Stock issued as dividends on the Convertible Preferred Stock pursuant
to Section 3 hereof. The initial liquidation preference of the Convertible
Preferred Stock and related Convertible Preferred Stock Rights shall be $100 per
share or right (the "Liquidation Value").
2. Rank. The Convertible Preferred Stock shall, with respect to dividend
-----
rights and rights on liquidation, winding up and dissolution, rank (i) senior to
both the Corporation's Common Stock, and to all classes and series of stock of
the Corporation now or hereafter authorized, issued or outstanding which by
their terms expressly provide that they are junior to the Convertible Preferred
Stock as to dividend distributions and distributions upon the liquidation,
winding up and dissolution of the Corporation or which do not specify their rank
(collectively with the Common Stock, the "Junior Securities"); (ii) on a parity
with each other class of capital stock or series of preferred stock issued by
the Corporation after the date hereof the terms of which specifically provide
that such class or series will rank on a parity with the Convertible Preferred
Stock as to dividend distributions and distributions upon the liquidation,
winding up and dissolution of the Corporation (collectively referred to as
"Parity Securities"), provided that any such Parity Securities that were not
--------
approved by the holders of Convertible Preferred Stock in accordance with
Section 7(b) hereof shall be deemed to be Junior Securities and not Parity
Securities; and (iii) junior to each other class of capital stock or other
series of Preferred Stock issued by the Corporation after the date hereof the
terms of which have been approved by the holders of the Convertible Preferred
Stock in accordance with Section 7(b) hereof and which specifically provide that
such class or series will rank senior to the Convertible Preferred Stock as to
dividend distributions or distributions upon the liquidation, winding up and
dissolution of the Corporation (collectively referred to as "Senior
Securities").
3. Dividends. (a) The holders of shares of the Convertible Preferred Stock
----------
shall be entitled to receive, out of funds legally available therefor, dividends
per share at the annual rate of eight percentum (8%) of the Liquidation Value.
Such dividends shall be cumulative and shall accrue and be payable in equal
quarterly amounts per share of two percentum (2%) of the Liquidation Value per
share on March 1, June 1, September 1 and December 1 in each year (each of such
dates being a "Dividend Payment Date"), to holders of record at the close of
business on the date specified by the Board of Directors at the time such
dividend is declared (the "Record Date"), in preference to dividends on the
Junior Securities, commencing on the Dividend Payment Date next succeeding the
Issue Date. Any such Record Date shall be not less than 10 days and not more
than 30 days prior to the relevant Dividend Payment Date. All dividends with
respect to shares of Convertible Preferred Stock shall be paid in additional
shares of Convertible Preferred Stock and not in cash. Dividend payments shall
be made by issuing shares (or fractions thereof) of Convertible Preferred Stock
with an aggregate Liquidation Preference equal to the amount of such dividends.
All dividends paid with respect to shares of Convertible Preferred Stock
pursuant to this Section 3 shall be paid pro rata to the holders entitled
thereto. All shares of Convertible Preferred Stock issued as a dividend with
respect to the Convertible Preferred Stock will thereupon be duly authorized,
validly issued, fully paid and nonassessable.
(a) In the case of shares of Convertible Preferred Stock issued on the
Issue Date, dividends shall accrue and be cumulative from such date. In the case
of shares of Convertible Preferred Stock issued subsequent to the Issue Date,
dividends shall accrue and be cumulative from the Specific Issue Date relating
thereto. In the case of shares of Convertible Preferred Stock issued as a
dividend on shares of Convertible Preferred Stock, dividends shall accrue and be
cumulative from the Dividend Payment Date (which shall be the Specific Issue
Date) in respect of which such shares were issued as a dividend.
(b) Each fractional share of Convertible Preferred Stock outstanding shall
be entitled to a ratably proportionate amount of all dividends accruing with
respect to each outstanding share of Convertible
-3-
<PAGE>
Preferred Stock pursuant to paragraph (a) of this Section 3, and all such
dividends with respect to such outstanding fractional shares shall be cumulative
and shall accrue (whether or not declared), and shall be payable in the same
manner and at such times as provided for in paragraph (a) of this Section 3 with
respect to dividends on each outstanding share of Convertible Preferred Stock.
Each fractional share of Convertible Preferred Stock outstanding shall also be
entitled to a ratably proportionate amount of any other distributions made with
respect to each outstanding share of Convertible Preferred Stock, and all such
distributions shall be payable in the same manner and at the same time as
distributions on each outstanding share of Convertible Preferred Stock.
(c) (i) So long as any shares of the Convertible Preferred Stock are
outstanding, the Corporation shall not, without the prior consent of the holders
of at least two-thirds of the outstanding Convertible Preferred Stock, make any
payment on account of, or set apart for payment money for a sinking or other
similar fund for, the purchase, redemption or retirement of, any Junior
Securities or any warrants, rights, calls or options exercisable for or
convertible into any Junior Securities, whether directly or indirectly, and
whether in cash, obligations or shares of the Corporation or other property
(other than dividends or distributions payable in additional shares of Junior
Securities to holders of Junior Securities), and shall not permit any
corporation or other entity directly or indirectly controlled by the Company to
purchase or redeem any Junior Securities or any warrants, rights, calls or
options exercisable for or convertible into any Junior Securities.
(ii) So long as any shares of the Convertible Preferred Stock are
outstanding, the Corporation shall not, without the prior consent of the holders
of at least two-thirds of the outstanding Convertible Preferred Stock, declare,
pay or set apart for payment any dividend or make any distribution or payment on
any Junior Securities or Parity Securities, or make any payment on account of,
or set apart for payment money for a sinking or other similar fund for, the
purchase, redemption or retirement of, Parity Securities or any warrants,
rights, calls or options exercisable for or convertible into any Parity
Securities, whether directly or indirectly, and whether in cash, obligations or
shares of the Corporation or other property (other than dividends or
distributions payable in additional shares of Parity Securities to holders of
Parity Securities), and shall not permit any corporation or other entity
directly or indirectly controlled by the Corporation to purchase or redeem any
Parity Securities or any warrants, rights, calls or options exercisable for or
convertible into any Parity Securities, and thereafter, neither the Corporation
nor any Corporation or other entity directly or indirectly controlled by the
Corporation shall make any such declaration, payment, setting apart for payment,
purchase, redemption, retirement or distribution.
4. Liquidation Preference. (a) In the event of any voluntary or
-------------------------
involuntary liquidation, dissolution or winding up of the affairs of the
Corporation, each holder of shares of Convertible Preferred Stock then
outstanding shall be entitled to be paid out of the assets of the Corporation
available for distribution to its stockholders an amount in cash equal to 100%
of the Liquidation Value for each share of Convertible Preferred Stock then
outstanding held by such holder, plus an amount in cash equal to all accrued but
unpaid dividends (including all Convertible Preferred Stock Rights) thereon to
the date of liquidation, dissolution or winding up, before any payment shall be
made or any assets distributed to the holders of any of the Junior Securities.
If the assets of the Corporation are not sufficient to pay in full the
liquidation payments payable to the holders of outstanding shares of the
Convertible Preferred Stock and any Parity Securities, then the holders of all
such shares shall share ratably in such distribution of assets in accordance
with the amount which would be payable on such distribution if the amounts to
which the holders of outstanding shares of Convertible Preferred Stock and the
holders of outstanding shares of such Parity Securities are entitled were paid
in full.
(a) For the purposes of this Section 4, neither the voluntary sale,
conveyance, exchange or transfer (for cash, shares of stock, securities or other
consideration) of all or substantially all of the property or assets of the
Corporation nor the consolidation or merger of the Corporation with any one or
more other corporations shall be deemed to be a voluntary or involuntary
liquidation, dissolution or winding up of the Corporation, unless such voluntary
sale, conveyance, exchange or transfer shall be in connection with a plan of
liquidation, dissolution or winding up of the Corporation.
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5. Redemption. (a) The Corporation may, at its option, redeem in whole at
-----------
any time or in part from time to time (and, if in part, by lot or pro rata from
--- ----
each holder as the Corporation shall elect), in the manner hereinafter provided,
shares of Convertible Preferred Stock, at a redemption price per share, payable
in cash, equal to 100% of the Liquidation Value thereof plus 100% of the sum of
accrued and unpaid dividends thereon (including an amount equal to a prorated
dividend from the last Dividend Payment Date immediately prior to the redemption
date).
(a) (i) In the event that the Corporation shall redeem shares of
Convertible Preferred Stock pursuant to Section 5 (a) hereof, notice of such
redemption shall be mailed by first-class mail, postage prepaid, not less than
30 days or more than 60 days prior to the redemption date to the holders of
record of the shares to be redeemed at their respective addresses as they shall
appear in the records of the Corporation; provided, however, that failure to
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give such notice or any defect therein or in the mailing thereof shall not
affect the validity of the proceedings for the redemption of any shares so to be
redeemed except as to the holder to whom the Corporation has failed to give such
notice or except as to the holder to whom notice was defective. Each such notice
shall state: (i) the redemption date; (ii) the number of shares of Convertible
Preferred Stock to be redeemed and, if less than all the shares held by such
holder are to be redeemed, the number of such shares to be redeemed and the
manner in which such shares were selected for redemption; (iii) the redemption
price per share; (iv) the place or places where certificates for such shares are
to be surrendered for payment of the redemption price; (v) that dividends on the
shares to be redeemed will cease to accrue on such redemption date; and (vi)
that the holder's right to convert such shares into shares of Common Stock shall
terminate on the close of business on the third Business Day preceding such
redemption date.
(i) Notice by the Corporation having been mailed as provided in Section
5(b)(i) hereof, and provided that on or before the applicable redemption date
funds, if any, necessary for such redemption shall have been set aside by the
Corporation, separate and apart from its other funds, in trust for the pro rata
benefit of the holders of the shares so called for or entitled to redemption, so
as to be and to continue to be available therefor, then, from and after the
redemption date (unless the Corporation defaults in the payment of the
redemption price, in which case such rights shall continue until the redemption
price is paid), dividends on the shares of Convertible Preferred Stock so called
for or entitled to redemption shall cease to accrue, and said shares shall no
longer be deemed to be outstanding and shall not have the status of shares of
Convertible Preferred Stock, and all rights of the holders thereof as
stockholders of the Corporation (except the right to receive the applicable
redemption price and any accrued and unpaid dividends from the Corporation to
the date of redemption, and the right to convert such shares into shares of
Common Stock which shall continue until the close of business on the third
Business Day preceding the date of redemption) shall cease. Upon surrender of
the certificates for any shares so redeemed (properly endorsed or assigned for
transfer, if the Board of Directors of the Corporation shall so require and a
notice by the Corporation shall so state), such shares shall be redeemed by the
Corporation at the applicable redemption price as aforesaid. In case fewer than
all the shares represented by any such certificate are redeemed, a new
certificate or certificates shall be issued representing the unredeemed shares
without cost to the holder thereof.
6. Reacquired Shares. Shares of Convertible Preferred Stock that have been
-----------------
issued and reacquired in any manner, including shares reacquired by purchase,
redemption or conversion pursuant to Section 8 hereof, shall (upon compliance
with any applicable provisions of the laws of the State of Delaware) have the
status of authorized and unissued shares of the class of Preferred Stock
undesignated as to series and may be redesignated and reissued as part of any
series of Preferred Stock other than the Convertible Preferred Stock.
7. Voting Rights. In addition to any voting rights provided by law, the
--------------
holders of Convertible Preferred Stock shall have the following voting rights:
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<PAGE>
(a) General. Except as required in this Article V and as otherwise required
-------
by law, shares of Convertible Preferred Stock (including shares received as
dividends thereon) shall have no voting rights.
(b) Voting Rights On Extraordinary Matters. In addition to any vote or
-----------------------------------------
consent of stockholders required by law, the approval of holders of two-thirds
of the outstanding shares of Convertible Preferred Stock, voting as a class,
shall be required (i) to amend the Certificate of Incorporation of the
Corporation to increase the authorized number of shares of Preferred Stock or to
authorize the creation or issuance, or the increase in the authorized amount, of
any Parity Securities or Senior Securities, or to authorize the creation or
issuance of securities convertible into or exchangeable for, or options,
warrants or other rights to acquire, any Parity Securities or Senior Securities,
(ii) to reclassify any series of Junior Securities to Senior Securities or
Parity Securities, (iii) to amend, repeal or change any of the provisions of the
Certificate of Incorporation of the Corporation or the provisions of this
Article V in any manner that would alter or change the powers, preferences or
special rights of the shares of Convertible Preferred Stock so as to affect them
adversely, including without limitation changing the voting percentage required
for approval by the holders of Convertible Preferred Stock of the foregoing
matters, (iv) otherwise to restrict the rights, preferences or privileges of the
Convertible Preferred Stock, or (v) to authorize the consolidation or merger of
the Corporation with or into another Person (whether or not the Corporation is
the Surviving Person), or the sale, assignment, transfer, lease, conveyance or
other disposal of all or substantially all of its properties or assets in one or
more related transactions to another Person unless: (A) the Corporation is the
Surviving Person or the Surviving Person is a corporation organized or existing
under the laws of the United States, any state thereof or the District of
Columbia, (B) the Convertible Preferred Stock is converted into or exchanged for
and becomes shares of the Surviving Person (if other than the Corporation),
having in respect of the Surviving Person substantially the same powers,
preferences and relative participating, optional or other special rights, and
the qualifications, limitations or restrictions thereon, that the Convertible
Preferred Stock had immediately prior to such transaction and such corporation
will have no class of shares either authorized or outstanding ranking prior to
or on a parity with the Convertible Preferred Stock except the same number of
shares ranking prior to or on a parity with the Convertible Preferred Stock and
having the same rights and preferences as the shares of the Corporation
authorized and outstanding immediately preceding any such transaction.
8. Conversion. (a) Upon the IPO Date, as and to the extent provided in the
----------
next sentence of this Section 8(a), shares of Convertible Preferred Stock,
including shares issued as dividends and each related Convertible Preferred
Stock Right, held by the Initial Purchaser or a Designated Transferee shall be
automatically converted, at the Conversion Price (as hereinafter defined), into
fully paid and non-assessable shares of Common Stock on the terms and conditions
set forth in this Section~8(a), but only to the extent the shares of Common
Stock into which such shares of Convertible Preferred Stock or related
Convertible Preferred Stock Rights have been converted are being offered for
sale in the Initial Public Offering; provided, however, that if the sale of the
related IPO Stock is not consummated within 45 Business Days following the IPO
Date, conversion of the shares of Convertible Preferred Stock or Convertible
Preferred Stock Rights pursuant to this Section 8(a) shall be ineffective nunc
----
pro tunc as to the number of shares of Common Stock which are not actually sold
- --- ----
in the Initial Public Offering, without further action by the Corporation, the
holders of Convertible Preferred Stock or the holders of Common Stock into which
such Convertible Preferred Stock or Convertible Preferred Stock Rights were
originally converted. The number of shares of Convertible Preferred Stock,
including shares issued as dividends and each related Convertible Preferred
Stock Right, required to be converted shall be equal to such number as will
yield, giving effect to conversion as provided in Section 8(b) at the Conversion
Price, a number of shares of Common Stock equal to the number of shares of IPO
Stock which are sold in the Initial Public Offering giving rise to the
conversion. The conversion of the shares of Convertible Preferred Stock,
including shares issued as dividends and each related Convertible Preferred
Stock Right, pursuant to this Section 8(a) shall occur without any further
action being taken by the Corporation or the holders of Convertible Preferred
Stock. Promptly after the occurrence of the IPO Date, the Corporation shall
deliver to
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<PAGE>
the holders of the shares of Convertible Preferred Stock written
notice of such occurrence (which shall specify the number of such shares
required to be converted ("Conversion Shares")), and the holders of the
Conversion Shares shall promptly deliver the certificates representing the
Conversion Shares in exchange for the certificates representing the IPO Stock.
(a) At any time following the IPO Date, each share of Convertible Preferred
Stock, including additional shares issued as dividends and each related
Convertible Preferred Stock Right, shall be convertible at the option of the
holder thereof into fully paid and nonassessable shares of Common Stock on the
terms and conditions set forth in this Section 8(b), upon surrender to the
Corporation of the certificates for the shares to be converted, into a number of
fully paid and nonassessable shares of Common Stock equal to the aggregate
Liquidation Value of the Convertible Preferred Stock and Convertible Preferred
Stock Rights to be converted divided by a conversion price (the "Conversion
Price") which initially shall be the Initial Public Offering Price and which
shall be subject to adjustment for certain events as hereinafter provided.
Conversion of the Convertible Preferred Stock and Convertible Preferred Stock
Rights as permitted by Section 8(b) hereof may be effected by any holder thereof
upon the surrender to the Corporation at its principal office or at such other
office or agency maintained by the Corporation for that purpose of the
certificate for the Convertible Preferred Stock to be converted accompanied by a
written notice stating that such holder elects to convert all or a specified
whole number of such shares and related rights in accordance with the provisions
of this Section 8(b) and specifying the name or names in which such holder
wishes the certificate or certificates for shares of Common Stock to be issued.
In case such notice shall specify a name or names other than that of such
holder, such notice shall be accompanied by payment of all transfer taxes
payable upon the issuance of shares of Common Stock in such name or names.
(b) The holder of shares of Convertible Preferred Stock will pay any and
all issue and other taxes that may be payable in respect of any issue or
delivery of shares of Common Stock on conversion of Convertible Preferred Stock
and Convertible Preferred Stock Rights pursuant hereto. As promptly as
practicable, and in any event within ten Business Days after the surrender of
the certificate or certificates subject to conversion and, if applicable, the
receipt of such notice relating thereto and payment of all transfer taxes (or
the demonstration to the reasonable satisfaction of the Corporation that such
taxes have been paid), the Corporation shall deliver or cause to be delivered
(i) certificates representing the number of validly issued, fully paid and
nonassessable shares of Common Stock to which the holder of shares of
Convertible Preferred Stock and Convertible Preferred Stock Rights being
converted shall be entitled, (ii) if less than the full number of shares of
Convertible Preferred Stock evidenced by the surrendered certificate or
certificates is being converted, a new certificate or certificates, of like
tenor, for the number of shares evidenced by such surrendered certificate or
certificates less the number of shares and rights being converted, and (iii)
payment of all amounts to which a holder is entitled pursuant to Sections 8(d)
and 8(f) hereof. Such conversion shall be deemed to have been made (i) in the
case of conversion pursuant to Section 8(a), as of the IPO Date, and (ii) in the
case of conversion pursuant to Section 8(b), at the close of business on the
date of giving of the notice to convert specified in such Section and of such
surrender of the certificate or certificates representing the shares of
Convertible Preferred Stock to be converted (each, an "Effective Date") so that
the rights of the holder thereof as to the shares being converted shall cease as
of the Effective Date except for the right to receive shares of Common Stock in
accordance herewith, and the Person entitled to receive the shares of Common
Stock shall be treated for all purposes as having become the record holder of
such shares of Common Stock at the Effective Date.
(c) Upon conversion of any shares of Convertible Preferred Stock or related
Convertible Preferred Stock Rights, the holder thereof shall be entitled to
receive in additional shares of Convertible Preferred Stock all accrued
dividends payable up to and including the date fixed for conversion (including
an amount equal to a prorated dividend from the last Dividend Payment Date
immediately prior to the date of conversion). The holder of shares of
Convertible Preferred Stock at the close of business on a Record Date shall
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<PAGE>
be entitled to receive the dividend payable on such shares on the corresponding
Dividend Payment Date notwithstanding the conversion thereof.
(d) The Corporation shall at all times reserve and keep available, free
from liens, charges and security interests and not subject to any preemptive
rights, for issuance upon conversion of the Convertible Preferred Stock and
related Convertible Preferred Stock Rights such number of its authorized but
unissued shares of Common Stock as will from time to time be sufficient to
permit the conversion of all outstanding shares of Convertible Preferred Stock
and Convertible Preferred Stock Rights, and shall take all action required to
increase the authorized number of shares of Common Stock if necessary to permit
the conversion of all outstanding shares of Convertible Preferred Stock and
Convertible Preferred Stock Rights.
(e) No fractional shares or scrip representing fractional shares of Common
Stock shall be issued upon the conversion of any shares of Convertible Preferred
Stock or related Convertible Preferred Stock Rights. Instead of any fractional
interest in a share of Common Stock which would otherwise be deliverable upon
the conversion of a share of Convertible Preferred Stock or Convertible
Preferred Stock Right, the Corporation shall pay to the holder of such share an
amount in cash equal to such fractional interest multiplied by the Current
Market Price of the Common Stock on the day of conversion. If more than one
share or right shall be surrendered for conversion at one time by the same
holder, the number of full shares of Common Stock issuable upon conversion
thereof shall be computed on the basis of the aggregate Liquidation Value of the
shares of Convertible Preferred Stock and Convertible Preferred Stock Rights so
surrendered.
(f) The Conversion Price shall be subject to adjustment as follows:
(i) In case the Corporation shall at any time or from time to time after
the IPO Date (A) pay a dividend or make a distribution in shares of Common Stock
or securities convertible into Common Stock, (B) subdivide or reclassify the
outstanding shares of Common Stock into a greater number of shares of Common
Stock, (C) combine or reclassify the outstanding shares of Common Stock into a
smaller number of shares, or (D) otherwise issue by reclassification of the
shares of Common Stock any shares of capital stock of the Corporation, then, and
in each such case, the Conversion Price shall be adjusted so that the holder of
any shares of Convertible Preferred Stock and related Convertible Preferred
Stock Rights thereafter surrendered for conversion shall be entitled to receive
the number of shares of Common Stock or other securities of the Corporation
which such holder would have owned or have been entitled to receive after the
happening of any of the events described above had such shares of Convertible
Preferred Stock and related Convertible Preferred Stock Rights been surrendered
for conversion immediately prior to the happening of such event or the record
date therefor, whichever is earlier. An adjustment made pursuant to this Section
8(g)(i) shall become applicable (x) in the case of any such dividend or
distribution, immediately after the close of business on the record date for the
determination of holders of shares of Common Stock entitled to receive such
dividend or distribution and (y) in the case of any such subdivision,
reclassification or combination, at the close of business on the day upon which
such corporate action becomes effective. Such adjustment shall be made
successively.
(ii) In case the Corporation shall after the IPO Date (1) issue securities
convertible into or exchangeable for, or warrants, rights or options exercisable
for, shares of Common Stock, to all holders of its Common Stock or (2) sell and
issue any shares of Common Stock or securities convertible into or exchangeable
for, or warrants, rights or options exercisable for, shares of Common Stock
(except in a Public Offering), in either case at a price per share (determined,
for purposes of the immediately preceding clause (2), in the case of warrants,
rights options and convertible and exchangeable securities, by dividing (x) the
total amount received or receivable by the Corporation in consideration of the
sale and issuance of such warrants, rights, options or convertible or
exchangeable securities plus the total
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<PAGE>
consideration payable to the Corporation upon exercise, conversion or
exchange thereof by (y) the total number of shares of Common Stock covered by
such warrants, rights, options or convertible or exchangeable securities) which
is less than 90% of the Current Market Price for the period comprising the 20
consecutive Trading Days commencing on the 30th Trading Day prior to the record
date or date of issuance referred to in Section 8(g)(iv)(A) hereof, then, and in
each such case, the Conversion Price shall be reduced in accordance with the
following formula:
(N x P)
------
AC = C x O +( M )
--------
O + N
where
AC = the adjusted Conversion Price.
C = the current Conversion Price.
O = the number of shares of Common Stock outstanding on the record
date or the issue date,as the case may be.
N = the number of additional shares of Common Stock
offered.
P = the offering price per share of the additional shares.
M = the Current Market Price of Common Stock for the period
described above ending on the record date or the issue
date, as the case may be.
Notwithstanding the foregoing, adjustments resulting from securities
convertible into or exchangeable for, or warrants, rights or options
exchangeable for, shares of Common Stock which are also subject to Section
8(g)(iii) hereof shall be calculated in accordance with the provisions of such
section.
(iii) In case the Corporation shall after the IPO Date (1) issue securities
convertible into or exchangeable for, or warrants, rights or options exercisable
for shares of Common Stock, to all holders of its Common Stock or (2) sell and
issue any shares of Common Stock or securities convertible into or exchangeable
for, or warrants, rights, or options exercisable for, shares of Common Stock
(except in a Public Offering) in either case at a price per share (determined,
for purposes of the immediately preceding clause (2), in the case of warrants,
rights, options and Convertible and exchangeable securities, by dividing (x) the
total amount received or receivable by the Corporation in consideration of the
sale and issuance of such warrants, rights, options or convertible or
exchangeable securities plus the total consideration payable to the Corporation
upon exercise, conversion or exchange thereof by (y) the total number of shares
of Common Stock covered by such warrants, rights, options or convertible or
exchangeable securities) which is less than the Conversion Price then in effect,
such Conversion Price shall be reduced to equal the price determined by
multiplying the Conversion Price then in effect by a fraction, the numerator of
which shall be the sum of (x) the number of shares of Common Stock outstanding
at the close of business on the record date or date of issuance referred to in
Section 8(g)(iv)(A) hereof (without giving effect to any such issuance) and (y)
the number of shares of Common Stock which the aggregate consideration received
by the Corporation for the total number of shares of Common Stock (or
convertible or exchangeable securities or warrants, rights or options) issued
would purchase at the Conversion Price then in effect and the denominator of
which shall be the sum of (A) the number of shares of Common Stock outstanding
at the close of business on such record date or date of issuance and (B) the
number of shares of Common Stock issued (or into which such convertible or
exchangeable securities or warrants, rights or options may be converted,
exchanged or exercised).
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<PAGE>
(iv) (A) For the purposes of adjustments required as a result of Sections
8(g)(ii)(2) and 8(g)(iii)(2) hereof, the shares of Common Stock which the holder
of any such warrants, rights, options or convertible or exchangeable securities
shall be entitled to subscribe for or purchase shall be deemed to be issued and
outstanding as of the date of such sale and issuance, and the consideration
received or receivable by the Corporation therefor shall be deemed to be the
consideration received or receivable by the Corporation (plus any discounts or
commissions in connection therewith) for such rights, options, warrants or
convertible or exchangeable securities, plus the consideration or premiums
stated in such rights, options, warrants or convertible or exchangeable
securities to be paid for the shares of Common Stock purchasable thereby. In
case the Corporation shall sell and issue shares of Common Stock for a
consideration consisting, in whole or in part, of property other than cash or
its equivalent, then in determining the "price per share," "consideration
payable to the Corporation" and the "consideration received or receivable by the
Corporation" for purposes of the first sentence of Section 8(g)(ii) and
8(g)(iii) hereof and the immediately preceding sentence of this Section
8(g)(iv)(A), the Board of Directors shall determine, in its discretion, the fair
value of said property, and such determination, if made in good faith, shall be
binding. The adjustments set forth in Sections 8(g)(ii) and 8(g)(iii) shall be
made successively whenever any such Common Stock, rights, option, warrants or
convertible or exchangeable securities are issued, and shall become effective
(i) in the case of Sections 8(g)(ii)(1) and 8(g)(iii)(1), hereof, immediately
after the record date for the determination of stockholders entitled to receive
the rights, options, warrants or convertible or exchangeable securities and (ii)
in the case of Sections 8(g)(ii)(2) and 8(g)(iii)(2) hereof on the date of
issuance thereof.
(B) Upon the expiration of any rights, options, warrants or convertible or
exchangeable securities issued by the Corporation which caused a reduction to
the Conversion Price pursuant to Sections 8(g)(ii)(1) and 8(g)(iii)(1) hereof,
if any thereof shall not have been exercised, then the Conversion Price shall be
increased by the amount of the initial reduction of the Conversion Price
pursuant to such Sections in respect of such expired rights, options, warrants
or convertible or exchangeable securities.
(C) Neither (1) the issuance of any shares of Common Stock (whether
treasury shares or newly issued shares) pursuant to (x) a dividend or
distribution on, or subdivision, combination or reclassification of, the
outstanding shares of Common Stock requiring an adjustment in the Conversion
Price pursuant to Section 8(g)(i) hereof or (y) the exercise of any convertible
security, warrant, right or option outstanding as of the IPO Date (including the
Convertible Preferred Stock), (2) the issuance of shares of Convertible
Preferred Stock in payment of dividends on shares of such stock or the issuance
of shares of Common Stock upon conversion of such shares, nor (3) the issuance
of options, warrants or restricted shares of Common Stock to directors or
members of the management of the Corporation or its subsidiaries pursuant to
management incentive plans or stock option plans or other similar plans in
effect from time to time, nor (4) shares of Common Stock, warrants, rights,
options or convertible or exchangeable securities containing the right to
subscribe for or purchase shares of Common Stock issued in any of the
transactions described in Sections 8(g)(ii)(1) or 8(g)(iii)(1) hereof, shall be
deemed to constitute an issuance of Common Stock, convertible or exchange
securities, warrants, rights or options by the Corporation for purposes of
Sections 8(g)(ii)(2) and 8(g)(iii)(2). All shares of Common Stock issued and all
shares of Common Stock reserved for issuance pursuant to any outstanding
convertible securities (including the Convertible Preferred Stock), warrants,
rights or options deemed not to constitute an issuance pursuant to the previous
sentence shall nevertheless be deemed to be outstanding for all computations
pursuant to this Section 8(g) until such shares are no longer outstanding or
such convertible securities warrants, rights or options shall expire.
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<PAGE>
(v) In case the Corporation shall at any time or from time to time after
the IPO Date declare, order, pay or make a dividend or other distribution
(including without limitation any distribution of stock or other securities,
evidences of indebtedness, property or assets or rights or warrants to subscribe
for securities of the Corporation or any of its Subsidiaries) on its Common
Stock (other than (A) regular quarterly dividends payable in cash, (B) dividends
or distributions of shares of Common Stock referred to in Section 8(g)(i)
hereof, or (C) dividends and distributions, referred to in Section 8(g)(ii)(1)
and 8(g)(iii)(1) hereof) (any of the foregoing other than the items specified in
clauses (A), (B) and (C) referred to as "Securities or Assets"), then and in
each such case, unless the Corporation elects to reserve shares or other units
of such Securities or Assets for distribution to the holders of the Convertible
Preferred Stock upon the conversion of the shares of Convertible Preferred Stock
and related Convertible Preferred Stock Rights so that any such holder
converting shares of Convertible Preferred Stock and related Convertible
Preferred Stock Rights will receive upon such conversion, in addition to the
shares of the Common Stock to which such holder is entitled, the amount and kind
of such Securities or Assets which such holder would have received if such
holder had, immediately prior to the record date for the distribution of the
Securities or Assets, converted its shares of Convertible Preferred Stock and
related Convertible Preferred Stock Rights into Common Stock, the Conversion
Price shall be adjusted so that the same shall equal the price determined by
multiplying the Conversion Price in effect immediately prior to the date of such
distribution by a fraction of which the numerator shall be the Current Market
Price for the period comprising the 20 consecutive Trading Days commencing on
the 30th Trading Day prior to the record date fixed for the determination of
stockholders entitled to receive such dividend or distribution less the then
fair market value (as determined by the Board in good faith) of the portion of
the capital stock or assets or evidences of indebtedness so distributed or of
such rights or warrants applicable to one share of Common Stock, and of which
the denominator shall be the Current Market Price of the Common Stock on such
record date; provided, however, that if the then fair market value (as so
-------- -------
determined) of the portion of the Securities or Assets so distributed applicable
to one share of Common Stock is equal to or greater than the Current Market
Price of the Common Stock on the record date mentioned above, in lieu of the
foregoing adjustment, adequate provision shall be made so that each holder of
shares of the Convertible Preferred Stock and related Convertible Preferred
Stock Right shall have the right to receive the amount and kind of Securities or
Assets which such holder would have received had such holder converted each such
share of the Convertible Preferred Stock and related Convertible Preferred Stock
Right immediately prior to the record date for the distribution of the
Securities or Assets. Such adjustment shall become effective immediately after
the record date for the determination of shareholders entitled to receive such
distribution.
(vi) For purposes of this Section 8(g), the number of shares of Common
Stock at any time outstanding shall not include any shares of Common Stock then
owned or held by or for the account of the Corporation.
(vii) All calculations of the Conversion Price pursuant to this Section
8(g) shall be made to the nearest cent. Anything in this Section 8(g) to the
contrary notwithstanding, (A) the Corporation shall not be required to give
effect to any adjustment in the Conversion Price unless and until the net effect
of one or more adjustments (each of which shall be carried forward), determined
as above provided, shall have resulted in a reduction of the Conversion Price of
at least 1%, and when the cumulative net effect of more than one adjustment so
determined shall be to reduce the Conversion Price by at least 1%, such
reduction in Conversion Price shall thereupon be given effect and (B) except as
set forth in Section 8(g)(iv)(B) hereof, in no event shall the then current
Conversion Price be increased as a result of any calculation made at any time
pursuant to this Section 8(g).
-11-
<PAGE>
(g) In case of any capital reorganization or reclassification of
outstanding shares of Common Stock (other than a reclassification to which
Section 8(g)(i) hereof shall apply), or in case of any merger or consolidation
of the Corporation with or into another Person, or in case of any sale or
conveyance to another Person of all or substantially all of the assets of the
Corporation (each of the foregoing being referred to as a "Transaction"), each
share of Convertible Preferred Stock and related Convertible Preferred Stock
Right then outstanding shall thereafter be convertible into, in lieu of the
Common Stock issuable upon such conversion prior to consummation of such
Transaction, the kind and amount of shares of stock and other securities and
property receivable (including cash) upon the consummation of such Transaction
by a holder of that number of shares of Common Stock into which one share of
Convertible Preferred Stock was convertible immediately prior to such
Transaction (including, on a pro rata basis, the cash, securities or property
received by holders of Common Stock in any tender or exchange offer that is a
step in such Transaction).
Notwithstanding anything contained herein to the contrary, the Corporation
will not effect any Transaction unless, prior to the consummation thereof, (i)
the Surviving Person shall agree that the shares of Convertible Preferred Stock
shall be treated as provided in the first paragraph of this Section 8(h) and the
agreements governing such Transaction shall so provide, and (ii) the Surviving
Person thereof shall assume, by written instrument mailed, by first-class mail,
postage prepaid, to each holder of shares of Convertible Preferred Stock at such
holder's address as it appears in the records of the Corporation, the obligation
to deliver to such holder such cash or other securities to which, in accordance
with the foregoing provisions, such holder is entitled and such Surviving Person
shall have mailed, by first-class mail, postage prepaid, to each holder of
shares of Convertible Preferred Stock at such holder's address as it appears in
the records of the Corporation, an opinion of independent counsel for such
Person stating that such assumption agreement is a valid, binding and
enforceable agreement of the Surviving Person.
(h) In any case, if necessary, appropriate adjustment (as determined in
good faith by the Board of Directors) shall be made in the application of the
provisions set forth in this Section~8 with respect to rights and interests
thereafter of the holders of shares of Convertible Preferred Stock to the end
that the provisions set forth herein for the protection of the conversion rights
of Convertible Preferred Stock shall thereafter be applicable, as nearly as
reasonably may be, to any such other shares of stock and other securities (other
than the Common Stock) and property deliverable upon conversion of the shares of
Convertible Preferred Stock remaining outstanding with such adjustments in the
Conversion Price and such other adjustments in the provisions hereof as the
Board of Directors shall in good faith determine to be appropriate. In case
securities or property other than Common Stock shall be issuable or deliverable
upon conversion as aforesaid, then all references in this Section~8 shall be
deemed to apply, so far as appropriate and as nearly as may be, to such other
securities or property.
(i) If the Corporation shall pay any dividend or make any other
distribution to the holders of its Common Stock (other than regular quarterly
dividends payable in cash) or shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock of any class or any
other right, or there shall be any Transaction, or there shall be a voluntary or
involuntary dissolution, liquidation or winding up of the Corporation, then, in
any one or more of said cases the Corporation shall give at least 10 days, prior
written notice to the holders of Convertible Preferred Stock by first-class
mail, postage prepaid, to each holder at its address as it appears in the
records of the Corporation of the earlier of the dates on which (i) the books of
the Corporation shall close or a record shall be taken for such stock dividend,
distribution or subscription rights or (ii) such Transaction, dissolution,
liquidation or winding up shall take place; provided, that in the case of any
--------
Transaction to which Section 8(h) hereof apply, the Corporation shall give at
least 30 days, and no more than 60 days, prior written notice as aforesaid. Such
notice shall also specify the date as of which the holders of the Common Stock
of record shall participate in said dividend, distribution or subscription
rights or shall be entitled to exchange their Common Stock for securities or
other property deliverable upon such reorganization,
-12-
<PAGE>
reclassification, consolidation, merger, sale or conveyance or participate
in such dissolution, liquidation or winding up, as the case may be. Failure to
give such notice shall not invalidate any action so taken.
9. Reports as to Adjustments Upon the occurrence of any event specified in
-------------------------
Section 8(g) hereof that would result in any adjustment of the Conversion Price,
then, and in each such case, the Corporation shall promptly deliver by
first-class mail, postage prepaid to each holder at its address as it appears in
the records of the Corporation, a certificate signed by the President or a Vice
President and by the Treasurer or an Assistant Treasurer or the Secretary or an
Assistant Secretary of the Corporation setting forth in reasonable detail the
event requiring the adjustment and the method by which such adjustment was
calculated and specifying the conversion rate then in effect following such
adjustment. Where appropriate, such notice to the holders of Convertible
Preferred Stock may be given in advance and included as part of the notice
required pursuant to Section 8(j) hereof.
10. Certain Covenants. Any holder of Convertible Preferred Stock may
------------------
proceed to protect and enforce its rights and the rights of such holders by any
available remedy by proceeding at law or in equity to protect and enforce any
such rights, whether for the specific enforcement of any provision herein or in
aid of the exercise of any power granted herein, or to enforce any other proper
remedy.
11. Definitions. For the purposes of this Article V, the following terms
-----------
shall have the meanings indicated:
"Business Day" shall mean any day other than a Saturday, Sunday or a day on
which banking institutions in the State of New York are authorized or obligated
by law or executive order to close.
"Convertible Preferred Stock Right" shall mean with respect to any shares
of Convertible Preferred Stock, at any time, each share, or fraction thereof, of
Convertible Preferred Stock representing an amount equal to any unpaid dividends
on a share of such Convertible Preferred Stock accrued beginning on the Specific
Issue Date relating to such shares.
"Current Market Price," when used with reference to shares of Common Stock
or other securities on any date, shall mean the closing price per share of
Common Stock or such other securities on such date and, when used with reference
to shares of Common Stock or other securities for any period, shall mean the
average of the daily closing prices per share of Common Stock or such other
securities for such period. The closing price for each day shall be the last
sale price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Common Stock or such other securities are not listed or admitted to
trading on the New York Stock Exchange, as reported, in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Common Stock or such
other securities are listed or admitted to trading or, if the Common Stock or
such other securities are not listed or admitted to trading on any national
securities exchange, the last quoted sale price or, if not so quoted, the
average of the high bid and low asked prices in the over-the-counter market, as
reported by the National Association of Securities Dealers, Inc. Automated
Quotation System or such other system then in use, or, if on any such date the
Common Stock or such other securities are not quoted by any such organization,
the average of the closing bid and asked prices as furnished by a professional
market maker making a market in the Common Stock or such other securities
selected by the Board of Directors of the Corporation. If the Common Stock or
such other securities are not publicly held or so listed or publicly traded,
"Current Market Price" shall mean (a)the Initial Public Offering Price for
purposes of any determination made in connection with a transaction contemplated
by Section 8(a), or (b) the fair market value per share of Common Stock or of
such other securities
-13-
<PAGE>
as determined by an independent investment banking firm with an established
national reputation as a valuer of equity securities selected by the
Corporation.
"Designated Transferee" shall mean any Person to whom the Initial
Purchasers or any Designated Transferee shall have sold or otherwise transferred
shares of Convertible Preferred Stock.
"Effective Date" shall have the meaning set forth in Section 8(c) hereof.
"Initial Public Offering" shall mean the first registration of Common Stock
under the Securities Act (other than any such registration (a) on Form S-4 or
S-8 or any successor or similar forms, or (b) filed in connection with an
exchange offer or any offering of Common Stock solely to the Corporation's
existing stockholders) which becomes effective and under which shares of Common
Stock are sold to the public and for which a closing occurs.
"Initial Public Offering Price" shall mean the price per share at which
shares of Common Stock are sold to the public in the Initial Public Offering,
less underwriting discounts and commissions.
"Initial Purchaser" shall mean Bradley N. Rotter.
"IPO Date" shall mean the date on which the Securities and Exchange
Commission shall have declared effective the registration statement filed with
respect to the Initial Public Offering in which the Corporation is offering
shares of Common Stock and the Initial Purchaser or a Designated Transferee is
offering shares of Common Stock owned beneficially or of record by the Initial
Purchaser or a Designated Transferee.
"IPO Stock" shall mean the shares of Common Stock issued upon conversion of
Convertible Preferred Stock or Convertible Preferred Stock Rights which are
offered by the Initial Purchaser or a Designated Transferee in the Initial
Public Offering.
"Issue Date" shall mean the first date on which shares of Convertible
Preferred Stock are issued.
"Junior Securities" shall have the meaning set forth in Section 2 hereof.
"Parity Securities" shall have the meaning set forth in Section 2 hereof.
"Person" shall mean any individual, firm, corporation or other entity, and
shall include any successor (by merger or otherwise) of such entity.
"Public Offering" shall mean a registration of Common Stock under the
Securities Act (other than any such registration (a) on Form S-4 or S-8 or any
successor or similar forms, or (b) filed in connection with an exchange offer or
any offering of Common Stock solely to the Corporation's existing security
holders) which becomes effective and under which shares of Common Stock are sold
to the public and shall include an Initial Public Offering.
"Securities Act" shall mean the Securities Act of 1933, or any similar
Federal statute, and the rules and regulations of the Securities and Exchange
Commission thereunder, all as the same shall be in effect at the time.
"Specific Issue Date" shall mean, with respect to any shares of Convertible
Preferred Stock, the date on which such shares of Convertible Preferred Stock
are issued.
-14-
<PAGE>
"Surviving Person" shall mean the continuing or surviving Person of a
merger, consolidation or other corporate combination, the Person receiving a
transfer of all or a substantial part of the properties and assets of the
Corporation, or the Person consolidating with or merging into the Corporation in
a merger, consolidation or other corporate combination in which the Corporation
is the continuing or surviving Person, but in connection with which the
Convertible Preferred Stock or Common Stock of the Corporation is exchanged or
converted into the securities of any other Person or the right to receive cash
or any other property.
"Trading Day" shall mean a day on which the principal national securities
exchange on which the Common Stock is listed or admitted to trading is open for
the transaction of business or, if the Common Stock is not listed or admitted to
trading on any national securities exchange, a Business Day.
"Transaction" shall have the meaning set forth in Section~8(h).
ARTICLE VI
==========
12. Number of Directors. Subject to the rights, if any, of the holders of
-------------------
any series of the Preferred Stock to elect additional directors under
circumstances specified in a Preferred Stock Designation, the number of
directors of the Corporation shall be fixed from time to time by or in the
manner provided in the By-Laws of the Corporation (the "By-Laws").
13. No Cumulative Voting. Cumulative voting by the stockholders of the
---------------------
Corporation at any election for directors of the Corporation is hereby
prohibited.
14. Classified Board of Directors. The directors of the Corporation, other
-----------------------------
than those who may be elected by the holders of any series of the Preferred
Stock, will be classified with respect to the time for which they hold office
into three classes designated, respectively, Class 1, Class 2 and Class 3. The
number of directors from time to time in office shall be divided as nearly as
possible equally among the three classes. The directors first appointed to Class
1, Class 2 and Class 3 will hold office for a term expiring at the annual
meeting of stockholders to be held in 1996, 1997 and 1998, respectively, with
the members of each class to hold office until their successors are elected and
qualified. Directors may be elected by stockholders only at a meeting of
stockholders. At each annual meeting of stockholders of the Corporation, the
successors of the class of directors whose terms expire at such meeting will be
elected to hold office for a term expiring at the annual meeting of stockholders
held in the third year following the year of their election.
15. Nomination of Director Candidates. Advance notice of stockholder
------------------------------------
nominations for the election of directors must be given in the manner provided
in the By-Laws of the Corporation.
16. Newly Created Directorships and Vacancies. Subject to the rights, if
-------------------------------------------
any, of the holders of any series of Preferred Stock to elect additional
Directors under circumstances specified in a Preferred Stock Designation, newly
created directorships resulting from any increase in the number of directors and
any vacancies on the Board of Directors resulting from any cause will be filled
solely by the affirmative vote of a majority of the remaining directors then in
office, even though less than a quorum, or by a sole remaining director. Any
director elected in accordance with the preceding sentence will hold office for
the remainder of the full term of the class of directors in which the new
directorship was created or the vacancy occurred and until such director's
successor has been elected and qualified. No decrease in the number of directors
constituting the Board of Directors may shorten the term of any incumbent
director.
-15-
<PAGE>
17. Removal. Subject to the rights, if any, of the holders of any series of
-------
Preferred Stock in respect of the election of additional directors under
circumstances specified in a Preferred Stock Designation, any director may be
removed from office (a) by the Board as provided in the By-Laws and (b) by the
stockholders only for cause and only in the manner provided in this Section 6.
At any annual meeting or special meeting of the stockholders, the notice of
which states that the removal of a director or directors is among the purposes
of the meeting, the affirmative vote of the holders of at least 66_% of the
outstanding Voting Stock, voting together as a single class, may remove such
director or directors for cause. For the purposes of this Certificate of
Incorporation, "Voting Stock" means stock of the Company of any class or series
entitled to vote generally in the election of directors.
18. Election of Directors Without Written Ballot. Elections of directors
----------------------------------------------
need not be by written ballot except and to the extent provided by the By-laws.
19. Amendments. Notwithstanding any other provision of this Certificate of
----------
Incorporation, the affirmative vote of the holders of at least 66_% of the
outstanding Voting Stock, voting together as a single class, shall be required
to amend, alter or repeal, or to adopt any provision inconsistent with, this
Article VI.
ARTICLE VII
============
Each person who is or was or had agreed to become a director or officer of
the Corporation, and each such person who is or was serving or who had agreed to
serve at the request of the Board of Directors or an officer of the Corporation,
as an employee or agent of the Corporation or as a director, officer, employee,
or agent of another corporation, partnership, joint venture, trust, or other
entity, whether for profit or not for profit (including the heirs, executors,
administrators, or estate of such person), shall be indemnified by the
Corporation to the full extent permitted by the DGCL or any other applicable law
as currently or hereafter in effect. The right of indemnification provided in
this Article VII (a) will not be exclusive of any other rights to which any
person seeking indemnification may otherwise be entitled, including without
limitation pursuant to any contract approved by a majority of the Board of
Directors of the Corporation (whether or not the directors approving such
contract are or are to be parties to such contract or similar contracts), and
(b) will be applicable to matters otherwise within its scope whether or not such
matters arose or arise before or after the adoption of this Article VII. Without
limiting the generality or the effect of the foregoing, the Corporation may
adopt By-Laws, or enter into one or more agreements with any person, which
provide for indemnification greater or different than that provided in this
Article VII or the DGCL. Notwithstanding anything to the contrary in this
Article VII, in the event that the Corporation enters into a contract with any
person providing for indemnification of such person, the provisions of such
contract will exclusively govern the Company's obligations in respect of
indemnification for or advancement of fees or disbursements of such person's
counsel or any other professional engaged by such person. Any amendment or
repeal of, or adoption of any provisions inconsistent with, this Article VII
will not adversely affect any right or protection existing hereunder, or arising
out of events occurring or circumstances existing, prior to such amendment,
repeal, or adoption and no such amendment, repeal, or adoption, will affect the
legality, validity, or enforceability of any contract entered into or right
granted prior to the effective date of such amendment, repeal, or adoption.
ARTICLE VIII
=============
To the fullest extent permitted by the DGCL or any other applicable law
currently or hereinafter in effect, no director shall be personally liable to
the Corporation or any stockholder for monetary damages for or with respect to
any acts or omissions in the performance of his or her duties as a director of
the
-16-
<PAGE>
Corporation. Any repeal or modification of this Article VIII will not
adversely affect any right or protection of a director of the Corporation
existing prior to such repeal or modification.
ARTICLE IX
===========
In furtherance and not in limitation of the rights, powers, privileges, and
discretionary authority granted or conferred by the DGCL or other statute or
laws of the State of Delaware, the Board of Directors is expressly authorized to
make, amend and repeal any one or more provisions of the By-Laws of the
Corporation without any action on the part of the stockholders, but the
stockholders may make additional By-Laws and may later amend or repeal any one
or more provisions of the By-Laws, whether adopted by them or otherwise.
Notwithstanding the foregoing and anything contained in this Certificate of
Incorporation to the contrary, Sections 1.1, 1.3, 1.9, 2.1, 2.2, 2.3, 2.4 and
5.5 of the By-Laws may not be amended or repealed by the stockholders, and no
provision inconsistent therewith may be adopted by the stockholders, except upon
the affirmative vote of the holders of at least 66_% of the outstanding Voting
Stock, voting together as a single class. Notwithstanding anything contained in
this Certificate of Incorporation to the contrary, the affirmative vote of the
holders of at least 66_% of the outstanding Voting Stock, voting together as a
single class, is required to amend or repeal, or adopt any provision
inconsistent with, this Article IX.
IN WITNESS WHEREOF, the Corporation has caused this Second Amended and
Restated Certificate of Incorporation to be signed in its name and on its behalf
by a duly authorized officer.
POINT WEST CAPITAL CORPORATION
(F/K/A DIGNITY PARTNERS, INC.)
By: /s/Alan B. Perper
--------------------------------
Alan B. Perper
President
ATTEST:
/s/John Ward Rotter
- --------------------------------
John Ward Rotter
Secretary
-17-
Exhibit 10
AMENDMENT NO. 3 TO
-------------------
INDENTURE
----------
THIS AMENDMENT NO. 3 TO INDENTURE (this "Amendment") dated 2 July, 1997, is
------
made by and among Dignity Partners Funding Corp. I, a Delaware corporation (the
"Issuer"), Dignity Partners, Inc., a Delaware corporation (the "Servicer"), and
Bankers Trust Company, a New York banking corporation, as trustee (herein,
together with its permitted successors in trusts hereunder, called the
"Indenture Trustee").
RECITALS
WHEREAS, the Issuer, the Servicer and the Indenture Trustee have entered
into the Indenture, dated as of February 1, 1995 (the "Indenture"), whereby the
Issuer has issued its Senior Viatical Settlement Noted, Series 1995-A (the
"Notes"), which Indenture was amended by Amendment No. 1 to Indenture dated
September 29, 1995;
WHEREAS, pursuant to Sections 12.02 and 12.03 of the Indenture, the Issuer
has established a Collection Account and a Liquidity Account in which funds are
held and from which funds are required to be transferred from time to time;
WHEREAS, Heller Financial, The Lincoln National Life Insurance Company and
First Penn-Pacific Life Insurance Company together constitute the Holders of
100% of the Notes (together, the "Holders")
WHEREAS, the Holders are willing to modify Section 12.02(d) of the
Indenture, which Section governs payments made from the Collection Account;
WHEREAS, pursuant to Section 9.01 of the Indenture, the Issuer, the
Servicer and the Indenture Trustee, with the consent of the Holders, may modify
the Indenture provided that the Rating Agency Condition is met;
WHEREAS, the Issuer, the Servicer and all of the Holders are willing to
waive the requirement that the Rating Agency Condition is met as a condition to
this Amendment, and all of the Holders hereby direct the Indenture Trustee to
consent to this Amendment; and,
WHEREAS, promptly after the execution of this Amendment the Issuer will
mail the Rating Agency a copy of this Amendment pursuant to Section 9.01 of the
Indenture.
AGREEMENT
NOW, THEREFORE, in exchange for good and valuable consideration and
sufficiency of which are hereby acknowledged, the parties do hereby covenant and
agree as follows:
<PAGE>
Section 1. Definitions.
------------
Capitalized terms used herein which are not otherwise defined herein have
the meanings ascribed to such terms in the Indenture.
Section 2. Amendments.
-----------
(a) Section 9.01 of the Indenture is hereby amended by deleting the words:
(i) "and provided that the Rating Agency Condition is met"; (ii)
"and satisfaction of the Rating Agency Condition"; and (iii)
"and without satisfaction of the Rating Agency Condition"
(b) Section 12.02(d)(x) of the Indenture is hereby amended and restated to
read as follows:
"To pay Dignity Partners as Servicer the amount necessary
to reimburse Dignity Partners as provided in the Contribution
,Sale and Servicing Agreement for the payment of premiums
paid on any Policy during the related Collection Period
(the "Premium Reimbursement"), provided however, that, if to
-------- --------
the extent there are insufficient funds in the Collection
Account to pay Dignity Partners the Premium Reimbursement
(the "Collection Account Premium Reimbursement Deficiency"),
Dignity Partners shall be paid the Collection Account Premium
Reimbursement Deficiency from the Liquidity Account, provided
--------
further however, that the Majority Noteholders may, at any
------- -------
time, provide the Indenture Trustee with written notice that
Dignity Partners shall not receive any further payments on
account of the Collection Account Premium Reimbursement
Deficiency from the Liquidity Account and such written notice
from the Majority Noteholders to the Indenture Trustee shall
become effective on the Business Day after the first Payment
Date following such written notice."
Section 3. Waiver.
--------
The Issuer, the Servicer and the Holders hereby waive the requirements of
Section 9.01 of the Indenture that the Rating Agency Condition is met as a
condition to this Amendment, and hold the Indenture Trustee harmless with
respect to such waiver and with respect to entering into this Amendment.
Section 4. Representation and Warranties.
------------------------------
Each party by executing this Amendment hereby represents and warrants that
the person executing this Amendment on behalf of such party is duly authorized
to do so, such party has full right and authority to enter into this Amendment
and to consummate the transaction described in this Amendment, and this
Amendment constitutes the valid and legally binding obligation of such party,
and enforceable against such party in accordance with its terms.
-2-
<PAGE>
Section 5. Effective Date.
---------------
This Amendment shall become effective as of April 1, 1997, provided that
each of the following conditions is satisfied:
(a) The Indenture Trustee shall have received from each parties
hereto and each Noteholder an executed counterpart of this Amendment.
(b) The Indenture Trustee and each Noteholder shall receive from
the Issuer and the Servicer a copy of a resolution passed by the board
of directors of each such corporation, certified by the Secretary or
an Assistant Secretary of such corporation as being in full force and
effect on the date hereof, authorizing the execution, delivery and
performance of this Amendment.
Section 6. Miscellaneous.
---------------
(a) Ratification of Indenture. The terms and provisions set forth in
-------------------------
this Amendment shall modify and supersede all inconsistent terms and
provisions set forth in the Indenture and except as expressly modified
and superseded by this mendment, the Indenture is ratified and
confirmed in all respects and shall continue in full force in no
manner be waived, impaired or otherwise adversely affected hereby,
and are hereby ratified and confirmed.
(b) References. The Indenture and any and all other agreements,
documents or instruments now or hereafter executed and delivered
pursuant to the terms hereof or pursuant to the terms of the Indenture
as amended hereby, are hereby amended so that any reference in such
agreements to the Indenture shall mean a reference to the Indenture as
amended hereby.
(c) Counterparts. This Amendment may be executed in two or more
counterparts,each or which will be deemed to be an original but all of
which together will constitute one and the same instrument.
(d) Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York, without
regard to the application of choice of law principles, except to the
extent that such laws are supersede by federal law.
(e) Binding Agreement. This Amendment shall be binding upon and
inure to the benefit of the Issuer, the Servicer, the Indenture
Trustee, the Noteholders and their respective successors and
assigns, including, without limitation, all future Holders of the
Notes.
(f) No Waiver. By entering into this Amendment, the Holders do
not intend to modify any other terms, provisions, or conditions of the
Indenture, and the Holders do not
-3-
<PAGE>
waive any defaults or events of default that may exist under the
Indenture or under the Contribution, Sale and Servicing Agreement.
The Holders reserve all of their rights to exercise any and all of
their remedies as provided in the Indenture and documents relating
thereto, at such time and in such manner as provided in the Indenture
and related documents. Nothing contained in this Amendment shall be
construed or interpreted as being a waiver of any of the Holders'
rights or remedies other than the Holders' agreement to modify the
Indenture in accordance with this Amendment.
IN WITNESS WHEREOF, this Amendment No. 3 to Indenture has been signed
and delivered by the parties as of the date first above written.
DIGNITY PARTNERS FUNDING CORP. I
By: /S/ JOHN WARD ROTTER
----------------------------------
Title: SECRETARY
---------------------------------
DIGNITY PARTNERS, INC.
By: /S/ JOHN WARD ROTTER
----------------------------------
Title: SECRETARY
-------------------------------
BANKERS TRUST COMPANY,
as Indenture Trustee
By: /S/ ALFIA MONASTRA
----------------------------------
Title: ASSISTANT VICE PRESIDENT
-------------------------------
Consented and Agreed to as of the date first above written:
HELLER FINANCIAL
By:/S/ KEVIN O'NEILL
-------------------------------
Title: AVP
-------------------------------
THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY
By: Lincoln Investment Management,Inc.
Its Attorney-In-Fact, having changed
its name from Lincoln
National Investment Management Company
By:/S/ DAVID C. PATCH
-------------------------------
Title: VICE PRESIDENT
-------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-q FOR THE QUARTERLY PERIOD ENDED June 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001002813
<NAME> Dignity Partners, Inc.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Jun-30-1997
<CASH> 18,892,526
<SECURITIES> 3,954,029
<RECEIVABLES> 577,702
<ALLOWANCES> 0
<INVENTORY> 39,173,887 <F1>
<CURRENT-ASSETS> 773,366
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 63,371,510
<CURRENT-LIABILITIES> 5,484,977
<BONDS> 38,900,690 <F2>
0
0
<COMMON> 42,918
<OTHER-SE> 18,942,925
<TOTAL-LIABILITY-AND-EQUITY> 63,371,510
<SALES> 285,977
<TOTAL-REVENUES> 2,963,585
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,696,367
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,824,259
<INCOME-PRETAX> (557,041)
<INCOME-TAX> 0
<INCOME-CONTINUING> (557,041)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,884,651
<CHANGES> 0
<NET-INCOME> 1,327,610
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0
<FN>
<F1>INCLUDES ASSETS HELD FOR SALE AND PURCHASED LIFE INSURANCE POLICY.
<F2>REPRESENTS LONG TERM BORROWINGS OF THE COMPANY.
</FN>
</TABLE>
