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, 1998
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, $0.01 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, $0.01 par value
held by non-affiliates of the registrant as of February 26, 1999 was
approximately $24,578,950
The number of shares of the registrant's common stock, $0.01 par value
outstanding as of February 26, 1999 was 3,262,324.
Documents Incorporated by Reference:
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The registrant's proxy statement (to be filed) related to its 1999 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, 1998
Table of Contents
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PART I Page
Item 1. Business................................................................ 1
Item 2. Properties.............................................................. 9
Item 3. Legal Proceedings....................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders..................... 10
.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stock Matters .... 11
Item 6. Selected Financial Data................................................. 12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ............. 32
Item 8. Financial Statements and Supplementary Data............................. 33
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................... 33
PART III
Item 10. Directors and Executive Officers of the Registrant...................... 58
Item 11. Executive Compensation.................................................. 58
Item 12. Security Ownership of Certain Beneficial Owners and Management ......... 58
Item 13. Certain Relationships and Related Transactions.......................... 58
.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ........ 58
Signatures............................................................................ 63
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Unless the context otherwise requires, all references to "Point West" refer to
Point West Capital Corporation 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. 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) 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. In February 1997,
Point West's Board of Directors (the "Board") decided to cease the Company's
viatical settlement business. In the third quarter of 1996, the Company decided
to sell all or substantially all of its assets. See "Asset Sales; Viatical
Settlement Business." 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 become a more
broadly-based specialty financial services company. During 1997, the Company
expanded its financial services business through the operations of 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 Capital"), Allegiance Funding Corp. I ("Allegiance
Funding") and Allegiance Capital Trust I ("Allegiance Trust I"), which lend
funds to funeral home and cemetery owners. During 1998, the Company formed Point
West Securities, LLC ("PWS"), a broker-dealer licensed by the National
Association of Securities Dealers, Inc. ("NASD"). References herein to Fourteen
Hill include Fourteen Hill Management and Fourteen Hill Capital. References
herein to Allegiance include Allegiance Capital, Allegiance Funding and
Allegiance Trust I.
Information regarding the revenues, contributed income (loss) and
identifiable assets for each of the Company's business segments is contained in
Note 16 of the Company's consolidated financial statements included herein.
The Company continues to evaluate other business opportunities. The
Company is seeking advice from financial advisors to assist it in its strategy
of developing or acquiring new operating businesses. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Considerations Under the Investment Company Act of 1940."
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
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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) 394-9467.
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"). DPFC purchased life insurance
policies with proceeds of the Securitized Notes. It continues to beneficially
own the policies that have not matured. Those policies are pledged as collateral
for the Securitized Notes. DPFC is deemed a bankruptcy remote entity. DPFC no
longer purchases policies.
Fourteen Hill
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In June 1997, the Company formed Fourteen Hill Management and Fourteen
Hill Capital. Fourteen Hill Management is a limited liability company wholly
owned by Point West. It was formed solely to serve as the general partner of one
or more small business investment companies ("SBIC"). Fourteen Hill Capital is a
limited partnership operating as an SBIC. Fourteen Hill Capital received its
SBIC license from the Small Business Administration ("SBA") in September 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
as defined by SBA regulations. Fourteen Hill Capital commenced operations in
August 1997.
Allegiance
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Allegiance Capital is a limited liability company formed in September
1997 as a specialty finance company to provide senior secured loans to funeral
home and cemetery owners. Point West has a 65% ownership interest and 95% voting
control in Allegiance Capital and serves as the managing member. Allegiance's
president and its vice president of marketing, each of whom was hired in
September 1997, have the balance of such interests. Allegiance Capital owns 100%
of Allegiance Funding, which is a special purpose subsidiary formed to acquire
and securitize loans originated by Allegiance Capital. Pursuant to a Trust
Agreement dated August 19, 1998 (the "Allegiance Trust Agreement"), Allegiance
Funding formed a trust, Allegiance Trust I, to consummate a structured financing
which may provide up to approximately $56.4 million to support Allegiance's
lending activities (the "Allegiance Financing").
PWS
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PWS is a limited liability company formed on July 7, 1998 as a
broker-dealer. PWS is wholly owned by Point West. PWS received its license from
the NASD to become a licensed securities broker-dealer on December 3, 1998. In
addition, PWS is registered as a broker-dealer with the Securities and Exchange
Commission ("SEC") and as of February 28, 1999 was registered as a broker-dealer
in California, New York and 18 other states. Operations for PWS in 1998 were
immaterial.
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 Company subsequently sold substantially all of
the Company's policies other than the 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"). The Company has
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discussed potential sales of DPFC policies with the Noteholders. However, the
Company has not decided whether it will sell the DPFC polices and cannot
determine whether the Noteholders will consent to such a sale or whether such a
sale is feasible. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Description of Securitized Notes."
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 life insurance policies. 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.
By December 31, 1998, the Company had completed the sale of all but 7 policies
under these sales agreements.
Viatical Business
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Until the Company ceased purchasing policies, the Company's viatical
settlement business involved the following principal steps: (1) origination of
policy purchases, (2) 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, (3) closing
the transaction, (4) monitoring the insured and the policy and (5) collecting
the policy proceeds following the insured's death. The Company ceased purchasing
policies in February 1997. Therefore, monitoring and collection activities are
the only activities the Company continues to undertake.
Monitoring
Following the purchase of a life insurance policy, the insured
is regularly monitored to obtain timely information concerning the
insured so that proceeds may be collected as promptly as possible
following the death of the insured. In addition, the Company monitors
the policy to ensure it does not lapse because of a failure to pay
timely premiums. 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
premiums. As owner of record of the policy, the Company generally
receives those notices 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 -- Results of Operations by Segment -- Viatical Settlements
-- 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.
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Consideration of Strategic Options and New Businesses
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In September 1996, in light of the uncertainties facing the Company's
viatical settlement business, the Company engaged an investment bank to assist
the Company in the evaluation of its strategic direction. As a result of the
Company's evaluation, the Company embarked on a strategy to become a more
broadly-based specialty financial services company. The Company continues to
pursue other potential business opportunities. The Company is seeking advice
from financial advisors to assist it in its strategy of developing or acquiring
new operating businesses. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Considerations Under the Investment
Company Act of 1940."
Small Business Loans and Investments
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Overview
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Fourteen Hill Capital is licensed by the SBA as an SBIC. Fourteen Hill
Capital focuses on creating a diversified portfolio of loans to and debt and
equity investments in later-stage growth and expansion companies. To date,
Fourteen Hill Capital has focused on businesses in the area of e-commerce,
internet and telecommunications. Fourteen Hill Capital's loans and investments
are 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.
These entities are generally companies with a net worth of less than $18 million
and average net income of 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 of less than $6 million and average net
income of less than $2 million for the last two years. Fourteen Hill Capital
holds an SBIC debenture license.
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. It is also subject to usury and
other similar laws in those jurisdictions.
Origination & Investment Selection
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Fourteen Hill Capital intends to focus on later stage growth companies.
The size of each individual transaction by Fourteen Hill Capital 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 at the time of any investment expects to dispose of the investment after
five years, situations may arise in which it may hold equity securities for a
different period of time.
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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. These activities include (1) new product development, (2) expansion
into new markets, (3) increasing production capacity or (4) 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: (1) highly skilled management with the capability to
organize resources, develop products and exploit market opportunities, (2)
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, (3) strong
demonstrable cash flows, both historical and projected, or other security, (4)
access to additional capital and (5) the existence of a reasonable exit
strategy. Fourteen Hill Capital employs 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 with investment bankers, fund managers, lenders, venture capitalists,
leveraged buyout sponsor groups and other SBIC's. Fourteen Hill Capital uses its
own analysts that review informational packages in order to identify potential
investments. After identifying investments that meet Fourteen Hill Capital's
investment criteria, the analysts conduct 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, Point West's
executive officers. All loan and investment decisions are presented to the
Investment Committee for their approval prior to commitment.
Monitoring Investments
----------------------
Portfolio loans and investments have a designated employee who is
responsible for periodic contact and all initial troubleshooting. Additionally,
this individual carefully reviews 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
competes effectively with those 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.
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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. The funeral home and cemetery businesses comprise what is frequently
called the "death care" industry. Death care historically has been a relatively
stable and mature industry, 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 seeks 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 targets family-owned and other private owners of funeral home
and cemetery establishments. Loans are sourced by marketing employees and
independent parties 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 are 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. These purposes include (1) acquisitions, (2) debt
refinancing and (3) stockholder buyouts or distributions. Allegiance charges a
loan arrangement fee payable at closing as well as 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, generally 15 to 18 years.
Allegiance obtains a senior, secured position with respect to the
borrowers and business establishments it finances. Security for loans is
generally provided through a mortgage providing a first priority security
interest in the owned or leased real property 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
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information concerning the prospective borrower. Information collected from the
borrower includes detailed information regarding ownership, business locations
and characteristics, personnel, real 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 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. The Company uses third-party environmental
service providers for the environmental review. In addition to providing
assurance as to the quality of the real property collateral, the review
generally meets standards for due diligence developed to avoid lender liability.
All loan decisions are presented to an investment committee for its
approval prior to commitment. The committee is comprised of Point West's
executive officers and the president of Allegiance. Allegiance relies on outside
legal counsel to prepare loan documents and to facilitate loan closings.
Servicing
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Point West performs certain basic loan servicing functions related to
loans made by Allegiance. These functions include (1) sending monthly billing
statements and other notices, (2) tracking and posting loan payments, (3)
directing the transfer of loan payments to the appropriate accounts and (4)
maintaining loan files.
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 uses this information 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.
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Competition
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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 a non-industry lender,
provide it with the ability to compete effectively.
Regulation
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On October 23, 1998, Allegiance Capital received its finance lenders
license from California. Allegiance may be subject to licensing requirements as
a lender in other jurisdictions in which it operates. It is also subject to
usury and other similar laws in such jurisdictions.
Broker-Dealer Activities
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Overview
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PWS is a broker-dealer licensed by the NASD and registered with the
SEC. As of February 28, 1999, PWS was also licensed as a broker-dealer in
California, New York and 18 other states. PWS intends to offer investment
banking services targeting e-commerce, telecommunications, internet and other
growth companies. PWS also intends to provide equity research and brokerage
services to institutional investors. PWS did not commence operations until
December 1998. The full scope of services to be provided by PWS has not yet been
determined.
Competition
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PWS encounters intense competition in its business and competes
directly with numerous securities firms, most of which have substantially
greater capital and other resources. PWS also faces competition from banks,
insurance companies and financial institutions. The companies in the industries
to which PWS targets its investment banking services are relatively small. PWS
believes that its large competitors will not target those companies. The Company
also believes that PWS will be able to compete effectively with those
competitors primarily on the basis of the quality of its service, product
selection and price.
Regulation
-----------
The securities industry in the United States is subject to extensive
regulation under federal and state laws. The SEC is the federal agency
responsible for the administration of the federal securities laws. However, much
of the regulation of broker-dealers has been delegated to self-regulatory
organizations, principally the NASD and the NYSE. These self-regulatory
organizations adopt rules (which are subject to approval by the SEC) for
governing the industry and conduct periodic examinations of member
broker-dealers. Securities firms are also subject to regulation by state
securities commissions in the states in which they are registered.
The regulations to which broker-dealers are subject cover all aspects
of the securities business, including sales methods, trading practices, capital
structure, record keeping and the conduct of directors, officers and employees.
Additional legislation, changes in rules promulgated by the SEC and by
self-
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regulatory organizations or changes in the interpretation or enforcement of
existing laws and rules often directly affect the method of operation and
profitability of broker-dealers. The SEC and the self-regulatory organizations
may conduct administrative proceedings that can result in censure, fine,
suspension or expulsion of a broker-dealer, its officers or employees. The
principal purpose of regulation and discipline of broker-dealers is the
protection of clients and the securities markets rather than protection of
creditors and shareholders of broker-dealers.
Other Investments
-----------------
From time to time, Point West invests in companies directly and not
through Fourteen Hill. These activities, which are sporadic, include loans and
equity investments.
Employees
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As of December 31, 1998, the Company employed 17 individuals, two of
whom (in addition to Point West's executive officers) also perform services on
behalf of The Echelon Group of Companies, LLC ("New Echelon LLC"). New Echelon
LLC is owned by Point West's 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
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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 May 1999. The Company is in the
process of evaluating other locations and renewal terms at its existing
facilities. The Company believes there are a number of suitable locations on
acceptable rent terms within the San Francisco area. The Company expects that
its space-sharing arrangement with New Echelon LLC will continue under any
renewed or new lease.
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. (now Point West Capital Corporation)
and each of its directors by three individuals purporting to act on behalf of
themselves and an alleged class consisting of all purchasers of the Company's
common stock during the period February 14, 1996 to July 16, 1996. The complaint
alleged that the defendants violated Section 10(b) of the Securities Exchange
Act of 1934 and Rule 10b-5 thereunder and Section 11 of the Securities Act of
1933 and seeks, among other things, compensatory damages, interest, fees and
costs. The allegations were based on alleged misrepresentations in and omissions
from the Company's registration statement and prospectus related to its initial
public offering and certain documents filed by the Company under the Exchange
Act. On April 24, 1998, the Court granted the Company's and other defendants'
motion to dismiss as it related to the Section 11 claims with prejudice but
denied the motion to dismiss the claims under Section 10(b) and Rule 10b-5 as to
all defendants other than Mr. Bow, one of Point West's directors. Plaintiffs
have appealed this dismissal to the United States Circuit Court for the Ninth
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Circuit. Plaintiffs have also filed a motion for class certification which the
remaining defendants have opposed. On November 13, 1998, the Court granted
plaintiff's motion for class certification. The case is currently in discovery.
A trial date has been set for October 1999. The Company and each of the
remaining 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 case
has been stayed since its inception by agreement of the parties. 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 1998.
10
<PAGE>
PART II
-------
ITEM 5--MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
- --------------------------------------------------------------------------
MATTERS
- -------
The Common Stock trades on the National Market System of The Nasdaq
Stock MarketSM under the symbol "PWCC." As of February 26, 1999, there were
approximately 113 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 February 26, 1999, the Company
estimates that there were more than 500 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.
1998 High Low
---- ---- ----
First Quarter ........... $ 6 $ 3 3/4
Second Quarter........... 7 1/8 4 3/4
Third Quarter............ 6 4
Fourth Quarter........... 7 2 1/4
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
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 existing
businesses and any new businesses. Therefore, the Company does not anticipate
paying cash dividends on the Common Stock for the foreseeable future.
11
<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," information for
1998, 1997 and 1996 and as of December 31, 1998, 1997 and 1996 are not
comparable to each other or to prior periods.
<TABLE>
<CAPTION>
Years Ended December 31,
========================
1998 1997 1996 1995 1994
(Dollars in thousands)
----------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
- -----------------------------
Earned discounts on life insurance policies (1) .............................. $ -- $ -- $ 3,697 $ 6,933 $ 4,240
Earned discounts on prior maturities and matured
policies (1)............................................................ 439 489 1,782 -- --
Interest income................................................................ 1,494 1,184 783 267 118
Net gain on sale of non-marketable securities.................................. -- 680 -- -- --
Gain (loss) on assets sold..................................................... 165 1,463 180 -- --
Total income................................................................... 2,408 3,918 6,405 7,389 4,443
Interest expense............................................................... 3,680 3,599 3,984 3,352 1,115
Provision for loss on assets held for sale..................................... -- 328 3,140 -- --
Loss on investment in wholly owned financing
subsidiary.............................................................. -- -- 6,940 -- --
Loss on non-marketable securities.............................................. 1,073 -- -- -- --
Total expenses................................................................. 8,352 6,795 17,118 5,394 2,279
Income (loss) before income taxes, minority interest
and net loss in wholly owned financing subsidiary
charged to reserve for equity interest ................................. (5,945) (2,877) (10,713) 1,996 2,163
Income tax (expense) benefit .................................................. (6) (4) 526 (625) (137)
Net loss in wholly owned financing subsidiary charged
to reserve for equity interest........................................... 2,300 3,891 488 -- --
Net income (loss)(2)............................................................(3,650) 1,011 (9,699) 803 235
Comprehensive income---- net unrealized investment gains (losses)
("Comprehensive Income").................................................. (2,786) 2,597 -- -- --
Total comprehensive income (loss)...............................................(6,437) 3,608 -- -- --
Basic earnings (loss) per share (3).............................................$(1.12) $ 0.29 $ (2.46) $ 0.51 $ 0.26
Diluted earnings (loss) per share (3)...........................................$(1.12) $ 0.28 $ (2.46) $ 0.42 $ 0.19
Balance Sheet Data (at period end):
- -----------------------------------
Cash and cash equivalents...................................................... $ 6,668 $10,040 $6,586 $ 1,057 $ 31
investment securities.......................................................... 2,113 5,817 -- -- --
Loans receivable............................................................... 10,188 4,016 -- -- --
Purchased life insurance policies.............................................. 33,893 36,587 41,246 48,938 32,916
Non-marketable securites....................................................... 5,397 1,658 3,000 -- --
Total assets................................................................... 62,443 62,969 68,944 58,226 35,433
Reserve for equity interest in wholly owned financing
subsidiary.............................................................. -- 2,300 6,453 -- --
Revolving certificates......................................................... 5,400 -- -- -- --
12
</TABLE>
<PAGE>
Total long term debt (4)........... 41,529 38,804 41,218 40,549 18,447
Total liabilities................. 47,613 41,703 48,802 46,680 22,176
Total stockholders' equity (2).... 14,830 21,266 20,142 4,866 4,062
--
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations by Segment - Viatical
Settlements - Method of Accounting for Viatical Settlements."
(2) Includes minority interest of $568 in 1995 and $1,791 in 1994 on the
statements of operations data and minority interest of $6,680 in 1995 and
$9,195 in 1994 on the balance sheet data. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Method of
Consolidation - Dignity Viatical & Dignified One."
(3) Reflects the following transactions as if such transaction had occurred at
the beginning of 1994, 1995 and 1996: (a) On September 30, 1995, Point West
and its then sole stockholder, The Echelon Group Inc. ("Echelon"), which
was owned entirely by Point West's 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 Point
West's executive officers, and a merger of Echelon into Point West. Point
West's initial public offering occurred in February 1996. See Note 9 of
Notes to Consolidated Financial Statements.
(4) Includes long term notes payable, debentures payable to Small Business
Administration and other long term liabilities.
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 of the Company at December 31, 1998 and results of
operations for the Company for the three years ended December 31, 1998, 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 the second half of 1997) the Company's results of operations and
cash flows for 1998, 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, Allegiance and PWS.
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 Fourteen Hill, Allegiance and
PWS. The Company continues to evaluate other potential business opportunities.
Fourteen Hill, Allegiance and PWS, whose business activities are described under
"Item 1--Business," may or may not be indicative of the types of business
opportunities the Company will continue to pursue. See "Method of Consolidation"
and "Considerations Under the Investment Company Act of 1940" below. 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.
13
<PAGE>
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 this 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, these assets are accounted for at 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 results of operations or
financial position.
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 developed, 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 sale price of $19.5 million,
representing $29.2 million in aggregate face value. Through December 31, 1998,
the Company consummated the sale of 355 policies for $19.3 million, representing
$28.9 million in aggregate face value. At December 31, 1998, the Company owned 7
policies under the aforementioned sales agreements with a carrying value of
$67,000 and a face value of $436,000.
The Company also continues to hold, through DPFC, a substantial amount
of policies, which at December 31, 1998 totaled 494 policies with a face value
of $39.0 million and a carrying value of $33.9 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 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 6 of Notes to Consolidated
Financial Statements. DPFC no longer purchases policies.
14
<PAGE>
Dignity Viatical & Dignified One
--------------------------------
Dignity Viatical Settlement Partners, L.P. ("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. In June 1996, Point West purchased the limited partnership
interests in Dignity Viatical and became the sole owner of all of the
partnership interests therein. In 1996, the Company sold virtually all of the
policies owned by Dignity Viatical. See Note 1c of Notes to Consolidated
Financial Statements.
Dignified One was a limited partnership formed in 1994 to fund
purchases of life insurance policies. 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.
Fourteen Hill
-------------
The Company also consolidates the assets, liabilities and operations of
Fourteen Hill.
Allegiance
----------
The Company also consolidates the assets, liabilities and operations of
Allegiance. In September 1997, the Company formed Allegiance Capital, a limited
liability company, to provide senior secured loans to funeral home and cemetery
owners. Point West made the only capital contribution to Allegiance Capital.
During 1998, Point West was allocated all interest on loans through November 20,
1998, which was the initial funding date for the Allegiance Financing.
Additionally, Point West will be allocated interest (based on the
weighted-average interest rate of all loans outstanding) to the extent that
Point West's capital investment in Allegiance exceeds $3.0 million. Net profits
of Allegiance Capital 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. Allegiance Capital owns 100% of Allegiance Funding, which is a special
purpose subsidiary formed to acquire and securitize loans originated by
Allegiance Capital. Pursuant to the Allegiance Trust Agreement, Allegiance
Funding formed a trust, Allegiance Trust I, to consummate the Allegiance
Financing. See "Liquidity and Capital Resources -- Allegiance" below.
PWS
---
The Company also consolidates the assets, operations and liabilities of
PWS. Operations for PWS in 1998 were immaterial.
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
15
<PAGE>
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.
Results of Operations for the Company
- -------------------------------------
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
---------------------------------------------------------------------
Total Income. Total income decreased 38.5% to $2.4 million in 1998 from
$3.9 million in 1997 due primarily to a $1.3 million decrease in the gain on
assets (life insurance policies) sold. In addition, total income for 1997
included a $680,000 net gain on sale of non-marketable securities sold by Point
West in 1997. Offsetting this decrease was an aggregate increase of $517,000 in
interest income and other income related to the activities of Allegiance and
Fourteen Hill.
Total Expenses. Total expenses increased 23.5% to $8.4 million in 1998
from $6.8 million in 1997 due primarily to a $1.1 million loss on non-marketable
securities recognized by Fourteen Hill in 1998. Contributing to the increase in
1998 were: (i) a $363,000 increase in compensation and benefits resulting from
the hiring of employees to support Allegiance's and PWS' activities and an
increase in salaries and other benefits for other employees for 1998; and (ii) a
$253,000 increase in other general and administrative expenses due to increased
premium expenses incurred in connection with life insurance policies held by
DPFC. The 1997 expenses include a $328,000 provision for loss on assets held for
sale.
Income Tax Expense. In 1998 the Company recorded $5,600 for minimum
state income taxes. See Note 8 of Notes to Consolidated Financial Statements.
Net Loss in Wholly Owned Financing Subsidiary Charged to Reserve for
Equity Interest. The DPFC net loss of $2.3 million and $3.9 million recorded in
1998 and 1997, respectively, were included in the Company's loss before income
taxes and net loss in wholly owned financing subsidiary charged to reserve for
equity interest. Prior to the depletion of the reserve during the third quarter
of 1998, losses were charged against the reserve for equity interest in wholly
owned financing subsidiary. After the reserve was fully depleted during the
third quarter of 1998, DPFC's losses have been reflected in the Company's
consolidated statement of operations and comprehensive income (loss). All
additional losses of DPFC will be reflected in the Company's consolidated
statement of operations and comprehensive income (loss) for the periods in which
such losses occur.
Comprehensive Income. Comprehensive Income decreased to $(2.8) million in
1998 from $2.6 million in 1997, as a result of a decrease in the market value of
marketable investment securities held by Fourteen Hill. In addition, $1.2
million of unrealized gains were recorded in 1997 in connection with warrants
which were exercised in January 1998. See Note 2 of Notes to Consolidated
Financial Statements. The Company also had holdings which under Generally
Accepted Accounting Principles ("GAAP") were carried at cost. In particular, at
December 31, 1998 the Company was carrying at cost, an investment which had on
file a registration statement with the SEC for an initial public offering which
is scheduled to occur in March 1999. In addition, another investment carried at
cost was preferred shares convertible into marketable securities. If the Company
had converted such convertible shares in 1998, an unrealized gain of $4.1
million would have been recorded on the balance sheet at December 31, 1998 (the
Company converted 33% of these shares to marketable securities in February
1999). See "Results of Operations by Segment -- Fourteen Hill." Since Fourteen
Hill was not formed until 1997, there was no Comprehensive Income in 1996.
16
<PAGE>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
---------------------------------------------------------------------
Total Income. Total income decreased 39.1% to $3.9 million in 1997 from
$6.4 million in 1996 due primarily to a $5.0 million decrease in earned
discounts. Earned discounts decreased because the Company began recognizing
income with respect to its viatical settlement business upon receipt of proceeds
on policies. Offsetting this decrease was: (i) a $1.6 million increase in the
gain on assets (life insurance policies) sold; (ii) a $680,000 net gain on sale
of non-marketable securities; and (iii) a $401,000 increase in interest income
resulting from the investment of the proceeds from the gain on assets sold in
short term securities and marketable securities.
Total Expenses. Total expenses decreased 60.2% to $6.8 million in 1997
from $17.1 million in 1996 due primarily to the $6.9 million loss on investment
in wholly owned financing subsidiary, DPFC, and the $3.1 million provision for
loss on assets held for sale both recorded in 1996. In addition, a $384,000
reduction in interest expense contributed to the decrease.
Income Tax Expense. In 1997 the Company recorded $4,000 for minimum
state income taxes. See Note 8 of Notes to Consolidated Financial Statements.
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 loss
before income taxes and net loss in wholly owned financing subsidiary charged to
reserve for equity interest. This loss was charged against the reserve for
equity interest in wholly owned financing subsidiary.
Results of Operations by Segment
- --------------------------------
Viatical Settlements
--------------------
The viatical settlements segment includes results of operations in
connection with viatical settlements for DPFC, Point West and Dignity Viatical.
Method of Accounting for Viatical Settlements
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 and
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
17
<PAGE>
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 in 1996 to sell all or substantially
all of its assets, the Company established a reserve for loss on sale of assets
during 1996. This reserve is reevaluated quarterly. The reserve for loss on sale
of assets was $167,000 and $399,000 as of December 31, 1998 and 1997,
respectively. In 1996, the Company also established a reserve for loss of Point
West's equity interest in DPFC 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 of Point West's equity interest in
DPFC was $2.3 million as of December 31, 1997. By the end of the third quarter
of 1998, the reserve was fully depleted. See "Certain Accounting Implications
for DPFC." In addition, beginning in 1996, the Company began 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. The Company also no longer
included in the carrying value of policies premiums incurred after June 30,
1996.
Certain Accounting Implications for DPFC
Although the Securitized Notes have a stated maturity of March 10,
2005, the Securitized Notes were originally expected to be repaid by the fourth
quarter of 1997. However, at December 31, 1998, $38.5 million remained
outstanding under the Securitized Notes. As a result of the substantially
delayed collection of DPFC policies, DPFC had a deficit of $1.7 million at
December 31, 1998.
If the collection experience for the DPFC policies continues to be
substantially delayed, DPFC's deficit will increase for one or more 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.
In 1998, the total loss realized by DPFC was $4.0 million, $2.3 million
of which was charged against the reserve for equity interest in wholly owned
financing subsidiary, and $1.7 million of which was otherwise reflected in the
Company's consolidated statement of operations and comprehensive income (loss).
The $1.7 million portion of the loss for 1998 decreased basic EPS by $0.52 for
1998. The average historical quarterly losses in DPFC have been approximately $1
million per quarter over the past four quarters. Upon the retirement of the
Securitized Notes, the Company will recognize a gain in an amount approximately
equal to any accumulated deficit of DPFC.
The Securitized Notes represent the obligations solely of DPFC. Point
West did not guarantee repayment of the Securitized Notes and is not required to
fund any principal or interest deficiencies thereunder.
18
<PAGE>
Year Ended December 31, 1998 Compared to Year Ended December 31 1997
and Year Ended December 31, 1997 Compared to Year Ended December 31,
1996
Earned Discounts. Earned discounts on matured polices decreased 10.2%
to $439,000 in 1998 from $489,000 in 1997, and decreased 50.1% in 1997 from
$980,000 in 1996. Effective July 1, 1996, the Company began recognizing earned
discounts only upon receipt of proceeds on matured policies (pursuant to the
death of an insured). The decrease in 1997, therefore, probably would have been
more pronounced if the Company had been recognizing for the entire year of 1996
earned discounts only upon receipt of proceeds on matured policies.
The decreases are due primarily to fewer deaths of insureds and
secondarily to a decrease in the size of the Company's portfolio of policies.
During 1998, earned discounts on matured policies were recognized on 46 policies
with a face value of $2.9 million, compared to 77 and 96 policies with a face
value of $4.9 million and $6.4 million in 1997 and 1996, respectively.
In the first six months of 1996, the earned discount was recognized on
each purchased policy. Earned discounts on life insurance policies was $3.7
million for the six months ended June 30, 1996. The Company has not recognized
any earned discounts in that manner since July 1, 1996. In addition, the Company
recognized $802,000 of earned discounts on prior maturities in 1996. 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. Because the Company began recognizing earned
discounts under a different method in July 1996, earned disounts on prior
maturities were recognized at the time of change in method and have not been
recognized in 1997 or 1998. See "Method of Accounting for Viatical Settlements."
As of December 31, 1998, the Company held 501 policies with an
aggregate carrying value of $34.0 million and an aggregate face value of $39.4
million. Virtually all of the policies are pledged as security for the
Securitized Notes.
Interest Income. Interest income decreased 13.8% to $200,000 in 1998
from $232,000 in 1997, and 17.4% in 1997 from $281,000 in 1996 , as a result of
lower cash balances attributable to DPFC. The cash generated by DPFC is
restricted under the Indenture.
Gain (Loss) on Assets Sold. The gain on assets sold decreased 89.0% to
$165,000 in 1998 from $1.5 million in 1997 because a large portion of the sale
proceeds from life insurance policies was collected during the first half of
1997. The Company collected the sale proceeds on 7 policies in 1998 compared to
246 policies in 1997. The Company collected the sale proceeds on 102 policies in
1996 and recorded a net loss on assets sold of $180,000 in connection with these
sales. The realized gain (loss) was calculated based on the difference between
the sale proceeds and the carrying value after giving effect to the provision
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 and paid-up cash values, increases in face value
of matured policies and refunds of premiums on matured policies. Other income
increased $106,000 to $173,000 in 1998 from $67,000 in 1997 due to a $65,000
increase in face value on one policy in 1998 and an aggregate of $43,000 in
paid-up cash values on two policies in 1998. Other income decreased 77.4% in
1997 from $297,000 in 1996 due to the decrease in the number of matured
policies.
Interest Expense. Interest expense decreased 1.3% to $3,551,000 in 1998
from $3,599,000 in 1997, and 5.1% in 1997 from $3,794,000 in 1996 as a result of
principal repayments under the Securitized
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Notes. Average borrowings under the Securitized Notes were $38.6 million in 1998
compared to $39.3 million in 1997 and $42.7 million in 1996.
Other General and Administrative Expenses. Other general and administrative
expenses increased $359,000 to $594,000 in 1998 from $235,000 in 1997. This
increase was due primarily to an increase in life insurance policy premium
costs. However, because such premium costs were largely charged against the
reserve for equity interest in wholly owned financing subsidiary until it was
depleted in the third quarter of 1998, the increase had a marginal effect on the
Company's 1998 net income relative to 1997. Other general and administrative
expenses increased $223,000 in 1997 from $12,000 in 1996. This increase was due
primarily to a $151,000 increase in life insurance policy premium costs in 1997
compared to 1996. For the reasons discussed above, the increase in premium costs
did not impact net income in 1997. In addition, the $72,000 annual fee paid to
the trustee for the Securitized Notes was expensed in 1997 and 1998.
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 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."
Fourteen Hill
-------------
Method of Accounting for Loans and Debt and Equity Securities
SFAS 115 requires marketable debt and equity securities 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. The Company
had no trading securities at December 31, 1998 and 1997. The Company uses the
cost method to account for non-marketable securities. The Company reviews on a
quarterly basis all non-marketable securities and attempts to ascertain whether
the value is impaired.
During 1998, the Company reflected in its Quarterly Reports on Form
10-Q certain convertible preferred securities as available-for-sale. The
unrealized gains correspondingly reflected in stockholders' equity on the
balance sheet were $2.7 million, $6.4 million and $4.8 million as of March 31,
June 30, and September 30, 1998, respectively, and in Comprehensive Income on
the income statement were $2.7 million, $3.7 million and $(1.6) million for the
quarters then ended, respectively. Such securities were convertible into
marketable securities but nonetheless should have been reflected as
non-marketable securities under GAAP and carried at a cost of $900,000 with
corresponding footnote disclosure regarding any significant appreciation. At
December 31, 1998, such convertible preferred shares are shown as non-marketable
securities at a cost of $900,000. If the Company had converted such shares in
1998, an unrealized gain of $4.1 million would have been recorded in
stockholders' equity on the balance
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sheet at December 31, 1998 (the Company converted 33% of these shares to
marketable securities in February 1999). Footnote disclosure regarding any
significant appreciation in such non-marketable securities will be given in the
future.
Any realized gains and losses, accrued interest and dividends and
unrealized losses judged to be other-than-temporary will be reported on an
appropriate line item above "Net Income (Loss)" on the consolidated statements
of operations and comprehensive income (loss). See Note 2 of Notes to
Consolidated Financial Statements.
Included on the balance sheet at December 31, 1998, were 329,490
convertible preferred shares of FlashNet Communications, Inc. ("FlashNet"),
which were carried on the balance sheet at cost of $2 million. FlashNet is an
internet service provider which serves individuals and businesses across the
United States. In December 1998, FlashNet filed a registration statement with
the SEC for an initial public offering. In connection with such initial public
offering, Fourteen Hill's shares are automatically convertible and Fourteen Hill
will hold 1,120,266 common shares of FlashNet, after giving effect to a 3.4 to 1
stock split which was authorized to occur prior to the initial public offering.
If the FlashNet initial public offering occurs, the FlashNet shares will become
marketable securities. As a result, any unrealized gains or losses in such
investment will be reflected as "Accumulated Comprehensive Income--Net
Unrealized Investment Gains (Losses)" in stockholders' equity. Pursuant to a
standard lock-up agreement, Fourteen Hill will not be able to sell or otherwise
dispose of its FlashNet shares until six months after the initial public
offering.
Beginning in 1999, because of the recent volatility of the stock
market, particularly in internet and internet related stocks, Point West has
hedged a portion of its exposure and may increase its hedging activities to
reduce its exposure to such volatility. Such hedging has included shorting
stocks of certain competitors of the Company's holdings. However, under GAAP it
is unlikely that such hedging activities will constitute hedges under Statement
of Financial Accounting Standards No. 80 ("SFAS 80"), Accounting for Futures
Contracts. Therefore, such hedging activities will be reflected in the Company's
Consolidated Statement of Operations and Comprehensive Income (Loss). See "Item
7A -- Quantitative and Qualitative Disclosures About Market Risks.""
The Company accounts for loans by accruing interest on outstanding
balances. At December 31, 1998 and 1997, the Company evaluated each of Fourteen
Hill's outstanding loans and determined that an allowance for loan losses was
not necessary. As Fourteen Hill's loan portfolio grows or upon subsequent
evaluation, allowances for loan losses will be added to the extent considered
necessary. Loan origination fees and direct loan origination costs are
capitalized and recognized over the life of the related loan as an adjustment of
yield (interest income) in accordance with Statement of Financial Accounting
Standards No. 91 ("SFAS 91"), Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases. See Note 3 of Notes to Consolidated Financial Statements.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Since Fourteen Hill was not formed until 1997, there are no results of
operations for 1996.
Interest Income. Interest income increased $167,000 to $300,000 in 1998
from $133,000 in 1997. This increase was due primarily to the interest earned on
loans made by Fourteen Hill. See "Method of Accounting for Loans and Debt and
Equity Securities." Fourteen Hill had two loans outstanding in the aggregate
amount of $864,000 at the end of 1998 versus one loan outstanding in the amount
of $250,000 at the end of 1997. The weighted-average interest rate on the loans
made in 1998 was 14.9% compared to
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an interest rate of 14% on the loan made in 1997. In addition, Fourteen Hill
recognized $98,000 of interest income in 1998 as a result of warrants received
in connection with one of the outstanding loans.
Other Income. Components of other income include certain gains realized
in connection with sales of securities and application fees. Other income was
$25,000 in 1998 versus $800 in 1997. This increase was primarily the result of
investment securities sold during 1998.
Interest Expense. Interest expense was $98,000 in 1998 due to the
interest on funds borrowed in July 1998. The interest rate (including a 1%
annual fee) was 6.9%. Prior to July 1998, Fourteen Hill had no debt.
Amortization. Amortization costs increased $58,000 to $62,000 in 1998
from $4,000 in 1997 because of the financing costs associated with the borrowed
funds and because organizational costs were expensed in 1998.
Loss on Non-Marketable Securities. Fourteen Hill reviews on a quarterly
basis all non-marketable securities and attempts to ascertain whether the value
is impaired. As a result of such review, Fourteen Hill determined that $1.1
million of non-marketable securities of one company was impaired at September
30, 1998. Therefore, Fourteen Hill wrote-off the entire $1.1 million carrying
value of such security.
Allegiance
----------
Method of Accounting for Loans and Debt and Equity Securities
The Company accounts for loans advanced by Allegiance by accruing
interest on outstanding balances. At December 31, 1998 the Company recorded an
allowance for loan losses of $50,000. The allowance for loan losses is estimated
by management based on a review of the loans and factors which in management's
judgement deserve recognition under current economic conditions. Management
believes that the allowance for loan losses is adequate. Although management
uses available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions. At December
31, 1997, the Company evaluated Allegiance's one outstanding loan and determined
that an allowance for loan losses was not necessary.
Loan origination fees and direct loan origination costs are capitalized
and recognized over the life of the related loan as an adjustment of yield
(interest income) in accordance with SFAS 91.
The Allegiance Financing provides for short term floating rate debt
that is expected to become long term fixed rate debt. The interest rate at which
Allegiance anticipates issuing long term certificates will be set in the future
when approximately $30 million of loans have been originated. Because of a
provision allowing Allegiance to redeem outstanding certificates when 15% of the
original principal balance remains outstanding, the Allegiance Financing does
not qualify for sale treatment under Statement of Financial Accounting Standards
No. 125 ("SFAS 125"), Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities. Accordingly, the Allegiance Financing will
not receive gain on sale treatment under SFAS 125. The loans and any borrowing
under the Allegiance Financing will be reflected on the consolidated balance
sheet. Allegiance utilizes futures contracts to hedge certain interest rate
exposure between the time of origination of the loans and the expected issuance
of term certificates. The futures contracts are to protect the margins earned on
the loans. Any realized gain or loss related to these hedges are deferred and
recognized over the life of the related loan as an adjustment of interest
income. Pursuant to SFAS 80 all such deferred amounts are reflected on the
balance sheet as an increase (in the case of a hedging loss) or decrease (in the
case of a
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hedging gain), in the carrying value of loans receivable. As of December 31,
1998, Allegiance had net realized losses on its hedging activities of $261,000
which increased loans receivable in a like amount. In addition, Allegiance had
unrealized net losses from open hedging positions of $800 as of December 31,
1998. Allegiance had no hedging activities at December 31, 1997. See "Item 7A --
Quantitative and Qualitative Disclosures About Market Risks"
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Since Allegiance was not formed until 1997, there are no results of
operations for 1996.
Interest Income. Interest income increased $575,000 to $589,000 in 1998
from $14,000 in 1997. This increase was due primarily to increased loans made by
Allegiance. Allegiance had five loans outstanding in the aggregate amount of
$9.1 million at the end of 1998 versus one loan outstanding in the amount of
$3.8 million at the end of 1997. The weighted-average interest rate on the loans
outstanding at the end of 1998 was 9.3% compared to an interest rate of 9.4% on
the one outstanding loan at the end of 1997.
Interest Expense. Interest expense for Allegiance was $31,000 in 1998
as a result of the interest paid under the Allegiance Financing. At December 31,
1998, the weighted-average interest rate under the Allegiance Financing was
8.17%. Prior to 1998, Allegiance had no debt.
Compensation and Benefits. Compensation and benefits increased $137,000
to $184,000 in 1998 from $47,000 in 1997. This increase resulted from the hiring
of two new employees in September 1997 to support Allegiance's lending
activities.
Other General and Administrative Expenses. Other general and
administrative expenses increased $145,000 to $178,000 in 1998 from $33,000 in
1997. This increase was primarily due to an increase in Allegiance's activities
and the allowance for loan losses that was recorded in 1998. See "Method of
Accounting for Loans and Debt and Equity Securities."
Amortization. Amortization costs increased $55,000 to $56,000 in 1998
from $1,000 in 1997. Such costs increased due to the financing costs associated
with the Allegiance Financing and because organizational costs were expensed in
1998.
Other
-----
The other segment includes operating results for Point West and PWS.
Except for compensation and benefit expenses clearly attributable to Allegiance,
corporate overhead is included in the other segment and has not been allocated.
Activities for PWS were immaterial in 1998.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
and Year Ended December 31, 1997 Compared to Year Ended December 31,
1996
Interest Income. Interest income decreased 49.5% to $406,000 in 1998
from $804,000 in 1997, and increased 60.2% in 1997 from $502,000 in 1996. This
decrease in 1998 is due to lower cash balances. In 1998, the Company used a
portion of proceeds from the sale of policies in the first half of 1997 to grow
other businesses. In 1997, such proceeds were invested in short term securities
and marketable securities. This increase in 1997 is due to 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 Point West's initial public offering
proceeds.
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Net Gain on Sale of Non-Marketable Securities. In the first quarter of 1997
Point West recognized a $700,000 gain on the sale of a portion of its investment
in Car Club. In March 1997, Point West converted 8.2 million shares of
convertible preferred stock into 8.2 million shares of common stock of Car Club
and sold such shares (approximately 38% of Point West's equity investment in Car
Club) to an unaffiliated third party for $1.8 million. The carrying value of
such shares was $1.1 million. In addition, 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 Car Club. Since Point West did not exercise
this option, a $20,000 pre-tax loss was recognized in 1997. Point West accounts
for this investment using the cost method. See Note 4 of Notes to Consolidated
Financial Statements.
Other Income. Components of other income include a placement fee and
certain gains realized in connection with sales of securities. Other income
increased $94,000 to $120,000 in 1998 from $26,000 in 1997. This increase was
primarily a result of a $70,000 placement fee received by Point West in
connection with an investment made by co-investors of Fourteen Hill Capital in
an unaffiliated small business entity. The placement fee received was in the
form of preferred shares. These preferred shares were written off as part of the
$1.1 million write off of non-marketable securities. See Note 4 of Notes to
Consolidated Financial Statements. Other income increased 62.5% in 1997 from
$16,000 in 1996 due primarily to an increase in gains realized on sales of
securities.
Interest Expense. Interest expense was $190,000 in 1996 in connection
with Point West's revolving credit facility. Average borrowings were $800,000 in
1996 under the revolving credit facility which was repaid and terminated in
August 1996. Point West has not has any debt since then. Point West had assumed
certain variable rate interest exposure of Allegiance between the time of
origination of loans and the expected issuance of term certificates. See "Item
7A -- Quantitative and Qualitative Disclosures About Market Risks."
Compensation and Benefits. Compensation and benefits increased 18.2% to
$1.3 million in 1998 from $1.1 million in 1997. This increase resulted from the
hiring of two new employees in the third quarter of 1998 to support PWS'
activities and an increase in compensation and benefits for other employees for
1998. Compensation and benefits decreased 8.3% in 1997 from $1.2 million in
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 Point West's executive officers)
in 1997.
Other General and Administrative Expenses. Other general and
administrative expenses decreased 22.9% to $925,000 in 1998 from $1.2 million in
1997. This decrease was due primarily to a decrease in legal expenses in 1998 in
the amount of $228,000 incurred in connection with the federal and state alleged
class action lawsuits filed against Point West and its officers and directors.
See "Item 3 -- Legal Proceedings." This decrease was largely a result of the
retention limit being satisfied, requiring the insurance carrier to fund the
majority of the continuing costs of such litigation. Point West expects legal
expenses to increase substantially in 1999 since the case is currently in
discovery and the trial date is set for October 1999. Other general and
administrative expenses decreased 14.3% in 1997 from $1.4 million in 1996. This
decrease is due to an aggregate reduction in the amount of $548,000 consisting
of a decrease in general legal expenses, marketing expenses, professional fees
and the elimination of medical review costs associated with Point West's former
viatical settlement business. Partially offsetting this was $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.
The Company's current lease expires in May 1999. The Company is in the
process of evaluating other locations and renewal terms at its existing
facilities. If the Company remains in its current space,
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the Company's monthly rent is likely to increase from $5,240 per month to
approximately $12,000 per month.
Liquidity and Capital Resources
- -------------------------------
The Company
At present, neither Point West nor PWS has an external funding source
from which to fund its working capital and general corporate needs. During 1998,
Point West supported its operations and the operations of PWS and Fourteen Hill
primarily from cash balances. The Company generated cash primarily from sales
proceeds of life insurance policies and investment securities. The Company
invested the cash in the growth of its businesses. At December 31, 1998, the
Company's cash and cash equivalents were $6.7 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, Allegiance and PWS and
any other business opportunities the Company pursues. See "Consideration Under
the Investment Company Act of 1940." There can be no assurance that Point West
or PWS will be successful in obtaining external financing on satisfactory terms
assuming the Company determines additional funds are needed. Point West at
present anticipates having sufficient liquidity to meet its working capital and
operational needs through 1999, using current cash and cash equivalents.
DPFC
DPFC does not have operations. Point West, as servicer, incurs
administrative costs associated with the Securitized Notes. Point West is
reimbursed for these costs subject to priority provisions contained in the
Indenture. As of December 31, 1998, the outstanding principal amount of the
Securitized Notes was $38.5 million. As of the same date, DPFC had restricted
cash of $2.9 million, which cannot be accessed by Point West except for
reimbursement of costs incurred in connection with its activities as servicer
under the Indenture. 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 Point West to expend cash or obtain financing to
satisfy such principal and interest obligations.
Fourteen Hill
Fourteen Hill's activities have generally been supported by capital
investments by Point West. During 1997, Point West contributed $2.5 million to
Fourteen Hill. During 1998, Point West contributed an additional $2.5 million to
Fourteen Hill. During the first two months of 1999, Point West has contributed
an additional $800,000 to Fourteen Hill.
Fourteen Hill Capital has an SBA debenture license and, therefore, may
be permitted to borrow up to $7.5 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").
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 an SBIC debenture license must maintain proper
diversification of its portfolio. This requirement generally means that in order
to borrow funds from the SBA, no single investment may exceed 20% of the SBIC's
regulatory capital plus its net unrealized investment gains. Additionally, the
portfolio must consist of a proper mix of debt and equity investments.
On July 16, 1998, Fourteen Hill Capital borrowed $3 million from the
SBA. At present, Fourteen Hill Capital is unable to borrow additional funds from
the SBA because (1) two investments each represents an amount greater than 20%
of its regulatory capital plus its net unrealized investment gains
25
<PAGE>
and (2) Fourteen Hill Capital has negative retained earnings. The Company cannot
determine when, if ever, it will be able to borrow additional funds from the
SBA. In addition, if Fourteen Hill Capital does not liquidate a portion of its
investment portfolio or obtain additional regulatory capital, the SBA may
accelerate the repayment of the debenture. The Company believes that if its
holdings in FlashNet become marketable securities, the only reason it may not be
able to borrow additional funds from the SBA is that Fourteen Hill Capital is
not profitable.
Fourteen Hill may not have sufficient liquidity, at least in the short
term, to grow its business.
Allegiance
At December 31, 1998, Point West made the only capital contribution to
Allegiance Capital in the amount of $4.6 million.
On August 19, 1998, Allegiance put in place the Allegiance Financing
which may provide up to $56.4 million solely to support any lending activities
of Allegiance. The Allegiance Financing provides interim floating rate financing
through August 31, 1999. The Company anticipates that the Allegiance Financing
will ultimately provide 15 year fixed and floating rate financing for loans
originated by Allegiance. However, if Allegiance does not originate $30 million
in loans by August 31, 1999, the term certificates may not be issued and
Allegiance would be responsible for finding an alternative financing source to
repay the interim financing. As of December 31, 1998, Allegiance had borrowed
the principal amount of $5.4 million under the Allegiance Financing. See
"Description of Revolving Certificates."
The Company expects that the Allegiance Financing will provide
sufficient funds to support Allegiance's lending activities through August 1999.
Description of Revolving Certificates
- -------------------------------------
Pursuant to the Allegiance Financing, a consortium of insurance
companies (the "Investors") will provide funding of approximately $26.4 million
through August 31, 1999 on a non recourse revolving certificate basis to be used
for the purchase or funding of loans originated by Allegiance Capital and
transferred to Allegiance Funding. Upon the earlier of the incurrence of $26.4
million of revolving certificates or August 31, 1999, such revolving
certificates will be repaid through the issuance of term certificates with an
approximate 15-year maturity. In addition, the Allegiance Financing provides a
commitment to provide up to an additional $30 million of funding through August
31, 1999 through 15-year term loans. In the event that term certificates are not
issued by August 31, 1999, Allegiance will be required to refinance any
revolving certificates outstanding under the Allegiance Financing.
The Allegiance Financing contemplates the issuance of various classes
of revolving and term certificates through Allegiance Trust I. Certificates
receiving ratings are to be purchased by the Investors, while Allegiance Funding
will retain unrated certificates. The revolving certificates received ratings
from Duff & Phelps Credit Rating Co. ranging from A to BB and it is anticipated
that the term certificates, when and if issued, will also receive ratings from
Duff & Phelps. Allegiance Trust I issued the Class B-R, Class C-R and Class D-R
revolving certificates in 1998. The Class C-R certificates were issued in
November 1998 in the principal amount of $2.1 million and received a rating of
BB from Duff & Phelps. The Class B-R certificates were issued in December 1998
in the principal amount of $3.3 million and received a rating of BBB from Duff &
Phelps. Such certificates bear interest at a variable rate based on the one-year
U.S. Treasury Rate plus a weighted-average spread of 3.9%. The weighted-average
interest rate of the certificates at December 31, 1998 was 8.17%. Allegiance
initially retained the unrated Class D-R revolving certificate with a maximum
aggregate principal amount of $3,650,000. This certificate represents the right
to receive all excess cash flow from Allegiance Trust I. Allegiance also
anticipates
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<PAGE>
retaining unrated term certificates following retirement of revolving
certificates. Because of Allegiance's right to redeem the certificates if 15% or
less in principal amount of certificates is outstanding, the Allegiance
Financing does not qualify for sale treatment under SFAS 125. Accordingly, the
Allegiance Financing will not receive gain on sale treatment under SFAS 125. The
loans and any borrowings under the Allegiance Financing will be reflected on the
Company's consolidated balance sheet.
In connection with the Allegiance Financing, Allegiance Capital paid a
$175,000 commitment fee when the funds were initially borrowed under the
Allegiance Financing. Of such commitment fee, $58,000 will be amortized over the
expected life of the revolving certificates (10 months) and $117,000 will be
amortized over the expected life of the Allegiance Financing (15 years). This
allocation was based on an estimate of the portion of the commitment fee
attributable to the revolving certificates and the term certificates.
Allegiance's ability to borrow under the Allegiance Financing is based
on the delivery of loans meeting certain eligibility criteria relating to
loan-level and pool-level credit criteria, form of security and appropriate
legal documentation. The loan-level credit criteria and security and
documentation requirements generally follow Allegiance's basic lending
guidelines. The pool-level criteria create requirements with respect to a
variety of parameters intended to achieve certain overall levels of credit
quality and credit diversification. The ability to borrow is also subject to the
non-occurrence of certain events of default, some of which are curable and some
of which result in permanent loss of borrowing rights. Permanent loss of funding
will result from, among other things, the following: (i) non-payment of interest
on the revolving certificates; (ii) any event of default by the servicer, Point
West, or special servicer, Allegiance Capital, (as described below), not cured
or waived within 30 days; (iii) the occurrence of certain events of bankruptcy,
insolvency or reorganization with respect to Allegiance Funding; and (iv) the
occurrence of certain specified levels of delinquent or defaulted loans or loan
losses. Temporary loss of funding will result from exceeding certain specified
levels of delinquent or defaulted loans or loan losses, or from non-compliance
with required liquidity account levels (as described below).
Under the Allegiance Financing, a liquidity account (the "Reserve
Account") is required to be maintained, generally at 1% of the aggregate balance
of loans underlying the revolving certificates, subject to a minimum of
$250,000. The required amount can increase by a formula amount upon the
incurrence of, and based on a fraction of the dollar amount of, any delinquent,
defaulted or underperforming loans.
Point West acts as servicer and Allegiance Capital acts as special
servicer pursuant to a Servicing Agreement (the "Allegiance Servicing
Agreement"). As servicer, Point West is required to provide monthly reports to
the trustee regarding loan collections, to maintain the loan payment records and
to provide related monitoring services. Point West receives a fee of 0.20% per
annum on the outstanding balance of the loan pool underlying the revolving
certificates, and bears all expenses related to its duties, as well as the
trustee fee. As special servicer, Allegiance Capital provides quarterly reports
to the trustee regarding loan collateral performance and is responsible for
managing any delinquencies, defaults or liquidations. An unaffiliated third
party provides additional services with respect to loan collateral monitoring as
servicing advisor. Allegiance Capital receives a fee of 0.20% per annum on the
outstanding balance of the loan pool underlying the revolving certificates, and
bears all expenses related to its duties, as well as the servicing advisor's
fees. Point West, Allegiance Capital and the servicing advisor are entitled to
receive reimbursement from loan collections for certain expenses which may be
incurred with respect to loan defaults, work-outs or dispositions. All amounts
owed to Point West and Allegiance Capital are subject to availability of cash
after payment of certain other priority amounts pursuant to the Allegiance Trust
Agreement. An event of default under the Allegiance Servicing Agreement will
occur upon, among other things, (i) failure by the servicer, special servicer or
servicing advisor to remit any loan collections received by them; (ii) failure
by the servicer, special servicer or
27
<PAGE>
servicing advisor to deliver the reports required to be delivered by them; or
(iii) the occurrence of certain events of bankruptcy, insolvency or
reorganization with respect to the servicer, special servicer or servicing
advisor. If an event of default occurs and is not remedied, the offending party,
servicer, special servicer, or servicing advisor, may be replaced at the request
of the Investors and replaced by a nominee of Allegiance Funding, subject to the
approval of the Investors.
Description of Securitized Notes
- --------------------------------
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.
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. 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 "DPFC 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 DPFC 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 DPFC 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 Point West's executive officers and no person other
than Point West's executive officers will own more than 20% of such aggregate
voting power, (iv) a requirement that Point West's executive officers constitute
a majority of the Board, and (v) a requirement that Point West employ at least
two of Point West's executive officers (or such other personnel reasonably
acceptable to the Noteholders) in their respective current capacities. An event
of default will occur under the DPFC 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 DPFC Servicing Agreement, Point West can be
replaced as servicer under the Indenture. The back-up servicer is the trustee
under the Indenture.
28
<PAGE>
Considerations Under the Investment Company Act of 1940
- -------------------------------------------------------
The Investment Company Act of 1940 (the "1940 Act") creates a
comprehensive regulatory framework applicable generally to investment companies
(i.e., companies engaged primarily in the business of investing, reinvesting or
trading in securities within the meaning of the 1940 Act, whether or not those
companies intend to be engaged primarily in such business). There are various
percentage of assets and income tests under the 1940 Act (the "Percentage
Tests") that are relevant in considering whether a company is deemed to be an
investment company. Companies that are subject to the 1940 Act must register
with the SEC as investment companies and upon registration become subject to
extensive regulation.
Nonetheless, the Company believes it is not engaged primarily in the
business of investing, reinvesting or trading in securities within the meaning
of the 1940 Act and the rules of the SEC promulgated thereunder and does not
believe that it should be deemed to be an investment company under the
Percentage Tests. In addition, the company does not believe it holds itself out
as an investment company. However, the Company believes that it may exceed the
Percentage Tests in the future as a result of the following:
* Allegiance has not grown its commercial lending business as
quickly as the Company had expected;
* The Company has been unable to commence or acquire other
complementary financial services businesses as rapidly as it
had hoped; and
* The success of Fourteen Hill, which holds a number of
investment securities, has exceeded expectations.
The bulk of investment securities held by the Company have been
acquired since January 1998. The aggregate value of these investments has
increased substantially since the purchase dates. In particular, Fourteen Hill
will hold 1,120,266 shares of FlashNet common stock, after giving effect to the
3.4 to 1 stock split and assuming the initial public offering of FlashNet is
consummated. FlashNet has announced its intention to complete its initial public
offering in the middle of March. Based on preliminary price indications, the
Company expects the value of the FlashNet shares that it owns to increase
dramatically if the initial public offering occurs. Given the value of the
Company's other assets, the Company believes that the increased value of the
FlashNet shares may cause the Company to exceed the Percentage Tests even if
those Percentage Tests have not yet been exceeded.
The Company intends to pursue an aggressive strategy to ensure that it
is not deemed to be an investment company. Some elements of this strategy,
however, may at least in the short term materially adversely affect the
Company's financial condition or results of operations, or both. The elements of
this strategy, which are subject to the risks described below involve:
* pursuing the growth of new operating businesses, by
acquisition or internal development;
* continuing to develop Allegiance's commercial lending
business; and
* disposing of investment securities and/or restricting the
growth of Fourteen Hill's business.
29
<PAGE>
Growth of New Business
- ----------------------
The Company is seeking advice from financial advisors to assist it in
its strategy of developing or acquiring new operating businesses that do not
involve investment securities. Although the Company intends to pursue businesses
which are complementary to the Company's current businesses, these businesses
may not necessarily involve financial services. These businesses will be
operating entities which do not own, trade or hold any significant amount of
investment securities. The Company may not find any suitable businesses to
acquire or develop on terms acceptable to the Company. In addition, the Company
may not be able to successfully integrate the operations of any new businesses.
Finally, any new businesses may not contribute positively to the Company's
financial condition or results of operations.
Accelerating the Growth of Allegiance
The Company will use all reasonable efforts to grow the commercial
lending business of Allegiance. However, the growth of Allegiance is dependent
on the market's acceptance of the product offerings and services of Allegiance,
Allegiance's continued ability to raise financing for its activities,
Allegiance's ability to find suitable creditworthy borrowers and competitive
pressures in the lending industry.
Disposing of Investment Securities/Limiting Growth of Fourteen Hill
The Company may determine that it must dispose of investment securities
to avoid being deemed to be an investment company. Therefore, the dispositions
may occur at times and on terms that would not maximize the value of these
investments. In addition, the dispositions may result in disadvantageous tax
consequences. The Company intends to use any proceeds of any sale to reduce debt
and support its working capital. Pending final use, proceeds will be invested in
U.S government securities.
The Company may also determine that it needs to limit the growth of
Fourteen Hill's business to avoid being an investment company under the 1940
Act. Limiting Fourteen Hill's growth may materially adversely affect the
Company's future financial condition and results of operations.
Year 2000 Readiness Disclosure
- ------------------------------
The "Year 2000 issue" refers to a wide variety of potential computer
program processing and functionality issues that may arise from the inability of
computer programs to properly process date-sensitive information relating to the
Year 2000, years thereafter and to a lesser degree the Year 1999. Any of the
Company's computers, computer programs and administration equipment or products
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. If any of the Company's systems or equipment
that have date-sensitive software use only two digits, system failures or
miscalculations may result causing disruptions of operations, including, among
other things, a temporary inability to process transactions or send and receive
electronic data with third parties or engage in similar normal business
activities. The following discussion constitutes a Year 2000 Readiness
Disclosure.
The Company expects to spend approximately $50,000 to $100,000 in the
aggregate to modify its computer information systems enabling proper processing
of transactions relating to the year 2000 and beyond ("Year 2000 Compliant").
During 1998, the Company made an assessment of Year 2000 Compliant issues and
determined that it needed to modify or replace certain third party computer
hardware and software. As the Company has implemented solutions to the Year 2000
Compliant issues,
30
<PAGE>
in some circumstances it has determined that replacing existing systems,
hardware, or equipment may be more efficient and also provide additional
functionality. The Company has completed the majority of such modifications and
replacements. Through December 31, 1998, the Company had incurred Year 2000
Compliant costs of approximately $24,000, of which $19,000 has been capitalized.
The Company does not believe the amounts expected to be expensed over the next
year will have a material effect on its financial position or results of
operations. However, there can be no assurance that actual costs (i) will not
materially exceed expected costs and (ii) will not have a material adverse
effect on the Company's financial condition and results of operation. The
Company is currently assessing its electronic office equipment such as the phone
system, copiers, fax machines, printers, and the like to determine if such
equipment is date sensitive and will require upgrades. The Company is also
assessing the readiness of its business-critical spreadsheets and customized
databases and plans to make modifications of those systems as necessary. During
1999, the Company will test and make any system refinements that may be needed.
The Company has begun assessing the readiness of external entities,
such as vendors, suppliers, investments and financial institutions which
interface with the Company and plans to have this assessment complete by June
30, 1999. The Company plans to determine whether those parties have appropriate
plans to remediate Year 2000 issues where their systems interface with the
Company's systems or otherwise impact its operations. The Company plans to
assess the extent to which its operations are vulnerable should those
organizations fail to properly remediate their computer systems. The Company's
Year 2000 team is made up of three internal staff members. While the Company
believes its planning efforts are adequate to address its Year 2000 concerns,
there can be no guarantee that the systems of other companies on which the
Company's systems and operations rely will be Year 2000 Compliant on a timely
basis. Although the Company believes it is unlikely, there can be no assurance
that the failure of the Company or a third party on which it is dependent to be
Year 2000 Compliant will not have a material adverse effect on the Company's
operations, prospects, financial condition or results of operations.
The Company's contingency plans, if year 2000 modifications do not work
or are not ready by year 2000, relies significantly on manual procedures and
record keeping. All files are expected to be adequately backed up as of December
31, 1999 and to be available to facilitate manual record keeping. Adequate hard
copy reports of balances and transactions as of December 31, 1999 will also be
available to provide a complete manual system of accounting and inventory
control, if required. Subsequent to year 2000, manual systems will continue to
be in place to mitigate the risk of lost information due to any unforeseen
interruptions that may occur as a result of year 2000 issues arising after
January 1, 2000. Nonetheless, there can be no assurance that the Company's
contingency plan will effectively mitigate any Year 2000 failures or that such
contingency plan would not itself materially adversely effect the Company's
financial condition or results of operations.
Forward Looking Statements
- --------------------------
This report includes forward looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. All statements made herein
which are not based on historical facts are forward looking and, accordingly,
involve risks and uncertainties that could cause actual results to differ
materially from those discussed. Such forward looking statements include those
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations" relating to (i) the ability of Allegiance to finance the loans at
the expected rating levels, (ii) sufficiency of the Company's liquidity and
capital resources (See "Liquidity and Capital Resources"), (iii) the Company's
ability to continue not being subject to registration and regulation under the
1940 Act (See "Considerations Under the Investment Company Act of 1940"), (iv)
expected expenses in connection with the federal and state alleged class action
lawsuits filed against the Company and its officers and directors and (v)
expected expenses to make the Company's computer operations Year 2000 Compliant
and expectations regarding
31
<PAGE>
the Year 2000 Compliance of the Company, third-parties on which the Company is
dependent and the efficacy of contingency plans related thereto. 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) Allegiance's ability to originate a sufficient
number and amount of loans, the market's acceptance of the asset class
consisting of the loans held by Allegiance and Allegiance's ability to finance
the loans on terms acceptable to the market and Allegiance, (ii) the results of
the Company's consideration of strategic options and any costs associated with a
chosen option, (iii) availability and cost of capital, (iv) the factors
described under "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Considerations Under the Investment Company Act of
1940," (v) the outcome of the federal and state alleged class action lawsuits
filed against the Company and its officers and directors 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
- --------------------------------------------------------------------
Market risk refers to the risk that a change in the level of one or
more market prices, interest rates, or other market factors, such as liquidity,
will result in losses for a specified position or portfolio. The Company's
exposure to market risk arises primarily from Fourteen Hill's investments in the
stock of public and private companies, fixed rate loans and debt investments
made by Allegiance and Fourteen Hill and Allegiance's variable rate debt. The
Company's management believes the Company's risk management and hedging
practices result in carefully managed market exposure.
The Company has investment holdings in various companies. Due to the
varying nature of these investments, it is difficult to correlate the effects of
the market to a particular market index. The effects of the market are reviewed
by management on an individual investment-by-investment basis.
Beginning in 1999, because of the recent volatility of the stock
market, particularly in internet and internet related stocks, Point West has
hedged a portion of its exposure and may increase its hedging activities to
reduce its exposure to such volatility. Such hedging has included shorting
stocks of certain competitors of the Company's holdings. However, under GAAP it
is unlikely that such hedging activities will constitute hedges under Statement
of Financial Accounting Standards No. 80 ("SFAS 80"), Accounting for Futures
Contracts. Therefore, such hedging activities will be reflected in the Company's
Consolidated Statement of Operations and Comprehensive Income (Loss).
Allegiance's variable rate debt consist of Trust certificates totaling
$5.4 million which bear interest based on the one-year U.S. Treasury Rate plus a
weighted average spread of 3.9%. See Note 5 of Notes to Consolidated Financial
Statements.
32
<PAGE>
The table below represents principal cash flows and weighted average
interest rates for the Allegiance loans outstanding at December 31, 1998:
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 Thereafter
---- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Fixed rate loans (1) $208,620 $243,757 $267,424 $293,394 $321,891 $7,768,381
Average interest rates 9.3% 9.3% 9.3% 9.3% 9.3% 9.3%
- --
<FN>
(1) The Company hedges its interest rate exposure related to the loans made by
Allegiance because the interest rate at which Allegiance anticipates
issuing term certificates will be set in the future at some point before
August 31, 1999, when approximately $30 million of loans have been
originated. Allegiance utilizes futures contracts to hedge certain interest
rate exposure between the time of origination of the loans and the issuance
of term certificates. The Company sold 10-year Treasury Notes to hedge such
interest rate risk.
</FN>
</TABLE>
In connection with the Allegiance Financing, Point West agreed to
provide additional cash to Allegiance Trust I in the event that monthly LIBOR
interest rates exceed 6.16%. The amount of cash will be a function of several
variables including the monthly LIBOR interest rate and the amount of revolving
Class A-R certificates outstanding under Allegiance Trust I.
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
See pages 34 through 57.
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- --------------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
None.
33
<PAGE>
KPMG 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, 1998 and 1997, and the related
consolidated statements of operations and comprehensive income (loss),
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998. 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, 1998 and 1997,and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1998, in conformity with generally accepted accounting principles.
KPMG LLP
San Francisco, California
February 27, 1999
34
<PAGE>
POINT WEST CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
December 31, December 31,
ASSETS 1998 1997
------------------- ------------------
<S> <C> <C>
Cash and cash equivalents $ 6,668,126 $ 10,039,560
Restricted cash 3,153,513 3,756,714
Investment securities
Held-to-maturity -- 2,220,000
Available-for-sale 2,113,034 3,597,343
Matured policies receivable 12,000 305,435
Loans receivable, net of unearned income of $117,709 and
$59,884, respectively and net of an allowance on
loan losses of $50,000 and $0, respectively 10,187,590 4,015,716
Purchased life insurance policies 33,893,017 36,586,788
Non-marketable securities 5,396,607 1,658,478
Deferred financing cost, net of accumulated amortization
of $907,848 and $617,026, respectively 810,545 525,433
Furniture and equipment, net of accumulated depreciation of
$4,469 and $341, respectively 25,365 6,862
Other assets 182,964 256,924
------------------- ------------------
Total assets $ 62,442,761 $ 62,969,253
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued interest expense $ 263,805 $ 183,150
Accounts payable 192,436 216,851
Accrued compensation payable 222,000 193,000
Reserve for equity interest in wholly owned financing
subsidiary -- 2,300,037
Revolving certificates 5,400,045 --
Long term notes payable 38,528,914 38,804,107
Debentures payable to Small Business Administration 3,000,000 --
Deferred income taxes 6,000 6,000
------------------- ------------------
Total liabilities 47,613,200 41,703,145
------------------- ------------------
Stockholders' equity:
Common stock, $0.01 par value; 15,000,000 authorized shares,
4,291,824 shares issued
3,253,324 shares outstanding 42,918 42,918
Additional paid-in-capital 29,496,720 29,496,720
Accumulated comprehensive income-- net unrealized
investment gains (losses) (188,966) 2,597,239
Retained deficit (11,647,079) (7,996,737)
Treasury stock, 1,038,500 shares (2,874,032) (2,874,032)
------------------- ------------------
Total stockholders' equity 14,829,561 21,266,108
------------------- ------------------
Total liabilities and stockholders' equity $ 62,442,761 $ 62,969,253
=================== ==================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
35
<PAGE>
POINT WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the Years Ended December 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------------- -------------- --------------
<S> <C> <C> <C>
Income:
Earned discounts on life insurance policies $ -- $ -- $ 3,697,032
Earned discounts on prior maturities -- -- 802,471
Earned discounts on matured policies 438,792 488,563 979,611
Interest income 1,494,079 1,183,919 783,115
Net gain on sale of non-marketable
securities -- 679,665 --
Gain (loss) on assets sold 165,346 1,463,080 (179,548)
Other 309,354 102,663 322,141
---------------- -------------- --------------
Total income 2,407,571 3,917,890 6,404,822
Expenses:
Interest expense 3,679,566 3,599,487 3,983,606
Compensation and benefits 1,514,812 1,151,574 1,196,291
Other general and administrative expenses 1,728,169 1,474,916 1,388,338
Amortization 352,181 240,194 449,631
Depreciation 4,128 341 19,967
Provision for loss on assets held for sale -- 328,236 3,139,588
Loss on investment in wholly owned financing
subsidiary -- -- 6,940,189
Loss on non-marketable securities 1,073,494 -- --
---------------- -------------- --------------
Total expenses 8,352,350 6,794,748 17,117,610
---------------- -------------- --------------
Loss before income taxes and net loss
in wholly owned financing subsidiary
charged to reserve for equity interest (5,944,779) (2,876,858) (10,712,788)
Income tax (expense) benefit (5,600) (4,000) 525,711
Net loss in wholly owned financing subsidiary charged
to reserve for equity interest 2,300,037 3,891,494 487,600
---------------- -------------- --------------
Net income (loss) (3,650,342) 1,010,636 (9,699,477)
Comprehensive income -- net unrealized
investment gains (losses) 2,786,205 2,597,239 --
---------------- -------------- --------------
Total comprehensive income (loss) $ (6,436,547) $ 3,607,875 $ (9,699,477)
================ ============== ==============
Basic earnings (loss) per share $ (1.12) $ 0.29 $ (2.46)
Diluted earnings (loss) per share (1.12) 0.28 (2.46)
Weighted average number of shares of common stock
outstanding 3,253,324 3,521,736 3,942,166
Weighted average number of shares of common stock
and common stock equivalents outstanding 3,253,324 3,605,674 3,942,166
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
36
<PAGE>
POINT WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated
Comprehensive
Income-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, 1996 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
-------- ---------- --------- -------- ----------- ---------- ------------------------ ------------
Net unrealized investment
losses -- -- -- -- -- (2,786,205) -- -- (2,786,205)
Net loss -- -- -- -- -- -- (3,650,342) -- (3,650,342)
-------- ---------- --------- -------- --------- --------- ------------ ------------ -----------
Balances at December 31,
1998 -- $ -- 4,291,824 $42,918 $29,496,720 $(188,966) $(11,647,079) $(2,874,032) $14,829,561
========= ========== ========= ======== =========== ========== ============ ============ ============
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
37
<PAGE>
POINT WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------------- --------------- -------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (3,650,342) $ 1,010,636 $ (9,699,477)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 356,309 240,535 469,599
Loss (gain) on sale of assets (165,346) (1,463,080) 191,851
Net gain on sale of non-marketable securities -- (679,665) --
Provisions for loss on sale of assets -- 328,236 3,139,587
Warrants granted to consultants -- -- 92,170
Earned discounts on policies (438,792) (488,563) (5,479,114)
Purchase of life insurance policies -- (882,848) (23,912,464)
Collections on matured life insurance policies 3,209,114 6,051,149 15,523,569
Decrease in unearned income on policies -- -- (715,883)
Increase in reserve for loans receivable 50,000 -- --
Decrease (increase) in other assets 11,600 (25,096) (15,519)
Decrease in deferred taxes -- -- (525,711)
Increase (decrease) in accrued interest expense 80,655 (7,744) (138,933)
Decrease in accounts payable (24,415) (103,726) (56,627)
Decrease in IPO financing costs payable -- -- (306,900)
Decrease in payable to related party -- -- (1,482,170)
Increase (decrease) in accrued compensation payable 29,000 6,610 (662,758)
Increase (decrease) in reserve for equity interest in
wholly
owned financing subsidiary (2,084,412) (3,891,494) 6,452,589
Increase in non-marketable securities received (97,816) -- --
Loss on non-marketable securities 1,073,494 -- --
----------------- --------------- -------------------
Net cash (used in) provided by operating (1,650,951) 94,950 (17,126,191)
activities
----------------- --------------- -------------------
Cash flows from investing activities:
Proceeds from sale of other assets 229,067 12,692,793 6,533,523
Purchase of furniture and equipment (22,630) (7,203) (6,776)
Decrease (increase) in restricted cash 603,201 868,949 (58,818)
Purchase of investments and non-marketable securities (6,808,817) (3,220,000) (3,000,000)
Sale of investments and non-marketable securities 3,013,010 2,021,187 --
Additions to loans receivable (6,549,689) (4,015,716) --
Principal payments on loans receivable 327,815 -- --
----------------- --------------- -------------------
Net cash (used in) provided by investing (9,208,043) 8,340,010 3,467,929
activities
----------------- --------------- -------------------
Cash flows from financing activities:
Proceeds from long term notes payable -- -- 6,375,000
Principal payments on long term notes payable (275,193) (2,414,098) (4,261,933)
Proceeds from debentures payable to the Small Business 3,000,000 -- --
Administration
Proceeds from revolving certificates 5,400,045 -- --
Proceeds from other long term debt -- -- 5,540,132
Principal payments on other long term debt -- -- (6,984,402)
Distribution to limited partners -- -- (783,313)
Purchase of limited partners' interest in investment -- -- (5,081,184)
partnership
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 costs (637,292) (83,717) (88,000)
Reimbursement of IPO financing costs -- -- 750,000
----------------- --------------- -------------------
Net cash provided by (used in) financing 7,487,560 (4,981,847) 19,188,098
activities
----------------- --------------- -------------------
Net (decrease) increase in cash and cash (3,371,434) 3,453,113 5,529,836
equivalents
Cash and cash equivalents, beginning of period 10,039,560 6,586,447 1,056,611
----------------- --------------- -------------------
Cash and cash equivalents, end of period $ 6,668,126 $ 10,039,560 $ 6,586,447
================= =============== ===================
Supplemental disclosures:
Supplemental disclosure of non-cash activities:
Unrealized (loss) gain on securities available for sale $(2,786,205) $ 2,597,239 $ --
================= =============== ===================
Receipt of warrants $ 97,816 $ -- $ --
================= =============== ===================
Supplemental disclosure of cash flow information:
State taxes paid $ 19,680 $ 40,233 $ 6,389
================= =============== ===================
Cash paid for interest $ 3,598,911 $ 3,607,231 $ 4,113,703
================= =============== ===================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
38
<PAGE>
Point West Capital Corporation
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
1. Summary of Significant Accounting Policies
------------------------------------------
a. General Description
Point West Capital Corporation ("Point West") and its consolidated
entities (the "Company"), is a specialty financial services company.
The principal business activity of the Company through February 1997
was to provide viatical settlements for terminally ill persons. A viatical
settlement is the payment of cash in return for an ownership interest in, and
right to receive the death benefit (face value) of, a life insurance policy. 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 belief 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 AIDS Conference, the Company decided in the third quarter of 1996 to sell
all or substantially all of its assets. 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 (or otherwise collected) all but 7
of such policies (having an aggregate face value of $436,000) at December 31,
1998.
Subsequent to February 1997, the Company has become a more
broadly-based specialty financial services company. The Company continues to
evaluate business opportunities. During 1997, the Company expanded its financial
services business through the operations of 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 Capital"), Allegiance Funding Corp. I ("Allegiance Funding") and
Allegiance Capital Trust I ("Allegiance Trust I"), which lend funds to funeral
home and cemetery owners. During 1998, the Company formed Point West Securities,
LLC ("PWS"), a broker-dealer licensed by the National Association of Securities
Dealers, Inc. ("NASD"). References herein to Fourteen Hill include Fourteen Hill
Management and Fourteen Hill Capital. References herein to Allegiance include
Allegiance Capital, Allegiance Funding and Allegiance Trust I. The Company
continues to service the life insurance policies held by its wholly owned
special purpose subsidiary, Dignity Partners Funding Corp. I ("DPFC").
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. All policies held by DPFC are pledged as
security for the Securitized Notes.
39
<PAGE>
Point West Capital Corporation
Notes to Consolidated Financial Statements
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 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 99.978% of the partnership interests. Point West is one of the
two limited partners of Fourteen Hill Capital and owns 0.02% of the partnership
interests. The remaining 0.002% of the partnership interests is owned by one
unaffiliated limited partner. Fourteen Hill Capital provides loans, debt and
equity capital to small companies as defined by the SBA. Fourteen Hill Capital
commenced operations in August 1997.
On September 5, 1997, the Company formed Allegiance Capital, a limited
liability company, to provide senior secured loans to funeral home and cemetery
owners. Point West has a 65% ownership interest and 95% voting control in
Allegiance Capital and serves as the managing member of Allegiance Capital.
Allegiance Capital's president and its vice president of marketing, each of whom
was hired in September 1997, have the balance of such interests and have an
option to acquire from Point West 5% of the equity interests (but not the voting
power) if certain events occur. Point West made the only capital contribution to
Allegiance Capital in the amount of $4.6 million. During 1998, Point West was
allocated all interest on loans through November 20, 1998, which was the initial
funding date for the Allegiance Financing. Additionally, Point West will be
allocated interest (based on the weighted-average interest rate of all loans
outstanding) to the extent that Point West's capital investment in Allegiance
exceeds $3.0 million. Net profits of Allegiance Capital 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
this 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. Allegiance Capital owns 100% of
Allegiance Funding, which is a special purpose subsidiary formed to acquire and
securitize loans originated by Allegiance Capital.
At December 31, 1998, Allegiance had funded five loans in the aggregate
principal amount of $9.1 million. The Allegiance Financing contemplates the
issuance of various classes of revolving and term certificates through
Allegiance Trust to finance its lending operations. The Allegiance Financing
does not qualify for sale treatment under Statement of Financial Accounting
Standards No. 125 ("SFAS 125"), Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. Accordingly, the Allegiance
Financing will not receive gain on sale treatment under SFAS 125. The loans and
any borrowing under the Allegiance Financing will be reflected on the
consolidated balance sheet. The Company consolidates the assets, liabilities and
operations of Allegiance Capital, Allegiance Funding and Allegiance Trust I.
The Company consolidates the assets, liabilities and operations of PWS,
a wholly owned limited liability company, formed on July 7, 1998. PWS received
its license from the NASD to become a licensed securities broker-dealer on
December 3, 1998. In addition, PWS is registered with the SEC and as of February
28, 1999 was registered as a broker-dealer in California, New York and 18 other
states. Point West capitalized PWS with $414,000. Operations for PWS in 1998
were immaterial.
40
<PAGE>
Point West Capital Corporation
Notes to Consolidated Financial Statements
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, 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 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.
d. Loans Receivable and Allowance for Loan Losses
Loans are stated at the principal amount outstanding, net of unearned
income and the allowance for loan losses. The allowance for loan losses is
estimated by management based on a review of the loans and factors which in
management's judgement deserve recognition under current economic conditions.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. At December 31, 1997, the Company evaluated Allegiance's one
outstanding loan and determined that an allowance for loan losses was not
necessary. In addition, the Company evaluated Fourteen Hill's outstanding loans
and determined that an allowance for loan losses was not necessary at December
31, 1998 or December 31, 1997. A loan is placed on non-accrual status when
analysis indicates the following conditions are occurring: the loan is being
maintained on a cash basis and/or where it is determined to have deteriorated to
the point where payment in full of principal or interest has been in default for
a period of 90 days or more unless the obligation is well secured and in process
of collection. A loan can be returned to accrual status once analysis has
determined that the above noted factors are no longer occurring and the loan is
current. See Note 3.
e. Purchased Life Insurance Policies
Through June 30, 1996, the Company recognized income ("earned
discount") on each purchased policy by accruing, over the period between the
acquisition date of the policy and the Company's estimated date of collection of
the face value of the policy (the "Accrual Period"), the difference (the
"unearned discount") between (a) the death benefit payable (face value) under
the policy less the amount of fees, if any, payable to a referral source upon
collection of the face value, and (b) the carrying value of the policy. 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 and 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 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.
41
<PAGE>
Point West Capital Corporation
Notes to Consolidated Financial Statements
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). The income is equal to the difference between the policy proceeds
(less any back-end sourcing fees) and the carrying value of the 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 (as defined in Note 6),
requires 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 decided whether it will sell such policies and cannot determine
whether the Noteholders will consent to a sale or whether such a sale of DPFC
policies is feasible. A reserve was recorded in 1996 in the amount of $6.9
million to reflect the estimated loss of Point West's equity interest in DPFC.
The reserve provided for the write-off of the unrealized residual value
associated with DPFC. The losses of DPFC were charged first against the reserve
which, during the third quarter of 1998, was fully depleted. Losses associated
with DPFC after depletion of the reserve during the third quarter of 1998 have
been, and all future losses associated with DPFC will be, reflected in the
Company's consolidated statement of operations and comprehensive income (loss)
in the appropriate period. See Note 6.
f. Deferred Financing and Organizational Costs
In 1995, financing costs of $1.1 million were incurred in connection
with the Securitized Notes. These costs have been deferred and are amortized
straight-line over the term of the Securitized Notes. In 1997, organizational
costs of $50,000 were incurred in connection with Fourteen Hill and
organizational costs of $16,000 were incurred in connection with Allegiance.
These costs have been fully amortized as of December 31, 1998. In 1998,
financing costs of $500,000 were incurred to obtain the Allegiance Financing (as
defined in Note 5). These costs have been deferred and are amortized
straight-line over the respective terms of the financing arrangements. At
December 31, 1998 and 1997 the total deferred financing costs were $811,000 and
$525,000, respectively.
g. Furniture and Equipment
As a result of the Company's decision in the third quarter of 1996 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 1997 and 1998 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.
h. Other Assets
Other assets primarily include assets held for sale. As a result of the
Company's decision in the third quarter of 1996 to sell all or substantially all
of its assets, it reclassified all assets owned as of that date, other than the
assets of DPFC, to a "held-for-sale" category. Accordingly, these assets are
recorded on the balance sheet as of December 31, 1998 and 1997 at the lower of
carrying value or fair value less
42
<PAGE>
Point West Capital Corporation
Notes to Consolidated Financial Statements
estimated cost to sell. In connection with its decision to sell assets, the
Company established a reserve for loss on sale of assets in 1996. The Company
reevaluates the reserve each quarter.
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.
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,
1998, the aggregate face value of policies issued by any one insurer with
respect to the Company's portfolio of insurance policies approximated 7% 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 $3.7 million, which approximated 6% of total assets at December
31, 1998.
l. Earnings Per Share
Statement of Financial Accounting Standards No. 128, Earnings per
Share, requires earnings per share ("EPS") is 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. See Note 11.
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.
Loans receivable includes hedging gains and losses, net of unearned
income and allowance for loan losses. Unearned income represents fees paid by
borrowers to Allegiance Capital net of direct expenses.
43
<PAGE>
Point West Capital Corporation
Notes to Consolidated Financial Statements
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 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 Compensation Committee. The Plan contribution expenses which are included in
compensation and benefits during 1998, 1997 and 1996 were $85,000, $86,000 and
$70,000, 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 15.
q. Recent Accounting Developments
During 1998, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard No. 133 ("SFAS 133"), Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Management is still
reviewing the impact of this pronouncement. During 1998, the Accounting
Standards Executive Committee issued Statement of Position 98-5 ("SOP 98-5"),
Reporting on Costs of Start-Up Activities. SOP 98-5 requires costs of start-up
activities and organizational costs to be expensed as incurred. Management will
comply with this statement.
2. Investment Securities
- -- ---------------------
Statement of Financial Accounting Standards No. 115 ("SFAS 115"),
Accounting for Certain Instruments in Debt and Equity Securities, requires
marketable debt and equity securities 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. Many of the equity securities
classified by the Company as available-for-sale are securities traded in the
over-the-counter ("OTC") market. Fair market value is estimated by the Company
based on the average closing bid of the securities for the last three trading
days of the reporting period and is adjusted to reflect management's
44
<PAGE>
Point West Capital Corporation
Notes to Consolidated Financial Statements
estimate of liquidity constraints. The Company had no trading securities at
December 31, 1998 or December 31, 1997. Any realized gains and losses, accrued
interest and dividends and unrealized losses on securities judged to be other-
than-temporary are reported on an appropriate line item above "Net Income
(Loss)" on the consolidated statements of operations and comprehensive income
(loss).
The amortized costs and estimated fair value of investment securities
(before any minority interest) as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
December 31, 1998
- ---------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Cost Unrealized Gains Unrealized
Loss Fair Value
<S> <C> <C> <C> <C>
Available-for-sale
Corporate Bond $ 350,000 $ -- $ (190,000) $ 160,000
Common Stock $ 1,952,000 $ 8,092 $ (7,058) $1,953,034
--------------- --------------- --------------- ---------------
Total available-for-sale $ 2,302,000 $ 8,092 $ (197,058) $2,113,034
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
- -----------------------------------------------------------------------------------------------------------------------
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 $ 1,000,000 $ 2,597,343 $ -- $ 3,597,343
--------------- --------------- --------------- ---------------
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 and in classified as held-to-maturity at December 31, 1998 and 1997
have maturity dates ranging from one to six years, and all investments in
warrants have expiration dates ranging from one to five years. Certain warrants
outstanding at December 31, 1997 were exercised on January 1998 and the
securities purchased upon such exercise are reflected at December 31, 1997 as
available-for-sale.
Cumulative unrealized gains (losses) on available-for-sale securities
(representing differences between estimated fair value and cost) of ($189,000)
and $2.6 million at December 31, 1998 and 1997, respectively, are shown as a
separate component of stockholders' equity called "Accumulated Comprehensive
Income -- Net Unrealized Investment Gains (Losses)." At December 31, 1998 and
1997, the Company's total comprehensive income (loss) includes net unrealized
investment gains (losses) which represents the increase (decrease) in the
Company's marketable securities classified as available-for-sale.
45
<PAGE>
Point West Capital Corporation
Notes to Consolidated Financial Statements
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 net of the allowance for loan losses of $50,000 for the
Allegiance loans, and interest is accrued as earned. See Note 1d.
Allegiance had five loans outstanding at December 31, 1998 in the
aggregate principal amount of $9.1 million, which bear a weighted-average fixed
interest rate per annum of 9.3%. Principal payments are due monthly on such
loans, and such loans mature, subject to permitted prepayments, in approximately
fifteen years from the initial loan date. Loan origination fees and direct loan
origination costs are capitalized and recognized over the life of the related
loan as an adjustment of yield (interest income) in accordance with Statement of
Financial Accounting Standards No. 91 ("SFAS 91"), Accounting for Nonrefundable
Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases.
On August 19, 1998, Allegiance put in place a structured financing
which provides short term financing and may provide long term financing, subject
to certain limitations, with respect to loans Allegiance has made in the past
and may make in the future. It is anticipated that this transaction will provide
interim floating rate financing and ultimately permanent fixed and floating rate
financing for loans originated by Allegiance. See Note 5. The interest rate at
which it is anticipated that term certificates will be issued will be set in the
future when approximately $30 million of loans have been originated. Allegiance
utilizes futures contracts to hedge certain interest rate exposure between the
time of origination of the loans and the issuance of term certificates. The
futures contracts are to protect the margins earned on the loans. Any realized
gain or loss related to these hedges are deferred and recognized by the Company
over the life of the related loan as an adjustment of interest income. Pursuant
to Statement of Financial Accounting Standards No. 80 ("SFAS 80"), Accounting
for Futures Contracts, all such deferred amounts are reflected on the balance
sheet as an increase (in the case of a hedging loss) or decrease (in the case of
a hedging gain), in the carrying value of loans receivable. As of December 31,
1998, the Company had net realized losses on its hedging activities of $261,000
which increased loans receivable in a like amount. In addition, the Company had
unrealized net losses from open hedging positions of $800 as of December 31,
1998. The Company had no hedging activities at December 31, 1997.
Fourteen Hill had two loans outstanding at December 31, 1998 in the
aggregate principal amount of $864,000, one of which was originated in January
1998 and bears interest at a fixed interest rate per annum of 15% and the other
of which was originated in September 1998 and bears interest at a fixed interest
rate per annum of 14%. Such loans mature, subject to permitted prepayments, in
approximately 5 years. A partial payment in the amount of $181,000 was made in
October 1998 on the loan that was originated in January 1998.
4. Non-Marketable Securities
- -- -------------------------
Non-marketable securities include investments in non-marketable debt
and equity securities through Point West and Fourteen Hill. The Company accounts
for such non-marketable securities using the cost method.
On November 4, 1996, Point West purchased 21.5 million convertible
preferred shares for $3.0 million (representing a less than 50% interest) in
American Information Company, Inc., commonly known as Car Club ("Car Club"), a
privately held company which, among other things, provides information services
to individuals owning or purchasing automobiles. On March 18, 1997, Point West
46
<PAGE>
Point West Capital Corporation
Notes to Consolidated Financial Statements
converted 8.2 million shares of convertible preferred stock into 8.2 million
shares of common stock of Car Club and sold such non-marketable shares
(approximately 38% of Point West's equity investment in Car Club) 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 Car Club. Since Point West did not exercise
this option, a $20,000 pre-tax loss was recognized in 1997. As of December 31,
1998 and 1997, the carrying value of the remaining $13.3 million non-marketable
convertible preferred shares was $1.7 million.
In 1998, Fourteen Hill invested $750,000 in the convertible preferred
shares (convertible into common shares) of one unaffiliated small business
entity and $1 million in the debt securities (which are convertible into
preferred shares, which in turn are convertible into common shares) of another
unaffiliated small business entity.
Fourteen Hill also invested $900,000 in the convertible preferred
shares (convertible into common shares) of another unaffiliated small business
entity. Such convertible preferred shares held at December 31, 1998 are
reflected as non-marketable securities with a cost of $900,000. Approximately
33% of these securities with a cost basis of $297,000 were converted to common
shares in February 1999. Had 100% of these securities been converted to common
shares at December 31, 1998, the Company would have reflected additional
"Accumulated Comprehensive Income--Net Unrealized Investment Gains" of $4.1
million.
In addition, Fourteen Hill invested $2 million in 329,490 convertible
preferred shares of FlashNet Communications, Inc. ("FlashNet"), which was
carried on the balance sheet at December 31, 1998 at an aggregate cost of $2
million. FlashNet is an internet service provider which serves individuals and
businesses across the United States. In December 1998, FlashNet filed a
registration statement with the SEC for an initial public offering. In
connection with such initial public offering, Fourteen Hill will hold 1,120,266
convertible preferred shares of FlashNet, after giving effect to a 3.4 to 1
stock split which is authorized to occur prior to the initial public offering.
If the FlashNet initial public offering occurs, the Flashnet shares will become
marketable securities. As a result, any unrealized gains or losses in such
investment will be reflected as "Accumulated Comprehensive Income--Net
Unrealized Investment Gains" in stockholders' equity. Pursuant to a standard
lock-up agreement, Fourteen Hill will not be able to sell or otherwise dispose
of its FlashNet shares until six months after the initial public offering.
The Company reviews on a quarterly basis all non-marketable securities
and attempts to ascertain whether the value is impaired. As a result of such
review, the Company determined that $1.1 million of non-marketable securities of
one company was impaired at September 30, 1998, and therefore wrote-off the
entire $1.1 million carrying value of such security.
5. Revolving Certificates
- -- ----------------------
Pursuant to the Allegiance Financing, a consortium of insurance companies
(the "Investors") will provide funding of approximately $26.4 million through
August 31, 1999 on a non recourse revolving certificate basis to be used for the
purchase or funding of loans originated by Allegiance Capital and transferred to
Allegiance Funding. Upon the earlier of the incurrence of $26.4 million of
revolving certificates or August 31, 1999, such revolving certificates will be
repaid through the issuance of term certificates with an approximate 15-year
maturity. In addition, the Allegiance Financing provides a commitment to provide
up to an additional $30 million of funding through August 31, 1999 through
15-year term loans. In the event that term certificates are not issued by August
31, 1999, Allegiance will be required to refinance any revolving certificates
outstanding under the Allegiance Financing.
47
<PAGE>
Point West Capital Corporation
Notes to Consolidated Financial Statements
The Allegiance Financing contemplates the issuance of various classes
of revolving and term certificates through Allegiance Trust I. Certificates
receiving ratings are to be purchased by the Investors, while Allegiance Funding
will retain unrated certificates. The revolving certificates received ratings
from Duff & Phelps Credit Rating Co. ranging from A to BB and it is anticipated
that the term certificates, when and if issued, will also receive ratings from
Duff & Phelps. Allegiance Trust I issued the Class B-R, Class C-R and Class D-R
revolving certificates in 1998. The Class C-R certificates were issued in
November 1998 in the principal amount of $2.1 million and received a rating of
BB from Duff & Phelps. The Class B-R certificates were issued in December 1998
in the principal amount of $3.3 million and received a rating of BBB from Duff &
Phelps. Such certificates bear interest at a variable rate based on the one-year
U.S. Treasury Rate plus a weighted-average spread of 3.9%. The weighted-average
interest rate of the certificates at December 31, 1998 was 8.17%. Allegiance
initially retained the unrated Class D-R revolving certificate with a maximum
aggregate principal amount of $3,650,000. This certificate represents the right
to receive all excess cash flow from Allegiance Trust I. Allegiance also
anticipates retaining unrated term certificates following retirement of
revolving certificates. Because of Allegiance's right to redeem the certificates
if 15% or less in principal amount of certificates is outstanding, the
Allegiance Financing does not qualify for sale treatment under Statement of
Financial Accounting Standards No. 125 ("SFAS 125"), Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities.
Accordingly, the Allegiance Financing will not receive gain on sale treatment
under SFAS 125. The loans and any borrowings under the Allegiance Financing will
be reflected on the consolidated balance sheet.
In connection with the Allegiance Financing, Allegiance Capital paid a
$175,000 commitment fee when the funds were initially borrowed. Of such
commitment fee, $58,000 will be amortized over the expected life of the
revolving certificates (10 months) and $117,000 will be amortized over the
expected life of the Allegiance Financing (15 years). This allocation was based
on an estimate of the portion of the commitment fee attributable to the
revolving certificates and the term certificates.
In connection with the Allegiance Financing, Point West agreed to
provide additional cash to Allegiance Trust I in the event that monthly LIBOR
interest rates exceed 6.16%. The amount of cash will be a function of several
variables including the monthly LIBOR interest rate and the amount of revolving
Class A-R certificates outstanding under Allegiance Trust I.
6. Long Term Notes Payable
- -- -----------------------
The Senior Viatical Settlement Notes, Series 1995-A, Stated Maturity
March 10, 2005 (the "Securitized Notes") were issued by DPFC. Principal and
interest payments on the Securitized Notes are payable solely from collections
on pledged policies and deposited funds. The Securitized Notes, which are
reported on the balance sheet as long term notes payable, 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. From 1996 through the third quarter of 1998, losses associated with DPFC
were charged against the reserve which was originally established in 1996 for
the estimated loss of Point West's equity interest in DPFC. See Note 1e. Since
the third quarter of 1998, losses associated with DPFC after depletion of the
reserve have been reflected in the Company's consolidated statement of
operations and comprehensive income (loss) in the appropriate period. Upon the
retirement of the Securitized Notes, the Company will recognize a gain in
48
<PAGE>
Point West Capital Corporation
Notes to Consolidated Financial Statements
an amount approximately equal to any accumulated deficit reflected. At December
31, 1998, DPFC's accumulated deficit was $1.7 million. In 1998, the total loss
realized by DPFC was $4.0 million, $2.3 million of which was charged against the
reserve for equity interest in wholly owned financing subsidiary, and $1.7
million of which was otherwise reflected in the Company's consolidated
statements of operations and comprehensive income (loss).
Point West is the servicer of the policies pledged under the indenture
pursuant to which the Securitized Notes were issued and incurs servicing
expenses (which are reimbursed, subject to certain priority payments) in
connection therewith.
7. Debentures payable to Small Business Administration
- -- ---------------------------------------------------
As of December 31, 1998, Fourteen Hill Capital had issued one debenture
in the principal amount of $3 million payable to the Small Business
Administration ("SBA") with semi-annual interest only payments at a fixed rate
of 5.9% (plus a 1% annual fee) and a scheduled maturity date of September 1,
2008. In addition, Fourteen Hill Capital paid to the SBA a $105,000 fee (3.5% of
the total borrowings) to borrow such money. The debenture is subject to a
prepayment penalty if paid prior to September 1, 2003.
At present, Fourteen Hill Capital is unable to borrow additional funds
from the SBA because (1) two investments each represents an amount greater than
20% of its regulatory capital plus its net unrealized investment gains and (2)
Fourteen Hill Capital has negative retained earnings. The Company cannot
determine when, if ever, it will be able to borrow additional funds from the
SBA. In addition, if Fourteen Hill Capital does not liquidate a portion of its
investment portfolio or obtain additional regulatory capital, the SBA may
accelerate the repayment of the debenture. The Company believes that if its
holdings in FlashNet become marketable securities, the only reason it may not be
able to borrow additional funds from the SBA is that Fourteen Hill Capital is
not profitable.
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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal:
Current (benefit)expense.............. $ -- $ -- $ --
Deferred (benefit) expense........... -- -- (210,113)
State:
Current (benefit) expense ............. 5,600 4,000 --
Deferred (benefit) expense ........... -- -- (315,598)
------------ ------------ -------------
Total tax (benefit) expense............... 5,600 $ 4,000 $ (525,711)
============= ============== =============
</TABLE>
49
<PAGE>
Point West Capital Corporation
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of December
31, are presented below. 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 1997 are primarily a result of adjustments to
conform to tax returns as filed.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Revenue and expenses recognized on the cash
basis for tax purposes....................................... $ 270,173 $ 236,218
Depreciation, amortization and other........................... 6,961 13,606
Provision for assets held for sale............................. 66,407 158,878
Provision for loss on investment in subsidiary ................ -- 916,206
Provision for loss on non-marketable securities................ 427,620 --
Allowance for loan losses...................................... 19,917 --
Unrealized loss on securities available for sale.............. 75,265 --
Net operating loss carryforwards............................... 5,773,727 4,098,144
-------------- -----------------
6,640,070 5,423,052
Valuation allowance .......................................... (4,296,383) (1,867,064)
-------------- -----------------
Deferred tax assets net of valuation allowance .............. 2,343,687 3,555,988
Deferred tax liabilities:
Unrealized gain on securities available for sale............. -- 1,034,522
Accretion recognized on a cash basis for tax purposes........ 2,349,687 2,527,466
----------------- ------------------
2,349,687 3,561,988
----------------- ------------------
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 1998 and 1997 as a result of the
net operating loss carryforward. 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.
50
<PAGE>
Point West Capital Corporation
Notes to Consolidated Financial Statements
The differences between the statutory income tax rate and the Company's
effective tax rate for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Tax expense at statutory rate (34%)...... $ (1,239,212) $ 344,976 $ (3,476,564)
State taxes net of federal benefits........ (76,409) 189,173 (627,622)
Change in valuation allowance (1)....... 1,319,532 (530,149) 3,431,001
Other......................................... 1,689 -- 147,474
------------------ ------------------- ------------------
Total tax (benefit) expense $ 5,600 4,000 (525,711)
------------------ ------------------- ------------------
<FN>
- --
(1) $1,109,787 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
increase of $1,319,532 is based on management's determination that the
resulting deferred assets are not more likely than not to be realized.
</FN>
</TABLE>
At December 31, 1998, the Company has an estimated federal tax net
operating loss carryforward of $15,132,165 expiring in the years 2009 to 2019,
and a California tax net operating loss carryforward of approximately
$10,777,311 expiring in the years 1999 to 2004.
9. 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.
51
<PAGE>
Point West Capital Corporation
Notes to Consolidated Financial Statements
10. Earned Discounts
- -- ----------------
Earned discounts on life insurance policies reflect the amount of
accretion recorded in the first six months of 1996. 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. See Note 1e.
11. Earnings per Share
- -- ------------------
The weighted average number of common stock shares and additional
common stock equivalent shares used in computing EPS are set forth below for the
periods indicated.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Weighted average number of shares of common
stock outstanding.................................... 3,253,324 3,521,736 3,942,166
Additional common stock equivalents............... -- 83,938 --
---------- ---------- ----------
Weighted average number of shares of common
stock and common stock equivalents
outstanding...................................... 3,253,324 3,605,674 3,942,166
========= ========= =========
</TABLE>
Diluted EPS for 1998 and 1996 do not include any common stock
equivalents due to their anti-dilutive effect. Common Stock equivalents for 1997
include, to the extent they do not have an anti-dilutive effect, employee stock
options, non-employee director stock options and warrants issued to an
investment banking firm.
12. Commitments
- -- -----------
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. The Company is currently
evaluating its leasing alternatives. If the Company remains in its current
space, the Company's monthly rent is likely to increase to approximately $12,000
per month.
Future minimum rental payments (less amounts to be paid by New Echelon
LLC) at December 31, 1998, under operating leases with an initial term of one
year or more, are as follows:
Year ended December 31, 1999.......... $ 26,202
Year ended December 31, 2000.......... --
-------------
Total................................. $ 26,202
=============
13. Litigation
- -- -----------
From time to time, the Company is involved in routine legal proceedings
incidental to its business, including litigation in connection with the
collection of amounts owed by insurance company obligors. The Company does not
expect that these proceedings, individually or in the aggregate, will have a
material adverse effect on the Company's financial position, liquidity or
results of operations.
52
<PAGE>
Point West Capital Corporation
Notes to Consolidated Financial Statements
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. (now Point West Capital Corporation)
and each of its directors by three individuals purporting to act on behalf of
themselves and an alleged class consisting of all purchasers of the Company's
common stock during the period February 14, 1996 to July 16, 1996. The complaint
alleged that the defendants violated Section 10(b) of the Securities Exchange
Act of 1934 and Rule 10b-5 thereunder and Section 11 of the Securities Act of
1933 and seeks, among other things, compensatory damages, interest, fees and
costs. The allegations were based on alleged misrepresentations in and omissions
from the Company's registration statement and prospectus related to its initial
public offering and certain documents filed by the Company under the Exchange
Act. On April 24, 1998, the Court granted the Company's and other defendants'
motion to dismiss as it related to the Section 11 claims with prejudice but
denied the motion to dismiss the claims under Section 10(b) and Rule 10b-5 as to
all defendants other than Mr. Bow, one of Point West's directors. Plaintiffs
have appealed this dismissal to the United States Circuit Court for the Ninth
Circuit. Plaintiffs have also filed a motion for class certification which the
remaining defendants have opposed. On November 13, 1998, the Court granted
plaintiff's motion for class certification. The case is currently in discovery.
A trial date has been set for October 1999. The Company and each of the
remaining 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 case
has been stayed since its inception by agreement of the parties. The Company and
each of the defendants intend to continue to defend the action vigorously.
14. 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 interest expense, accounts payable and accrued compensation
payable 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.
The portfolio of purchased life insurance policies is stated at cost
plus accretion through June 1996 which approximates fair market value.
Due to the unique nature of the Company's investment in non-marketable
securities, it is not practical to estimate fair value.
The revolving certificates, long term notes payable and debentures
payable to the SBA are all stated at cost. The revolving certificates bear a
variable interest rate of the weighted-average spread of
53
<PAGE>
Point West Capital Corporation
Notes to Consolidated Financial Statements
3.9% over the one-year U.S. Treasury rate. The long term notes payable bear a
fixed interest rate of 9.17% and are equivalent to newly acquired debt at 1%
over prime interest rates. The debenture bears a fixed interest rate of 6.9%.
15. Stock-Based Compensation
- -- ------------------------
The Company has two stock option plans. Under the Amended and Restated
1995 Stock Option Plan ("Employee Plan"), Point West may grant options to its
employees for up to 450,000 shares of common stock. Under the Stock Option Plan
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 generally equals the market price of the
Common Stock on the date of grant. Each option generally expires ten years after
the date of grant. Under the Employee Plan, each granted option generally vests
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 34%, 33% and 33% at the next three annual meetings following the grant
date. At each annual meeting, each non-employee director is granted 5,000
options that vest at the next annual meeting. Incentive stock options granted to
10% stockholders under the Employee Plan have different terms than generally
described above. These options have an exercise price equal to 110% of market
value on the date of grant, vest 20% per year over 4 years and expire 5 years
after the date of grant.
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:
1998 1997 1996
---- ---- ----
Expected volatility 75% 75% 20%
Employee Plan:
Risk-free interest rate 5.0% 5.8% 6.3%
Expected life 6 years 7 years 7 years
Director Plan:
Risk-free interest rate 4.6% 5.6% 6.0%
Expected life 2 years 2 years 4 years
54
<PAGE>
Point West Capital Corporation
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
==================== ==================== ====================
Weighted- Weighted- Weighted
Average Average Average
Exercise Excercise Excercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C>
Outstanding at
Beginning of year 273,000 $ 3.40 181,000 $ 3.33 -- --
Granted 125,500 $ 3.41 96,000 $ 3.44 407,000 $ 8.18
Exercised -- -- -- -- -- --
Forfeited (13,000) $ 1.85 (4,000) $ 1.38 (75,000) $ 12.18
Canceled -- -- -- -- (151,000) $ 12.01
------------ ------------- -------------
Outstanding at end
of year 385,500 $ 3.45 273,000 $ 3.40 181,000 $ 3.33
------------ ------------- -------------
Options exercisable
at year-end 111,400 $ 5.03 53,733 $ 6.47 6,667 $ 13.50
Weighted-average
fair value of each
option granted
during year $ 2.20 $ 2.38 $ 3.11
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------- -------------------------------------
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted
Exercisable Outstanding at Contractual Life Exercise Price Exercisable -Average
Prices 12/31/98 12/31/98 Exercise Price
<S> <C> <C> <C> <C> <C>
$1.38 - $1.38 137,000 7.55 $ 1.38 54,800 $ 1.38
$2.25 - $2.75 82,500 5.71 $ 2.41 -- --
$3.44 - $3.44 93,000 8.84 $ 3.44 26,600 $ 3.44
$5.00 - $6.50 43,000 9.50 $ 5.35 -- --
$12.38 - $13.50 30,000 7.28 $ 13.13 30,000 $13.13
--------------- ------ ---- ------ ------ ------
$1.38 - $13.50 385,500 7.66 $ 3.45 111,400 $ 5.03
</TABLE>
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its option 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>
<CAPTION>
1998 1997 1996
----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Net income (loss) As reported $ (3,650,342) $ 1,010,636 $ (9,699,477)
Pro forma $ (3,878,265) $ 799,444 $ (9,881,226)
Basic earnings (loss) per share As reported $ (1.12) $ 0.29 $ (2.46)
Pro forma $ (1.19) $ 0.23 $ (2.51)
Diluted earnings (loss) per share As reported $ (1.12) $ 0.28 $ (2.46)
Pro forma $ (1.19) $ 0.22 $ (2.51)
</TABLE>
55
<PAGE>
Point West Capital Corporation
Notes to Consolidated Financial Statements
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 an investment banking firm. These warrants were 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.
16. Segment Reporting
- -- -------------------
Financial Accounting Standard No. 131 ("SFAS 131"), Disclosures about
Segments of an Enterprise and Related Information, was issued in June 1997 and
is effective for periods beginning after December 15, 1997. The Statement
establishes standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker, or
decision making group, in deciding how to allocate resources and in assessing
performance. The Company's chief operating decision making group is comprised of
the Chairman of the Board, President and Chief Financial Officer of Point West.
The Company's reportable operating segments include Viatical
Settlements, Fourteen Hill and Allegiance. The activities of each operating
segment are described in Note 1c. The Other Segment includes Point West and PWS.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies. The following table
represents the Company's results from segments for 1998. Segment reporting for
1997 has not been included since the operations of Fourteen Hill and Allegiance
were insignificant as of such date. Segment reporting for 1996 has not been
included since Fourteen Hill and Allegiance did not exist as of such date.
<TABLE>
<CAPTION>
Viatical Fourteen
Settlements (1) Hill Allegiance Other Total
--------------- ----- ---------- ----- -----
<S> <C> <C> <C> <C> <C>
Interest income...... $ 199,782 $ 299,842 $ 588,639 $ 405,816 $ 1,494,079
Other revenue........ 776,797 24,691 (8,050) 120,054 913,492
Interest expense...... 3,550,664 98,372 30,530 -- 3,679,566
Depreciation &
Amortization....... 234,880 61,733 55,568 4,128 356,309
Contributed income
(loss) (2).............. (1,102,563) (874,293) 129,611 (1,803,097) (3,650,342)
Comprehensive
Income............... -- 1,345,286 -- -- 1,345,286
Segment assets...... 37,078,882 7,140,917 10,162,182 8,060,780 62,442,761
<FN>
- --
(1) The viatical settlements segment includes results of operations in
connection with viatical settlements for DPFC, Point West and Dignity
Viatical.
(2) Corporate overhead is not generally allocated between segments and is
included in the other segment.
</FN>
</TABLE>
56
<PAGE>
Point West Capital Corporation
Notes to Consolidated Financial Statements
A reconciliation of the totals reported for the operating segments to
the applicable line items in the consolidated financial statements is as
follows:
Income
------
Interest income $ 1,494,079
Other revenue 913,492
--------------
Total income $ 2,407,571
17. Events Subsequent to the Balance Sheet Date
- -- --------------------------------------------
On January 5, 1999 Fourteen Hill made an investment of $500,000 in equity
of a small business entity to which it had loaned funds in 1998. On January 21,
1999, such small business entity made a partial payment in the amount of
$245,000 of its $250,000 loan. In addition, on February 17, 1999 Fourteen Hill
made an investment of $1 million in equity of a small business entity. Fourteen
Hill also sold $191,000 at cost of a $750,000 equity investment in a small
business entity and recognized a gain of $45,000 in 1999. On February 24, 1999,
Fourteen Hill converted 55,970 preferred shares of a total of 167,910 preferred
shares it holds of a small business entity. Fourteen Hill received 223,880
common shares upon such conversion and recorded a gain in 1999.
57
<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 1999 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 LLP dated February 27, 1999 are included herein at
pages 34 through 57:
Independent Auditors' Report.
Consolidated Balance Sheets as of December
31, 1998 and 1997
Consolidated Statements of Operations and
Comprehensive Income (Loss) for the years
ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Stockholders'
Equity for the years ended December 31,
1998, 1997 and 1996.
58
<PAGE>
Consolidated Statements of Cash Flows for
the years ended December 31, 1998, 1997 and
1996.
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. (Incorporated by reference to Exhibit 4.3 of
the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997).
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. (Incorporated by reference to Exhibit 4.5 of
the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997).
10.1* Point West Capital Corporation Amended and Restated
1995 Stock Option Plan (Incorporated by reference to
Exhibit 10 of the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998).
10.2* Stock Option Plan for Non-Employee Directors
(Incorporated by reference to Exhibit 10.2 of the
Registration Statement).
59
<PAGE>
10.3* Form of option agreement dated November 17, 1997
granted to each of Bradley N. Rotter, Alan B. Perper
and John Ward Rotter. (Incorporated by reference to
Exhibit 10.4 of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997).
10.4* Form of option agreement dated November 25, 1998
granted to each of 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).
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 December31, 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).
60
<PAGE>
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 Amended and Restated Limited Liability Company
Agreement of Allegiance Capital, LLC (Incorporated by
reference to Exhibit 10.5 of the Company's Quarterly
Report on Form 10-Q for the quarter ended September
30, 1998).
10.20 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).
10.21 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).
10.22** Trust Agreement, dated as of August 1, 1998, among
Allegiance Funding Corp. I, Manufacturers and Traders
Trust Company and Point West Capital Corporation
(Incorporated by reference to Exhibit 10.1 of the
Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998).
10.23** Supplement to Trust Agreement for Revolving Series
1998-1, dated as of August 1, 1998 among Allegiance
Funding Corp. I, Manufacturers and Traders Trust
Company and Point West Capital Corporation
(Incorporated by reference to Exhibit 10.2 of the
Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998).
10.24** Loan Acquisition Agreement, dated as of August 1,
1998, between Allegiance Capital, LLC and Allegiance
Funding Corp. I (Incorporated by reference to Exhibit
10.3 of the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998).
10.25** Servicing Agreement, dated as of August 1, 1998,
among Point West Capital Corporation, Allegiance
Capital, LLC, Allegiance Funding Corp. I,
Manufacturers and Traders Trust Company and other
party thereto (Incorporated by reference to Exhibit
10.4 of the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998).
10.26 Point West Securities LLC Operating Agreement by
Point West Capital Corporation and Point West
Securities, LLC as of July 8, 1998.
21.1 Subsidiaries of the Company.
61
<PAGE>
23.1 Consent of Independent Certified Public Accountants.
24.1 Powers of Attorney.
27 Financial Data Schedule.
* Management contract or compensation plan or arrangement.
** Certain information omitted pursuant to an order for confidential
treatment granted by the SEC.
(b) Reports on Form 8-K:
Date Item Reported Matter Reported
---- ------------- ----------------
November 16, 1998 5 November 16, 1998 5
The Company issued a
press release
regarding its
results of
operations for the
third quarter of
1998.
62
<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 5,1999 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 5, 1999:
/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 5, 1999
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
63
POINT WEST CAPITAL CORPORATION
Incentive Stock Option Agreement
--------------------------------
INCENTIVE STOCK OPTION AGREEMENT,dated as of November 25,1998
(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 (i) at a regular or special meeting of the Committee held
on, or (ii) by the unanimous written consent of the members of the Committee
effective on, November 25, 1998 (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 $2.475 per share (the
"Option Price"), which is 110% of 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 25% of the Option Shares on the
first anniversary of the Date of Grant and to the extent of an additional 25% on
each of the second through the fourth anniversary of the Date of Grant so long
as Optionee has remained in the continuous employ of the Company or a Subsidiary
from the date 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) Five 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 any of Bradley N. Rotter, Alan B. Perper or
John Ward Rotter or any of their respective family members or
affiliates) 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 day
-----
of .
---------,------
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
- ----------------
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
POINT WEST SECURITIES LLC
OPERATING AGREEMENT
by
Point West Capital Corporation
and
Point West Securities, LLC
as of
July 8, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
=====
<S> <C>
SECTION I. DEFINED TERMS........................................................................ 1
SECTION II. FORMATION AND NAME; OFFICE; PURPOSE; TERM............................................ 3
2.1 ORGANIZATION.................................................................................. 3
2.2 NAME OF THE COMPANY........................................................................... 3
2.3 PURPOSE....................................................................................... 3
2.4 TERM.......................................................................................... 4
2.5 PRINCIPAL OFFICE.............................................................................. 4
2.6 RESIDENT AGENT................................................................................ 4
2.7 MEMBERS....................................................................................... 4
2.8 OFFICERS, DIRECTORS, AND MANAGERS............................................................ 4
SECTION III. MEMBERS; CAPITAL; CAPITAL ACCOUNTS................................................... 4
3.1 INITIAL CAPITAL CONTRIBUTIONS................................................................. 4
3.2 NO OTHER CAPITAL CONTRIBUTIONS REQUIRED....................................................... 4
3.3 LOANS......................................................................................... 4
SECTION IV. PROFIT, LOSS AND DISTRIBUTIONS....................................................... 4
4.1 DISTRIBUTIONS OF CASH FLOW.................................................................... 4
4.2 ALLOCATION OF PROFIT OR LOSS.................................................................. 4
4.3 LIQUIDATION AND DISSOLUTION................................................................... 4
SECTION V. MANAGEMENT: RIGHTS, POWER AND DUTIES................................................. 5
5.1 MANAGEMENT.................................................................................... 5
5.2 PERSONAL SERVICES............................................................................. 5
5.3 LIABILITY AND INDEMNIFICATION................................................................. 5
SECTION VI. TRANSFER OF INTERESTS AND WITHDRAWALS OF MEMBERS..................................... 5
6.1 TRANSFERS..................................................................................... 5
6.2 TRANSFER TO A SUCCESSOR....................................................................... 5
SECTION VII. DISSOLUTION, LIQUIDATION AND TERMINATION OF THE
COMPANY.............................................................................. 5
7.1 EVENTS OF DISSOLUTION......................................................................... 5
7.2 PROCEDURE FOR WINDING UP AND DISSOLUTION...................................................... 6
7.3 FILING OF ARTICLES OF CANCELLATION............................................................ 6
SECTION VIII. BOOKS, RECORDS, ACCOUNTING AND TAX ELECTIONS......................................... 6
8.1 BANK ACCOUNTS................................................................................. 6
8.2 BOOKS AND RECORDS............................................................................. 6
</TABLE>
(i)
<PAGE>
TABLE OF CONTENTS - Cont.
-------------------------
<TABLE>
<S> <C>
8.3 ANNUAL ACCOUNTING PERIOD...................................................................... 6
8.4 DISREGARD OF ENTITY........................................................................... 6
8.5 TAX MATTERS PARTNER........................................................................... 6
SECTION IX. GENERAL PROVISIONS................................................................... 7
9.1 ASSURANCES.................................................................................... 7
9.2 NOTIFICATIONS................................................................................. 7
9.3 SPECIFIC PERFORMANCE.......................................................................... 7
9.4 COMPLETE AGREEMENT............................................................................ 7
9.5 APPLICABLE LAW................................................................................ 7
9.6 SECTION TITLES................................................................................ 7
9.7 BINDING PROVISIONS............................................................................ 8
9.8 JURISDICTION AND VENUE........................................................................ 8
9.9 TERMS......................................................................................... 8
9.10 SEPARABILITY OF PROVISIONS.................................................................... 8
9.11 COUNTERPARTS.................................................................................. 8
</TABLE>
Exhibit A - Member Taxpayer Identification and Percentage
- ---------
Exhibit B - Point West's Cash and Property Contribution
- ---------
(ii)
<PAGE>
POINT WEST SECURITIES LLC
-------------------------
OPERATING AGREEMENT
-------------------
This Operating Agreement (this "Agreement") is entered into as of this
---------
8th day of July, 1998, by and among Point West Capital Corporation, a Delaware
corporation ("Point West") and Point West Securities, L.L.C.
(the "Company").
EXPLANATORY STATEMENT
---------------------
The Company was organized as a limited liability company in Delaware on
July 8, 1998 in accordance with the terms of, and subject to the conditions set
forth in, this Agreement. This Agreement sets forth the agreements under which
the Company will operate. The Company was formed as a single Member limited
liability company, which is intended to be disregarded for federal income tax
purposes.
NOW, THEREFORE, for good and valuable consideration, the parties,
intending legally to be bound, agree as follows:
I.
--
DEFINED TERMS
=============
The following capitalized terms shall have the meanings specified in
this Section I. Other terms are defined in the text of this Agreement; and,
throughout this Agreement, those terms shall have the meanings respectively
ascribed to them.
"Agreement" means this Agreement, as amended from time to time.
==========
"Code" means the Internal Revenue Code of 1986, as amended, or any
======
corresponding provision of any succeeding law.
"Company" means the limited liability company organized in accordance
=========
with this Agreement.
"Delaware Act" means the Delaware Limited Liability Company Act, as
===============
amended from time to time.
"Interest" means a Person's share of the Profits and Losses of, and the
==========
right to receive distributions from, the Company.
"Interest Holder" means any Person who holds an Interest, whether as a
=================
Member or as an unadmitted assignee of a Member.
"Involuntary Withdrawal" means, with respect to Point West, the
=========================
occurrence of any of the following events:
<PAGE>
(a) Point West makes an assignment for the benefit of
---
creditors;
(b) Point West files a voluntary petition of bankruptcy
---
(c) Point West is adjudged bankrupt or insolvent or there
---
is entered against Point West an order for relief in any bankruptcy or
insolvency proceeding;
(d) Point West files a petition or answer seeking for
---
Point West any reorganization, arrangement, composition, readjustment,
liquidation, dissolution, or similar relief under any statute, law, or
regulation;
(e) Point West seeks, consents to, or acquiesces in the
---
appointment of a trustee for, receiver for, or liquidation of Point
West or of all or any substantial part of Point West's properties;
(f) Point West files an answer or other pleading
---
admitting or failing to contest the material allegations of a petition
filed against Point West in any proceeding described in subsections (a)
through (e);
(g) any proceeding against Point West seeking
---
reorganization, arrangement, composition, readjustment, liquidation,
dissolution, or similar relief under any statute, law, or regulation,
continues for one hundred twenty (120) days after the commencement
thereof, or the appointment of a trustee, receiver, or liquidator for
Point West or all or any substantial part of Point West's properties
without Point West's Agreement or acquiescence, which appointment is
not vacated or stayed for one hundred twenty (120) days or, if the
appointment is stayed, for one hundred twenty (120) days after the
expiration of the stay during which period the appointment is not
vacated; or
(h) Point West's death or adjudication by a court of
---
competent jurisdiction as incompetent to manage Point West's person or
property.
"Member" means Point West and any Person who subsequently is
========
admitted as a member of the Company.
"Membership Rights" means all of the rights of a Member in the Company,
===================
including a Member's (a) Interest; (b) right to inspect the Company's books and
records; (c) right to participate in the management of and vote on matters
coming before the Company; and (d) unless this Agreement or the Articles of
Organization provide to the contrary, right to act as an agent of the Company.
"Person" means and includes an individual, corporation, partnership,
========
association, limited liability company, trust, estate, or other entity.
"Positive Capital Account" means a Capital Account with a balance
===========================
greater than zero.
2
<PAGE>
"Profit" and "Loss" means, for each taxable year of the Company (or
======== =======
other period for which Profit or Loss must be computed) the Company's taxable
income or loss determined in accordance with the Code.
"Regulation" means the income tax regulations, including any temporary
============
regulations, from time to time promulgated under the Code.
"Successor" means all Persons to whom all or any part of an Interest is
===========
transferred either because of (a) the sale or gift by Point West of all or any
part of its Interest, (b) an assignment of Point West's Interest due to Point
West's Involuntary Withdrawal, or (c) because such Person dies and the persons
are such Person's personal representatives, heirs, or legatees.
"Transfer" means, when used as a noun, any voluntary sale,
==========
hypothecation, pledge, assignment, attachment, or other transfer, and, when used
as a verb, means voluntarily to sell, hypothecate, pledge, assign, or otherwise
transfer.
"Withdrawal" means a Member's dissociation from the Company by any
============
means.
II.
==
FORMATION AND NAME; OFFICE; PURPOSE; TERM
=========================================
II.1 ORGANIZATION. Point West Securities, LLC has organized a
---- =============
limited liability company pursuant to the Act and the provisions of this
Agreement and, for that purpose, has caused Articles of Organization to be
prepared, executed and filed under the Delaware Act on July 8, 1998.
II.2 NAME OF THE COMPANY. The name of the Company shall be
--- ====================
"Point West Securities LLC". The Company may do business under that name and
under any other name or names upon which Point West may, in its sole discretion,
determine. If the Company does business under a name other than that set forth
in its Articles of Organization, then the Company shall file a trade name
certificate as required by law.
II.3 PURPOSE. Company is organized to engage in any lawful act
---- =======
or activity for which a limited liability company may be organized under the
Delaware Act, and to do any and all things necessary, convenient, or incidental
to that purpose.
II.4 TERM. The term of the Company began upon the filing of the
---- ====
Articles of Organization under the Delaware Act and shall continue in existence
until July 31, 2028, unless its existence is sooner terminated pursuant to
Section VII of this Agreement.
II.5 PRINCIPAL OFFICE. The principal office of the Company in the
---- ================
State of Delaware shall be located at 1220 North Market Street, Suite 606,
Wilmington, Delaware 19801, or at any other place within the State of Delaware
which Point West, in its sole discretion, determines.
3
<PAGE>
II.6 RESIDENT AGENT. The name and address of the Company's resident
---- ==============
agent in the State of Delaware shall be Registered Agents, Ltd.
II.7 MEMBERS. The name, present mailing address, taxpayer
---- =======
identification number and Percentage of each Member are set forth on Exhibit
-------
"A".
- ---
SECTION III.
------------
MEMBERS; CAPITAL; CAPITAL ACCOUNTS
==================================
III.1 INITIAL CAPITAL CONTRIBUTIONS. Upon the execution of this
---- =============================
Agreement, Point West shall contribute to the Company the cash and property set
forth on Exhibit "B", as the single and sole Member of the Company.
-----------
III.2 NO OTHER CAPITAL CONTRIBUTIONS REQUIRED. No Member shall be
----- =======================================
required to contribute any additional capital to the Company, and except as set
forth in the Act, no Member shall have any personal liability for any
obligations of the Company.
III.3 LOANS. Any Member may, at any time, make or cause a loan to be
----- =====
made to the Company in any amount and on those terms upon which the Company and
the Member agree.
IV
--
PROFIT, LOSS AND DISTRIBUTIONS
==============================
IV.1 DISTRIBUTIONS OF CASH FLOW. Cash Flow for each taxable year of
---- ==========================
the Company shall be distributed to Point West no later than seventy-five (75)
days after the end of the taxable year.
IV.2 ALLOCATION OF PROFIT OR LOSS. All Profit or Loss shall be
---- ============================
allocated to Point West, as the single and sole Member of the Company.
IV.3 LIQUIDATION AND DISSOLUTION. If the Company is liquidated, the
---- ===========================
assets of the Company shall be distributed to Point West or to a Successor or
Successors.
V.
MANAGEMENT: RIGHTS, POWER AND DUTIES
====================================
V.1 MANAGEMENT. The Company shall be managed solely by the Members.
--- ==========
V.2 PERSONAL SERVICES. No member shall be required to perform
--- =================
services for the Company solely by virtue of being a Member.
4
<PAGE>
V.3 LIABILITY AND INDEMNIFICATION.
--- =============================
1. The Members shall not be liable, responsible, or
accountable, in damages or otherwise, to the Company for any act
performed by any of them with respect to Company matters, except for
fraud.
2. The Company shall indemnify Members for any act performed
by any of them with respect to Company matters, except for fraud.
VI
--
TRANSFER OF INTERESTS AND
=========================
WITHDRAWALS OF MEMBERS
======================
VI.1 TRANSFERS. Point West may Transfer all, or any portion of, or
---- =========
its interest or rights in, its Membership Rights to one or more Successors.
VI.2 TRANSFER TO A SUCCESSOR. In the event of any Transfer of all
---- =========================
or any part of Point West's Interest to a Successor, the Successor shall
thereupon become a Member and the Company shall be continued.
VII.
---
DISSOLUTION, LIQUIDATION AND
============================
TERMINATION OF THE COMPANY
===========================
VII.1 EVENTS OF DISSOLUTION. The Company shall be dissolved upon the
----- =====================
happening of any of the following events:
1. When the period fixed for its duration in Section 2.4 has
expired; or
2. If one or all of the Members unanimously determine to
dissolve the Company.
The Company shall not dissolve merely because of Point West's
Involuntary Withdrawal.
VII.2 PROCEDURE FOR WINDING UP AND DISSOLUTION. If the Company is
----- ==========================================
dissolved, the affairs of the Company shall be wound up. On winding up of the
Company, the assets of the Company shall be distributed, first, to creditors of
the Company in satisfaction of the liabilities of the Company, and then to the
Persons who are the Members of the Company in proportion to their Interests.
VII.3 FILING OF ARTICLES OF CANCELLATION. If the Company is dissolved,
----- ==================================
Articles of Cancellation shall be promptly filed with the Delaware Secretary of
State. If there are no remaining Members, the Articles shall be filed by the
last Person to be a Member; if there are no remaining
5
<PAGE>
Members, or a Person who last was a Member, the Articles shall be filed by the
legal or personal representatives of the Person who last was a Member.
VIII.
-----
BOOKS, RECORDS, ACCOUNTING
--------------------------
AND TAX ELECTIONS
=================
VIII.1 BANK ACCOUNTS. All funds of the Company shall be deposited
------ ==============
in a bank account or accounts opened in the Company's name. The Member shall
unanimously determine the institution or institutions at which the accounts will
be opened and maintained, the types of accounts, and the Persons who will have
authority with respect to the accounts and the funds therein.
VIII.2 BOOKS AND RECORDS. The Members shall keep or cause to be kept
------ =================
complete and accurate books and records of the Company and supporting
documentation of the transactions with respect to the conduct of the Company's
business. The books and records shall be maintained in accordance with sound
accounting principles and practices.
VIII.3 ANNUAL ACCOUNTING PERIOD. The annual accounting period of the
------ ========================
Company shall be its taxable year. The Company's taxable year shall be selected
by the Members, subject to the requirements and limitations of the Code.
VIII.4 DISREGARD OF ENTITY. Point West and the Company intend for the
------ ====================
Company to be treated as a partnership for federal income tax purposes, if the
Company has two or more Members, and otherwise as an entity that is disregarded
as an entity separate from its owner for federal income tax purposes pursuant to
Treasury Regulation Section 301.7701-3.
VIII.5 TAX MATTERS PARTNER. To the extent applicable, Point West shall
------ ===================
act as the "tax matters partner" within the meaning of Section 623(a)(7) of the
Code.
IX.
--
GENERAL PROVISIONS
==================
IX.1 ASSURANCES. Each Member shall execute all such certificates
---- ==========
and other documents and shall do all such filing, recording, publishing, and
other acts as the Members deem appropriate to comply with the requirements of
law for the formation and operation of the Company and to comply with any laws,
rules, and regulations relating to the acquisition, operation, or holding of the
property of the Company.
IX.2 NOTIFICATIONS. Any notice, demand, consent, election, offer,
---- =============
approval, require, or other communication (collectively, a "notice") required or
------
permitted under this Agreement must be in writing and either delivered
personally or sent by certified or registered mail, postage prepaid, return
receipt requested. A notice must be addressed to an Interest Holder at the
Interest Holder's last known address on the records of the Company. A notice to
the Company must be addressed to the Company's principal office. A notice
delivered personally will be deemed given only when
6
<PAGE>
acknowledged in writing by the person to whom it is delivered. A notice that is
sent by mail will be deemed given three (3) business days after it is mailed.
Any party may designate, by notice to all of the others, substitute addresses or
addresses for notices; and, thereafter, notices are to be directed to those
substitute addresses or addressees.
IX.3 SPECIFIC PERFORMANCE. The parties recognize that irreparable
---- ====================
injury will result from a breach of any provision of this Agreement and that
money damages will be inadequate to fully remedy the injury. Accordingly, in the
event of a breach or threatened breach of one or more of the provisions of this
Agreement, any party who may be injured (in addition to any other remedies which
may be available to that party) shall be entitled to one or more preliminary or
permanent orders 1. restraining and enjoining any act which would constitute a
breach or 2. compelling the performance of any obligation which, if not
performed, would constitute a breach.
IX.4 COMPLETE AGREEMENT. This Agreement constitutes the complete
---- ==================
and exclusive statement of the agreement among the Company and the original
Member. It supersedes all prior written and oral statements, including any prior
representation, statement, condition, or warranty. Except as expressly provided
otherwise herein, this Agreement may not be amended without the written consent
of all of the Members.
IX.5 APPLICABLE LAW. All questions concerning the construction,
---- ================
validity, and interpretation of this Agreement and the performance of the
obligations imposed by this Agreement shall be governed by the internal law, not
the law of conflicts, of the State of Delaware.
IX.6 SECTION TITLES. The headings herein are inserted as a matter of
---- ===============
convenience only, and do not define, limit or describe the scope of this
Agreement or the intent of the provisions hereof.
IX.7 BINDING PROVISIONS. This Agreement is binding upon, and inures to
---- ==================
the benefit of, the parties hereto and their respective heirs, executors,
administrators, personal and legal representatives, Successors, and permitted
assigns.
IX.8 JURISDICTION AND VENUE. Any suit involving any dispute or matter
---- =======================
arising under this Agreement may only be brought in the United States District
Court for the District of Delaware or any Delaware State Court having
jurisdiction over the subject matter of the dispute or matter. All Members
hereby consent to the exercise of personal jurisdiction by any such court with
respect to any such proceeding.
IX.9 TERMS. Common nouns and pronouns shall be deemed to refer to the
---- =====
masculine, feminine, neuter, singular and plural, as the identity of the Person
may in the context require.
IX.10 SEPARABILITY OF PROVISIONS. Each provision of this Agreement
----- ==========================
shall be considered separable; and if, for any reason, any provision or
provisions herein are determined to be invalid and contrary to any existing or
future law, such invalidity shall not impair the operation of or affect those
portions of this Agreement which are valid.
7
<PAGE>
IX.11 COUNTERPARTS. This Agreement may be executed simultaneously
----- ============
in two or more counterparts each of which shall be deemed an original, and all
of which, when taken together, constitute one and the same document. The
signature of any party to any counterpart shall be deemed a signature to, and
may be appended to, any other counterpart.
IN WITNESS WHEREOF, the parties have executed, or caused this Agreement
to be executed, under seal, as of the date set forth hereinabove.
WITNESS OR ATTEST:
=================
POINT WEST SECURITIES, LLC
By: Michael Gallo
------------------------
Managing Director
POINT WEST CAPITAL CORPORATION
By: Alan B. Perper
------------------------
President
8
<PAGE>
Exhibit A
----------
Point West Capital Corporation
1700 Montgomery Street, Suite 250
San Francisco, CA 94111
EIN: 94-3165263
Percentage of Member: 100%
9
<PAGE>
Exhibit B
3.1 INITIAL CAPITAL CONTRIBUTIONS.
Cash contribution to Point West Securities, LLC
$250,000
10
Exhibit 21.1
SUBSIDIARIES
Dignity Partners Funding Corp. I, a Delaware Corporation
Fourteen Hill Capital, L.P., a Delaware Limited Partnership
Fourteen Hill Management, LLC, a Delaware Limited Liability Company
Allegiance Capital, LLC, a Delaware Limited Liability Company
Allegiance Funding Corp. I, a Delaware Corporation
Point West Securities, LLC, a Delaware Limited Liability Company
Exhibit 23.1
Consent of Independent Certified Public Accountants
The Board of Directors and Stockholders of
Point West Capital Corporation:
We consent to the 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 27, 1999, relating to the consolidated balance sheets of
Point West Capital Corporation as of December 31, 1998, and 1997,and the related
consolidated statements of operations and comprehensive income (loss),
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998, which report appears in the December 31, 1998,
annual report on Form 10-K of Point West Capital Corporation.
/s/KPMG LLP
San Francisco, California
March 05, 1999
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, 1998 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 22 day of February,
1999.
/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, 1998 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 22 day of February,
1999.
/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, 1998 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 22 day of February,
1999.
\s\ Stephen T. Bow
---------------------------
Stephen T. Bow
<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, 1998 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 22 day of February,
1999.
\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, 1998, 1997 AND 1996 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-31-1998 Dec-31-1997 Dec-31-1996
<PERIOD-START> Jan-01-1998 Jan-01-1997 Jan-01-1996
<PERIOD-END> Dec-31-1998 Dec-31-1997 Dec-31-1996
<CASH> 9,821,639 13,796,274 11,212,110
<SECURITIES> 7,509,641 7,475,821 3,000,000
<RECEIVABLES> 10,199,590 <F1> 4,321,151 1,181,513
<ALLOWANCES> 0 0 0
<INVENTORY> 33,893,017 <F2> 36,586,788 <F2> 52,766,342 <F2>
<CURRENT-ASSETS> 993,509 782,357 784,508
<PP&E> 29,834 7,203 0
<DEPRECIATION> (4,469) (341) 0
<TOTAL-ASSETS> 62,442,761 62,969,253 68,944,473
<CURRENT-LIABILITIES> 6,084,286 2,899,038 7,584,003
<BONDS> 41,528,914 <F3> 38,804,107 <F3> 41,218,205 <F3>
0 0 0
0 0 0
<COMMON> 42,918 42,918 42,918
<OTHER-SE> 14,786,643 21,223,190 20,099,347
<TOTAL-LIABILITY-AND-EQUITY> 62,442,761 62,969,253 68,944,473
<SALES> 438,792 488,563 5,479,114
<TOTAL-REVENUES> 2,407,571 3,917,890 6,404,822
<CGS> 0 0 0
<TOTAL-COSTS> 0 0 0
<OTHER-EXPENSES> 3,599,290 2,867,025 3,054,227
<LOSS-PROVISION> 1,073,494 328,236 10,079,777
<INTEREST-EXPENSE> 3,679,566 3,599,487 3,983,606
<INCOME-PRETAX> (5,944,779) (2,876,858) (10,712,788)
<INCOME-TAX> (5,600) (4,000) 525,711
<INCOME-CONTINUING> (5,950,379) (2,880,858) (10,187,077)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 2,300,037 3,891,494 487,600
<CHANGES> 0 0 0
<NET-INCOME> (3,650,342) 1,010,636 9,699,477
<EPS-PRIMARY> (1.12) .29 (2.46)
<EPS-DILUTED> (1.12) .28 (2.46)
<FN>
<F1> INCLUDES MATURED POLICIES RECEIVABLE AND LOANS RECEIVABLE.
<F2> INCLUDES ASSETS HELD FOR SALE AND PURCHASED LIFE INSURANCE POLICIES FOR
1996. INCLUDES PURCHASED LIFE INSURANCE POLICIES FOR 1998 AND 1997.
<F3> REPRESENTS LONG TERM BORROWINGS OF THE COMPANY.
</FN>
</TABLE>
