SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 0-27736
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)
Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
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Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's common stock, $.01 par value,
held by non-affiliates of the registrant as of February 28, 1998 was
approximately $5,833,600.
The number of shares of the registrant's common stock, $.01 par value,
outstanding as of February 28, 1998 was 3,253,324.
Documents Incorporated by Reference:
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The registrant's proxy statement (to be filed) related to its 1998 annual
meeting of stockholders is incorporated by reference in Part III hereof.
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POINT WEST CAPITAL CORPORATION
Form 10-K Annual Report
For the Fiscal Year Ended December 31, 1997
Table of Contents
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PART I Page
Item 1. Business................................................................ 1
Item 2. Properties.............................................................. 8
Item 3. Legal Proceedings....................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders..................... 9
.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stock Matters .... 10
Item 6. Selected Financial Data................................................. 11
Item 7. Management's Discussion and Analysis of Financial Condition and.........
Results of Operations................................................... 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ............. 23
Item 8. Financial Statements and Supplementary Data............................. 23
Item 9. Changes in and Disagreements with Accountants on Accounting.............
and Financial Disclosure............................................... 23
PART III
Item 10.Directors and Executive Officers of the Registrant...................... 45
Item 11.Executive Compensation.................................................. 45
Item 12.Security Ownership of Certain Beneficial Owners and Management ......... 45
Item 13.Certain Relationships and Related Transactions.......................... 45
.
PART IV
Item 14.Exhibits, Financial Statement Schedules and Reports on Form 8-K ........ 45
Signatures............................................................................ 49
</TABLE>
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Unless indicated otherwise, all information contained herein gives effect to the
Reorganization and the Reverse Stock Split (each as defined herein). Unless the
context otherwise requires, all references to "Point West" refer to Point West
Capital Corporation (formerly known as Dignity Partners, Inc.) and all
references to the "Company" refer to Point West Capital Corporation and its
consolidated entities.
PART I
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ITEM 1--BUSINESS
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General
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The Company is a specialty financial services company. Until February
1997, the Company provided viatical settlements for terminally ill persons. A
viatical settlement is the payment of cash in return for an ownership interest
in, and the right to receive the face value of, a life insurance policy. In
connection with a viatical settlement, the policyholder assigned his or her
policy to the Company, which became the holder, owner or certificate holder of
the policy and the beneficiary thereunder with the right to receive from the
insurance company the face value payable under the policy following the death of
the insured. The amount paid by the Company for a policy was determined by the
Company based on various factors, including the Company's estimate of the life
expectancy of the insured and the estimated premiums payable by the Company
under the policy over the expected life of the insured and certain other costs
of the viatical settlement. Through December 31, 1997, the Company purchased
1,531 policies with an aggregate face value of $114.1 million, of which $42.6
million had been collected on 626 policies upon the death of the insured. In
addition, through December 31, 1997, the Company had received proceeds of $19.2
million on 348 policies sold to third parties pursuant to sale agreements
(representing $28.4 million in aggregate face value). In excess of 95% of the
Company's purchases involved policies insuring the lives of individuals
diagnosed with HIV and AIDS. See "Asset Sales; Viatical Settlement Business."
In February 1997, Point West's Board of Directors (the "Board") decided
to cease the Company's viatical settlement business. The Board's decision
resulted from (i) accounts of research results reported at the International
AIDS Conference held in Vancouver, British Columbia in July 1996 (the "AIDS
Conference"), (ii) the Board's beliefs regarding increased risks of purchasing
and holding policies insuring the lives of individuals diagnosed with HIV or
AIDS, (iii) accounts of subsequent research results which appeared to confirm
the reports from the AIDS Conference, and (iv) a determination by the Board that
it was not viable for the Company to continue to operate a viatical settlement
business solely for non-AIDS policies. Also as a result of the accounts of
research results reported at the International AIDS Conference, the Company
decided in the third quarter of 1996 to sell all or substantially all of its
assets. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Through December 31, 1997, the Company had entered into agreements to
sell 373 policies with an aggregate face value of $29.2 million and had
consummated the sale of all but 14 of such policies (having an aggregate face
value of $937,000). The Company, through its wholly owned special purpose
subsidiary, Dignity Partners Funding Corp. I ("DPFC"), continues to hold
policies which are pledged as security for the Securitized Notes (defined
herein). The Company continues to service the life insurance policies held by
DPFC.
Subsequent to February 1997, the Company has sought to become a
broad-based specialty financial services company. To that end, the Company has
expanded its financial services business through the formation and investment in
other entities, including Fourteen Hill Management, LLC ("Fourteen Hill
Management"), Fourteen Hill Capital, L.P. ("Fourteen Hill Capital"), Allegiance
Capital, LLC ("Allegiance") and Allegiance Funding Corp. I. ("Allegiance
Funding"). The Company continues to evaluate other strategic business
opportunities. Fourteen Hill Capital and Allegiance, whose business activities
are described below, are indicative of the types of business opportunities the
Company intends to pursue.
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The Company
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General
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Point West was incorporated in Delaware as Dignity Partners, Inc. in
September 1992 and commenced operations on January 2, 1993. Effective August 1,
1997, its name was changed to Point West Capital Corporation. The Company's
principal executive offices are located at 1700 Montgomery Street, Suite 250,
San Francisco, California 94111, and its telephone number is (415) 394-9469.
DPFC
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DPFC is a wholly owned subsidiary of Point West formed for the limited
purposes of issuing Senior Viatical Settlement Notes, Series 1995-A, Stated
Maturity March 10, 2005 (the "Securitized Notes") and purchasing (with proceeds
of the Securitized Notes) and holding beneficial ownership of the policies.
Those policies are pledged as collateral for the Securitized Notes. DPFC is
deemed a bankruptcy remote entity. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Method of Consolidation" and "
- -- Liquidity and Capital Resources." DPFC has purchased 902 policies with an
aggregate face value of $67.1 million and will not purchase any more policies.
At December 31, 1997, DPFC owned 543 policies with an aggregate face value of
$42.2 million.
Fourteen Hill Management and Fourteen Hill Capital
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On June 3, 1997, the Company formed Fourteen Hill Management and
Fourteen Hill Capital. Fourteen Hill Management is a wholly owned limited
liability company of Point West formed solely for the purpose of serving as the
general partner of one or more small business investment companies ("SBIC").
Fourteen Hill Capital is a limited partnership formed solely for the purpose of
operating as an SBIC. Fourteen Hill Capital received its SBIC license from the
Small Business Administration ("SBA") effective September 26, 1997. Fourteen
Hill Management is the sole general partner of Fourteen Hill Capital, and Point
West is one of the two limited partners of Fourteen Hill Capital. Fourteen Hill
Capital provides loans, debt and equity capital to small companies (i.e.,
generally companies with a net worth less than $18 million and average net
income less than $6 million for the last two years). Fourteen Hill Capital
commenced operations in August 1997 by providing a loan to one unaffiliated
entity and providing equity capital to another unaffiliated entity in the
aggregate amount of $1.25 million. Such transactions were the only ones
outstanding at December 31, 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Method of Consolidation" and
Note 17 of Notes to Consolidated Financial Statements.
Allegiance and Allegiance Funding
---------------------------------
Allegiance is a limited liability company formed on September 5, 1997
as a specialty finance company to operate a securitization-based loan program
targeted to the nation's funeral home and cemetery owners. Through December 31,
1997, Allegiance had funded one loan in the amount of $3.8 million. The only
outstanding commitment at December 31, 1997 of $2.1 million was funded in
January 1998. Point West provided the $5.9 million of capital for such loans.
Point West has a 54% equity interest and 95% voting control in Allegiance and
serves as its managing member. Allegiance owns 100% of Allegiance Funding, which
is a special purpose corporation formed to facilitate the securitization of
loans consummated by Allegiance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Method of Consolidation."
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Asset Sales; Viatical Settlement Business
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Introduction
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In December 1996, the holders of the Company's Common Stock, $0.01 par
value ("Common Stock"), authorized the Board to sell all or substantially all of
the assets of the Company. The Board subsequently authorized the sale of all or
substantially all of the Company's policies other than the sale of policies held
by DPFC. The sale of policies held by DPFC, all of which are pledged as security
for the Securitized Notes, will require the consent of the Company and the
holders of the Securitized Notes ("Noteholders"). See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Description of
Securitized Notes." The Company has discussed potential sales of DPFC policies
with the Noteholders; however, the Company has not determined whether it will
decide to sell such polices and cannot determine whether the Noteholders will
consent to such a sale or whether such a sale is feasible.
Terms of Sale Agreements
------------------------
Through December 1997, the Company entered into several agreements to
sell portions of its portfolio of policies. None of the purchasers is affiliated
with the Company or any of its directors or officers. The sale agreements
provided for the sale, upon the issuing insurance company's acknowledgment of
transfer of ownership, of an aggregate of 373 policies having an aggregate face
value of approximately $29.2 million for an aggregate purchase price of $19.5
million. The agreements contained cross indemnity provisions pursuant to which
the Company and the purchaser agreed to indemnify each other against losses,
liabilities or damages arising in connection with a claim under any policy or
with any breach of any representation or warranty made by the breaching party in
the agreement.
Through December 31, 1997, the Company had collected an aggregate of
$19.2 million in sales proceeds under the sale agreements. Eleven policies
covered by sale agreements 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 these
policies. The Company experienced delays or difficulties in transferring the
ownership of the remaining 14 policies and, due to contractual provisions in the
related sales agreements, the sales of these policies were not consummated.
However, the Company is continuing its attempt to sell these policies. Such
policies (representing $937,000 in face amount) were carried on the balance
sheet at December 31, 1997 at $129,000 after giving effect to the reserve for
loss on assets held for sale.
Viatical Settlement Business
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Until the Company ceased purchasing policies, the Company's viatical
settlement business involved the following principal steps: (a) origination of
policy purchases, (b) underwriting, which included evaluating the terms of a
policy and, with the assistance of one or more independent physicians or other
medical consultants, estimating the life expectancy of the insured, (c) closing
the transaction, (d) monitoring the insured and the policy and (e) collecting
the policy proceeds following the insured's death. The Company ceased purchasing
policies in February 1997 and, therefore, monitoring and collection activities
are the only steps that continue in servicing the policies.
Monitoring
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Following the purchase of a life insurance policy, the insured
is regularly monitored to obtain timely information concerning the
insured so that proceeds may be collected as promptly as possible
following the death of the insured. In addition, the Company monitors
the policy to ensure it does not lapse because of a failure to timely
pay premiums. Such premiums are paid by the Company unless a waiver is
in place. Some protection against the failure to pay premiums is
provided by statutory or policy provisions that require insurance
companies to provide written notice before terminating a policy for
failure to pay
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premiums. As owner of record of the policy, the Company generally
receives such notice directly. Furthermore, the Company monitors the
policy to ensure that premium waivers are renewed and that, when
required, the policy is converted (e.g., from a group term policy to an
individual whole life policy) in a timely manner. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Accounting Implications for DPFC." Collection
Once the Company learns of an insured's death, a request for a
copy of the death certificate is filed in the appropriate governmental
office. The Company then files the death certificate with the insurance
company and requests payment of the policy proceeds. The Company
monitors the collection status until it receives the face value of the
policy.
Consideration of Strategic Options
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In September 1996, the Company, in light of the uncertainties facing
its viatical settlement business, engaged Jefferies & Company, Inc.
("Jefferies") to assist the Company in the evaluation of its strategic
direction. As a result of the Company's evaluation and Jefferies' assistance,
the Company is pursuing small business investments through Fourteen Hill Capital
and loans to the nation's funeral home and cemetery owners through Allegiance.
The Board continues to evaluate other strategic options, primarily financial
services opportunities. There can be no assurance that any other feasible option
will be found or that any option selected and pursued will be profitable.
Small Business Investments
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Overview
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Fourteen Hill Capital is licensed by the SBA as an SBIC. Fourteen Hill
Capital will focus on creating a diversified portfolio of loans to and
investments in later-stage growth and expansion companies. Such loans and
investments will be structured in a variety of ways, including loans, debt
investments such as subordinated debt with equity participation through warrants
or conversion rights, and investments in preferred and common stock.
Regulation
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As an SBIC, Fourteen Hill Capital is required to make loans to or
invest in qualified entities as defined by regulations promulgated by the SBA.
Such entities are generally companies with a net worth less than $18 million and
average net income less than $6 million for the last two years. Additionally, at
least 20% of Fourteen Hill Capital's loans and investments must be made to
entities with a net worth less than $6 million and average net income less than
$2 million for the last two years.
SBIC's are permitted to obtain funds from the SBA based upon the amount
of regulatory capital defined in the SBA regulations. In the case of Fourteen
Hill Capital, such regulatory capital was $5 million at December 31, 1997.
Because Fourteen Hill Capital holds a debenture SBIC license, Fourteen
Hill Capital may be permitted to borrow up to $10 million from the SBA. Any
borrowings bear interest at the rate for ten year debentures issued by SBIC's
and funded through public sales of certificates bearing the SBA's guarantee
("Debenture Rate"). Such interest is payable semi-annually. In addition, there
is a leverage fee of 3% and a fee of 1% per annum on the outstanding amount of
debt. Among other requirements, an SBIC with a debenture SBIC license must
maintain proper diversification of its portfolio, which generally means that, in
order to borrow funds from the SBA, no single investment may exceed 20% of the
SBIC's regulatory capital. See "Management's Discussion and Analysis of
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Financial Condition and Results of Operations -- Liquidity and Capital
Resources." At present, Fourteen Hill Capital has not obtained any borrowings
from the SBA.
SBIC's such as Fourteen Hill Capital are also limited with respect to
the rates of interest they can charge on their loans and debt investments. The
maximum rate of interest permitted at present for loans is the greater of (i)
19% and (ii) 1100 basis points over the Debenture Rate or weighted average cost
of capital incurred (including SBA debt). The maximum rate of interest permitted
at present for debt investments is the greater of (i) 14% and (ii) 600 basis
points over the Debenture Rate or weighted average cost of capital incurred
(including SBA debt).
Fourteen Hill Capital may be subject to licensing requirements as a
lender in jurisdictions in which it operates and is subject to usury and other
similar laws in such jurisdictions.
Origination & Investment Selection
----------------------------------
Fourteen Hill Capital intends to focus on investing in later stage
growth companies. The investments in which Fourteen Hill Capital intends to
invest will typically range from $500,000 to $1 million. Fourteen Hill Capital's
investments in small businesses are made with the intent of having the loans
repaid and liquidating the equity portion of the investments after five years.
Although Fourteen Hill Capital expects to dispose of an investment after five
years, situations may arise in which it may hold equity securities for a
different period of time.
Fourteen Hill Capital seeks to lend to or invest in well-managed,
growing, public or private companies that seek capital to finance a variety of
activities including new product development, expansion into new markets,
increasing production capacity or the acquisition of complementary businesses.
Fourteen Hill Capital considers a number of criteria in making loan and
investment decisions. Although the criteria below may not be applied in every
instance and their importance may vary depending on the relevant circumstances,
the following characteristics generally are sought when evaluating a potential
borrower or investment: (i) highly skilled management with the capability to
organize resources, develop products and exploit market opportunities, (ii)
superior growth and the presence of a clearly defined marketing strategy which
addresses the conditions of the market, the needs of the customers and
established competitive practices exhibited in the relevant industry, (iii)
strong demonstrable cash flows, both historical and projected, or other
security, (iv) access to additional capital from the existing shareholders and
(v) the existence of a reasonable exit strategy. Fourteen Hill Capital will
employ third party experts where appropriate to assess the market opportunity or
operational capabilities of the potential investee.
Fourteen Hill Capital locates potential SBIC investments through
contacts Point West's executive officers (the "Executive Officers") have with
investment bankers, lenders, venture capitalists, leveraged buyout sponsor
groups and other SBIC's. Fourteen Hill Capital uses analysts that review
informational packages in order to identify potential investments. After
identifying investments that meet Fourteen Hill Capital's investment criteria,
the analyst conducts a more thorough investigation and analysis of the applicant
("Due Diligence"). The Due Diligence process often includes on-site visits,
review of historical and prospective financial information, interviews with
management, employees, customers and vendors of the applicant, background checks
and research on the applicant's product, service or particular industry.
Fourteen Hill Capital has a committee (the "Investment Committee") that
consists of Bradley N. Rotter, Alan B. Perper and John Ward Rotter, the
Executive Officers. All loan and investment decisions are presented to the
Investment Committee for their approval prior to commitment.
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Monitoring Investments
----------------------
Portfolio loans and investments will have a designated individual who
will be responsible for periodic contact and all initial troubleshooting.
Additionally, this contact will carefully review operating results, cash flow,
working capital and financial structure against budgets. Any divestiture,
foreclosure or restructuring must be approved by the Investment Committee.
Competition
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Fourteen Hill Capital's principal competitors include financial
institutions, venture capital firms and other non-traditional lenders. Many of
these entities have greater financial and managerial resources than Fourteen
Hill Capital. The Company believes that many of these entities do not have an
interest in the relatively small size of transactions which Fourteen Hill
Capital targets. Additionally, the Company believes that Fourteen Hill Capital
will be able to compete effectively with such entities primarily on the basis of
the quality of its service, its reputation and the timely decision-making
process it follows, and to a significantly lesser degree on the interest rates
or other terms it offers on loans or investments to those seeking capital.
Loans to Funeral Homes and Cemeteries
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Overview
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Allegiance provides long-term debt to experienced owners of established
funeral home and cemetery businesses on a senior secured basis at competitive
rates. Allegiance Funding, a wholly owned subsidiary of Allegiance, was created
to facilitate the potential funding and securitization of loans.
The funeral home and cemetery businesses comprise what is frequently
called the "death care" industry. Death care is a relatively stable and mature
industry. This is partly due to the inevitable nature of mortality. In addition,
most areas of the country are already served by one or more funeral homes and
cemetery establishments and opportunities for expansion mostly consist of
consolidation of existing establishments. Though subject to consolidation in
recent years, the death care industry remains highly fragmented. The for-profit
ownership base within the death care industry is split among private entities,
primarily smaller family-owned businesses and a number of large public
corporations, including Service Corp. International, Loewen Group and several
others. A variety of factors, including turnover among the base of privately
owned death care businesses and the recognition of the increasing value of these
businesses, have combined to create demand for capital within the industry.
These capital needs have been underserved by traditional lending sources.
Allegiance generally will seek to finance funeral home and cemetery
businesses which are well-established by virtue of years of service in the
communities they serve. The Company believes that the heritage, reputation and
attendant goodwill built up by these institutions provide superior collateral
value.
Marketing & Origination
-----------------------
Allegiance is targeting family-owned and other private owners of
funeral home and cemetery establishments. It is expected that loans will be
sourced by marketing representatives both directly through the solicitation of
owners of funeral homes and cemetery businesses and indirectly through contacts
with industry associations, professional groups, business advisors and others.
Origination activities will be supported through print advertising in industry
trade publications, newsletters and attendance at industry conferences.
Loans are offered with fixed or adjustable interest rates, generally in
minimum amounts of $500,000. Loan proceeds may be used by the borrower for a
variety of purposes, including acquisition, debt refinancing and stockholder
buyouts or distributions. Allegiance charges a loan arrangement fee payable at
closing as well as
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application and commitment fees, which may be credited against the loan
arrangement fee at closing. Contractual repayment terms require monthly payments
sufficient to pay accrued interest and a portion of principal sufficient to
amortize the loan balance over a long-term repayment schedule, currently 15 to
18 years.
Allegiance obtains a senior, secured position with respect to the
borrowers and business establishments it finances. As such, security for loans
is generally provided through a mortgage (deed of trust) providing a first
priority security interest in the real property (normally a fee interest but in
certain instances a leasehold interest) associated with the borrower's business
establishment(s); security agreement providing a first priority security
interest in the related personal property, intangible assets and intellectual
property; pledge agreement providing a first priority security interest in the
borrower's stock (if a corporation); and personal guarantees of the borrower's
principals.
Underwriting
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Loan commitments are made based on an in-depth qualitative and
quantitative underwriting analysis. This analysis focuses on the applicant, its
ownership and management, and the funeral home and/or cemetery establishments it
owns and operates. The process begins with the collection of information
concerning the borrower. Information collected from the borrower includes
detailed information regarding ownership, business locations and
characteristics, personnel, the real property and personal property used in
connection with the business, the market environment in which the business
operates, banking and trade references and historical financial statements and
tax returns.
The management review seeks to assess the quality, sufficiency and
commitment of management, with an emphasis on the borrower's owners or managers
("key principals"). This assessment includes a review of the key principals'
backgrounds, including education, professional experience, other business
experience and other activities such as community involvement. Staffing levels
of licensed and other professionals are reviewed to determine sufficiency given
historic service volume and any projected increases. Allegiance requires that
the funeral home and cemetery establishments financed by it, and the funeral
directors and embalmers associated with such establishments, be fully licensed
in compliance with applicable legal requirements.
The business portion of the underwriting analysis includes a review of
tangible aspects of the business such as property condition and appearance, and
intangible factors affecting business value and economics, such as history,
location and market demographics. Financial statements are analyzed internally
to determine historic adjusted cash flow in light of the proposed loan amount
and debt service burden. In addition, third-party consultants independently
determine adjusted cash flow and assess business value. Business value of the
subject business is assessed based primarily on its historic financial
performance and secondarily on the real property and other assets of the
business.
Assessments of business value are used to determine a loan-to-business value
ratio.
Prior to closing, any real property to be pledged as collateral
undergoes an environmental review, utilizing third-party environmental service
providers, which generally meets standards for due diligence developed to avoid
lender liability.
All loan decisions are presented to an investment committee comprised
of the Executive Officers and the president of Allegiance for their approval
prior to commitment. Allegiance relies on outside legal counsel to prepare loan
documents and close loans.
Servicing
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It is anticipated that Point West will perform certain basic loan
servicing functions related to loans made by Allegiance. These functions may
include sending monthly billing statements and other notices, tracking and
posting loan payments, directing the transfer of loan payments to the
appropriate accounts and maintaining loan files.
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In addition to the functions performed by Point West, Allegiance
performs loan portfolio surveillance functions in order to monitor credit
quality. Borrowers provide certain information periodically, including quarterly
and annual financial statements as well as supplemental business activity
information. Allegiance utilizes this information collected from borrowers to
periodically monitor covenant compliance and the credit quality of the
borrowers' underlying businesses. As a senior secured lender, in the event of
default, Allegiance is in a relatively strong position to control any
disposition of the businesses it finances. However, the monitoring process is
intended to help borrowers identify and address problems to avoid defaults.
Competition
-----------
Allegiance faces competition from alternative providers of capital,
including primarily financial institutions, the financial services industry and
to a lesser extent other companies in the death care industry. The financial
services industry is highly competitive. Allegiance competes with both
traditional lenders such as commercial banks, thrifts and finance companies as
well as specialized lenders such as Provident Services, Inc. (a subsidiary of
Service Corp. International) and Franchise Mortgage Acceptance Co. The Company
believes that Allegiance's focus on and knowledge of the death care industry,
its ability to offer loans on terms which meet the needs of owners and acquirers
of death care businesses, and the attractiveness of independent ownership, will
provide it with the ability to operate successfully.
Regulation
----------
Allegiance may be subject to licensing requirements as a lender in
jurisdictions in which it operates and is subject to usury and other similar
laws in such jurisdictions.
Investment in Convertible Preferred Shares
- ------------------------------------------
On November 4, 1996, Point West made a strategic equity investment of
$3.0 million in convertible preferred stock and an option to buy 8.2 million
shares of common stock of American Information Company, Inc. ("American
Information"), a privately held company which, among other things, provides
information services to individuals owning or purchasing automobiles. In March
1997, Point West sold a portion of its investment. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Year Ended
December 31, 1997 Compared to Year Ended December 31, 1996 -- Net Gain on Sale
of Convertible Preferred Shares" and Note 5 of Notes to Consolidated Financial
Statements.
Employees
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As of December 31, 1997, the Company employed 15 individuals, two of
whom (in addition to the Executive Officers) also perform services on behalf of
The Echelon Group of Companies, LLC ("New Echelon LLC"). New Echelon LLC is
owned by the Executive Officers. None of the Company's employees is a member of
a labor union. The Company believes that it maintains good relations with its
employees.
ITEM 2--PROPERTIES
- ------------------
The Company currently leases approximately 5,900 square feet of office
space in San Francisco which it shares with New Echelon LLC. The Company, which
is the lessee under the lease, charges New Echelon LLC for 35% of the rent of
the entire office space. See "Certain Relationships and Related Transactions."
The Company believes that its current office space will be adequate for its
purposes through the expiration of the lease in 1999. The Company also leases an
office in Incline Village, Nevada.
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ITEM 3--LEGAL PROCEEDINGS
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From time to time, the Company is involved in routine legal proceedings
incidental to its business, including litigation in connection with the
collection of amounts owed by insurance company obligors. The Company does not
expect that these proceedings, individually or in the aggregate, will have a
material adverse effect on the Company's financial position, liquidity or
results of operations.
On December 19, 1996, a complaint was filed in the United States
District Court, Northern District of California (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 l0b-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. The
plaintiffs filed an amended complaint on September 8, 1997 and on October 8,
1997 the Company and other defendants filed a motion to dismiss the amended
complaint. On December 5, 1997, the Court granted the defendants' motion to
dismiss the amended complaint. However, the Court gave the plaintiffs permission
to file a second amended complaint in connection with claims under Section 10(b)
of the Securities Exchange Act of 1934 and Rule l0b-5 thereunder. Following an
order granting permissive intervention of an additional plaintiff, the
plaintiffs were granted leave to attempt to allege a claim under Section 11 of
the Securities Act of 1933 in the second amended complaint. On March 2, 1998,
the plaintiffs filed a second amended complaint. 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 LLC 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
- -----------------------------------------------------------
No matters were submitted to a vote of the Company's stockholders
during the fourth quarter of 1997.
9
<PAGE>
PART II
ITEM 5--MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
- --------------------------------------------------------------
STOCKHOLDERS MATTERS
---------------------
The Common Stock trades on The Nasdaq Stock MarketSM under the symbol
"PWCC." As of March 10, 1998, there were approximately 120 holders of record of
Common Stock, including banks, brokerage firms and other nominees. A substantial
portion of the publicly-held shares of Common Stock are held in book-entry form.
As of March 10, 1998, the Company estimates that there were approximately 420
beneficial owners of Common Stock. The following table sets forth, for the
fiscal quarters indicated, the high and low sales prices for the Common Stock on
The Nasdaq Stock MarketSM. The Company's initial public offering occurred on
February 14, 1996.
1997 High Low
---- ---- ---
First Quarter........................ $ 2 7/8 $ 2 1/2
Second Quarter....................... 3 5/8 2 1/2
Third Quarter........................ 3 5/8 2 7/8
Fourth Quarter 4 3/4 2 3/8
1996 High Low
---- ---- ---
First Quarter (from February, 1996).. $ 14 1/2 $ 11 1/8
Second Quarter....................... 13 3/4 6 1/2
Third Quarter........................ 9 1
Fourth Quarter....................... 3 15/32 2 1/8
The Company has never declared or paid any cash dividends on its
capital stock. The Indenture pursuant to which the Securitized Notes were issued
(the "Indenture") limits the Company's ability to pay dividends by restricting,
prior to repayment in full of the Securitized Notes, the Company's access to
cash generated through the collection of pledged policies. The Company currently
intends to retain its future earnings, if any, to finance its businesses.
Therefore, the Company does not anticipate paying cash dividends on the Common
Stock for the foreseeable future.
10
<PAGE>
ITEM 6--SELECTED FINANCIAL DATA
- -------------------------------
The data presented below should be read in conjunction with the
consolidated financial statements and notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere herein. For the reasons set forth in "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Method of
Accounting," information for 1997 and 1996 and as of December 31, 1997 and
December 31, 1996 are not comparable to each other or to prior periods.
Operating Data consists only of information regarding life insurance policies.
Operating Data for Fourteen Hill Capital and Allegiance have not been provided
because their operations were insignificant in 1997. Net income for Fourteen
Hill Capital and Allegiance in aggregate represented less than 3% of net income
for 1997.
<TABLE>
<CAPTION>
Years Ended December 31,
========================
1997 1996 1995 1994 1993(1)
(Dollars in thousands)
----------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
- -----------------------------
Earned discounts on life insurance policies (2) .............................. $ -- $ 3,697 $ 6,933 $ 4,240 $ 420
Earned discounts on prior maturities and matured
policies (2).................................................................. 489 1,782 -- -- --
Net gain on sale of convertible preferred shares .............................. 680 -- -- -- --
Gain (loss) on assets sold..................................................... 1,463 (180) -- -- --
Total income................................................................... 3,918 6,405 7,389 4,443 437
Interest expense............................................................... 3,599 3,984 3,352 1,115 52
Provision for loss on assets held for sale..................................... 328 3,140 -- -- --
Loss on investment in wholly owned financing
subsidiary.................................................................... -- 6,940 -- -- --
Total expenses................................................................. 6,795 17,118 5,394 2,279 776
Income (loss) before income taxes, minority interest
and net loss in wholly owned financing subsidiary
charged to reserve for equity interest ........................................ (2,877) (10,713) 1,996 2,163 (339)
Income tax benefit (expense)................................................... (4) 526 (625) (137) 229
Minority interest of limited partners in earnings of
investee (3).................................................................. -- -- (568) (1,791) (236)
Net loss in wholly owned financing subsidiary charged
to reserve for equity interest................................................. 3,891 488 -- -- --
Net income (loss).............................................................. 1,011 (9,699) 803 235 (347)
Basic earnings(loss)per share (4).............................................. $ 0.29 $ (2.46) $ 0.51 $ 0.26 $(10.15)
Diluted earnings (loss)per share (4)........................................... $ 0.28 $ (2.46) $ 0.42 $ 0.19 $(10.15)
Weighted average number of shares of common stock
outstanding--Basic (in thousands)(4)........................................... 3,522 3,942 1,589 899 34
Weighted average number of shares of common stock
and common stock equivalents outstanding --
Diluted (in thousands)(4) ..................................................... 3,606 3,942 1,902 1,211 34
Operating Data:
- ---------------
Number of policies sold during period(5)....................................... 91 257 -- -- --
Number of policies outstanding, end of period (6) ............................. 557 754 749 548 188
Aggregate face value of policies sold during period (5)........................ $7,590 $20,810 -- -- --
Aggregate face value of portfolio of policies, end of
period (6).................................................................... $43,089 $56,792 $ 59,744 $43,205 $14,785
11
<PAGE>
Balance Sheet Data (at period end):
- ------------------
Cash and cash equivalents...................................................... $10,040 $6,586 $ 1,057 $ 31 $ 1,073
investment securities.......................................................... 5,817 -- -- -- --
Loans receivable............................................................... 4,016 -- -- -- --
Assets held for sale........................................................... 129 11,520 -- -- --
Purchased life insurance policies.............................................. 36,587 41,246 48,938 32,916 11,446
Investment in convertible preferred shares................................... 1,658 3,000 -- -- --
Total assets................................................................... 62,969 68,944 58,226 35,433 13,967
Reserve for equity interest in wholly owned financing
subsidiary................................................................... 2,300 6,453 -- -- --
Long term notes payable........................................................ 38,804 41,218 39,105 -- --
Other long term debt........................................................... -- -- 1,444 18,447 --
Total.liabilities.............................................................. 41,703 48,802 46,680 22,176 594
Minority interest of limited partners in investment
partnership (3).............................................................. -- -- 6,680 9,195 10,035
Total stockholders' equity..................................................... 21,266 20,142 4,866 4,062 3,339
- ----------
<FN>
(1) The Company commenced operations on January 2, 1993 and commenced
purchasing life insurance policies on April 4, 1993.
(2) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Method of Accounting."
(3) The minority interest for 1995,1994,1993 represents the interest of the
former limited partners of Dignity Viatical (defined herein) in the net
assets and income of Dignity Viatical. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Method of
Consolidation" and Notes 1c and 9 of Notes to Consolidated Financial
Statements.
(4) Reflects the following transactions as if such transaction had occurred at
the beginning of each period presented: (a) On September 30, 1995, Point
West and its then sole stockholder, The Echelon Group Inc. ("Echelon"),
which was owned entirely by the Executive Officers, entered into a series
of transactions (collectively, the "Reorganization") to separate the
business of Point West from Echelon's other business interests; (b) On
January 12, 1996, Point West effected a reverse stock split pursuant to
which each outstanding share of Common Stock was converted into .7175 of a
share of Common Stock; (c) In February 1996, all outstanding shares of
Point West's Cumulative Pay-in-Kind Preferred Stock were converted into
321,144 shares of Common Stock. The Reorganization included a sale of
assets by Echelon to New Echelon, which was also owned entirely by the
Executive Officers, and a merger of Echelon into Point West. In connection
with such merger, Point West's authorized and outstanding capital was
increased. See Note 10 and 12 of Notes to Consolidated Financial
Statements.
(5) Represents policies sold or covered by a sale agreement executed during
1997 and 1996 other than policies which had not been transferred as of
December 31, 1997.
(6) Includes policies categorized as "assets held for sale," "purchased life
insurance policies" and "matured policies receivable."
</FN>
</TABLE>
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -------------------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
The following is a discussion and analysis of the consolidated
financial condition and results of operations for the Company for the years
ended December 31, 1997, 1996 and 1995, and of certain factors that may affect
the Company's prospective financial condition and results of operations. The
following should be read in conjunction with the consolidated financial
statements and related notes appearing elsewhere herein. For the reasons set
forth below (including the reclassification into "assets held for sale" of a
substantial portion of the Company's assets in the third quarter of 1996 and
related accounting consequences and the inception of two businesses in 1997) the
Company's results of operations and cash flows for 1997 and 1996 are not
comparable to each other or to prior periods.
Overview
- --------
The Company is a specialty financial services company. The Company's
financial statements consolidate the assets, liabilities and operations of DPFC,
Fourteen Hill Management, Fourteen Hill Capital, Allegiance and Allegiance
Funding. See Notes to Consolidated Financial Statements (contained herein) for
further information regarding these entities.
12
<PAGE>
Until February 1997, the Company provided viatical settlements for
terminally ill persons. See "Cessation of Viatical Settlement Business; Sale of
Assets; Name Change." Subsequently, the Company has sought to become a
broad-based specialty financial services company. To that end, the Company has
expanded its financial services business through the formation and investment in
other entities, including Fourteen Hill Management, Fourteen Hill Capital,
Allegiance and Allegiance Funding. The Company continues to evaluate other
strategic business opportunities. Fourteen Hill Capital and Allegiance, whose
business activities are described under Item 1 -- Business, are indicative of
the types of business opportunities the Company intends to pursue. See "Method
of Consolidation." No assurance can be given that the Company will be successful
in becoming a broad-based specialty financial services company or that any such
enterprise will be successful.
Point West was formed in September 1992 and commenced operations on
January 2, 1993. Effective September 30, 1995, Echelon was merged with and into
Point West as part of the Reorganization. See Footnote (4) to Item 6.--Selected
Financial Data. The Merger had no material impact on the Company's financial
condition or results of operations except for the effect on per share
calculations.
Cessation of Viatical Settlement Business; Sale of Assets; Name Change
- ----------------------------------------------------------------------
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 AIDS Conference, the Company was temporarily ceasing processing new
applications for policies insuring individuals afflicted with AIDS and HIV while
it further analyzed the effects of such research results on its business and its
strategic options. Further analysis resulted in the Company's concluding that
the efficacy of the treatments reported at the AIDS Conference and subsequently
reported treatments had increased the risks of purchasing and holding policies
insuring the lives of individuals diagnosed with HIV and AIDS. The Company
decided in the third quarter of 1996 to sell all or substantially all of its
assets. As a result of such decision, the Company reclassified all of its assets
(other than the policies held by DPFC) to a "held-for-sale" category during the
third quarter of 1996. Accordingly, such assets are accounted for on the lower
of carrying value or fair value less cost to sell. The Company cannot predict
what further impact the foregoing may have on its business, prospects, results
of operations or financial position.
The Company sought and received in December 1996 stockholder approval
to sell all or substantially all of its assets.
Based on the Company's evaluation of the effects of the research
results reported at the AIDS Conference and subsequent reports and other
information, the Company believed that it had become extremely difficult to
predict accurately life expectancy of people afflicted with HIV and AIDS.
Further, the Company decided that it was not viable to continue to operate a
viatical settlement business solely for non-AIDS policies while a market for
non-AIDS policies develops, if it developed at all. As a result, the Board in
February 1997 approved the cessation of the viatical settlement business and the
sale by the Company of its non-AIDS policies.
Through December 31, 1997, the Company entered into agreements to sell
approximately 373 policies with an aggregate purchase price of $19.5 million,
representing $29.2 million in aggregate face value. Through such date, the
Company consummated the sale of 348 policies for $19.2 million, representing
$28.4 million in aggregate face value. The Company reported a pre-tax loss of
$180,000 in 1996 and a pre-tax gain of $1.5 million in 1997 in connection with
such sales. See "Year Ended December 31, 1997 Compared to Year Ended December
31, 1996 -- Gain (Loss) on Assets Sold" and "Year Ended December 31, 1996
Compared to Year Ended December 31, 1995 -- Gain (Loss) on Assets Sold." The
Company has experienced delays or difficulties in transferring the ownership of
14 policies with an aggregate face value of $937,000 at December 31, 1997. The
Company continues to pursue
13
<PAGE>
other options for the sale of these 14 policies; however, due to the limited
market the Company reevaluated the fair value of these policies and recorded in
the third quarter of 1997 an additional reserve of $328,000 for these assets.
The fair value is based on management's best estimate in light of the limited
market and the prices received by the Company in connection with its other
sales. As of December 31, 1997 the carrying value of these 14 policies was
$129,000. See Note 4 of the Notes to Consolidated Financial Statements.
The Company also continues to hold, through DPFC, a substantial amount
of policies, which at December 31, 1997 totaled 543 policies with a face value
of $42.2 million and a carrying value of $36.9 million.
Because the Company no longer engages in the viatical settlement
business, the Board determined that a change in the Company's name was
appropriate. The Company sought and received in June 1997 stockholder approval
to amend Point West'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. Through June 30, 1996, the carrying value for each
policy was reflected on the Company's consolidated balance sheet under
"purchased life insurance policies" and consisted of the purchase price, other
capitalized costs and the earned discount on the policy accrued to the balance
sheet date. The Company capitalized as incurred the following costs of a
purchased policy: (i) the purchase price paid for the policy, (ii) policy
premiums, if any, paid by the Company, (iii) amounts, if any, paid to referral
sources upon acquisition of the policy and (iv) amounts paid to Company-retained
physicians or other medical consultants ("Consultants") who estimated the
insured's life expectancy. The carrying value of a policy changed over time, and
was adjusted quarterly to reflect earned discounts accrued on the policy,
amounts paid for any additional future increases in coverage, any additional
premium payments and any premium refunds if the policy becomes covered by
premium waiver provisions. The length of the Accrual Period was determined by
the Company based upon its estimate of the date on which it would collect the
face value of the policy. Such estimate was based upon the Company's estimate of
the life expectancy of the insured, after review of the medical records of the
insured by one or more Consultants, and was also adjusted to reflect the
historical accuracy of the life expectancies estimated by the Consultants and
the typical period between the date of an insured's death and the date on which
the Company collects the face value of the policy.
The unearned discount was accrued over the Accrual Period using the
"level yield" interest method. Under the "level yield" method, the yield was
held constant such that when the yield was applied to the carrying value of the
policy on a compounded basis over the course of the Accrual Period, the unearned
discount was fully accrued as earned discount by the end of the Accrual Period.
As a result of the Company's decision to sell all or substantially all
of its assets, the Company established a reserve for loss on sale of assets
during the quarter ended September 30, 1996 and reevaluates this reserve
quarterly. An additional reserve of $328,000 was recorded in the third quarter
of 1997. The Company also established a reserve for loss of Point West's equity
interest in DPFC during the third quarter of 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. The reserve for loss on sale of
assets was $399,000 and $2.9 million as of December 31, 1997 and 1996,
respectively. The reserve for loss of Point West's equity interest in DPFC was
$2.3 million and $6.5 million as of December 31, 1997 and 1996, respectively. In
addition, beginning in the third quarter of 1996, the Company began generally
recognizing income with respect to its viatical settlement business upon receipt
of proceeds on policies (either pursuant to sale of the policy or the death of
the insured).Such income
14
<PAGE>
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. See Notes 1e and 4 of the Notes to
Consolidated Financial Statements for further information regarding the reserve
for loss on sale of assets.
Financial Accounting Standards No. 115 ("SFAS No. 115"), Accounting for
-------------
Certain Instruments in Debt and Equity Securities, requires marketable debt and
- -------------------------------------------------
equity securities (including those held by Fourteen Hill Capital) to be
classified into held-to-maturity, available-for-sale and trading categories.
Securities classified as held-to-maturity are reported at amortized cost and
available-for-sale securities are reported at fair market value with unrealized
gains and losses as a separate component of stockholders' equity net of
applicable taxes. There were no trading securities at December 31, 1997. Any
realized gains and losses, declines in value of securities judged to be
other-than-temporary and accrued interest and dividends on all securities will
be reported in the income statement as recognized. See Note 2 of the Notes to
Consolidated Financial Statements.
The Company accounts for loans advanced by Fourteen Hill Capital and
Allegiance by accruing interest on outstanding balances. Since there were only a
few loans outstanding at December 31, 1997, the Company evaluated the loans and
determined that a specific reserve was not necessary. As the loan portfolios
grow, general reserves will be added to the extent considered necessary.
Method of Consolidation
- -----------------------
DPFC
----
The Company's financial statements consolidate the assets, liabilities
and operations of DPFC, Point West's wholly owned subsidiary through which the
Company issued the Securitized Notes. See Note 7 of Notes to Consolidated
Financial Statements. DPFC has purchased 902 policies with an aggregate face
value of $67.1 million and will not purchase any more policies. The carrying
value of the policies held by DPFC was $36.9 million at December 31, 1997.
Dignity Viatical and Dignified One
----------------------------------
Dignity Viatical was a limited partnership formed in 1993 to fund
purchases of life insurance policies. Point West served as the sole general
partner, and persons not affiliated with the Company were limited partners.
Because Point West controlled Dignity Viatical, the assets, liabilities and
operations of Dignity Viatical were consolidated in the Company's consolidated
financial statements from 1993 to June 24, 1996. The minority interest of former
limited partners in investment partnership reflected in the Company's
consolidated financial statements represents the limited partners' interests in
the net assets and income of Dignity Viatical. Through June 1996, Dignity
Viatical had purchased 169 policies with an aggregate face value of $13.9
million. On June 25, 1996, Point West purchased the limited partnership
interests in Dignity Viatical and became the sole owner of all of the
partnership interests therein. On August 2, 1996, the Company entered into an
agreement to sell to an unaffiliated third party virtually all of the policies
owned by Dignity Viatical (representing $5.9 million in face value). The cash
proceeds of such sale in 1996 (approximately $4.7 million) have been collected
by the Company. See Notes lc and 9 of Notes to Consolidated Financial
Statements.
Dignified One was a limited partnership formed in 1994 to fund
purchases of life insurance policies. Dignified One purchased 26 policies, with
an aggregate face value of $1.8 million. All policies held by Dignified One were
collected or sold by September 1997. Due to its immateriality, Dignified One has
been treated as an investment for accounting purposes. Therefore, the policies
purchased by Dignified One are not reflected in the Company's consolidated
financial statements or in the Company's operating or selected financial data
presented herein.
15
<PAGE>
Fourteen Hill Management and Fourteen Hill Capital
--------------------------------------------------
The Company also consolidates the assets, liabilities and operations of
Fourteen Hill Management and Fourteen Hill Capital. Fourteen Hill Management is
a wholly owned limited liability company of Point West formed on June 3, 1997
solely for the purpose of serving as the general partner of one or more SBIC's.
Fourteen Hill Capital is a limited partnership formed on June 3, 1997 solely for
the purpose of operating as an SBIC. Fourteen Hill Management is the sole
general partner of Fourteen Hill Capital, and owns 99.956% of the partnership
interests. Point West is one of the two limited partners of Fourteen Hill
Capital and owns a 0.04% of the partnership interests. The remaining 0.004% of
the partnership interest is owned by one unaffiliated limited partner. Point
West capitalized Fourteen Hill Management with $5.0 million. Fourteen Hill
Management has committed $5.0 million of capital to this partnership, and
through December 31, 1997, had invested $2.5 million in Fourteen Hill Capital.
Fourteen Hill Management receives a management fee for its services on behalf of
Fourteen Hill Capital. See Notes 1d, 2, 3 and 17 of the Notes to Consolidated
Financial Statements for further information regarding Fourteen Hill Management
and Fourteen Hill Capital.
Allegiance and Allegiance Funding
---------------------------------
Allegiance is a limited liability company formed on September 5, 1997
as a specialty finance company to provide senior secured loans to funeral home
and cemetery owners. Point West has a 54% equity interest and 95% voting control
in Allegiance and serves as the managing member of Allegiance. Allegiance's
president and its vice president of marketing, each of whom was hired in
September 1997, have the balance of such interests. Allegiance owns 100% of
Allegiance Funding, which is a special purpose subsidiary formed to facilitate
the potential securitization of loans consummated by Allegiance. Net profits of
Allegiance for each calendar year will be allocated first to Point West in an
amount equal to a return of 10% per annum, compounded monthly, on the amount of
its capital contribution, but not in excess of such net profits. Any shortfall
will be carried forward indefinitely to the next calendar year or years in which
net profits are sufficient to make such allocation. An additional 5% return for
each calendar year will be allocated first to Point West to the extent that in
each year sufficient profits are available with no carry forward provided.
Because the Company controls 95% of the voting power of Allegiance, the assets,
liabilities and operations of Allegiance and Allegiance Funding are consolidated
with the assets, liabilities and operations of the Company. Through December 31,
1997, Point West had invested $3.9 million in Allegiance. See Notes 1d, 3 and
13b of the Notes to Consolidated Financial Statements for further information
regarding Allegiance.
Certain Accounting Implications for DPFC
- ----------------------------------------
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 Securitized Notes were
not retired through collections by October 1997. In the event that the
collection experience for DPFC policies is substantially delayed, the equity of
DPFC may become negative. Because of recent delays and variability in
collections, the Company cannot currently predict at what point in time, if
ever, the equity of DPFC may become negative.
Additionally, if the collection experience for the DPFC policies is
substantially delayed, the value of the equity 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 the extent to which
policies held by DPFC will be so affected.
16
<PAGE>
In light of the foregoing, the Company believes that to the extent that
the losses of DPFC exceed its equity (creating a deficit), the deficit would be
recorded by the Company as a loss. Upon the retirement of the Securitized Notes
at less than book value, the Company would recognize a gain for the difference
which is expected to approximate the deficit of DPFC. At December 31, 1997, the
equity of DPFC was $2.3 million. 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 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.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
- ---------------------------------------------------------------------
Earned Discounts. Effective July 1, 1996, the Company began recognizing
----------------
earned discounts only upon receipt of proceeds on matured policies (pursuant to
the death of the insured). Consequently, the Company did not recognize any
earned discounts on life insurance policies during the year ended December 31,
1997, but instead recognized $489,000 of earned discounts on matured policies
for the year ended December 31, 1997. 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 six months 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
$3.7 million for the six months ended June 30, 1996. In the third quarter of
1996 the Company began recognizing earned discounts only upon receipt of
proceeds on policies (pursuant to the death of the insured). The Company
recognized $980,000 of earned discounts on matured policies during the year
ended December 31, 1996. In addition, the Company recognized $802,000 of earned
discounts on prior maturities. Such earned discounts were carried on the balance
sheet at June 30, 1996 as unearned income which related to policies for which
the Company had collected the proceeds prior to the expected collection date.
The Company will not have any earned discounts on prior maturities in any other
period. See "Method of Accounting."
The Company purchased only four policies (representing outstanding
commitments as of December 31, 1996) with an aggregate face value of $155,000
during the year ended December 31, 1997 compared to the purchase of 475 policies
with an aggregate face value of $33.1 million during the year ended December 31,
1996. See "Cessation of Viatical Settlement Business; Sales of Assets; Name
Change."
Interest Income. Interest income increased 51.2% in the year ended
----------------
December 31, 1997 over the year ended December 31, 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 nine months of
1996 was primarily the result of the investment of the Company's initial public
offering proceeds.
Net Gain on Sale of Convertible Preferred Shares. In 1997 the Company
--------------------------------------------------
recognized a $700,000 gain on the sale of a portion of Point West's investment
in American Information. In March 1997, Point West converted 8.2 million shares
of convertible preferred stock into 8.2 million shares of common stock of
American Information and sold such shares (approximately 38% of Point West's
equity investment in American Information) to an unaffiliated third party for
$1.8 million. The carrying value of such shares was $1.1 million. In addition,
Point
17
<PAGE>
West had an option that expired on October 26, 1997 to purchase, for
approximately $1.1 million, 8.2 million additional shares of common stock of
American Information. Since Point West did not exercise this option, a $20,000
pre-tax loss was recognized in 1997. The Company accounts for this investment
using the cost method. See Note 5 of the Notes to Consolidated Financial
Statements.
Gain (Loss) on Assets Sold. The Company collected during 1997 the sales
--------------------------
proceeds on 348 of the 373 policies subject to the sale agreements entered into
through December 31, 1997. See Note 4 of the Notes to Consolidated Financial
Statements. The total net gain recorded in 1997 in connection with these sales
was $1.5 million compared to a net loss of $180,000 in 1996. The realized gain
(loss) 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; Name Change."
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 realized capital
gains on investments securities. Other income decreased 68.1% in 1997 over 1996
due primarily to a decrease in the number of matured policies. Other income was
also relatively high in 1996 due to an $80,000 aggregate increase in face value
on two policies.
Interest Expense. Interest expense decreased 9.6% in 1997 compared to
-----------------
1996 due mainly to the repayment of indebtedness. There were no borrowings under
the Company's revolving credit facility in 1997 compared to average borrowings
of $800,000 in 1996. The revolving credit facility was repaid and terminated in
August 1996. Average borrowings under the Securitized Notes were $39.3 million
in 1997 compared to $42.7 million in the 1996. The interest rate on the
Securitized Notes was 9.17% in both periods.
Compensation and Benefits. Compensation and benefits decreased 3.7% in
-------------------------
1997 compared to 1996. This decrease was due mainly to the reduction in staff
with the cessation of application processing of new policies. Subsequent to the
AIDS Conference, the number of employees decreased from 27 on July 16, 1996 to
15 at December 31, 1996. Partially offsetting the staff reduction was the
increase in compensation and benefits for remaining employees (including the
Executive Officers) in 1997. The Company had 15 employees at December 31, 1997.
Other General and Administrative Expenses. Other general and
------------------------------------------------
administrative expenses increased 6.2% in 1997 compared to 1996. This increase
is primarily the result of $412,000 in legal expenses recorded in 1997 in
connection with federal and state alleged class action lawsuits filed against
the Company and its officers and directors and $151,000 in increased life
insurance policy premium costs recorded in 1997. Partially offsetting this was
an aggregate reduction in the amount of $405,000 consisting of a decrease in
general legal expenses, professional fees and the elimination of medical review
costs associated with the Company's former viatical settlement business.
Notwithstanding the increase in premium costs, such premium costs were reflected
in the reduction of the reserve for loss on investment in wholly owned financing
subsidiary. As a result, such increased premium costs did not impact net income.
Amortization. Amortization costs decreased 46.6% in 1997 compared to
-------------
1996 primarily because the Company prepaid its revolving credit facility in
August 1996 and as a result wrote off unamortized financing charges of $130,000
related to this facility in the third quarter of 1996. All periods include the
amortization of deferred financing costs for DPFC.
Provision for Loss on Assets Held for Sale. The Company recorded in
-------------------------------------------
1996 a provision for loss on sale of assets totaling $3.1 million based on
management's estimate of proceeds from the sale of policies. The provision
equaled the difference between the carrying value of policies and those
estimates. The estimates were based on the life expectancies of the insureds
covered by the policies, the estimated sale period and the prices obtained by
the Company in connection with other sales of policies. In 1997, the Company
recorded an additional provision in the
18
<PAGE>
amount of $328,000 in connection with the remaining policies not yet sold, based
on management's revised best estimate of proceeds from the sale of such
policies.
Loss on Investment in Wholly Owned Financing Subsidiary. A reserve was
-------------------------------------------------------
recorded in 1996 in the amount of $6.9 million to reflect the estimated loss of
Point West's entire equity interest in DPFC. Point West had an initial capital
investment in DPFC of $2.9 million and, through consolidation, an additional
$4.0 million of increased equity attributable to the earnings of DPFC. See "--
Certain Accounting Implications for DPFC."
Income Tax Expense. In 1997 the Company recorded $4,000 for minimum
-------------------
state income taxes. The Company only recorded this minimum income tax expense on
the income statement because the deferred tax asset of $3,805,100 was available
to offset any income tax liability. The Company adjusted its deferred tax asset,
liability and related allowance to reflect the tax effect on the earnings for
1997.
Net loss in Wholly Owned Financing Subsidiary Charged to Reserve for
----------------------------------------------------------------------
Equity Interest. At December 31, 1997 and 1996 the reserve to reflect the
- ----------------
estimated loss of Point West's entire equity interest in DPFC was $2.3 million
and $6.5 million, respectively. The DPFC net loss of $3.9 million and $488,000
recorded in 1997 and 1996, respectively, was included in the Company's net loss
before income taxes, minority interest of limited partners in earnings of
investment partnership 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. For a description of the
composition of such reserve, see "Loss on Investment in Wholly Owned Financing
Subsidiary" above.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
- ---------------------------------------------------------------------
Earned Discounts. The Company purchased 475 policies with an aggregate
----------------
face value of $33.1 million during the year ended December 31, 1996 compared to
the purchase of 386 policies with an aggregate face value of $29.7 million
during 1995. Of the 475 policies purchased in 1996, 133 policies with an
aggregate face value of $8.1 million were purchased in the second half of the
year. Earned discounts on life insurance policies decreased 46.4% from $6.9
million during 1995 to $3.7 million through June 30, 1996.
Effective June 30, 1996, the Company reclassified all of its assets
(other than the policies held by DPFC) to a "held for sale" category. The
Company also established a reserve to reflect estimated loss of Point West's
equity interest in DPFC because of the uncertainties created by the data
presented at the AIDS Conference and subsequently reported data. As a result,
beginning on July 1, 1996, the Company began recognizing income only upon
receipt of proceeds on policies (pursuant to the death of the insured).
Consequently, the Company did not recognize any earned discounts on life
insurance policies during the second half of 1996, but instead recognized
$980,000 of earned discounts on matured policies for such period. Such income is
equal to the difference between the proceeds the Company received on the
policies (less any back end sourcing fees) and the carrying value of such
policies after giving effect to any reserve for loss on the sale of such
policies. See Notes 1e, 1f, 4 and 11 to the Notes to Consolidated Financial
Statements. In addition, in connection with the decision to sell all or
substantially all of the Company's assets, in the third quarter of 1996 the
Company recognized $802,000 of earned discounts on prior maturities. Such earned
discounts were carried on the balance sheet at June 30, 1996 as unearned income
which related to policies for which the Company had collected the proceeds prior
to the expected collection date. The Company has not had earned discounts on
prior maturities since the third quarter of 1996 and will have none in future
periods.
Interest Income. Interest income increased dramatically (193%) in 1996
----------------
as a result of the investment of the February 1996 initial public offering
proceeds in short term securities and marketable securities. Interest income
decreased during 1996 as such funds were used to purchase life insurance
policies and for other working capital purposes.
See Note 10 of Notes to Consolidated Financial Statements.
19
<PAGE>
Gain (Loss) on Assets Sold. The total net loss recorded in 1996 on
----------------------------
assets sold was $180,000. On August 2, 1996, the Company sold 58 policies held
by Dignity Viatical and two other policies to an unaffiliated third party. This
transaction resulted in a pre-tax loss of approximately $300,000. Also recorded
in 1996, was a gain totaling $120,000 on proceeds collected in respect to
policies sold pursuant to a sale agreement. The realized gain was calculated
based on the difference between the sale value and the carrying value after
giving effect to the reserve for loss on sale of assets.
Other Income. Other income increased during 1996 due mainly to
-------------
collections on a relatively larger portfolio and a $80,000 aggregate increase in
face value on two policies.
Interest Expense. Interest expense increased 17.6% to $4.0 million in
------------------
1996 from $3.4 million in 1995 as a result of the relatively higher level of
portfolio purchases and the increase in borrowings used to fund those purchases.
Average borrowings under the Securitized Notes were $42.7 million in 1996
compared to $26.7 million in 1995. The interest rate on the Securitized Notes
decreased to 9.2% in October 1995 from 9.5%. Borrowings under the Company's
revolving credit facility bore a dollar weighted interest rate of 12.1% and
13.6% in 1996 and 1995, respectively. Average borrowings were $800,000 in 1996
compared to $4.2 million in 1995. See Notes 6 and 7 of Notes to Consolidated
Financial Statements, "Liquidity and Capital Resources" and "Description of
Securitized Notes" for further information regarding the Securitized Notes and
revolving credit facility.
Compensation and Benefits. Compensation and benefits increased 41.8% in
-------------------------
1996 compared to 1995 due to the hiring of additional personnel in 1996 to
handle the administrative tasks relating to the Company's relatively larger
portfolio and non-broker referral business and to support the Company's relative
growth in the first six months of 1996. Subsequent to the AIDS Conference and
the cessation of new application processing, the number of employees decreased
from 27 on July 16, 1996 to 15 at December 31, 1996.
Other General and Administrative Expenses. Other general and
------------------------------------------------
administrative expenses increased 56.0% to $1,388,000 in 1996 from $890,000 in
1995. Expenses for legal, accounting, insurance, director fees and advertising
increased in 1996 an aggregate of $483,000, in part as a result of the Company's
status as a public company, activities related to the special meeting of
stockholders of the Company held in December 1996 and new business development
activities. Additionally, because the Company ceased processing applications for
policies insuring individuals with AIDS and HIV, approximately $110,000 of
medical review costs associated with such policies in the underwriting process
were expensed in 1996. The Company also recorded in 1996 a one-time expense of
$92,000 to recognize the fair value of warrants issued to Jefferies to purchase
up to 300,000 shares of Common Stock. See Note 16 of Notes to Consolidated
Financial Statements.
Amortization. Because the Company prepaid its revolving credit facility
------------
in August 1996, the Company incurred a charge in the third quarter of 1996 of
$130,000 as a result of writing off the unamortized financing charges related to
that facility.
Provision for loss on assets held for sale. The Company recorded in
-------------------------------------------
1996 a provision for loss on sale of assets totaling $3.1 million based on
management's estimate of proceeds from the sale of policies. The provision
equaled the difference between the carrying value of policies and those
estimates. The estimates were based on the life expectancies of the insureds
covered by the policies, the estimated sale period and the prices obtained by
the Company in connection with other sales of policies. For purposes of
calculating such loss provisions, furniture and equipment were valued on the
assumption that miscellaneous office equipment had no sales value.
Loss on investment in wholly owned financing subsidiary. As of June 30,
-------------------------------------------------------
1996, the Company had an initial capital investment recorded of $2.9 million
and, through consolidation, an additional $4.0 million of increased equity
attributable to the earnings of DPFC. A reserve was recorded in 1996 in the
amount of $6.9 million to reflect the estimated loss of Point West's entire
equity interest in DPFC. See "-- Certain Accounting Implications for DPFC."
20
<PAGE>
Income Taxes. Income tax expense decreased in 1996 over the comparable
------------
period in 1995. This decrease was a result of the loss provision on assets held
for sale and equity loss of wholly owned financing subsidiary recorded in 1996.
Minority Interest of Limited Partners in Earnings of Investment
----------------------------------------------------------------------
Partnership. All earned discounts attributable to the former limited partners of
- -----------
Dignity Viatical had been fully accrued by December 31, 1995 and, therefore,
minority interest of limited partners in earnings of investment partnership was
zero for 1996 compared to $568,000 for 1995.
Net loss in wholly owned financing subsidiary charged to reserve for
----------------------------------------------------------------------
equity interest. In the fourth quarter of 1996, the DPFC net loss of $488,000
- ----------------
was included in the Company's net loss before income taxes, minority interest
and net loss in wholly owned financing subsidiary charged to reserve for equity
interest. This loss was charged against the initial reserve for equity interest
in wholly owned financing subsidiary which was recorded in the third quarter of
1996.
Liquidity and Capital Resources
- -------------------------------
Other than any debt borrowings that may be available to Fourteen Hill
Capital through the SBA, the Company does not currently have an external funding
source. Although Fourteen Hill Capital's license as a SBIC permits it to obtain
debt from the federal government, because one of Fourteen Hill Capital's
investments represents an amount greater than 20% of its regulatory capital (at
February 28, 1998 this investment constituted 40% of regulatory capital),
Fourteen Hill Capital will not be able to access such debt until it liquidates a
portion of such investment or increases its regulatory capital. The Securitized
Notes do not provide funds with which to fund operations. Allegiance is in the
process of negotiating an external funding facility to support its loan
activity. There can be no assurance that Allegiance will be
able to obtain external funding or that any such funding will be on terms
acceptable to the Company.
At December 31, 1997, cash and cash equivalents were $10.0 million and
investment securities was $5.8 million. The Company continues to analyze its
current and future needs for financing, which will be dependent on its ability
to develop the businesses of Fourteen Hill Capital and Allegiance and any other
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 capital commitments and
working capital and operational needs through 1998, using current cash and cash
equivalents and investment securities.
As of December 31, 1997, the outstanding principal amount of the
Securitized Notes was $38.8 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. See Notes 1f and 7
of the Notes to Consolidated Financial Statements.
Description of Securitized Notes
- ---------------------------------
The Securitized Notes were issued in 1995 pursuant to the Indenture,
which provided for a maximum lending commitment of $50.0 million, subject to
reduction of the commitment amount or early amortization in April 1996 if the
outstanding principal balance of the Securitized Notes was less than $50.0
million. Funds advanced under the Securitized Notes were used primarily to
purchase eligible policies which are pledged as collateral under the Indenture.
Prior to the Amortization Date, proceeds from collected policies pledged under
the Indenture were available to purchase additional policies. Repayments of
principal were originally scheduled to begin in September 1996. An early
amortization event occurred in June 1996 with the result that the maximum
lending commitment
21
<PAGE>
was reduced to the then outstanding balance ($45.5 million) from $50.0 million,
the Company lost the ability to use proceeds of policy collections to acquire
additional policies and principal repayments on the Securitized Notes began in
July 1996. The Securitized Notes bear interest at a fixed annual rate of 9.17%.
The principal amount of the Securitized Notes to be repaid in any month is equal
to proceeds of policies collected during the preceding month less certain
required monthly payments (such as interest and servicing and trustee fees) to
be paid on such date.
Although the Company and the Noteholders have had discussions about the
possible sale of policies pledged under the Indenture, the Indenture does not
provide for the sale of any of the policies pledged thereunder. Therefore, any
such sale would require the consent of the Company and the Noteholders.
The ownership interest in policies purchased by DPFC is nominally held
by an unaffiliated third party trustee under the Indenture but the policies are
beneficially owned by DPFC. The Company accounts for this securitization as a
debt financing and not as a sale of assets, which is in accordance with the
accounting literature in effect for bankruptcy remote entities with non-recourse
debt. The assets, liabilities and operations of DPFC are consolidated in the
Company's consolidated financial statements.
The Indenture contains certain covenants restricting the activities of
DPFC. Such covenants include provisions which (i) prohibit DPFC from incurring
debt other than trade payables and expense accruals and granting liens unless
such action would not cause Standard & Poor's to downgrade or withdraw the
rating it assigned to the Securitized Notes, and (ii) prohibit DPFC from
engaging in any business other than the acquisition, ownership, sale and
pledging of the pool of pledged policies (the "Pool") and the other trust
estate, the issuance and sale of the Securitized Notes and activities incidental
to the foregoing. In addition, DPFC is required to maintain in an account under
the Indenture (the "Liquidity Account") a balance of 10% of the outstanding
principal balance of the Securitized Notes. Subject to certain restrictions,
funds in the Liquidity Account may be used to pay, among other things, servicing
and trustee fees, principal and interest and taxes. Events of default under the
Indenture include (i) a default in payment of principal or interest on the
Securitized Notes when due, (ii) a default by DPFC in the performance of any
material covenant or a material breach of a representation or warranty of DPFC
which is not cured within 30 days, and (iii) certain events of bankruptcy,
insolvency and reorganization involving DPFC.
Point West acts as servicer under the Indenture pursuant to a
Contribution, Sale and Servicing Agreement (the "Servicing Agreement") and
receives monthly, pursuant and subject to the terms of the Indenture, a fee of
$36,000 until the earlier to occur of collection of the face value of the last
policy in the Pool or payment in full of the Securitized Notes. Point West is
required under the Servicing Agreement to monitor each policy and to cause the
collection and remittance to the trustee of the face value of matured policies.
Point West pays all expenses related to such monitoring and collection services,
including paying premiums and back-end fees, and is reimbursed for certain
expenses. All amounts owed to Point West pursuant to the monitoring and
collecting activities are subject to availability of cash after payment of other
priority amounts as provided in the Indenture. The Servicing Agreement contains
certain covenants restricting Point West's activities, including (i)
restrictions on mergers, (ii) provisions related to respecting the separate
legal status of DPFC, (iii) a requirement that no person will own a greater
percentage of the aggregate voting power of equity securities of Point West
entitled to vote in the election of directors than the percentage collectively
beneficially owned by the Executive Officers and no person other than the
Executive Officers will own more than 20% of such aggregate voting power, (iv) a
requirement that the Executive Officers constitute a majority of the Board, and
(v) a requirement that Point West employ at least two of the Executive Officers
(or such other personnel reasonably acceptable to the Noteholders) in their
respective current capacities. An event of default will occur under the
Servicing Agreement if, among other things, (i) an event of default occurs under
the Indenture, or (ii) certain events of bankruptcy, insolvency or
reorganization occur with respect to Point West. If an event of default occurs
under the Servicing Agreement, Point West can be replaced as servicer under the
Indenture. The back-up servicer is the trustee under the Indenture.
22
<PAGE>
Other
- -----
Based on a preliminary study, the Company expects to spend
approximately $50,000 to $100,000 from 1998 to 1999 to modify its computer
information systems enabling proper processing of transactions relating to the
year 2000 and beyond ("Year 2000 Compliant"). Amounts expensed in 1997 were
immaterial. The Company continues to evaluate appropriate courses of corrective
action, including replacement of certain systems whose associated costs would be
recorded as assets and depreciated. The Company does not expect the amounts
required to be expensed over the next two years to have a material effect on its
financial position or results of operations. The Company is also in the process
of reviewing whether or not its suppliers and vendors are Year 2000 Compliant.
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
relating to (i) the ability of the Company to sell any remaining policies held
for sale (See "Business -- Asset Sales; Viatical Settlement Business"), (ii) the
ability of the Company to find new successful business opportunities (See
"Business -- Consideration of Strategic Options"), (iii) the ability of Fourteen
Hill Capital to find profitable investments which range from $500,000 to $1
million (See "Business -- Small Business Investments"), (iv) the ability of
Allegiance to originate loans (See "Business -- Loans to Funeral Homes and
Cemeteries"), and (v) those under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" relating to (a) face and carrying
values of policies expected to continue to be owned by the Company, (b)
expectations regarding whether and the time at which the equity of DPFC will
become negative (see "Certain Accounting Implications for DPFC"), (c)
sufficiency of the Company's liquidity and capital resources (see "Liquidity and
Capital Resources"), and (d) expected expenses to make the Company's computer
operations Year 2000 compliant. 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 level of success of Allegiance and Fourteen Hill Capital, (ii)
increased competition to make loans to owners of funeral homes and cemeteries,
(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, (v)
availability and cost of capital, and (vi) the ability of the Company's
suppliers and vendors to become Year 2000 compliant.
ITEM 7A--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
- --------------------------------------------------------------------
Not required for fiscal 1997 because the Company's market capitalization
was less than $2.5 billion as of January 28, 1997.
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
See pages 24 through 44.
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- ---------------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
None.
23
<PAGE>
KPMG Peat Marwick LLP
Three Embarcadero Center
San Francisco, CA 94111
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders of
Point West Capital Corporation:
We have audited the accompanying consolidated balance sheets of Point West
Capital Corporation, as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Point West Capital
Corporation as of December 31, 1997 and 1996,and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1997, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
San Francisco, California
February 26, 1998
24
<PAGE>
POINT WEST CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
December 31, December 31,
ASSETS 1997 1996
-------------------- --------------------
<S> <C> <C>
Cash and cash equivalents $ 10,039,560 $ 6,586,447
Restricted cash 3,756,714 4,625,663
Investment securities (note 2)
Held-to-maturity 2,220,000 --
Available-for-sale 3,597,343 --
Matured policies receivable (note 1m) 305,435 1,181,513
Loans receivable, net of unearned income of $59,884
and $0, respectively (note 1d, 1m and 3) 4,015,716 --
Assets held for sale (note 1e and 4) 129,334 11,520,103
Purchased life insurance policies (note 1f) 36,586,788 41,246,239
Investment in convertible preferred shares (note 5) 1,658,478 3,000,000
Deferred financing and organizational costs, net of
accumulated amortization of $621,884 and
$381,690, respectively (note 1g) 525,433 681,910
Furniture and equipment, net of accumulated depreciation of
$341 and $0, respectively (note 1h) 6,862 --
Other assets 127,590 102,598
-------------------- --------------------
Total assets $ 62,969,253 $ 68,944,473
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses $ 183,150 $ 190,894
Accounts payable 216,851 320,577
Accrued compensation payable 193,000 186,390
Payable for policies purchased (note 1m) -- 427,553
Reserve for equity interest in wholly owned financing
subsidiary (note 1f) 2,300,037 6,452,589
Long term notes payable (note 7) 38,804,107 41,218,205
Deferred income taxes (note 1i and 8) 6,000 6,000
-------------------- --------------------
Total liabilities 41,703,145 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
Net unrealized investment gains (note 2 and 8) 2,597,239 --
Retained deficit (7,996,737) (9,007,373)
Treasury stock, 1,038,500 and 145,000 shares,
respectively (note 10) (2,874,032) (390,000)
-------------------- --------------------
Total stockholders' equity 21,266,108 20,142,265
-------------------- --------------------
Total liabilities and stockholders' equity $ 62,969,253 $ 68,944,473
==================== ====================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
25
<PAGE>
POINT WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Income:
Earned discounts on life insurance policies (note 11) $ -- $ 3,697,032 $ 6,933,318
Earned discounts on prior maturities (note 11) -- 802,471 --
Earned discounts on matured policies (note 11) 488,563 979,611 --
Interest income 1,183,919 783,115 266,979
Net gain on sale of convertible
preferred shares (note 5) 679,665 -- --
Gain (loss) on assets sold (note 4) 1,463,080 (179,548) --
Other 102,663 322,141 189,079
-------------- -------------- --------------
Total income 3,917,890 6,404,822 7,389,376
Expenses:
Interest expense 3,599,487 3,983,606 3,352,178
Compensation and benefits 1,151,574 1,196,291 843,646
Other general and administrative expenses 1,474,916 1,388,338 889,816
Amortization (note 1g and 6) 240,194 449,631 273,543
Depreciation (note 1h) 341 19,967 34,653
Provision for loss on assets held for sale (note 1e and 4) 328,236 3,139,588 --
Loss on investment in wholly owned financing
subsidiary (note 1f) -- 6,940,189 --
-------------- -------------- --------------
Total expenses 6,794,748 17,117,610 5,393,836
-------------- -------------- --------------
Income (loss) before income taxes, minority interest
and net loss in wholly owned financing subsidiary
charged to reserve for equity interest (2,876,858) (10,712,788) 1,995,540
Income tax (expense) benefit (note 8) (4,000) 525,711 (624,510)
Minority interest of limited partners in earnings
of investee (note 1c and 9) -- -- (567,831)
Net loss in wholly owned financing subsidiary charged
to reserve for equity interest (note 1f) 3,891,494 487,600 --
-------------- -------------- --------------
Net income (loss) $ 1,010,636 $ (9,699,477) $ 803,199
============== ============== ==============
Basic earnings (loss) per share (note 12) 0.29 (2.46) 0.51
Diluted earnings (loss) per share (note 12) 0.28 (2.46) 0.42
Weighted average number of shares of common stock
outstanding (note 12) 3,521,736 3,942,166 1,589,324
Weighted average number of shares of common stock
and common stock equivalents outstanding (note 12) 3,605,674 3,942,166 1,902,482
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
26
<PAGE>
POINT WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Net
Additional unrealized Retained
Preferred Stock Common Stock paid-in investment earnings Treasury
------------------ --------------
Shares Amount Shares Amount -capital gains (deficit) Stock Total
------- ---------- --------- ------- ---------- --------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
January 1, 1995 34,880 $3,488,013 1,589,324 $15,893 $ 669,594 $ -- $ (111,095) $ -- $ 4,062,405
Issuance of preferred
stock dividend 380 -- -- -- -- -- -- -- --
Net income -- -- -- -- -- -- 803,199 -- 803,199
-------- ---------- --------- -------- --------- --------- ------------ ------------ -----------
Balances at December 31,
1995 35,260 $3,488,013 1,589,324 $15,893 $ 669,594 $ -- $ 692,104 $ -- $ 4,865,604
Issuance of preferred
stock dividend 580 -- -- -- -- -- -- -- --
Issuances of common stock
(February 1996) (35,840) (3,488,013) 2,702,500 27,025 28,734,956 -- -- -- 25,273,968
Purchase of treasury stock -- -- -- -- -- -- -- (390,000) (390,000)
Grant of warrants
(September 1996) -- -- -- -- 92,170 -- -- -- 92,170
Net loss -- -- -- -- -- -- (9,699,477) -- (9,699,477)
-------- ---------- --------- -------- ---------- --------- ------------ ------------ ------------
Balances at December 31,
1996 -- $ -- 4,291,824 $42,918 $29,496,720 $ -- $(9,007,373) $ (390,000) $20,142,265
-------- ---------- --------- -------- ----------- --------- ------------ ------------ ------------
Net unrealized investment
gains -- -- -- -- -- 2,597,239 -- -- 2,597,239
Purchase of treasury stock -- -- -- -- -- -- -- (2,484,032) (2,484,032)
Net income -- -- -- -- -- -- 1,010,636 -- 1,010,636
Balances at December 31, -------- ---------- --------- -------- ----------- ---------- ------------ ------------ ------------
1997 -- $ -- 4,291,824 $42,918 $29,496,720 $2,597,239 $(7,996,737) $(2,874,032) $21,266,108
========= ========== ========= ======== =========== ========== ============ ============ ============
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
27
<PAGE>
POINT WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- --------------------- ---------------------
<S> <C> <C> <C>
Cash flows for operating activities:
Net income (loss) $ 1,010,636 $ (9,699,477) $ 803,199
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 240,535 469,599 308,196
Loss (gain) on assets (1,463,080) 191,851 --
Net gain on sale of convertible preferred shares (679,665) -- --
Provisions for loss on sale of assets 328,236 3,139,587 --
Warrants granted to consultants -- 92,170 --
Increase in accounts receivable -- -- (6,036)
Earned discounts on policies (488,563) (5,479,114) (6,933,318)
Purchase of life insurance policies (882,848) (23,912,464) (22,276,717)
Collections on matured life insurance policies 6,051,149 15,523,569 13,103,920
Increase (decrease) in unearned income on policies -- (715,883) 86,175
Decrease (increase) in other assets (25,096) (15,519) (76,251)
Increase (decrease) in deferred taxes -- (525,711) 623,690
Increase (decrease) in accrued expenses (7,744) (138,933) 149,827
Increase (decrease) in accounts payable (103,726) (56,627) 343,839
Increase (decrease) in IPO financing costs payable -- (306,900) 306,900
Increase (decrease) in payable to related party -- (1,482,170) 769,475
Increase (decrease) in accrued compensation payable 6,610 (662,758) 274,148
Increase (decrease) in reserve for equity interest in wholly
owned financing subsidiary (3,891,494) 6,452,589 --
Increase in minority interest -- -- 567,329
---------------- ---------------- ----------------
Net cash provided by (used in) operating activities 94,950 (17,126,191) (11,955,624)
---------------- ---------------- ----------------
Cash flows from investing activities:
Proceeds from sale of assets held for sale 12,692,793 6,533,523 --
Purchase of furniture and equipment (7,203) (6,776) (37,235)
Decrease (increase) in restricted cash 868,949 (58,818) (4,459,832)
Increase in investment securities (3,220,000) -- --
Increase in loans receivable (4,015,716) --
Sale (purchase) of investment in convertible preferred stock 2,021,187 (3,000,000) --
---------------- ---------------- ----------------
Net cash provided by (used in) investing activities 8,340,010 3,467,929 (4,497,067)
---------------- ---------------- ----------------
Cash flows from financing activities:
Proceeds from long term notes payable -- 6,375,000 39,105,138
Principal payments on long term notes payable (2,414,098) (4,261,933) --
Proceeds from other long term debt -- 5,540,132 22,701,070
Principal payments on other long term debt -- (6,984,402) (39,703,752)
Distribution to limited partners -- (783,313) (3,083,171)
Purchase of limited partners' interest in invetment partnership -- (5,081,184) --
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) (390,000) --
Increase in financing and organizational costs (83,717) (88,000) (790,544)
IPO financing costs -- -- (750,000)
Reimbursement of IPO financing costs -- 750,000 --
---------------- ---------------- ----------------
Net cash (used in) provided by financing activities (4,981,847) 19,188,098 17,478,741
---------------- ---------------- ----------------
Net increase in cash and cash equivalents 3,453,113 5,529,836 1,026,050
Cash and cash equivalents, beginning of period 6,586,447 1,056,611 30,561
---------------- ---------------- ----------------
Cash and cash equivalents, end of period $ 10,039,560 $ 6,586,447 $ 1,056,611
================ ================ ================
Supplemental disclosures:
Supplemental disclosure of non-cash activities:
Unrealized gain on securities available for sale $ 2,597,239 $ -- $ --
================ ================ ================
Supplemental disclosure of cash flow information:
State taxes paid $ 40,233 $ 6,389 $ 3,367
================ ================ ================
Cash paid for interest $ 3,607,231 $ 4,113,703 $ 2,901,685
================ ================ ================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
28
<PAGE>
Point West Capital Corporation
Notes to Consolidated Financial Statements
December 31, 1997,1996 and 1995
1. Summary of Significant Accounting Policies
------------------------------------------
a. General Description
-------------------
Point West Capital Corporation (formerly known as Dignity Partners,
Inc.) ("Point West") and its consolidated entities (the "Company"), is a
specialty financial services company. Until February 1997, the Company provided
viatical settlements for terminally ill persons. A viatical settlement is the
payment of cash in return for an ownership interest in, and right to receive the
death benefit (face value) from, a life insurance policy. Upon a viatical
settlement, the policyholder assigned his or her policy to the Company, which
became the holder, owner or certificate holder of the policy and the beneficiary
thereunder with the right to receive from the insurance company the face value
payable under the policy following the death of the insured.
On July 16, 1996, in response to accounts of the research results
reported at the International AIDS Conference held in Vancouver, British
Columbia in July 1996 (the "AIDS Conference"), the Company announced that it was
temporarily ceasing the processing of new applications to purchase policies
insuring the lives of individuals diagnosed with HIV and AIDS while it further
analyzed the effects on its business of such research results. Results from a
number of studies were reported which appeared to indicate that the treatments
involving a combination of various drugs were reducing substantially, and
perhaps eradicating, the levels of HIV detectable in the blood of persons
previously diagnosed with HIV and AIDS. Subsequent reports appeared to confirm
the reports from the AIDS Conference. On December 16, 1996, the Company obtained
stockholder approval to sell all or substantially all of its assets. The Company
has sold or is pursuing the sale of all of its policies other than those held by
DPFC (as defined herein). The Company believed that it was not viable to operate
a viatical settlement business solely for non-AIDS policies while a market for
non-AIDS policies developed, if it developed at all. As a result, the Board of
Directors (the "Board") in February 1997 decided to cease the Company's viatical
settlement business.
Subsequent to February 1997, the Company has sought to become a
broad-based specialty financial services company. To that end, the Company has
expanded its financial services business through the formation and investment in
other entities, including Fourteen Hill Management, LLC ("Fourteen Hill
Management") and Fourteen Hill Capital, L.P. ("Fourteen Hill Capital") which
invest in small businesses, and Allegiance Capital, LLC ("Allegiance") and
Allegiance Funding Corp. I ("Allegiance Funding") which loan funds to funeral
home and cemetery owners. The Company continues to service the life insurance
policies held by its wholly owned special purpose subsidiary, Dignity Partners
Funding Corp. I ("DPFC"), and to evaluate other strategic business
opportunities.
Point West was incorporated in the State of Delaware on September 8,
1992 as Dignity Partners, Inc. Effective August 1, 1997, Point West's name was
changed to Point West Capital Corporation.
b. Accounting Principles
---------------------
The consolidated financial statements are presented on the accrual
basis of accounting in conformity with generally accepted accounting principles.
The Company has not presented the viatical settlement business as a discontinued
operation because a substantial portion of the Company's assets are related to
the viatical settlement business. The sale of policies held by DPFC, all of
which are pledged as security for the Securitized Notes, will require the
consent of the Company and the holders of the Securitized Notes (the
"Noteholders"). The Company has discussed potential sales of DPFC policies with
the Noteholders; however, the Company has not determined
29
<PAGE>
Point West Capital Corporation
Notes to Consolidated Financial Statements
whether it will decide to sell such policies and cannot determine whether the
Noteholders will consent to such a sale or whether such a sale is feasible.
c. Principles of Consolidation
---------------------------
The Company consolidates the assets, liabilities and operations of its
wholly owned special purpose subsidiary, DPFC.
The Company also consolidates the assets, liabilities and operations of
Fourteen Hill Management, a wholly owned limited liability company, and Fourteen
Hill Capital, a related limited partnership, both formed on June 3, 1997.
Fourteen Hill Capital commenced operations in August 1997 by providing a loan to
one unaffiliated entity and providing equity capital to another unaffiliated
entity in the aggregate amount of $1.25 million. Fourteen Hill Capital received
its small business investment company ("SBIC") license from the Small Business
Administration (the "SBA") effective September 26, 1997. Fourteen Hill
Management is the sole general partner of Fourteen Hill Capital and owns 99.956%
of the partnership interests. Point West is one of two limited partners of
Fourteen Hill Capital and owns 0.04% of the partnership interests. The remaining
0.004% of the partnership interest is owned by one unaffiliated limited partner.
Point West capitalized Fourteen Hill Management with $5.0 million. Fourteen Hill
Management has committed $5.0 million of capital to Fourteen Hill Capital, and
through December 31, 1997, had invested $2.5 million in Fourteen Hill Capital.
At present, Fourteen Hill Capital does not have any outstanding debt from the
SBA and the Company believes that, until Fourteen Hill Capital liquidates a
portion of one of its investments or increases its regulatory capital, Fourteen
Hill Capital will not be eligible to incur debt from the SBA.
On September 5, 1997, the Company formed Allegiance, a limited
liability company, to provide senior secured loans to funeral home and cemetery
owners. Point West has a 54% equity interest and 95% voting control in
Allegiance and serves as the managing member of Allegiance. Allegiance's
president and vice president of marketing, each of whom was hired in September
1997, have the balance of such interests, which were deemed by the Company to
have a de minimis value as of December 31, 1997. In 1997, Point West made the
only capital contribution to Allegiance in the amount of $3.9 million.
Allegiance owns 100% of Allegiance Funding, which is a special purpose
subsidiary formed to facilitate the potential securitization of loans
consummated by Allegiance. The Company consolidates the assets, liabilities and
operations of Allegiance and Allegiance Funding. Allegiance commenced operations
in the fourth quarter of 1997 and at December 31, 1997 had one loan (in the
principal amount of $3.8 million) and one commitment (in the principal amount of
$2.1 million) outstanding. See Note 13b. Net profits of Allegiance for each
calendar year will be allocated first to Point West in an amount equal to a
return of 10% per annum, compounded monthly, on the amount of its capital
contribution, but not in excess of such net profits. Any shortfall will be
carried forward indefinitely to the next calendar year or years in which net
profits are sufficient to make such allocation. An additional 5% return for each
calendar year will be allocated first to Point West to the extent that in each
year sufficient profits are available with no carry forward provided.
Through June 1996, Point West was the sole general partner of Dignity
Viatical Settlement Partners, L.P. ("Dignity Viatical"), a limited partnership.
Because Point West controlled the partnership (see Note 9), the assets,
liabilities and operations of the partnership were consolidated with the assets,
liabilities and operations of the Company, and the interests of the former
limited partners were reflected as a minority interest in the accompanying
financial statements through December 31, 1995. On June 25, 1996, Point West
purchased all of the limited partnership interests in Dignity Viatical for
approximately $5.2 million which resulted in an elimination of the minority
interest on the balance sheet.
30
<PAGE>
Point West Capital Corporation
Notes to Consolidated Financial Statements
d. Loans Receivable
----------------
Loans are stated at the principal amount outstanding, net of unearned
income. Interest is accrued on the outstanding balances for all loans. Since
there were only a few loans outstanding at December 31, 1997, the Company
evaluated the loans and determined that a specific reserve was not necessary. As
the loan portfolios grow, general reserves will be added to the extent
considered necessary. See Note 3.
e. Assets Held For Sale
--------------------
As a result of the Company's decision to sell all or substantially all
of its assets, the Company reclassified during the third quarter of 1996 all of
its assets other than the assets of DPFC to a "held-for-sale" category.
Accordingly, such assets are recorded on the balance sheet as of December 31,
1997 and 1996 at the lower of carrying value or fair value less estimated cost
to sell. In connection therewith, the Company established a reserve for loss on
sale of assets during the quarter ended September 30, 1996 and recorded an
additional reserve at September 30, 1997. See Note 4.
f. Purchased Life Insurance Policies
---------------------------------
Through June 30, 1996, the Company recognized income ("earned
discount") on each purchased policy by accruing, over the period between the
acquisition date of the policy and the Company's estimated date of collection of
the face value of the policy (the "Accrual Period"), the difference (the
"unearned discount") between (a) the death benefit payable (face value) under
the policy less the amount of fees, if any, payable to a referral source upon
collection of the face value, and (b) the carrying value of the policy. Through
June 30, 1996, the carrying value for each policy was reflected on the Company's
consolidated balance sheet under "purchased life insurance policies" and
consisted of the purchase price, other capitalized costs and the earned discount
on the policy accrued to the balance sheet date. The Company capitalized as
incurred the following costs of a purchased policy: (i) the purchase price paid
for the policy, (ii) policy premiums, if any, paid by the Company, (iii)
amounts, if any, paid to referral sources upon acquisition of the policy and
(iv) amounts paid to Company-retained physicians or other medical consultants
("Consultants") who estimated the insured's life expectancy. The length of the
Accrual Period was determined by the Company based upon its estimate of the date
on which it would collect the face value of the policy. Such estimate was based
upon the Company's estimate of the life expectancy of the insured, after review
of the medical records of the insured by one or more Consultants, and was also
adjusted to reflect the historical accuracy of the life expectancies estimated
by the Company's Consultants and the typical period (collection period) between
the date of an insured's death and the date on which the Company collected the
face value of the policy.
The unearned discount was accrued over the Accrual Period using the
"level yield" interest method. Under the "level yield" method, the yield was
held constant such that when the yield was applied to the carrying value of the
policy on a compounded basis over the course of the Accrual Period, the unearned
discount was fully accrued as earned discount by the end of the Accrual Period.
Beginning in the third quarter of 1996, the Company began generally
recognizing income with respect to its viatical settlement business upon receipt
of proceeds on policies (either pursuant to sale of the policy 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.
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 as security for the Securitized Notes, will require the consent of
the Company and the Noteholders. The Company has discussed potential sales of
DPFC policies with the Noteholders; however, the Company has not determined
whether it will decide to sell such policies and cannot
31
<PAGE>
Point West Capital Corporation
Notes to Consolidated Financial Statements
determine whether the Noteholders would consent to such a sale or whether such a
sale is feasible. A reserve was recorded in the third quarter of 1996 in the
amount of $6.9 million to reflect the estimated loss of Point West's equity
interest in DPFC. As of December 31, 1997 and 1996 the reserve was $2.3 million
and $6.5 million, respectively. The reserve provides for the write-off of the
unrealized residual value associated with DPFC.
Only the net assets of DPFC are available to satisfy the Securitized
Notes. Point West did not guarantee the obligations owed under the Securitized
Notes. However, to the extent that the losses of DPFC exceed its equity
(creating a deficit), the deficit would be recorded by the Company as a loss.
Upon the retirement of the Securitized Notes at less than book value, the
Company would recognize a gain for the difference which is expected to
approximate the deficit of DPFC.
g. Deferred Financing and Organizational Costs
-------------------------------------------
Costs were incurred to obtain debt financing for the acquisition of
insurance policies. These costs have been deferred and are amortized
straight-line over the respective terms of the financing arrangements. In 1997,
financing and organizational costs of $50,000 were incurred in connection with
Fourteen Hill Capital and $29,000 was incurred in connection with Allegiance.
These costs have been deferred and are amortized straight-line over five years.
At December 31, 1997 and 1996 the total deferred financing and organizational
cost was $525,000 and $682,000.
h. Furniture and Equipment
-----------------------
As a result of the Company's decision to sell all or substantially all
of its assets, furniture and equipment at December 31, 1996 were valued on the
assumption that miscellaneous office equipment had no sales value. Furniture and
equipment purchased in late 1997 in support of the Company's expanded financial
services business are stated at purchased cost net of accumulated depreciation.
Depreciation is provided on a straight-line basis over the estimated useful
lives of the assets, which is generally five years.
i. Income Taxes
------------
The Company accounts for income taxes using the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis (temporary
differences). Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date of the tax change.
Deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carryforwards, and then a valuation allowance
is established to reduce that deferred tax asset if it is "more likely than not"
that the related tax benefits will not be realized in future years. See Note 8.
j. Cash and Cash Equivalents
-------------------------
The Company considers as cash equivalents all highly liquid investments
with an original maturity of three months or less.
32
<PAGE>
Point West Capital Corporation
Notes to Consolidated Financial Statements
k. Concentration of Credit Risk
----------------------------
Financial instruments that subject the Company to concentration of
credit risk consist primarily of receivables from insurance companies which are
the obligors under insurance policies owned by the Company. As of December 31,
1997, the aggregate face value of policies issued by any one insurer with
respect to the Company's portfolio of insurance policies approximated 8% of
total assets.
Other financial instruments that subject the Company to concentration
of credit risk include a loan made by Allegiance to an unaffiliated entity in
the amount of $3.8 million, which approximated 6% of total assets at December
31, 1997.
l. Earnings Per Share
------------------
Statement of Financial Accounting Standards No. 128, Earnings per
Share, was issued in February 1997 ("SFAS No. 128") and is effective for years
ending after December 15, 1997. Under this approach, earnings per share ("EPS")
is to be calculated and reported as two separate calculations: Basic EPS,
similar to the previous primary earnings per share excluding common stock
equivalents; and, Diluted EPS, similar to the previous fully diluted earnings
per share. EPS is calculated using the average number of Common Stock and Common
Stock equivalents outstanding. Common Stock equivalents for 1997 include
employee stock options, non-employee director stock options and warrants issued
to Jefferies & Company, Inc., the investment banking firm which advised the
Company in connection with strategic options, which do not have an anti-dilutive
impact. EPS for 1996 do not include stock equivalents due to the anti-dilutive
effect. Common Stock equivalents for 1995 include shares issued upon the
conversion into Common Stock of outstanding shares of the Company's Convertible
Cumulative Pay-in-Kind Preferred Stock (the "Convertible Preferred Stock"). The
outstanding shares of Convertible Preferred Stock were converted into Common
Stock in February 1996. See Note 12.
m. Terminology
-----------
Matured policies receivable represents policies for which the Company
has received notification that the insured has died and for which the Company is
awaiting collection of the face value.
Payable for policies purchased represents policies for which the
Company has become the holder, owner or certificate holder of the policy, and
the beneficiary thereunder, but at the request of the insured or a related party
payment is deferred for a short period.
Loans receivable on the balance sheet at December 31, 1997 is net of
unearned income. Unearned income represents fees paid to Allegiance related to
loans and commitment fees collected by Allegiance for loans that have not been
funded by year end.
n. Profit Sharing Plan
-------------------
Point West has a profit sharing plan (the "Plan") for its employees.
Each employee who has been employed for at least one year becomes a participant
in the Plan. The Plan provides for discretionary annual contributions by Point
West for the account of each participant. In any year in which the Plan is
"top-heavy" within the meaning of the Internal Revenue Code (the "Code"), the
Plan requires, consistent with the Code, that a minimum contribution be made for
non-key employees. The contribution is allocated among participants based on
their compensation under an allocation formula integrated with Social Security.
Participants vest 20% in their Plan accounts after two years of service
(excluding any service prior to 1993) and an additional 20% after each of the
next four years of service. Upon termination following permanent disability or
on retirement at age 65, all amounts
33
<PAGE>
Point West Capital Corporation
Notes to Consolidated Financial Statements
credited to a participant's account are distributed, in a lump sum or in
installments, as directed by the participant. Upon death, all amounts
credited to a participant's account become fully vested and are distributed
to the participant's surviving spouse or designated beneficiary. Each year,
profit sharing contributions, if any, are determined by the Board. The Plan
contribution expenses which are included in compensation and benefits
during 1997, 1996 and 1995 were $86,000, $70,190 and $89,505, respectively.
o. Use of Estimates
----------------
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
p. Stock-Based Employee Compensation
---------------------------------
The Company applies APB Opinion No. 25 in accounting for its two stock
compensation plans. No compensation cost has been recognized for these plans.
See Note 16.
q. Recent Accounting Developments
------------------------------
During 1997, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard No. 130 ("SFAS 130"), Reporting Comprehensive
-----------------------
Income. SFAS 130 is effective with the year-end 1998 financial statements;
- ------
however, the total comprehensive income is required in the financial statements
for interim periods beginning in 1998. FASB also issued Financial Accounting
Standard No. 131 ("SFAS 131"), Disclosure About Segments of An Enterprise and
-----------------------------------------------
Related Information. SFAS 131 is effective with the year-end 1998 financial
- --------------------
statements. Management will comply with the disclosure requirements.
2. Investment Securities
---------------------
Financial Accounting Standards No. 115 ("SFAS No. 115"), Accounting for
-------------
Certain Instruments in Debt and Equity Securities, requires marketable debt and
- -------------------------------------------------
equities to be classified into held-to-maturity, available-for-sale and trading
categories. Securities classified as held-to-maturity are reported at amortized
cost and available-for-sale securities are reported at fair market value with
unrealized gains and losses as a separate component of stockholders' equity net
of applicable taxes. There were no trading securities at December 31, 1997. Any
realized gains and losses, declines in value of securities judged to be
other-than-temporary and accrued interest and dividends on all securities will
be reported in the income statement as recognized.
34
<PAGE>
Point West Capital Corporation
Notes to Consolidated Financial Statements
There were no investment securities in 1996. The amortized costs and
estimated fair value of investment securities as of December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Cost Unrealized Gains Unrealized
Loss Fair Value
<S> <C> <C> <C> <C>
Held-to-maturity
Corporate bonds $ 2,220,000 $ 75,000 $ (5,000) $ 2,290,000
--------------- --------------- -------------- ---------------
Total-held-to-maturity $ 2,220,000 $ 75,000 $ (5,000) $ 2,290,000
Available-for-sale
Common stock $ 903,181 $ 1,355,153 $ -- $ 2,258,334
Warrants $ 96,819 $ 1,242,190 $ -- $ 1,339,009
--------------- --------------- --------------- ---------------
Total available-for-sale $ 1,000,000 $ 2,597,343 $ -- $ 3,597,343
</TABLE>
The Company classifies debt securities for which it has the positive
intent and ability to hold to maturity as held-to-maturity. All investments in
debt securities classified as held-to-maturity at December 31, 1997 have
maturity dates ranging from one to five years. Warrants classified as
available-for-sale have expiration dates ranging from one to five years. The
value of the warrants was determined using the Black-Scholes Model.
Unrealized gains on available-for-sale securities (representing
differences between estimated fair market value and cost of $2.6 million) were
credited to a separate component of stockholders' equity called "Net Unrealized
Investment Gains."
3. Loans Receivable
----------------
Loans receivable includes loans made to unaffiliated third parties
through Allegiance and Fourteen Hill Capital. Such loans are reported at
amortized cost and interest is accrued as earned. All loans at December 31, 1997
were current and no reserves were considered necessary as of such date.
Allegiance provides senior secured loans to funeral home and cemetery
owners. The loan outstanding at December 31, 1997 bore a fixed interest rate per
annum of approximately 9.4% and matures in approximately fifteen years with
monthly principal payments.
Fourteen Hill Capital provides financing to small businesses. The loan
outstanding at December 31, 1997 bore a fixed interest rate per annum of 14% and
matures in approximately five years. See Note 17.
35
<PAGE>
Point West Capital Corporation
Notes to Consolidated Financial Statememts
4. 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 DPFC, to a "held-for-sale" category. Accordingly,
such assets are recorded on the balance sheet as of December 31, 1997 and 1996
at the lower of carrying value or fair value less estimated cost to sell. In
connection with the decision to sell assets, the Company established a reserve
for loss on sale of assets in 1996 and reevaluates such reserve each quarter.
During the third quarter of 1997, the Company recorded an additional reserve in
the amount of $328,000 as a result of difficulties encountered with insurance
companies as described below in transferring the ownership of 14 policies.
Assets held for sale consist of:
Assets Held for Sale
====================
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
Capitalized costs $ 525,697 $ 14,089,124
Earned discounts on life insurance policies 2,482 380,692
Reserve for loss on sale (398,845) (2,949,713)
---------------- -----------------
Assets held for sale $ 129,334 $ 11,520,103
=============== =================
</TABLE>
The calculation of reserve for loss on sale was calculated based on the
life expectancy of the insured under each policy in relation to prices obtained
by the Company in connection with other sales, management's estimate of the
current saleability of such policy, the type of policy (e.g., term or whole
life), the age of the insured and the premiums on such policy. 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 is reported as a realized gain or loss on assets sold at the time any
sale proceeds are received.
Through December 1997, the Company entered into several agreements to
sell portions of its portfolio of policies. None of the purchasers thereunder is
affiliated with the Company or any of its directors or officers. The sale
agreements provided for the sale, upon the issuing insurance company's
acknowledgment of transfer of ownership, of an aggregate of 373 policies having
an aggregate face value of $29.2 million. Through December 31, 1997, the sale of
348 policies with an aggregate face value of $28.4 million had been consummated,
of which 104 policies with an aggregate face value of $8.5 million were sold in
1996 (resulting in a realized loss of $180,000) and 244 policies with an
aggregate face value of $19.9 million were sold in 1997 (resulting in a realized
gain of $1.5 million). Eleven policies covered by the sales agreements 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 these policies.
The policies representing "assets held for sale" consist of the
policies under the aforementioned sales agreements. The remaining 14 policies
(representing approximately $937,000 in face amount) were carried on the balance
sheet at December 31, 1997 at $129,000 after giving effect to the reserve for
loss on assets held for sale. The Company experienced delays or difficulties in
transferring the ownership of the remaining 14 policies and, due to contractual
provisions in the related sales agreements, the sales of these policies were not
consummated. However, the Company is pursuing other alternatives for the sale of
these policies.
5. Investment In Convertible Preferred Shares
------------------------------------------
On November 4, 1996, Point West purchased 21,517,100 convertible
preferred shares for $3.0 million (representing a less than 50% interest) in
American Information Company, Inc. ("American Information"), a privately held
company which, among other things, provides information services to individuals
owning or
36
<PAGE>
Point West Capital Corporation
Notes to Consolidated Financial Statements
purchasing automobiles. On March 18, 1997, Point West converted 8.2 million
shares of convertible preferred stock into 8.2 million shares of common
stock of American Information and sold such non-marketable shares
(approximately 38% of Point West's 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 1997. Point West
had an option that expired on October 26, 1997 to purchase, for
approximately $1.1 million, 8.2 million additional shares of common stock
of American Information. Since Point West did not exercise this option, a
$20,000 pre-tax loss was recognized in 1997. The Company accounts for this
investment using the cost method.
6. Revolving Credit Facility
-------------------------
Until August 1996, the Company had a revolving credit facility with
advances collateralized by a security interest in substantially all of Point
West's assets (including policies). Interest under the credit facility accrued
on outstanding advances at the lender's governing rate plus 5.25 percent for
amounts not in excess of $2,000,000 and at the lender's governing rate plus 2.75
percent for amounts in excess of $2,000,000. In the course of obtaining the
credit facility, the Company incurred and deferred total financing charges of
$671,008 which were subsequently reduced to $519,904 in February 1995, with the
issuance of the Senior Viatical Settlement Notes. This reduction in the amount
of $151,104 of financing charges was transferred to the Senior Viatical
Settlement Notes and amortized. Of the deferred amount, $94,042 and $118,617
were amortized in the periods ended December 31, 1996 and 1995, respectively.
The Company terminated the facility on August 29, 1996 at which time it repaid
principal and accrued interest in the amount of $3,301,328. In connection with
such repayment, the Company wrote off the remaining $130,000 of unamortized
financing costs.
7. 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. The assets of DPFC are the beneficial ownership
interests in the life insurance policies and funds which secure the Securitized
Notes. However, to the extent that the losses of DPFC exceed its equity
(creating a deficit), the deficit would be recorded by the Company as a loss.
Upon the retirement of the Securitized Notes at less than book value, the
Company would recognize a gain for the difference which is expected to
approximate the deficit of DPFC. At December 31, 1997, the equity of DPFC was
$2.3 million.
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.
37
<PAGE>
Point West Capital Corporation
Notes to Consolidated Financial Statements
8. Income Taxes
------------
The components of the provision for income tax included in the
statements of operations for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal:
Current (benefit)expense.............. $ -- $ -- $ --
Deferred (benefit) expense........... -- (210,113) 432,196
State:
Current (benefit) expense ............. 4,000 -- --
Deferred (benefit) expense ........... -- (315,598) 192,314
------------ ------------ -------------
Total tax (benefit) expense............... $ 4,000 $ (525,711) $ 624,510
============= ============== =============
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of December
31, are presented below. Amounts for the current year are based upon estimates
and assumptions as of the date of this report and could vary significantly from
amounts shown on the tax returns as filed. Accordingly, the variances from the
amounts previously reported for 1996 are primarily a result of adjustments to
conform to tax returns as filed.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Revenue and expenses recognized on the cash
basis for tax purposes....................................... $ 236,218 $ 277,989
Depreciation, amortization and other........................... 14,965 20,169
Provision for assets held for sale............................. 158,878 1,133,159
Provision for loss on investment in subsidiary ................ 916,206 2,466,359
Net operating loss carryforwards............................... 4,116,990 2,505,842
-------------- -----------------
5,443,257 6,403,518
Valuation allowance .......................................... (1,638,157) (3,202,828)
-------------- -----------------
Deferred tax assets net of valuation allowance .............. 3,805,100 3,200,690
Deferred tax liabilities:
Unrealized gain on securities available for sale 1,034,522 --
Accretion recognized on a cash basis for tax purposes 2,776,578 3,206,690
----------------- ------------------
3,811,100 3,206,690
----------------- ------------------
Net deferred tax asset (liability)..................................... $ (6,000) $ (6,000)
=============== =================
</TABLE>
Prior to September 30, 1996, the Company had provided for deferred
income taxes related to income accrued on purchased life insurance policies.
Based on the provision for loss on sale of assets and the reserve to reflect
estimated loss of Point West's equity interest in DPFC, the Company believes
that it does not have a federal tax liability related to these assets and has
therefore reversed all related liabilities for 1996. The Company believes that
it does not have a federal tax liability for 1997 as a result of the net
operating loss carry forward. The Company has recorded a deferred tax liability
related to the unrealized appreciation for the marketable equity securities. The
Company has also provided for miscellaneous state income taxes. A valuation
allowance has been recorded equivalent to the portion of the deferred tax asset
for which management cannot conclude that it is more likely than not that the
deferred tax asset will be realized.
38
<PAGE>
Point West Capital Corporation
Notes to Consolidated Financial Statements
The difference between the statutory income tax rate and the Company's
effective tax rate for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Tax expense at statutory rate (34%)......... 344,976 $(3,476,564) $ 678,484
State taxes net of federal benefits......... 189,173 (627,622) 126,927
Minority interest of limited partners....... -- -- (193,063)
Change in valuation allowance (1)........... (530,149) 3,431,001 --
Other....................................... -- 147,474 12,162
---------- ------------- -------------
Total tax (benefit) expense $ 4,000 $ (525,711) $ 624,510
========== ============= =============
</TABLE>
- ---
(1) Note: $1,034,522 of the change in tax valuation allowance has been
reflected in the statement of changes in stockholders equity in
connection with the unrealized gain on securities available-for-sale.
The remaining reduction of $530,149 is based on management's
determination that the resulting deferred assets are more likely than
not to be realized.
At December 31, 1997, the Company has an estimated federal tax net
operating loss carryforward of $11,151,894 expiring in the years 2009 to 2012,
and a California tax net operating loss carryforward of approximately $5,576,348
expiring in the years 1999 to 2002.
9. General Partner Interests in Dignity Viatical Settlement Partners, L.P.
----------------------------------------------------------------------
In 1993, Point West formed Dignity Viatical, a limited partnership, for
the purpose of financing the purchase of additional life insurance policies. The
capital contributions to Dignity Viatical aggregated approximately $10.1
million. Point West, as the general partner, had a 1% interest in Dignity
Viatical and was entitled to a preference in distributions of $233,597 for
providing management services (management fee) during the life of the
partnership (originally estimated to be approximately four years from
formation). Management fees were allocated to Point West as follows: For the
years ended December 31, 1996 and 1995 -- $89,753 and $59,848, respectively. The
assets, liabilities and operations of Dignity Viatical have been consolidated
with those of the Company for presentation in the consolidated financial
statements. Point West, as the general partner of Dignity Viatical, controlled
the operations of the partnership. The minority interest reflected in the 1995
consolidated statement of operations represents the former limited partners'
interest in the net assets and income of Dignity Viatical. On June 25, 1996,
Point West purchased all of the limited partnership interests of the limited
partners in Dignity Viatical for approximately $5.2 million. This purchase
resulted in the elimination of minority interest and net income in connection
with Dignity Viatical on the balance sheet and income statement on and after
June 30, 1996.
Summarized financial information with respect to Dignity Viatical
follows:
<TABLE>
<CAPTION>
December 31 December 31
1996 1995
<S> <C> <C>
Total income............................. $ 269,300 $1,024,402
Total expense............................ $ (137,110) $ (301,027)
----------- ------------
Net income............. $ 132,190 $ 723,375
========== ===========
</TABLE>
39
<PAGE>
Point West Capital Corporation
Notes to Consolidated Financial Statements
10. Common Stock
------------
In February 1996, the Company completed an initial public offering of
an aggregate of 2,702,500 shares of Point West Common Stock at the public
offering price of $12.00 per share. Of such shares, 2,381,356 shares were issued
and sold by Point West and 321,144 shares (representing all shares issuable and
issued pursuant to the conversion in full of the Convertible Preferred Stock)
were sold by Bradley Rotter, a director and Chairman of the Board. The Company
did not receive any proceeds of the shares sold by Bradley Rotter.
The Company received the following proceeds from the offering and
such proceeds had been applied in 1996 for the following purposes:
<TABLE>
<S> <C> <C>
Proceeds:
Proceeds, net of underwriters' discount $26,575,933
Less offering expenses (1,301,965)
------------
Net Proceeds $25,273,968
===========
Uses:
Policy purchases $17,832,821
Payments to related party 2,191,007
Accrued compensation payable 833,750
Taxes on accrued and unpaid salaries 20,187
Repayment of other short term debt 1,162,170
Repayment of long term debt 3,234,033
----------
Total uses $25,273,968
</TABLE>
In October 1996, the Board 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. Such authority was
increased by the Board in June 1997 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.
11. Earned Discounts
----------------
Earned discounts on life insurance policies reflect the amount of
accretion recorded in the first six months of 1996 and for the twelve months of
1995. With the decision to sell all or substantially all of the Company's
assets, the unearned discount included in the unearned income on the balance
sheet at June 30, 1996 relating to early maturities on or before June 30, 1996
has now been recorded as earned discounts on prior maturities. Any income since
the third quarter of 1996 has been recorded as earned discounts on matured
policies and recorded upon the notification of death of the insured.
12. Earnings per Share
------------------
SFAS No. 128 was issued in February 1997 and is effective for years
ending after December 15, 1997. The Statement specifies the computation,
presentation and disclosure requirements for EPS. This Statement's objective is
to simplify the computation of EPS and to make the U.S. standard for computing
EPS more compatible with the EPS standards of other countries and with that of
the International Accounting Standards Committee. Under this approach, EPS is to
be calculated and reported as two separate calculations: Basic EPS, similar to
the previous primary earnings per share excluding common stock equivalents; and,
Diluted EPS, similar to the previous fully diluted earnings per share.
40
<PAGE>
Point West Capital Corporation
Notes to Consolidated Financial Statements
The weighted average number of common stock shares and additional
common stock equivalent shares used in computing earnings per share of common
stock are set forth below for the periods indicated.
<TABLE>
<CAPTION>
1997 1996 1995
==== ==== ====
<S> <C> <C> <C>
Weighted average number of shares of common stock outstanding 3,521,736 3,942,166 1,589,324
Additional common stock equivalents 83,938 -- 313,158
Weighted average number of shares of common stock and --------- --------- ----------
common stock equivalents outstanding 3,605,674 3,942,166 1,902,482
</TABLE>
Common Stock equivalents for 1997 include employee stock options,
non-employee director stock options and warrants issued to Jefferies & Company,
Inc. which do not have an anti-dilutive impact. EPS for 1996 do not include
stock equivalents due to the anti-dilutive effect. Common Stock equivalents for
1995 include the Convertible Preferred Stock.
13. Commitments
-----------
a. Leases
------
The Company has a lease obligation for its California office space of
approximately 5,900 sq. ft. The lease expires on May 31, 1999, and the monthly
rent is $8,062, of which the Company pays $5,240 and The Echelon Group of
Companies, LLC ("New Echelon LLC") pays $2,822. Additionally, the Company has a
lease obligation for its Nevada office space of 600 sq. ft. The lease expires on
September 30, 1998 and the monthly rent is $905.
Future minimum rental payments (less amounts to be paid by New Echelon
LLC) at December 31, 1997, under operating leases with an initial term of one
year or more, are as follows:
Year ended December 31, 1998 .......... $ 71,027
Year ended December 31, 1999 .......... 26,202
Year ended December 31, 2000 .......... --
-----------
Total ................................. $ 97,229
b. Loans receivable
----------------
Allegiance issued a commitment letter on October 13, 1997 to make a
senior secured loan to an unaffiliated entity for $2.1 million. This loan was
funded on January 7, 1998.
14. Litigation
----------
From time to time, the Company is involved in routine legal proceedings
incidental to its business, including litigation in connection with the
collection of amounts owed by insurance company obligors. The Company does not
expect that these proceedings, individually or in the aggregate, will have a
material adverse effect on the Company's financial position, liquidity or
results of operations.
On December 19, 1996, a complaint was filed in the United States
District Court, Northern District of California (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
41
<PAGE>
Point West Capital Coporation
Notes to Consolidated Financial Statements
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. The plaintiffs filed an
amended complaint on September 8, 1997 and on October 8, 1997 the Company and
other defendants filed a motion to dismiss the amended complaint. On December 5,
1997, the Court granted the defendants' motion to dismiss the amended complaint.
However, the Court gave the plaintiffs permission to file a second amended
complaint in connection with claims under Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 thereunder. Following an order granting
permissive intervention of an additional plaintiff, the plaintiffs were granted
leave to attempt to allege a claim under Section 11 of the Securities Act of
1933 in the second amended complaint. On March 2, 1998, the plaintiffs filed a
second amended complaint. 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 LLC 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.
15. Fair Value of Financial Instruments
-----------------------------------
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Cash and cash equivalents, restricted cash, matured policies
receivable, accrued expenses, accounts payable and payable for policies
purchased are stated at approximate fair value because of the short maturity of
these instruments.
All balances have maturities within 60 days of the balance sheet date.
Investment securities are stated at fair market value based on quoted
market prices.
Loans receivable are stated at cost which approximates fair market
value.
Assets held for sale reflect management's estimate of fair market value
based on prices obtained by the Company in connection with other sales.
The portfolio of purchased life insurance policies is stated at cost
plus accretion through June 1996 which approximates fair market value.
At December 31, 1997, the long term notes payable are stated at cost.
The long term notes payable bear an fixed interest rate of 9.17% and are
equivalent to newly acquired debt at 1% over prime interest rates.
16. Stock-Based Compensation
------------------------
The Company has two stock option plans. Under the 1995 Stock Option
Plan ("Employee Plan"), Point West may grant options to its employees for up to
350,000 shares of common stock. Under the Stock Option Plan
42
<PAGE>
Point West Capital Corporation
Notes to Consolidated Financial Statements
For Non-Employee Directors ("Director Plan"), options for up to 75,000 shares of
common stock may be granted to non-employee directors of Point West. The
exercise price of each granted option equals the market price of the Common
Stock on the date of grant, with an expiration of ten years after grant date.
Under the Employee Plan, granted options generally vest 20% per year over five
years. Under the Director Plan, initially, each new non-employee director, when
joining the board, is granted 10,000 options that vest over 3 years and then, at
each annual meeting, is granted 5,000 options that vest after one year.
The fair value of each option is estimated on the date of grant using
the Black-Scholes option-pricing model. The following weighted-average
assumptions were used for grants in 1997: expected volatility of 75%; risk-free
interest rates of 5.8% for the Employee Plan and 5.6% for the Director Plan;
expected life of 7 years for the Employee Plan and 2 years for the Director
Plan. The following weighted-average assumptions were used for grants in 1996:
expected volatility of 20%; risk-free interest rates of 6.3% for the Employee
Plan and 6.0% for the Director Plan; expected life of 7 years for the Employee
Plan and 4 years for the Director Plan. No options were granted in 1995.
<TABLE>
<CAPTION>
1997 1996
---- ----
================================ ===============================
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
------ ---------------- ------ ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 181,000 $ 3.33 -- --
Granted 96,000 $ 3.44 407,000 $ 8.18
Exercised -- -- -- --
Forfeited (4,000) $ 1.38 (75,000) $ 12.18
Canceled -- -- (151,000) $ 12.01
--------- ---------
Outstanding at end of year 273,000 $ 3.40 181,000 $ 3.33
======= =========
Options exercisable at year-end 58,533 $ 6.20 6,667 $ 13.50
Weighted-average fair value of
options granted during $ 2.38 $ 3.11
year
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- --------------------
----------------------------------------------- -----------------------------------------
Weighted-A
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercisable Outstanding at Contractual Life Exercise Price Exercisable at Exercise Price
Prices 12/31/97 12/31/97
------------ -------------- ---------------- ---------------- -------------- ------------------
<S> <C> <C> <C> <C> <C>
$1.38 - $1.38 147,000 8.00 $ 1.38 30,200 $ 1.38
$3.44 - $3.44 96,000 9.90 $ 3.44 5,000 $ 3.44
$12.38 - $13.50 30,000 8.00 $13.13 23,333 $13.02
- ------------------ ------- ------ ------- ------- -------
$1.38 - $13.50 273,000 8.67 $ 3.40 58,533 $ 6.20
</TABLE>
43
<PAGE>
Point West Capital Corporation
Notes to Consolidated Financial Statements
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its fixed stock option plans. Had compensation cost for the Company's two
stock-based compensation plans been determined consistent with FASB Statement
No. 123, the Company's net income (loss) and net income (loss) per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<S> <C> <C> <C> <C>
Net income (loss) As reported $ 1,010,636 $ (9,699,477) $ 803,199
Pro forma $ 799,444 $ (9,881,226) $ 803,199
Basic earnings (loss) per share As reported $ 0.29 $ (2.46) $ 0.51
Pro forma $ 0.23 $ (2.51) $ 0.51
Diluted earnings (loss) per share As reported $ 0.28 $ (2.46) $ 0.42
Pro forma $ 0.22 $ (2.51) $ 0.42
</TABLE>
In addition to the above mentioned stock option plans, on September 16,
1996 Point West granted 300,000 warrants at a purchase price of $6.00 per share
to Jefferies & Company, Inc. These warrants are exercisable immediately and
expire on September 16, 2001. The expense for these warrants was determined
consistent with FASB Statement No. 123, and the Company's net income was reduced
by $92,167 in 1996. The fair value of each warrant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: expected volatility of 20%; risk-free interest
rate of 6.2%; and expected life of 5 years.
17. Events Subsequent to the Balance Sheet Date
-------------------------------------------
On January 20, 1998, the small business entity to which Fourteen Hill
Capital had loaned money in 1997 paid its loan in full in the amount of
$250,000. The other small business entity in which Fourteen Hill had invested as
of December 31, 1997, issued a redemption notice to call a warrant. On January
26, 1998, Fourteen Hill Capital exercised this warrant for $1 million. In
addition, Fourteen Hill Capital made the following two new investments in 1998:
(i) $795,000 loan at an interest rate of 15% per annum on January 12, 1998; and
(ii) $750,000 investment in convertible preferred stock with warrants on January
27, 1998.
44
<PAGE>
PART III
--------
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
Information regarding directors of the Company and the Executive
Officers (each of whom is a director) will be set forth under the caption
"Directors and Executive Officers" in the Company's proxy statement related to
its 1998 annual meeting of stockholders (the "Proxy Statement") and is
incorporated herein by reference. Information required by Item 405 of Regulation
S-K will be set forth under caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement and is incorporated herein by
reference.
ITEM 11--EXECUTIVE COMPENSATION
- -------------------------------
Information required by this item will be set forth under the caption
"Executive Compensation" in the Proxy Statement and, except for the information
under the captions "Executive Compensation -- Report of the Compensation
Committee on Executive Compensation" and "Executive Compensation -- Performance
Graph," is incorporated herein by reference.
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
Information required by this item will be set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement and is incorporated herein by reference.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
Information regarding certain relationships and related transactions of
directors and executive officers will be set forth under the caption "Certain
Relationships and Related Transactions" in the Proxy Statement and is
incorporated herein by reference.
PART IV
-------
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a) 1. The following designated financial statements and the
report thereon of KPMG Peat Marwick, LLP dated
February 26, 1998 are included herein at pages 24
through 44:
Independent Auditors' Report.
Consolidated Balance Sheets as of December
31, 1997 and 1996.
Consolidated Statements of Operations for
the years ended December 31, 1997, 1996 and
1995.
Consolidated Statements of Stockholders'
Equity for the years ended December 31,
1997, 1996 and 1995.
Consolidated Statements of Cash Flows for
the years ended December 31, 1997, 1996 and
1995.
45
<PAGE>
Notes to Consolidated Financial Statements.
2. All schedules are omitted because the required
information is not presented or is not present in
amounts sufficient to require submission of the
schedule, or because the required information is
included in the consolidated financial statements or
notes thereto.
3. Exhibits:
Exhibit
Number Description of Document
----- -----------------------
3.1 Composite of Second Amended and Restated
Certificate of Incorporation, as amended through
August 1, 1997 (Incorporated by reference to
Exhibit 3 of the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997).
3.2 Amended and Restated Bylaws of the Company
(Incorporated by reference to Exhibit 3.2 of the
Company's Registration Statement on Form S-1
(Registration No. 33-98708) (the Registration
Statement")).
4.1 Indenture, dated as of February 1, 1995 (the
"Indenture") among the Company, as Servicer, DPFC,
as Issuer, and Bankers Trust Company, as Indenture
Trustee ("Bankers Trust") (Incorporated by
reference to Exhibit 10.12 of the Registration
Statement).
4.2 Amendment No. 1 to the Indenture (Incorporated
by reference to Exhibit 10.13 of the
Registration Statement).
4.3 Amendment No. 2 to the Indenture, dated as of
August 5, 1996.
4.4 Amendment No. 3 to the Indenture, dated as of July
2, 1997 (Incorporated by reference to Exhibit 10 of
the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997).
4.5 Amendment No. 4 to the Indenture, dated as of
November 4, 1997.
10.1* 1995 Stock Option Plan (Incorporated by reference
to Exhibit 10.1 of the Registration Statement).
10.2* Amendment No. 1 to the Company's 1995 Stock Option
Plan (Incorporated by reference to Exhibit 4.4 of
the Company's Registration Statement on Form S-8,
Registration No. 333-21825).
10.3* Stock Option Plan for Non-Employee Directors
(Incorporated by reference to Exhibit 10.2 of
the Registration Statement).
10.4* Form of option agreement dated November 17, 1997
granted to each Bradley N. Rotter, Alan B.Perper
and John Ward Rotter.
10.5 Office Lease/Francisco Bay Office Park by and
between HHC Investments, Ltd. and Echelon
(Incorporated by reference to Exhibit 10.3 of the
Registration Statement).
46
<PAGE>
10.6 Assignment and Assumption Agreement dated September
30, 1995 (Incorporated by reference to Exhibit
10.16 of the Registration Statement).
10.7 Agreement between the Company and New Echelon LLC
regarding allocation of costs (Incorporated by
reference to Exhibit 10.4 of the Registration
Statement).
10.8* Profit Sharing Plan (Incorporated by reference to
Exhibit 10.5 of the Registration Statement).
10.9 Contribution, Sale and Servicing Agreement
("Servicing Agreement") dated as of February 1,
1995 among the Company, DPFC and Bankers Trust
(Incorporated by reference to Exhibit 10.14 of the
Registration Statement).
10.10 Amendment No.1 to Servicing Agreement(Incorporated
by reference to Exhibit 10.15 of the Registration
Statement).
10.11 Amendment No. 2 to the Servicing Agreement
(Incorporated by reference to Exhibit 10.10 of the
Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995).
10.12 Master Agreement for Purchase of Life Insurance
Policies dated September 27, 1996 (Incorporated by
reference to Exhibit 10 of the Company's Quarterly
Report on Form 10-Q for the quarter ended September
30, 1996).
10.13 Amendment dated as of November 13, 1996 to Master
Agreement for Purchase of Insurance Policies dated
as of September 27, 1996 (Incorporated by reference
to Exhibit 10.11 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31,
1996).
10.14 Purchase and Sale Agreement dated as of January 16,
1997 (Incorporated by reference to Exhibit 10.12 of
the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996).
10.15 Second Master Agreement for Purchase of Insurance
Policies dated as of February 10, 1997(Incorporated
by reference to Exhibit 10.13 of the Company's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1996).
10.16 Third Master Agreement for Purchase of Insurance
Policies dated as of March 24, 1997(Incorporated by
reference to Exhibit 10.14 of the Company's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1996).
10.17 Indemnification Agreement, dated September 30,
1995, between the Company (as successor to Echelon)
and New Echelon LLC (Incorporated by reference to
Exhibit 10.18 of the Registration Statement).
10.18 Limited Liability Company Agreement of Allegiance
Capital, LLC (Incorporated by reference to Exhibit
10.1 of the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997).
47
<PAGE>
10.19 Fourteen Hill Capital, L.P. Agreement of Limited
Partnership (Incorporated by reference to Exhibit
10.2 of the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997).
10.20 Fourteen Hill Management, LLC Operating Agreement
by Point West Capital and Fourteen Hill Management,
LLC as of June 9, 1997 (Incorporated by reference
to Exhibit 10.3 of the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30,
1997).
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Certified Public
Accountants.
24.1 Powers of Attorney.
27 Financial Data Schedule.
* Management contract or compensation plan or arrangement.
(b) Reports on Form 8-K:
Date Item Reported Matter Reported
---- ------------- ---------------
October 3, 1997 5 On October 3, 1997, the Company
issued a press release regarding
the filing of an amended complaint.
November 13, 1997 5 On November 13, 1997, the Company
issued a press release announcing
third quarter earnings and new
strategic direction.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated March 27, 1998 POINT WEST CAPITAL CORPORATION
/s/Alan B. Perper
-----------------------------
Alan B. Perper
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 27, 1998:
/s/ Alan B. Perper *
- ----------------------------- -----------------------------
Alan B. Perper John Ward Rotter
President and Director Executive Vice President,
(Principal Executive Officer) Chief Financial Officer
and Director
(Principal Financial and
Accounting Officer)
* *
- ----------------------------- -----------------------------
Bradley N. Rotter Stephen T. Bow
Chairman of the Board and Director Director
*
- -----------------------------
Paul A. Volberding, M.D.
Director
* The undersigned by signing his name hereunto has hereby signed this
report on behalf of the above-named directors, on March 27, 1998,
pursuant to a power of attorney executed on behalf of each such director
and filed with the Securities and Exchange Commission as Exhibit 24.1 to
this report.
By: /s/ Alan B. Perper
---------------------
Alan B. Perper
49
<PAGE>
Suqential
exhibit Page
Number Description of Document Number
- ------- ----------------------- ----------
3.1 Composite of Second Amended and Restated Certificate
of Incorporation, as amended through August 1, 1997
(Incorporated by reference to Exhibit 3 of the
Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997).
3.2 Amended and Restated Bylaws of the Company
(Incorporated by reference to Exhibit 3.2 of the
Company's Registration Statement on Form S-1
(Registration No. 33-98708) (the Registration
Statement")).
4.1 Indenture, dated as of February 1, 1995 (the
"Indenture") among the Company, as Servicer, DPFC, as
Issuer, and Bankers Trust Company, as Indenture
Trustee ("Bankers Trust") (Incorporated by reference
to Exhibit 10.12 of the Registration Statement).
4.2 Amendment No. 1 to the Indenture (Incorporated by
reference to Exhibit 10.13 of the Registration
Statement).
4.3 Amendment No. 2 to the Indenture, dated as of August
5, 1996.
4.4 Amendment No. 3 to the Indenture, dated as of July 2,
1997 (Incorporated by reference to Exhibit 10 of the
Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997).
4.5 Amendment No. 4 to the Indenture, dated as of
November 4, 1997.
10.1* 1995 Stock Option Plan (Incorporated by reference to
Exhibit 10.1 of the Registration Statement).
10.2* Amendment No. 1 to the Company's 1995 Stock Option
Plan (Incorporated by reference to Exhibit 4.4 of the
Company's Registration Statement on Form S-8,
Registration No. 333-21825).
10.3* Stock Option Plan for Non-Employee Directors
(Incorporated by reference to Exhibit 10.2 of the
Registration Statement).
10.4* Form of option agreement dated November 17, 1997
granted to each Bradley N. Rotter, Alan B. Perper and
John Ward Rotter.
10.5 Office Lease/Francisco Bay Office Park by and between
HHC Investments, Ltd. and Echelon (Incorporated by
reference to Exhibit 10.3 of the Registration
Statement).
10.6 Assignment and Assumption Agreement dated September
30, 1995 (Incorporated by reference to Exhibit 10.16
of the Registration Statement).
10.7 Agreement between the Company and New Echelon LLC
regarding allocation of costs (Incorporated by
reference to Exhibit 10.4 of the Registration
Statement).
50
<PAGE>
10.8* Profit Sharing Plan (Incorporated by reference to
Exhibit 10.5 of the Registration Statement).
10.9 Contribution, Sale and Servicing Agreement
("Servicing Agreement") dated as of February 1, 1995
among the Company, DPFC and Bankers Trust
(Incorporated by reference to Exhibit 10.14 of the
Registration Statement).
10.10 Amendment No. 1 to Servicing Agreement (Incorporated
by reference to Exhibit 10.15 of the Registration
Statement).
10.11 Amendment No. 2 to the Servicing Agreement
(Incorporated by reference to Exhibit 10.10 of the
Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995).
10.12 Master Agreement for Purchase of Life Insurance
Policies dated September 27, 1996 (Incorporated by
reference to Exhibit 10 of the Company's Quarterly
Report on Form 10-Q for the quarter ended September
30, 1996).
10.13 Amendment dated as of November 13, 1996 to Master
Agreement for Purchase of Insurance Policies dated as
of September 27, 1996 (Incorporated by reference to
Exhibit 10.11 of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996).
10.14 Purchase and Sale Agreement dated as of January 16,
1997 (Incorporated by reference to Exhibit 10.12 of
the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996).
10.15 Second Master Agreement for Purchase of Insurance
Policies dated as of February 10, 1997 (Incorporated
by reference to Exhibit 10.13 of the Company's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1996).
10.16 Third Master Agreement for Purchase of Insurance
Policies dated as of March 24, 1997 (Incorporated by
reference to Exhibit 10.14 of the Company's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1996).
10.17 Indemnification Agreement, dated September 30, 1995,
between the Company (as successor to Echelon) and New
Echelon LLC (Incorporated by reference to Exhibit
10.18 of the Registration Statement).
10.18 Limited Liability Company Agreement of Allegiance
Capital, LLC (Incorporated by reference to Exhibit
10.1 of the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997).
10.19 Fourteen Hill Capital, L.P. Agreement of Limited
Partnership (Incorporated by reference to Exhibit
10.2 of the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997).
10.20 Fourteen Hill Management, LLC Operating Agreement by
Point West Capital and Fourteen Hill Management, LLC
as of June 9, 1997 (Incorporated by reference to
Exhibit 10.3 of the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997).
51
<PAGE>
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Certified Public Accountants.
24.1 Powers of Attorney.
27 Financial Data Schedule.
* Management contract or compensation plan or arrangement
52
AMENDMENT NO. 2 TO
------------------
INDENTURE
---------
THIS AMENDMENT NO. 2 TO INDENTURE (this "Amendment") dated as of
August 5, 1996, 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 the
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, as amended by that
certain Amendment No. 1 to Indenture dated September 29, 1995 (as amended, the
"Indenture"), whereby the Issuer has issued its Senior Viatical Settlement
Notes, Series 1995-A (the "Notes");
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 consent to an amendment to the
Indenture, subject to the terms and conditions of this Amendment.
AGREEMENT
---------
NOW, THEREFORE, in exchange for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties do hereby
covenant and agree as follows:
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. Amendment.
---------
(a) Clause (iv) of Section 12.03(d) of the Indenture is hereby
amended and restated to read as follows:
"(iv) Until the principal amount of the Notes has been paid
in full, the Indenture Trustee shall withdraw from the
Liquidity Account and deposit into the Collection Account,
the amount, if any, by which the funds then held in the
Liquidity Account exceeds the greater of (x) 10% of the
Outstanding Principal Balance, after giving effect to the
payment of principal to be made on the Notes on such Payment
Date and (y) the Required Liquidity Amount."
Section 3. Representations and Warranties.
------------------------------
(a) Each party by executing this Amendment hereby represents and warrants
that the person executing
1
<PAGE>
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 is enforceable against
such party in accordance with its terms.
(b) The Issuer represents and warrants that all of the representations and
warranties of the Issuer set forth in Section 11.01 of the Indenture are true
and correct as of the date hereof.
Section 4. Effective Date.
--------------
This Amendment shall become effective as of the date specified in the
first paragraph of this Amendment, provided that each of the following
conditions is satisfied:
(a) The Indenture Trustee shall have received from each of the
parties hereto and each Noteholder an executed counterpart of this
Amendment.
(b) The Indenture Trustee and the Noteholders shall have
received written confirmation from the Rating Agency that the
execution, delivery and performance of this Amendment will not cause a
downgrading or withdrawal of the current rating by the Rating Agency on
the Notes.
Section 5. 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 Amendment, the Indenture is ratified
and confirmed in all respects and shall continue in full force and
effect. The security interests and assignments granted under the
Indenture shall 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 superseded by federal law.
(e) Binding Agreement. This Amendment shall be binding upon an
-----------------
inure to the benefit of the Issuer, the Servicer, the Indenture
Trustee, the Noteholders and their respective successors and assigns.
(f) Notice to Rating Agency. Promptly after the Effective Date,
-----------------------
the Servicer shall mail an executed copy of this Amendment to the
Rating Agency.
[Signature Page Follows]
2
<PAGE>
IN WITNESS WHEREOF, this Amendment No. 2 to Indenture has been signed
and delivered by the parties as of the date first above written.
DIGNITY PARTNERS FUNDING CORP. I
/s/ John Ward Rotter
--------------------
Secretary
Point West Capital Corporation.
/s/ John Ward Rotter
--------------------
Secretary
BANKERS TRUST COMPANY,
as Indenture Trustee
/s/Melissa Kaye Adelson
------------------------
Assistant Vice President
Consented and Agreed to as of the date first above written:
HELLER FINANCIAL
/s/ Hugh Wilder
---------------------------
Senior Vice Presdient
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
/s/Tim Powell
----------------------------
Second Vice President
FIRST PENN-PACIFIC LIFE INSURANCE COMPANY
By: Lincoln Investment Management, Inc.
Its Attorney-In-Fact,having changed its name from
Lincoln National Investment Management Company
/s/Tim Powell
----------------------------
Second Vice President
AMENDMENT NO. 4 TO INDENTURE
----------------------------
THIS AMENDMENT NO. 4 TO INDENTURE (this "Amendment") dated November 4,
1997, is made by and among Dignity Partners Funding Corp. I, a Delaware
corporation (the "Issuer"), Point West Capital Corporation (formerly known as
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 Notes, Series
1995-A (the "Notes"), which Indenture was amended by Amendment No.1 to
Indenture dated September 29.1995, Amendment No. 2 To Indenture dated as of
August 5, 1996 and Amendment No. 3 To Indenture dated July 2, 1997;
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 desire to amend the Indenture, including the
Sections that govern payments made from the Collection Account and the
Liquidity 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 desire 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, no other consents are required to be obtained under the terms
of the Indenture or the Contribution and Servicing Agreement; and
WHEREAS, promptly after the execution of this Amendment the Issuer
will mail to the Rating Agency a copy of this Amendment pursuant to Section
9.01 of the Indenture and will thereby notify the Rating Agency of the waiver
of the Rating Agency Condition by 100% of the Holders.
<PAGE>
AGREEMENT
---------
NOW, THEREFORE, in exchange for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties do hereby
covenant and agree as follows:
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 12.02(d)(viii) is hereby amended and restated as
follows:
"with respect to any Sourcing Agents who are not
employees or Affiliates of Dignity Partners or the
Issuer, to pay Dignity Partners as Servicer the
amounts necessary to reimburse Dignity Partners for
its payment of any Back-End Sourcing Agent Fees to
such Sourcing Agents with respect to Policies that
Matured during the related Collection Period, as
provided in the Contribution, Sale and Servicing
Agreement, and in the event Dignity Partners is not
the Servicer, to pay such Sourcing Agent any
Back-End Sourcing Agent Fees with respect to
Policies that Matured during the related Collection
Period, and to reimburse Dignity Partners for its
payment of the costs of increasing the Face Value
of the Policies owned by the Issuer in an amount
not to exceed $100,000, provided however, that the
Majority Noteholders may, at any time, provide the
Indenture Trustee with written notice that Dignity
Partners shall not receive any further
reimbursements for the payment of Back-End Sourcing
Agent Fees and for the payment of the costs of
increasing the Face Value made on any Policy and
such written notice from the Majority Noteholders
to Indenture Trustee shall become effective on the
Business Day after the first Payment Date following
such written notice;"
(b) Section 12.02(d)(ix)is hereby amended and restated 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 made on any Policy,
provided however, that the Majority Noteholders
may, at any time, provide the Indenture Trustee
with written notice that Dignity Partners shall not
receive any further reimbursements for the payment
of premiums made on any Policy and such written
notice from the Majority Noteholders to Indenture
Trustee shall become effective on the Business Day
after the first Payment Date following such written
notice;"
2
<PAGE>
(c) Section 12.02(d)(x)is hereby amended and restated as follows:
To deposit into the Liquidity Account an amount
necessary to bring the balance thereof up to an
amount equal to the greater of the Required
Liquidity Amount and 10% of the Outstanding
Principal Balance provided, that there are
sufficient funds in the Collection Account to do
so;"
(d) Section 12.03(d)(i) is hereby amended by (I) inserting the
phrase ",(viii) and (ix)" after the phrase "to clauses (i) through
(vi)" contained in the fourth line thereof and (II) inserting the
phrase ",(viii) and (ix)" after the phrase "to clauses (i) through
(v) and (vii)" contained in the ninth line thereof.
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.
Section 5. Effective Date.
--------------
This Amendment shall become effective as of August 1, 1997, provided
that each of the following conditions are 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.
3
<PAGE>
For purposes of the first Monthly Servicer Report prepared after the
execution of this Amendment, any reimbursements for back-end sourcing agent
fees, face increases and premiums on or after August 1, 1997 and prior to
October 1, 1997 shall be deemed to have been incurred during the related
Collection Period and the first Monthly Servicer Report prepared after
execution of this Amendment shall reflect any adjustments necessary to give
effect to the amendments adopted hereby as of August 1, 1997.
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 Amendment, 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, except as set forth in Section 3 hereof, and the Holders do
not 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. Except as set forth in Section 3 hereof, 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.
4
<PAGE>
IN WITNESS WHEREOF, this Amendment No. 4 to Indenture has been signed
and delivered by the parties as of the date first above written.
DIGNITY PARTNERS FUNDING CORP. I
/s/ John Ward Rotter
--------------------------------
Coporate Secretary
Point West Capital Corporation.
/s/ John Ward Rotter
--------------------------------
Coporate Secretary
BANKERS TRUST COMPANY,
as Indenture Trustee
/s/Alfia Monastra
--------------------------------
Assistant Vice President
Consented and Agreed to as of the date first above written:
HELLER FINANCIAL
/s/Hugh Wilder
-----------------------------------
Senior Vice President
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
/s/David C. Patch
-------------------------------------
Vice President
FIRST PENN-PACIFIC LIFE INSURANCE COMPANY
By: Lincoln Investment Management, Inc.
Its Attorney-In-Fact,having changed its name from
Lincoln National Investment Management Company
/s/David C. Patch
-------------------------------------
Vice President
POINT WEST CAPITAL CORPORATION
Incentive Stock Option Agreement
--------------------------------
INCENTIVE STOCK OPTION AGREEMENT, dated as of November 17,1997
(this "Agreement"), between ("Optionee") and Point West Capital
-------------
Corporation, a Delaware corporation (the "Company").
W I T N E S S E T H:
WHEREAS, Optionee is an employee of the Company;
WHEREAS, the execution of an incentive stock option agreement
in the form hereof has been duly authorized by a resolution of the Compensation
Committee (the "Committee") of the Board of Directors ("the Board") of the
Company duly adopted at a special meeting of the Committee held on November 17,
1997 (the "Date of Grant") and incorporated herein by reference; and
WHEREAS, the option granted hereunder is intended to be an
"incentive stock option" within the meaning of that term under Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the foregoing and the
mutual agreements herein contained, the parties hereto hereby agree as follows:
1.(a) Option. Pursuant to the Company's 1995 Stock Option Plan
------
(the "Plan"), the Company hereby grants to Optionee an option (the "Option") to
purchase 10,000 shares (the "Option Shares") of the Company's Common Stock, par
value $.01 per share ("Common Shares"), at the price of $3.438 per share (the
"Option Price"), which is the fair market value of the Common Shares (as
determined by the Committee) on the Date of Grant, and agrees to cause
certificates for any Common Shares purchased hereunder to be delivered to
Optionee upon payment in full of the Option Price, subject to the applicable
terms and conditions of the Plan and the terms and conditions hereinafter set
forth.
<PAGE>
2. Vesting of Option Shares.
------------------------
(a) Unless and until terminated as hereinafter provided, the
Option shall become exercisable to the extent of 20% of the Option Shares on
November 17, 1998 and to the extent of an additional 20% on each of the first
through the fourth anniversary of November 17, 1998 so long as Optionee has
remained in the continuous employ of the Company or a Subsidiary from thedate
hereof through such date. For the purposes of this Agreement, the continuous
employment of Optionee with the Company or a Subsidiary shall not be deemed to
have been interrupted, and Optionee shall not be deemed to have ceased to be an
employee of the Company or a Subsidiary, by reason of (i) the transfer of
Optionee's employment among the Company and its Subsidiaries or (ii) a leave of
absence approved by the Board of not more than 90 days, unless Optionee has a
statutory or contractual right to reemployment with the Company or a Subsidiary
following an approved leave of absence of more than 90 days. To the extent that
the Option shall have so become exercisable, it may be exercised in whole or in
part from time to time.
(b) Notwithstanding the provisions of paragraph 2(a) above,
the Option shall become immediately exercisable to the extent of 100% of the
Option Shares upon the occurrence of a Change in Control. If any event or
series of events constituting a Change in Control shall be abandoned, the
effect thereof shall be null and of no further force and effect and the
provisions of Section 2(a) shall be reinstated but without prejudice to any
exercise of the Option that may have occurred prior to such nullification.
(c) Notwithstanding the provisions of paragraph 2(a) above,
the Option shall become immediately exercisable to the extent of 100% of the
Option Shares upon the death or Disability of Optionee.
3. Exercises.
---------
(a) This Option, to the extent exercisable as provided in
Section 2, may be exercised by Optionee by delivery to the Company of (i) an
Exercise Notice in the form attached to this Agreement as Annex A,
appropriately completed and duly executed and dated by Optionee, (ii) payment
in full of the Option Price for the number of Option Shares which Optionee is
purchasing hereunder, and (iii) payment in full to the Company of any amounts
required to be paid pursuant to Section 3(c).
(b) The Option Price shall be payable (a) in cash or check
acceptable to the Company, (b) by transfer to the Company of Common Shares that
have been owned by Optionee for (i) more than one year prior to the date of
exercise and for more than two years from the date on which the option was
granted, if they were originally acquired by Optionee pursuant to the exercise
of an incentive stock option, or (ii) more than six months prior to the date of
exercise, if they were originally acquired by Optionee other than pursuant to
the exercise of an incentive stock option, or (c) by a combination of any of
the foregoing methods of payment. The requirement of payment in cash shall be
deemed satisfied if Optionee shall have made arrangements satisfactory to the
Company with a broker who is a member of the National Association of Securities
Dealers, Inc. to sell on the date of exercise a sufficient number of the Common
Shares being purchased so that the net proceeds of the sale transaction will at
least equal the aggregate Option Price, plus interest at the applicable federal
rate for the period from
<PAGE>
the date of exercise to the date of payment, and pursuant to which the broker
undertakes to deliver the aggregate Option Price, plus such interest, to the
Company not later than the date on which the sale transaction will settle in
the ordinary course of business.
(c) If the Company shall be required to withhold any federal,
state, local or foreign tax in connection with an exercise of the Option, it
shall be a condition to the exercise that Optionee pay the tax or make
provisions that are satisfactory to the Company for the payment thereof.
4. Termination of Option.
----------------------
The Option shall terminate on the earliest of the following
dates:
(a) The date on which Optionee ceases to be an employee of
the Company or a Subsidiary unless he ceases to be such an employee in a
manner described in (b) or (c) below.
(b) 90 days after Optionee ceases to be an employee of the
Company or any Subsidiary if (A) Optionee retires from employment with the
Company or any Subsidiary after reaching the age of 65 years, or (B)
Optionee's employment is terminated under circumstances determined by the
Committee to be for the convenience of the Company.
(c) One year after the date on which Optionee's employment is
terminated as a result of Optionee's death or Disability (as hereinafter
defined).
(d) Ten years from the Date of Grant.
In the event that Optionee commits an act that the Board determines to have been
intentionally committed and materially inimical to the interests of the Company,
the Option shall terminate as of the time of the commission of that act,
notwithstanding any other provision of this Agreement. In the event that
Optionee's employment is terminated by the Company for Cause, the Option shall
terminate as of the time Optionee's employment is terminated, notwithstanding
any other provision of this Agreement.
5. No Transfer of Option.
----------------------
The Option may not be transferred except by will or the laws
of descent and distribution and may not be exercised during the lifetime of
Optionee except by Optionee or Optionee's guardian or legal representative
acting on behalf of Optionee in a fiduciary capacity under state law and court
supervision.
6. Limitations on Exercise of Option.
----------------------------------
Notwithstanding any other provision of this agreement, the
Option shall not be exercisable if the exercise would involve a violation of any
applicable federal or state securities law, and the Company shall make
reasonable efforts to comply with all such laws.
<PAGE>
7. Adjustments.
-----------
(a) The Committee may make or provide for such adjustments in
the number and kind of Option Shares (including shares of another issuer) and
in the Option Price, as the Committee may in good faith determine to be
equitably required in order to prevent dilution or expansion of the rights of
Optionee that otherwise would result from (a) any stock dividend, stock split,
combination of shares, recapitalization or other change in the capital
structure of the Company, or (b) any merger, consolidation, spin-off, spin-out,
split-off, split-up, reorganization, partial or complete liquidation or other
distribution of assets, issuance of warrants or other rights to purchase
securities or any other corporate transaction or event having an effect similar
to the foregoing.
(b) In the event of any such transaction or event, the
Committee may provide in substitution for the Option such alternative
consideration as it may in good faith determine to be equitable under the
circumstances and may require in connection therewith the surrender of the
Option.
8. No Right to Employment.
----------------------
No provision of this agreement shall limit in any way
whatsoever any right that the Company or a Subsidiary may otherwise have to
terminate the employment of Optionee at any time.
9. Rights as a Stockholder.
-----------------------
The holder of this Option shall not be, nor have any of the
rights or privileges of, a holder of Common Shares in respect of any Option
Shares unless and until certificates representing such shares have been issued
by the Company to such holder.
10. Limitation on Incentive Stock Options.
-------------------------------------
Notwithstanding the intent that the Option be an "incentive
stock option" within the meaning of that term under Section 422 of the Code, the
option will be treated as a non-qualified stock option to the extent that the
fair market value of the shares with respect to which any incentive stock
options are exercisable for the first time by Optionee during any calendar year
(under all of the Company's plans and those of any of its subsidiaries) exceed
$100,000. This rule shall be applied by taking any options into account in the
order in which they were granted.
11. Required Holding Period.
------------------------
Notwithstanding the provisions of Section 2(b), to the extent
necessary for the Option, its exercise or the sale of Option Shares acquired
thereunder to be exempt from Section 16(b) of the Exchange Act of 1934, as
amended, (i) except in the case of Optionee's death or Disability, Optionee
shall not be entitled to exercise the Option until the expiration of the
six-month period following the Date of Grant, or (ii) at least six months shall
elapse from the Date of Grant to the date of disposition of the Option Shares
acquired upon exercise of the Option.
<PAGE>
12. Definitions.
-----------
For the purposes of this Agreement, the following terms have
the following meanings:
(a) "Cause" means (i) the commission by Optionee of an act of
fraud or embezzlement against the Company or an act which the Optionee knew to
be in gross violation of Optionee's duties to the Company (including the
unauthorized disclosure of confidential information), (ii) Optionee's continual
failure to render services to the Company, which failure (A) amounts to gross
neglect of Optionee's duties to the Company and (B) is not remedied within 10
days after notice thereof by the Company, or (iii) Optionee's conviction of a
felony.
(b) "Change in Control" means the occurrence of any of the
following events:
(i) The execution by the Company of an agreement for the
merger, consolidation or reorganization into or with another
corporation or other legal person; provided, however, that no such
-------- -------
merger, consolidation or reorganization shall constitute a Change in
Control if as a result of such merger, consolidation or reorganization
not less than a majority of the combined voting power of the
then-outstanding securities of such corporation or person immediately
after such transaction are held in the aggregate by the holders of
securities of the Company entitled to vote generally in the election of
Directors ("Voting Stock") immediately prior to such transaction;
(ii) The execution by the Company of an agreement for the sale
or other transfer of all or substantially all of its assets to another
corporation or other legal person; provided, however, that no such sale
-------- -------
or other transfer shall constitute a Change in Control if as a result
of such sale or transfer not less than a majority of the combined
voting power of the then-outstanding securities of such corporation or
person immediately after such sale or transfer is held in the aggregate
by the holders of Voting Stock immediately prior to such sale or
transfer.
(iii) There is a report filed on Schedule 13D or Schedule
14D-1 (or any successor schedule, form or report), each as promulgated
pursuant to the Exchange Act disclosing that any person (as the term
"person" is used in Section 13(d)(3) or Section 14(d)(2) of the
Exchange Act) (other than The Echelon Group of Companies, LLC, Bradley
N. Rotter, Alan B. Perper or John Ward Rotter) has or intends to become
the beneficial owner (as the term "beneficial owner" is defined under
Rule 13d-3 or any successor rule or regulation promulgated under the
Exchange Act) of securities representing 20% or more of the combined
voting power of the then-outstanding Voting Stock, including, without
limitation, pursuant to a tender offer or exchange offer;
(iv) If, during any period of two consecutive years,
individuals who at the beginning of any such period constitute the
directors of the Company cease for any reason to constitute at least a
majority thereof; provided, however, that for purposes of this
-------- -------
subsection (iv) each director who is first elected, or first nominated
for election by the Company's stockholders, by a vote of at least
two-thirds of the directors of the Company (or a committee thereof)
then still in office who were directors of the Company at the beginning
of any such period shall be deemed to have been a director of the
Company at the beginning of such period; or
<PAGE>
(v) except pursuant to a transaction described in the proviso
to subsection (i) of this Section 12(b), the Company adopts a plan for
the liquidation or dissolution of the Company.
(c) "Disability" means, as of any date, becoming disabled
within the meaning of such term in Section 22(e)(3) of the Code.
(d) "Subsidiary" means any corporation in which the Company
directly or indirectly owns or controls more than 50 percent of the total
combined voting power of all classes of stock issued by the corporation.
13. Severability.
------------
In the event that one or more of the provisions of this
agreement shall be invalidated for any reason by a court of competent
jurisdiction, any provision so invalidated shall be deemed to be separable from
the other provisions hereof, and the remaining provisions hereof shall continue
to be valid and fully enforceable.
14. Governing Law.
-------------
This agreement is made under, and shall be construed in
accordance with, the laws of the State of Delaware.
This Agreement is executed by the Company as of the 17th day
of November, 1997.
POINT WEST CAPITAL CORPORATION
By:
---------------------------
John Ward Rotter
CFO
The undersigned Optionee hereby acknowledges receipt of an
executed original of this Incentive Stock Option Agreement and the Plan and
accepts the Option subject to the applicable terms and conditions of the Plan
and the terms and conditions hereinabove set forth.
------------------------------
Optionee (Signature)
Name: -----------------------
Dated as of November 17, 1997
<PAGE>
ANNEX A
to
Incentive Stock Option Agreement
--------------------------------
Form of Exercise Notice
------------------------
Pursuant to the Incentive Stock Option Agreement dated as of
November17, 1997 between the undersigned and Point West Capital Corporation (the
"Company"), the undersigned hereby elects to exercise his option as follows:
(a) Number of shares purchased:
--------------------
(b) Total purchase price ((a) x Option Price):$
--------
Please issue a single certificate for the shares being purchased
in the name of the undersigned. The registered address on such certificate
should be:
---------------
---------------
The undersigned's social security number is: .
---------------.
Date: -------------------------
--------------- Optionee
SUBSIDIARIES
Dignity Partners Funding Corp. I, a Delaware Corporation
Fourteen Hill Capital, L.P., a Delaware Corporation
Fourteen Hill Mamagement, LLC, a Delaware Corporation
Allegiance Capital, LLC, a Delaware Corporation
Allegiance Funding Corp. I, a Delaware Corporation
Exhibit 23.1
Consent of Independent Auditors
The Board of Directors and Stockholders of
Point West Capital Corporation:
We consent to incorporation by reference in the registration statement Nos.
333-21825 and 333-21827 on Form S-8 of Point West Capital Corporation of our
report dated February 26, 1998, relating to the consolidated balance sheets of
Point West Capital Corporation as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1997, which report
appears in the December 31, 1997, annual report on Form 10-K of Point West
Capital Corporation.
/s/KPMG Peat Marwick LLP
March 24, 1998
Exhibit 24.1
POWER OF ATTORNEY
The undersigned, as a director and/or an officer of Dignity partners,
Inc. (the "Company"), does hereby constitute and appoint Alan B. Perper as his
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and his name, place and stead, in any and all
capacities, to sign the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 and any and all amendments thereto, and to file the
same, with exhibits and schedules thereto, and other documents therewith, with
the Securities and Exchange Commission, granting unto each said attorney-in-fact
full power and authority to do and perform each and every act and thing
necessary or desirable to be done in and about the premises, as fully to all
intents and purposes as be might or could do in person, thereby ratifying and
confirming all that any said attorney-in-fact, or his substitute, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 10 day of March,
1998.
/s/ Bradley N. Rotter
-----------------------------
Bradley N. Rotter
<PAGE>
Exhibit 24.1
POWER OF ATTORNEY
The undersigned, as a director and/or an officer of Dignity partners,
Inc. (the "Company"), does hereby constitute and appoint Alan B. Perper as his
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and his name, place and stead, in any and all
capacities, to sign the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 and any and all amendments thereto, and to file the
same, with exhibits and schedules thereto, and other documents therewith, with
the Securities and Exchange Commission, granting unto each said attorney-in-fact
full power and authority to do and perform each and every act and thing
necessary or desirable to be done in and about the premises, as fully to all
intents and purposes as be might or could do in person, thereby ratifying and
confirming all that any said attorney-in-fact, or his substitute, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 10 day of March,
1998.
/s/ John Ward Rotter
-----------------------------
John Ward Rotter
<PAGE>
Exhibit 24.1
POWER OF ATTORNEY
The undersigned, as a director and/or an officer of Dignity partners,
Inc. (the "Company"), does hereby constitute and appoint Alan B. Perper as his
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and his name, place and stead, in any and all
capacities, to sign the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 and any and all amendments thereto, and to file the
same, with exhibits and schedules thereto, and other documents therewith, with
the Securities and Exchange Commission, granting unto each said attorney-in-fact
full power and authority to do and perform each and every act and thing
necessary or desirable to be done in and about the premises, as fully to all
intents and purposes as be might or could do in person, thereby ratifying and
confirming all that any said attorney-in-fact, or his substitute, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 12 day of March,
1998.
\s\ Stephen T. Bow
---------------------------
Stephen T. Bow
Exhibit 24.1
POWER OF ATTORNEY
The undersigned, as a director and/or an officer of Dignity partners,
Inc. (the "Company"), does hereby constitute and appoint Alan B. Perper as his
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and his name, place and stead, in any and all
capacities, to sign the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 and any and all amendments thereto, and to file the
same, with exhibits and schedules thereto, and other documents therewith, with
the Securities and Exchange Commission, granting unto each said attorney-in-fact
full power and authority to do and perform each and every act and thing
necessary or desirable to be done in and about the premises, as fully to all
intents and purposes as be might or could do in person, thereby ratifying and
confirming all that any said attorney-in-fact, or his substitute, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 13 day of March,
1998.
\s\ Paul A. Volberding
---------------------------
Paul A. Volberding
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-K FOR THE ANNUAL PERIODS ENDED DECEMBER 31, 1997,1996 AND 1995 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANICAL STATEMENTS.
</LEGEND>
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> Dec-31-1997 Dec-31-1996 Dec-31-1995
<PERIOD-START> Jan-01-1997 Jan-01-1996 Jan-01-1995
<PERIOD-END> Dec-31-1997 Dec-31-1996 Dec-31-1995
<CASH> 13,796,274 11,212,110 5,623,456
<SECURITIES> 7,475,821 3,000,000 0
<RECEIVABLES> 4,321,151 1,181,513 1,652,921
<ALLOWANCES> 0 0 0
<INVENTORY> 36,716,122 <F1> 52,766,342 <F1> 48,938,098 <F1>
<CURRENT-ASSETS> 653,023 784,508 2,011,152
<PP&E> 0 0 0
<DEPRECIATION> 6,862 0 0
<TOTAL-ASSETS> 62,969,253 68,944,473 58,225,627
<CURRENT-LIABILITIES> 2,899,038 7,584,003 7,575,303
<BONDS> 38,804,107 <F2> 41,218,205 <F2> 39,105,138 <F2>
0 0 0
0 0 0
<COMMON> 42,918 42,918 15,893
<OTHER-SE> 21,223,190 20,099,347 11,529,293
<TOTAL-LIABILITY-AND-EQUITY> 62,969,253 68,944,473 58,225,627
<SALES> 488,563 5,479,114 6,933,318
<TOTAL-REVENUES> 3,917,890 6,404,822 7,389,376
<CGS> 0 0 0
<TOTAL-COSTS> 0 0 0
<OTHER-EXPENSES> 2,867,025 3,054,227 2,041,658
<LOSS-PROVISION> 328,236 10,079,777 0
<INTEREST-EXPENSE> 3,599,487 3,983,606 3,352,178
<INCOME-PRETAX> (2,876,858) (10,712,788) 1,995,540
<INCOME-TAX> (4,000) 525,711 (624,510)
<INCOME-CONTINUING> (2,880,858) (10,187,077) 1,371,030
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 3,891,494 487,600 (567,831)
<CHANGES> 0 0 0
<NET-INCOME> 1,010,636 9,699,477 803,199
<EPS-PRIMARY> .29 (2.46) .51
<EPS-DILUTED> .28 (2.46) .42
<FN>
<F1> INCLUDES ASSETS HELD FOR SALE AND PURCHASED LIFE INSURANCE POLICIES FOR
1997 AND 1996. INCLUDES ONLY PURCHASED LIFE INSURANCE POLICIES FOR 1995.
<F2> REPRESENTS LONG TERM BORROWINGS OF THE COMPANY.
</FN>
</TABLE>
